Earnings and Dividend per Share Information (4)

 

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(1) Earnings per share have been computed following the “two class method” set forth by the Statement on Financial Accounting Standards, or ASC 260 Earnings Per Share.  See “Item 10B. Memorandum and Articles of Association” for a description of the two classes of stock.

(2) See note 20 to the consolidated financial statements for a detailed calculation of earnings per share.

(3) Under Brazilian Corporate Law we are allowed to pay interest on shareholders’ equity as an alternative to paying dividends to our shareholders.  See “Item 10E. Taxation – Interest On shareholders’ Equity” for a description of interest on shareholders’ equity.

(4) Due to the stock dividend effected in 2009, 2008, 2007 and 2005, we present the 2008, 2007, 2006 and 2005 information  after giving retroactive effect to the stock split approved on August 22, 2005,  the stock split approved on August 27, 2007, the stock dividend approved on April 23, 2008 and the stock dividend approved on April 24, 2009 which was carried out on August 28, 2009.

(1) Under Brazilian Corporate Law we are allowed to pay interest on shareholders' equity as an alternative to paying dividends to our shareholders. See "Item 10E. Taxation - Brazilian Tax Considerations - Interest on shareholders' Equity" for a description of interest on shareholders' equity.

(2) Translated into US$ from reais at the commercial exchange rate established by the Central Bank at the end of the year in which dividends or interest on shareholders’ equity were paid or declared, as the case may be.

 

 

 

 

 

(2) See “Item 4B. Business Overview - Selected Statistical Information – Average Balance Sheet and Interest Rate Data” for more detailed information on our average assets, liabilities and shareholders’ equity for the years ended December 31, 2009, 2008 and 2007.

 

(3) Common shares issued, no par value: 2,289,286,475 as of December 31, 2009; 1,708,760,440 as of December 31, 2008; 1,722,875,704 as of December 31, 2007; 1,666,399,405 as of December 31, 2006 and 1,666,399,405 as of December 31, 2005. As of December 31, 2009 we held 2,202 shares in treasury. We did not hold any shares in treasury as of December 31, 2008. As of December 31, 2007, 2006 and 2005, we held 14,115,264; 13,740,989 and 12,066,513, shares in treasury, respectively. We restated the quantity of shares retroactively to reflect the stock splits effected on August 22, 2005 and October 1, 2007, the stock dividend approved on April 23, 2008 and the stock dividend approved on April 24, 2009 which was carried out on August 28, 2009.

 

(4) Preferred shares issued, no par value: 2,281,649,744 as of December 31, 2009; 1,605,988,901 as of December 31, 2008; 1,637,613,901 as of December 31, 2007; 1,637,613,901 as of December 31, 2006 and 1,449,189,143 as of December 31, 2005.  As of December 31, 2009, 2008, 2007, 2006 and 2005, we held  43,588,307; 64,639,300; 50,428,978; 54,398,135 and 67,496,000 shares in treasury, respectively. We restated the quantity of shares retroactively  to reflect the stock splits effected on August 22, 2005 and October 1, 2007, the stock dividend approved on April 23, 2008 and the stock dividend approved on April 24, 2009 which was carried out on August 28, 2009.

 

(5) Other shareholders’ equity includes treasury stock, additional paid-in capital, other accumulated comprehensive income, appropriated and unnappropriated retained earnings.

 

 

(1) Net interest income divided by average interest-earning assets.  See “Item 4B. Business Overview - Selected Statistical Information – Average Balance Sheets and Interest Rate Data” for more detailed information on our average assets, liabilities and shareholders’ equity for the years ended December 31, 2009, 2008 and 2007.

 

(2) Net income attributable to Itaú Unibanco divided by average total assets.  See “Item 4B. Business Overview - Selected Statistical Information – Average Balance Sheet and Interest Rate Data” for more detailed information on our average assets, liabilities and shareholders’ equity for the years ended December 31, 2009, 2008 and 2007.

 

(3) Net income attributable to Itaú Unibanco divided by average equity.  See “Item 4B. Business Overview - Selected Statistical Information – Average Balance Sheet and Interest Rate Data” for more detailed information on our average assets, liabilities and shareholders’ equity for the years ended December 31, 2009, 2008 and 2007.

 

(4) Salaries and employee benefits, administrative expenses, other non-interest expense (except expenses with respect to the social integration program ( Programa de Integração Social ), or PIS, the contribution for social security financing ( Contribuição para Financiamento da Seguridade Social ), or COFINS, and tax on services ( Imposto sobre Serviços ), or ISS), amortization of other intangible assets plus depreciation of premises and equipment as a percentage of the aggregate of net interest income, fee and commission income, insurance premiums, income on private retirement plans and on capitalization plans, trading income (losses), net gain (loss) on sale of available-for-sale securities, net gain (loss) on foreign currency transactions, net gain (loss) on translation of foreign subsidiaries and other non-interest income less insurance claims, changes in reserves for insurance operations, for private retirement plans and acquisition costs and taxes (consisting of  ISS, PIS and COFINS).

 

(5) Loans and leases as of year-end divided by total deposits as of year-end.

 

(6) As of year-end.

