In more than one sense, 2004 was an exceptional year for the world economy, for
Brazil and for Unibanco. This Letter attempts to put the recent facts into perspective,
demonstrating to shareholders why Unibanco, just after celebrating its first 80
years, looks ahead to 2005 and far beyond with a serene sense of confidence. With
the self-assurance of a financial institutional that has long known how to confront
challenges, to make the best of all opportunities and to consolidate its position
as one of the major banks in the country.
The Brazilian economy in 2004 grew in excess of 5% in real terms, the highest
rate since the 5.9% registered in 1994, with a 7.6% inflation rate, within the
official target of 5.5% + 2.5 p.p., lower than the annual average rate of 9.2%
in the 1995-2003 period. Credit expansion for the year stood above 21% in nominal
terms, with consumer credit rising as much as 29% (business credit growth was
16.3%). Unemployment closed the year at 9.6%, the lowest rate since the new
statistical series was launched, in October 2001. This reflects the economy's
vigor, the improvement in expectations and a larger degree of consumer and investor
confidence. At year-end, the exchange-rate was R$2.65 to the US dollar, down
from R$2.89 in 2003. The consolidated public debt declined to less than 52%
of GDP at the end of December, from 57% a year earlier.
This good performance in 2004 can be attributed to three main factors, which
should be kept in mind, given their relevance to the evaluation of Brazil's
and Unibanco's prospects for 2005 and 2006. After all, a motion picture is much
more realistic than a still photograph.
Firstly, it is important to remind that 2004 was an extraordinary year for
the international economy. As in very few years in the past decades, world output
increased by 5% in real terms, and with particular momentum in what the IMF
(PPP methodology) considers the two largest economies today: the United States
(4.4%) and China (9.5%). The robust demand caused a significant expansion in
international trade, in volume as well as price, particularly commodities, and
the same was true for the flow of trade-related direct investment. American
interest rates in 2004, and also in 2003, were at their lowest levels since
the early 1960's. As a consequence, the vast international liquidity reduced
risk-aversion and cleared the way for a significant expansion of capital flows
to governments and corporations, including those of several developing countries.
Secondly, we must pay justice to the Brazilian macroeconomic policy, in special
the demeanor of Finance Minister Antonio Palocci and his team during the first
two years of the current administration. A reaffirmation of the commitments
to fiscal responsibility, to controlling inflation, and to the floating exchange
regime was absolutely essential to the gradual reduction of the uncertainties
that had plagued good part of 2002's election year. The commitment was also
crucial to conduct the expectation-building process so that it had a positive
influence on corporate sentiment as well as consumer confidence.
Lastly, and perhaps less visible - if no less important -, are the processes
of institutional change and structural transformation that have characterized
the Brazilian economy for over a decade. Achievements such as the defeat of
hyperinflation that averaged 1,000% a year between 1988 and 1994. Or the relative
opening of the economy, to foreign trade that stimulated, in a first moment,
imports of capital goods and industrial inputs, increasing economic efficiency
and international competitiveness. The Fiscal Responsibility Law, the re-negotiation
of State and Municipal debt. The post-hyperinflation cleanup of the financial
system. The opening of entire sectors and industries to private investment,
areas in which the public sector could not invest to the degree required for
long