Exchange Rates

 

Before to March 14, 2005, under Brazilian regulations, foreign exchange transactions were carried out on either the commercial rate exchange market or the floating rate exchange market. The commercial market was reserved primarily for foreign trade transactions and transactions that generally required prior approval from the Central Bank, such as registered investments by foreign persons and related remittances of funds abroad (including the payment of principal and interest on loans, notes, bonds and other debt instruments denominated in foreign currencies and registered with the Central Bank). The floating rate exchange market generally applied to specific transactions for which Central Bank approval was not required. Rates in the two markets were generally the same. On March 4, 2005, the CMN, through Resolution No. 3,265 effective March 14, 2005, as updated by CMN Resolution No. 3,568 of May 29, 2008, unified the two markets and allowed the exchange rate to float freely for all purposes. Recently, CMN issued Resolutions No. 3,844 and No. 3,845, both dated March 3, 2010, and the Central Bank issued Circulars No. 3,491, No. 3,492 and No. 3,493, all dated March 24, 2010, which consolidate and simplify certain exchange rules and related procedures. Currently, the Brazilian foreign exchange system allows the purchase and sale of foreign currency and the performance of international transfers in reais by any individual or legal entity, subject to certain regulatory procedures.

 

The Brazilian government may impose temporary restrictions on the conversion of Brazilian currency into foreign currencies and on the remittance to foreign investors of proceeds from their investments in Brazil. Brazilian law allows the government to impose these restrictions whenever there is a serious imbalance in Brazil’s balance of payments or there are reasons to foresee a serious imbalance. We cannot predict whether the Brazilian government will impose remittance restrictions in the future. The real may depreciate or appreciate substantially against the U.S. dollar in the future.

 

As of May 4, 2010, the U.S. dollar- real exchange rate was R$ 1.7557 to US$1.00.

 

 

The following table sets forth information on the commercial market rate for U.S. dollars as reported by the Central Bank for the periods and dates indicated.

Source:  Central Bank

(1) Represents the average of the exchange rates on the last day of each month during the relevant period.

Source:  Central Bank

(1) Represents the average of the exchange rates on the last day of each month during the relevant period.

3B.	Capitalization and Indebtedness

 

Not applicable.

3C.	Reasons for the Offer and Use of Proceeds

 

Not applicable.

3D.	Risk Factors

 

An investment in our preferred shares and ADSs involves a high degree of risk. You should carefully consider the risks described below before making an investment decision. Our business, financial condition and results of operations could be materially and adversely affected by any of these risks. The market price of our preferred shares and ADSs could decline due to any of these risks or other factors, and you may lose all or part of your investment. The risks described below are those that we currently believe may materially affect us.

Risks Relating to Brazil

 

The Brazilian government has exercised, and continues to exercise, influence over the Brazilian economy.  This influence, as well as Brazilian political and economic conditions, could adversely affect us and the market price of our preferred shares and ADSs.

 

The Brazilian government from time to time intervenes in the Brazilian economy and makes changes in policies and regulations. The Brazilian government’s actions in the past included, among other measures, increases in interest rates, changes in tax policies, price controls, capital controls limits on selected imports and, prior to the current floating exchange regime, currency devaluations. Our business, financial condition, and results of operations may be materially and adversely affected by changes in policies or regulations involving or affecting factors, such as:

 

·

interest rates;

 

·

reserve requirements;

 

 

·

capital requirements and liquidity of capital and credit markets;

 

·

general economic growth, inflation and currency fluctuations;

 

·

tax policies and rules;

 

·

restrictions on remittances abroad and other exchange controls;

 

·

increases in unemployment rates, decreases in wage and income levels and other factors that influence our customers’ ability to meet their obligations to us; and

 

·

other political, social and economic developments in Brazil.

 

As a bank in Brazil, the vast majority of our income, expenses, assets and liabilities are directly tied to interest rates. Therefore, our results of operations and financial condition are significantly affected by inflation, interest rate fluctuations and related government monetary policies, all of which may have a material adverse effect on the growth of the Brazilian economy and on us, including our loan portfolio, our cost of funding and our income from credit operations.

 

In addition, changes in government may result in changes in policy that may affect us.  Uncertainty over whether the Brazilian government in the future will implement changes in policies or regulations affecting these and other factors in the future may contribute to heightened volatility in the Brazilian securities markets and in the securities of Brazilian issuers, which in turn may have a material adverse effect on us and the market price of our preferred shares and ADSs.

 

Inflation and fluctuations in interest rates could have a material adverse effect on us.

 

 Inflation and interest rates volatility have caused adverse effects in Brazil. While the Brazilian government has been able to keep inflation close to target levels in the last 12 years, we cannot assure you that it will continue to be able to do so and there is no guarantee that future administrations will be able to so.

 

 In addition, Brazil has experienced high interest rates, which have fluctuated significantly in Brazil. Between 2005 and 2009, the base interest rate established by the Central Bank, which is the benchmark interest rate payable to holders of securities issued by the Brazilian government and traded at the Special Clearing and Settlement System (Sistema Especial de Liquidação e Custódia or the "SELIC rate"), varied between 19.75% per year and 8.75% per year. Public expectations regarding possible future governmental actions in the economy, government intervention in the foreign exchange market and the effects of the downturn in the global financial markets have caused and may continue to cause interest rates to fluctuate. In addition, if Brazil experiences fluctuations in rates of inflation in the future, our costs and net margins may be adversely affected, and government measures to combat inflation may include tightening monetary policy with high interest rates which may harm our business. Increases in the SELIC rate could adversely affect us by reducing the demand for credit, increasing our cost of funds and increasing the risk of customer default. Conversely, decreases in the SELIC rate could also adversely affect us if the decreases lower our margins.

Exchange rate instability may have a material adverse effect on the Brazilian economy and us.

 

The Brazilian currency fluctuates in relation to the U.S. dollar and other foreign currencies. The Brazilian government has in the past implemented various economic plans and utilized a number of exchange rate regimes, including sudden devaluations, periodic mini-devaluations in which the frequency of adjustments has ranged from daily to monthly, floating exchange rate systems, and dual exchange rates coupled with exchange controls.  Since 1999, Brazil has adopted a floating exchange rate system with interventions by the Central Bank in buying or selling foreign currency.  From time to time, the exchange rate between the Brazilian currency and the U.S. dollar and other currencies has fluctuated significantly.  For example, the real depreciated 15.7% and 34.3% against the U.S. dollar in 2001 and 2002, respectively, and appreciated 22.3%, 8.8%, 13.4%, 9.5% and 20.7% against the U.S. dollar in 2003, 2004, 2005, 2006 and 2007, respectively.  More recently, in 2008, the real depreciated 24.2% against the U.S. dollar.  In 2009, the real appreciated 34.2% against the U.S. dollar from an exchange rate of R$2.3370 per US$1.00 as of December 31, 2008 to an exchange rate of R$1.7412 per US$1.00 as of December 31, 2009.  The average exchange rate in 2009 was R$1.99 per US$1.00 compared to an average exchange rate of R$1.84 per US$1.00 in 2008.

 

 

Some of our assets and liabilities are denominated in, or indexed to, foreign currencies, especially the U.S. dollar.  As of December 31, 2009, 9.6% of our total liabilities and 10.8% of our total assets were denominated in, or indexed to, a foreign currency. Although as of December 31, 2009, our material foreign investments were economically hedged in order to mitigate effects arising out of foreign exchange volatility, including the potential tax impact of those investments, there can be no assurance that those hedge strategies will remain in place or will offset those effects.  Therefore, a depreciation of the Brazilian currency could have several adverse effects on us, including (i) losses on our liabilities denominated in or indexed to foreign currencies, (ii) impairments to our ability to pay our dollar-denominated or dollar-indexed liabilities by making it more costly for us to obtain the foreign currency required to pay those obligations, (iii) impairments to the ability of our borrowers to repay dollar-denominated or dollar-indexed liabilities to us and (iv) negatively affect the market price of our securities portfolio.  Conversely, an appreciation of the Brazilian currency could cause us to incur losses on our assets denominated in or indexed to foreign currencies.  Therefore, depending on the circumstances, either a depreciation or appreciation of the real could have a material adverse effect on us and the market price of our preferred shares and ADSs.

 

Developments and the perception of risk of other countries may adversely affect the Brazilian economy and the market price of Brazilian securities.

 

Economic and market conditions in other countries, including the United States, European Union countries and emerging markets, may affect to varying degrees the market value of securities of Brazilian issuers.  Although economic conditions in these countries may differ significantly from economic conditions in Brazil, investors’ reactions to developments in these other countries may have an adverse effect on the market value of securities of Brazilian issuers, the availability of credit in Brazil and the amount of foreign investment in Brazil.  Crises in the United States, the European Union and emerging markets may diminish investor interest in securities of Brazilian issuers, including Itaú Unibanco Holding.  This could adversely affect the market price of our securities, and could also make it more difficult for us to access the capital markets and finance our operations in the future on acceptable terms or at all.

 

Banks located in countries considered to be emerging markets may be particularly susceptible to disruptions and reductions in the availability of credit or increases in financing costs, which could have a material adverse impact on our financial condition.  In addition, the availability of credit to entities that operate within emerging markets is significantly influenced by levels of investor confidence in such markets as a whole and any factor that impacts market confidence (for example, a decrease in credit ratings or state or central bank intervention in one market) could affect the price or availability of funding for entities within any of these markets.

Risk Factors Relating to Us and the Banking Industry

 

We are exposed to effects of the disruptions and volatility in the global financial markets and the economies in those countries where we do business, especially Brazil.

 

The financial global markets have deteriorated sharply since the end of 2007. Major financial institutions, including some of the largest global commercial banks, investment banks and insurance companies have been experiencing significant difficulties, especially lack of liquidity and depreciation of financial assets. These difficulties have constricted the ability of a number of major global financial institutions to engage in further lending activity and have caused losses. In addition, defaults by, and doubts about the solvency of certain financial institutions and the financial services industry generally have led to market-wide liquidity problems and could lead to losses or defaults by, and bankruptcies of, other institutions.

 

We are exposed to the disruptions and volatility in the global financial markets because of their effects on the financial and economic environment in the countries in which we operate, especially Brazil, such as a slowdown in the economy, an increase in the unemployment rate, a decrease in the purchasing power of consumers and the lack of credit availability. We lend primarily to Brazilian borrowers and these effects could materially and adversely affect our customers and increase our non-performing loans and, as a result, increase the risk associated with our lending activity and require us to make corresponding revisions to our risk management and loan loss reserve models. For example, in 2009, we experienced an increase in our non-performing loans overdue above 90 days from 3.9% of total loans on December 31, 2008 to 5.6% on December 31, 2009.

 

The global financial downturn has had significant consequences for Brazil and the other countries in which we operate, including stock, interest and credit market volatility, a general economic slowdown, and volatile exchange rates that may, directly or indirectly, adversely affect the market price of Brazilian securities and have a material adverse effect on us. In addition, institutional failures and disruption of the financial market in Brazil and the other countries in which we operate could restrict our access to the public equity and debt markets.

 

 

Continued or worsening disruption or volatility in the global financial markets could lead to further increase negative effects on the financial and economic environment in Brazil and the other countries in which we operate, which could have a material adverse effect on us.

 

Integration of acquired or merged businesses involves certain risks that may have a material adverse effect on us.

 

We have engaged in a number of mergers and acquisitions in the past and may make further acquisitions as part of our growth strategy in the Brazilian financial services industry. Recently, these transactions included the merger between Itaú and Unibanco (announced in the last quarter of 2008, approved by the Central Bank in the first quarter of 2009 and which is pending approval by Brazilian anti-trust authorities).  We believe that these transactions will contribute to our continued growth and competitiveness in the Brazilian banking sector.

 

 Any acquisition and merger of institutions and assets involves certain risks, including the risk that:

 

·

integrating new networks, information systems, personnel, financial and accounting systems, risk and other management systems, financial planning and reporting, products and customer bases into our existing business may run into difficulties or unexpected costs and operating expenses;

 

·

we may incur unexpected liabilities or contingencies relating to the acquired businesses, which may not be fully recovered from our counterparties in the merger or acquisition agreement;

 

·

antitrust and other regulatory authorities may impose restrictions or limitations on the terms of the acquisition or merger, require disposition of certain assets or businesses or withhold their approval of the transaction; and

 

·

we may fail to achieve the expected operation and financial synergies and other benefits from the mergers or acquisitions.

 

If we fail to achieve the business growth opportunities, cost synergies and other benefits we expect from mergers and acquisition transactions, or incur greater integration costs than we have estimated, our results of operations and financial condition may be materially and adversely affected.

 

Changes in applicable law and regulation may have a material adverse effect on us.

 

Brazilian banks, including us, are subject to extensive and continuous regulatory review by the Brazilian government, principally by the Central Bank. We have no control over applicable law and government regulations, which govern all aspects of our operations, including regulations that impose:

 

 

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reserve and compulsory deposit requirements

 

·

minimum levels for federal housing and rural sector lending

 

·

funding restrictions

 

·

lending limits, earmarked lending and other credit restrictions

 

·

limits on investments in fixed assets

 

·

corporate governance requirements

 

·

limitations on charging of commissions and fees by financial institutions for services to retail customers and the amount of interest financial institutions can charge

 

·

accounting and statistical requirements

 

·

other requirements or limitations in the content of the global financial crisis.

 

The regulatory structure for Brazilian financial institutions, including banks, broker-dealers, leasing companies and insurance companies, is continuously evolving. Parts of our business that are not currently subject to government regulation may become regulated and there are several legislative proposals to that effect currently under consideration in the Brazilian congress.  Disruptions and volatility in the global financial markets resulting in liquidity problems at major international financial institutions could lead the Brazilian government to change laws and regulations applicable to Brazilian financial intuitions based on these international developments.  The amendment of existing laws and regulations or the adoption of new laws and regulations could have a material adverse effect on us, including our ability to provide loans, make investments or render certain financial services. See “Item 4B. Business Overview – Regulation and Supervision - Regulation by the Central Bank.”

 

 

Tax reforms may have a material adverse impact on our results of operations.

 

The Brazilian government frequently enacts reforms to tax and other assessment regimes. These reforms include the enactment of new taxes or assessments, changes in the bases of calculation or rates of assessments, including rates applicable solely to the banking industry, and occasional enactment of temporary taxes for designated governmental purposes. For example, in October 2009, the Brazilian government imposed a 2.0% tax on the inflow of monies for investments in the Brazilian capital markets. The effects of these changes and any other changes that could result from the enactment of additional tax reforms cannot be quantified.  These changes, however, may reduce our volume of operations, increase our costs or limit our profitability.

 

Furthermore, these changes have produced uncertainty in the financial system which may increase the cost of borrowing and may contribute to an increase in our non-performing loan portfolio.

 

The increasingly competitive environment and consolidations in the Brazilian banking industry may have a material adverse effect on us.

 

The markets for financial and banking services in Brazil are highly competitive. We face significant competition from other large Brazilian and international banks, including an increase in competition from Brazilian public banks. Competition has increased as a result of recent consolidations among financial institutions in Brazil and as a result of new regulations by CMN that facilitate the customer’s ability to switch business between banks.  See “Item 4B. Business Overview – Regulation and Supervision.” The increased competition may materially and adversely affect us by, among other things, limiting our ability to retain our existing consumer base, increase our customer base and to expand our operations, reducing our profit margins on banking and other services and products we offer, and to the extent it limits investment opportunities.

 

Increases in reserve and compulsory deposit requirements may have a material adverse effect on us.

 

The Central Bank has periodically changed the level of reserves and compulsory deposits that financial institutions in Brazil are required to maintain with the Central Bank.  The Central Bank may increase the reserve and compulsory deposits requirements in the future or impose new requirements.

 

Reserve and compulsory deposit requirements reduce our liquidity to make loans and other investments.  In addition, the compulsory deposits generally do not yield the same return as other investments and deposits because:

 

·

a portion of compulsory deposits do not bear interest;

 

·

a portion of compulsory deposits must be held in Brazilian federal government securities; and

 

·

a portion of compulsory deposits must be used to finance government programs, including a federal housing program and rural sector subsidies.

 

As of December 31, 2009, we had R$9,827 million in interest-bearing compulsory deposits and R$4,042 million in non-interest-bearing compulsory deposits. Any increase in the compulsory deposits requirements may reduce our ability to lend funds and make other investments and, as a result, may have a material adverse effect on us.  For more detailed information on compulsory deposits, see “ Item 4B. Business Overview – Selected Statistical – Central Bank Compulsory Deposits.”

 

Changes in the profile of our business may have a material adverse effect on our loan portfolio.

 

As of December 31, 2009, our loan and financing portfolio was R$245,736 million compared to R$169,700 million as of December 31, 2008.  Our allowance for loan losses was R$19,968 million representing 8.1% of our total loan portfolio, as of December 31, 2009, compared to R$12,202 million, representing 7.2% of our total loan portfolio, as of December 31, 2008.  The quality of our loan portfolio is subject to changes in the profile of our business resulting from organic growth and our merger and acquisition activity and is dependent on domestic and, to a lesser extent, international economic conditions.  Adverse changes affecting any of the sectors to which we have significant lending exposure, political events within and external to Brazil and the variability of economic activity may have a material adverse impact on our business and our results of operations.  Furthermore, our historic loan loss experience may not be indicative of our future loan losses.

 

In addition, our strategy includes efforts to significantly expand our loan portfolio as well as increase the number of clients, particularly individuals and small and middle-market companies, that we serve. Certain financial products we offer to individuals and other clients are generally characterized by higher margins, but also higher risks of default. An increase in our loan portfolio, as well as a shift to higher margins and higher risk products, could   result in increased default rates, which could have a material adverse effect on us.

 

 

The value of our investment securities and derivatives positions are subject to market fluctuations due to changes in Brazilian or international economic conditions and may produce material losses.

 

As of December 31, 2009, investment securities represented R$116,554 million, or 19.5% of our assets, and derivative financial instruments, which are used to hedge against risks in each of our business areas, represented R$5,549 million, or 0.9% of our assets, and realized and unrealized gains and losses have had and will continue to have a significant impact on our results of operations.  These gains and losses, which we record when investments in securities are sold or are marked to market (in the case of trading securities) or when our derivative financial instruments are marked to market, may fluctuate considerably from period to period and are affected by domestic and international economic conditions. If, for example, we have entered into derivatives transactions to protect against decreases in the value of the real or in interest rates and the real increases in value or interest rates increase, we may incur financial losses. We cannot predict the amount of realized or unrealized gains or losses for any future period, and variations from period to period have no practical analytical value in helping us to make such a prediction.  Those losses could materially and adversely affect our results of operations and financial condition.  Gains or losses on our investment portfolio may not continue to contribute to net income at levels consistent with recent periods or at all, and we may not successfully realize the appreciation or depreciation now existing in our consolidated investment portfolio or any portion thereof. 

 

Exposure to Brazilian federal government debt could have a material adverse effect on us.

 

Like many other Brazilian banks, we invest in debt securities of the Brazilian government. As of December 31, 2009, approximately 7.0% of our total assets, and 36.2% of our securities portfolio, was comprised of debt securities issued by the Brazilian government. Any failure by the Brazilian government to make timely payments under the terms of these securities, or a significant decrease in their market value, will have a material adverse effect on us.

 

If our pricing expectations are incorrect or our reserves for future policyholder benefits and claims are inadequate, the profitability of our insurance and pension products or our results of operations and financial condition may be materially and adversely affected.

 

Our insurance and pension plan business sets prices and establishes reserves for many of our insurance and pension products based upon actuarial or statistical estimates. The pricing of our insurance and pension products and the insurance and pension plans reserves carried to pay future policyholder benefits and claims are each based on models that include many assumptions and projections which are inherently uncertain and involve the exercise of significant judgment, including as to the levels of and timing of receipt or payment of premiums, contributions, benefits, claims, expenses, interest credits, investment results, interest rates, retirement, mortality, morbidity and persistency. Although we frequently review the pricing of our insurance and pensions products and the adequacy of our insurance and pension plans reserves, we cannot determine with precision the ultimate amounts that we will pay for, or the timing of payment of, actual benefits, claims and expenses or whether the assets supporting our policy liabilities, together with future premiums and contributions, will be sufficient for payment of benefits and claims. Significant deviations in actual experience from our pricing assumptions could have a material adverse effect on the profitability of our insurance and pension plans products. In addition, if we conclude that our reserves, together with future premiums, are insufficient to cover future policy benefits and claims, we would be required to increase our reserves and incur income statement charges for the period in which the determination is made, which may have a material adverse effect on our results of operations and financial condition.

 

Our market, credit and operational risk management policies, procedures and methods may not be fully effective in mitigating our exposure to unidentified or unanticipated risks.

 

Our market, credit and operational risk management policies, procedures and methods, including our statistical modeling tools, such as value at risk (VAR), stress test and sensitive analyses, may not be fully effective in mitigating our risk exposure in all economic market environments or against all types of risk, including risks that we fail to identify or anticipate. Some of our qualitative tools and measures for managing risk are based upon our use of observed historical market behavior.  We apply statistical and other tools to these observations to quantify our risk exposures. These qualitative tools and measures may fail to predict future risk exposures. These risk exposures could, for example, arise from factors we did not anticipate or correctly evaluate in our statistical models. This would limit our ability to manage our risks. Our losses thus could be significantly greater than the historical measures indicate.  In addition, our quantified modeling does not take all risks into account.  Our more qualitative approach to managing those risks could prove insufficient, exposing us to material unanticipated losses.  If existing or potential customers believe our risk management is inadequate, they could take their business elsewhere. This could harm our reputation as well as our revenues and profits.

 

 

In addition, our businesses depend on the ability to process a large number of transactions securely, efficiently and accurately.  Losses can result from inadequate personnel, inadequate or failed internal control processes and systems, information systems failures or breaches or from external events that interrupt normal business operations.  We also face the risk that the design of our controls and procedures for mitigating operational risk proves to be inadequate or is circumvented.

 

We may incur losses associated with counterparty exposure.

 

We face the possibility that a counterparty will be unable to honor its contractual obligations. These counterparties may default on their obligations due to bankruptcy, lack of liquidity, operational failure or other reasons.  This risk may arise, for example, from entering into reinsurance agreements or loan facilities or other credit agreements under which counterparties have obligations to make payments to us; executing currency or other trades that fail to settle at the required time due to non-delivery by the counterparty or systems failure by clearing agents, exchanges, clearing houses or other financial intermediaries.  In addition, we routinely transact with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, mutual and hedge funds and other institutional clients.

 

Our controlling shareholder has the ability to direct our business.

 

As of December 31, 2009, IUPAR, our controlling shareholder, directly owned 51.0% of our common stock and 25.8% of our total capital stock.  See “Item 7A. Major Shareholders.” As a result, IUPAR has the power to control us, including the power to elect our directors and officers and determine the outcome of any action requiring shareholder approval, including transactions with related parties, corporate reorganizations and the timing and payment of dividends.  In addition, IUPAR is jointly controlled by Itaúsa, which is controlled by the Egydio de Souza Aranha family, and the former controlling shareholders of Unibanco, the Moreira Salles family.  The interests of IUPAR, Itaúsa and the Egydio de Souza Aranha and Moreira Salles families may be different from your interests as a shareholder or holder of ADS.

 

We are subject to regulation on a consolidated basis and may be subject to liquidation or intervention on a consolidated basis.

 

The Central Bank treats us and our subsidiaries and affiliates as a single financial institution for regulatory purposes. While our consolidated capital base provides financial strength and flexibility to our subsidiaries and affiliates, their activities could indirectly put our capital base at risk. In particular, any investigation of, or intervention by the Central Bank in, the affairs of any of our subsidiaries and affiliates could have an adverse impact on our other subsidiaries and affiliates and ultimately on us.

 

Risks Relating to the Preferred Shares and the ADSs

 

The relative volatility and illiquidity of the Brazilian securities markets may substantially limit your ability to sell the preferred shares underlying the ADSs at the price and time you desire.

 

Investing in securities that trade in emerging markets, such as Brazil, often involves greater risk than investing in securities of issuers in the United States or in other countries, and these investments are generally considered to be more speculative in nature.  The Brazilian securities market is substantially smaller, less liquid, more concentrated and can be more volatile than major securities markets in the United States or in other countries. We have not made any credit operations in the U.S. subprime market, including any collateralized debt obligations, however, the recent crisis in the United States subprime market may expose us to risk, as a result of a greater volatility in the Brazilian securities market. Accordingly, although you are entitled to withdraw the preferred shares underlying the ADSs from the depositary at any time, your ability to sell the preferred shares underlying the ADSs at a price and time at which you wish to do so may be substantially limited. There is also significantly greater concentration in the Brazilian securities market than in major securities markets such as the United States or in other countries. The ten largest companies in terms of market capitalization represented 54.7% of the aggregate market capitalization of the BM&FBOVESPA S.A. –  Bolsa de Valores, Mercadorias e Futuros , or BM&FBOVESPA, as of December 31, 2009. The top ten stocks in terms of trading volume accounted for 45.8%, 53.1% and 44.8% of all shares traded on the BM&FBOVESPA in 2007, 2008 and 2009, respectively.

 

The preferred shares and ADSs generally do not have voting rights.

 

Under Brazilian Corporate Law and our bylaws, holders of preferred shares, and therefore of the ADSs, are not entitled to vote at meetings of our shareholders, except in limited circumstances. See “Item 10B. Memorandum and Articles of Association.”

 

 

Holders of ADSs may be unable to exercise preemptive rights with respect to our preferred shares.

 

We may not be able to offer our preferred shares to U.S. holders of ADSs pursuant to preemptive rights granted to holders of our preferred shares in connection with any issuance of our preferred shares unless a registration statement under the Securities Act is effective with respect to the preferred shares and preemptive rights, or an exemption from the registration requirements of the Securities Act is available. We are not obligated to file a registration statement relating to preemptive rights with respect to our preferred shares, and we cannot assure you that we will file any such registration statement. If a registration statement is not filed and an exemption from registration does not exist, The Bank of New York Mellon, as depositary, will attempt to sell the preemptive rights, and you will be entitled to receive the proceeds of the sale. However, these preemptive rights will expire if the depositary does not sell them in a timely manner, and U.S. holders of ADSs will not realize any value from the granting of the preemptive rights. For more information on the exercise of your rights, see “Item 10B. Memorandum and Articles of Association – Preemptive Rights on Increase in Preferred Share Capital.”

 

If you surrender your ADSs and withdraw preferred shares, you risk losing the ability to remit foreign currency abroad and certain Brazilian   tax advantages.

 

As a holder of ADSs, you benefit from the electronic certificate of foreign capital registration obtained by the custodian for our preferred shares underlying the ADSs in Brazil, which permits the custodian to convert dividends and other distributions with respect to the preferred shares into non-Brazilian currency and remit the proceeds abroad. If you surrender your ADSs and withdraw preferred shares, you will be entitled to continue to rely on the custodian’s electronic certificate of foreign capital registration for only five business days from the date of withdrawal. Thereafter, upon the disposition of or distributions relating to the preferred shares, you will not be able to remit abroad non-Brazilian currency unless you obtain your own electronic certificate of foreign capital registration or you qualify under Brazilian foreign investment regulations that entitle some foreign investors to buy and sell shares on Brazilian stock exchanges without obtaining separate electronic certificates of foreign capital registration. If you do not qualify under the foreign investment regulations you will generally be subject to less favorable tax treatment of dividends and distributions on, and the proceeds from any sale of, our preferred shares. If you attempt to obtain your own electronic certificate of foreign capital registration, you may incur expenses or suffer delays in the application process, which could delay your ability to receive dividends or distributions relating to our preferred shares or the return of your capital in a timely manner. Moreover, should you surrender your ADSs and withdraw preferred shares, applicable regulations require you to enter into corresponding exchange transactions and pay taxes on these exchange transactions. The depositary’s electronic certificate of foreign capital registration may also be adversely affected by future legislative changes.

ITEM 4

INFORMATION ON THE COMPANY

 

4A.	History and Development of the Company

 

Itaú Unibanco Holding S.A.’s legal and commercial name is Itaú Unibanco Holding S.A. We were incorporated on September 9, 1943 and registered with the São Paulo State Board of Trade under number NIRE 35300010230. We are organized as a publicly held corporation for an unlimited period of time under the laws of the Federative Republic of Brazil. Our head offices are located at Praça Alfredo Egydio de Souza Aranha, 100, Torre Olavo Setubal, 04344-902, São Paulo, SP, Brazil and our telephone number is +55-11-5019-1267. Investor information can be found on our website at http://www.itauunibancoir.com/docs.  Information contained on our website is not incorporated by reference in, and shall not be considered a part of, this annual report.  Our agent for service of process in the United States is the general manager of our New York branch, which is located at 540 Madison Avenue, New York, NY 10022-3721.

General

 

The Itaú Financial Group traces its origins to 1944, when members of the Egydio de Souza Aranha family founded Banco Federal de Crédito S.A. in São Paulo. Unibanco Financial Group was founded by members of the Moreira Salles family in 1924, making it Brazil’s oldest non-state owned bank at the time of the Association with the Itaú Financial Group.

On November 3, 2008, the controlling shareholders of Itaúsa and of Unibanco Holdings entered into an association agreement to combine the operations of Itaú and Unibanco Financial Groups. To effect the Association, we carried out a corporate restructuring pursuant to which Unibanco Holdings and its subsidiary Unibanco became wholly owned subsidiaries of Itaú Unibanco Holding.

The shareholders of each of Itaú Unibanco Holding, Itaú Unibanco, E. Johnston Representação e Participações S.A., or Companhia E. Johnston, Unibanco Holdings and Unibanco approved the corporate reorganization at an extraordinary shareholders’ meetings held on November 28, 2008. The transactions were approved by the Central Bank in February 2009. The Association is pending approval by Brazilian anti-trust authorities ( Conselho Administrativo de Defesa Econômica ),   or CADE.

 

 

Operations

The table below presents revenues in U.S. GAAP for our segments for each of the years ended December 31, 2009, 2008 and 2007. According to note 32 to the consolidated financial statements, we now disclose four operational segments: Commercial Bank, Itaú BBA, Consumer Credit, and Corporation and Treasury.

(in millions of R$)
		2009				2008				2007
Commercial Bank (1)			37,473				25,359				20,355
Interest income from loans and leases			30,154				18,391				14,559
Fee and commission income			7,319				6,967				5,796
Itaú BBA			4,956				4,783				2,134
Interest income from loans and leases			4,352				4,395				1,779
Fee and commission income			603				388				355
Consumer Credit			19,632				10,126				8,241
Interest income from loans and leases			14,075				8,540				6,560
Fee and commission income			5,557				1,586				1,681

(in millions of R$)
		2009				2008				2007
Interest income from loan and leases			48,582				31,327				22,898
Brazil			45,261				25,924				19,643
Abroad			3,320				5,403				3,255
Fee and commission income			13,479				8,941				7,832
Brazil			12,853				8,337				7,485
Abroad			627				604				347
Insurance premiums, income on private retirement plans and on capitalization plans			8,132				3,917				3,500
Brazil			8,091				3,912				3,500
Abroad			41				5				-

(in millions of R$)
		2009				2008				2007
Commercial Bank			3,200				5,417				2,585
Argentina			282				379				205
Chile			610				1,112				597
Uruguay			252				1,694				724
Other companies abroad (1)			2,056				2,232				1,059
Itaú BBA			675				481				953
Other companies abroad (1)			675				481				953
Itaú Unibanco - Credit Card			112				114				63
Argentina			19				22				11
Uruguay			79				92				52
Chile			14				-				-

 

All of our transactions with Banco Itaú Europa and its subsidiaries are on an arm’s-length basis. Banco Itaú Europa’s senior unsecured debt is rated Baa1 by Moody’s and BBB+ by Fitch.

Other International Operations

 

In November 2008, Itaú Unibanco Holding entered into an agreement with Itaúsa for the acquisition of a 77.8% interest and a 80.0% voting interest in Itaúsa Export, and of a 12.13% voting interest of Itaúsa Europa, a subsidiary of Itaúsa Export, for approximately R$1,136.0 million.  As a result of the acquisition and subsequent corporate events, Itaú Unibanco Holding now holds indirectly 100% of the total and voting interest of Itaúsa Europa and Itaúsa Export. Itaúsa Export is a holding company domiciled in Brazil which holds a controlling interest in Itaúsa Europa. Itaúsa Europa is a holding company domiciled in Portugal.  Itaúsa Export’s and Itaúsa Europa’s business activities are carried out by their indirect subsidiaries and include corporate banking, international cash management services and private banking.  The acquisition by Itaú Unibanco Holding of all of the stock of Itaúsa Export and Itaúsa Europa was a condition precedent to the Association.

Our other international operations have the following objectives:

 

(1)           Support our customers in cross-border financial transactions and services:

 

The international areas of Itaú Unibanco Holding are active in providing our customers with a variety of financial products such as trade financing, loans from multilateral credit agencies, off-shore loans, international cash management services, foreign exchange, letters of credit, guarantees required in international bidding processes, derivatives for hedging or proprietary trading purposes, structured transactions, and international capital markets offerings.

 

Our international units include: Itaú BBA, Nassau branch (focused on corporate banking business); Itaú Unibanco, New York branch, Itaú Unibanco, Nassau branch and Itaú Unibanco, Cayman Islands branch (focused on middle-market customers); Interbanco S.A. (Paraguay), Banco Itaú Argentina, Banco Itaú Chile and Banco Itaú Uruguay (focused on retail customers, international corporate banking and middle-market); and Itaú Unibanco, Tokyo branch (focused on Brazilian retail customers living in Japan).

 

(2)           Manage proprietary portfolios and raise funds through the issuance of securities in the international market.

 

Funds raising through the issuance of securities, certificates of deposit, commercial paper and trade notes can be executed by Itaú Unibanco’s branches located in the Cayman Islands, Nassau, Bahamas and New York, Itaú Bank Ltd., or Itaú Bank, a banking subsidiary incorporated in the Cayman Islands, or Banco Itaú BBA’s Nassau branch. Itaú Unibanco’s Cayman Islands branch has issued subordinated debt which is treated as Tier 2 Capital. For a description of Tier 1 and Tier 2 Capital, see “—Regulation and Supervision—Regulation by the Central Bank—Capital Adequacy and Leverage/Regulatory Capital Requirements.”

 

The proprietary portfolios are mainly held by Itaú Bank and Itaú Unibanco Cayman Islands branch. These offices also enhance our ability to manage our international liquidity. Itaú BBA’s proprietary positions abroad are booked in the Itaú BBA, Nassau branch.

 

Marketing and Distribution Channels

 

We provide integrated financial services and products to our customers through a variety of marketing and distribution channels. Our distribution network consists principally of branches, ATMs and customer site branches, or CSBs, which are banking service centers located on corporate customers’ premises.

 

The following table provides information relating to our branch network, customer site branches and ATMs as of December 31, 2009 in Brazil and abroad:

 

		Branches				CSBs				ATMs
Itaú Unibanco Holding			3,550				915				29,522
Itaú Personnalité			165				3				344
Itaú BBA			9				-				-
Total in Brazil			3,724				918				29,866
Itaú Unibanco abroad (excluding Latin America)			4				-				-
Argentina			81				23				164
Chile			70				-				48
Uruguay			38				1				32
Paraguay			19				6				166
Total			3,936				948				30,276

Region		Branches				CSBs				ATMs
South			633				125				4,179
Southeast			2,499				653				21,694
Center-west			282				62				1,663
Northeast			242				45				1,788
North			68				33				542
Total in Brazil			3,724				918				29,866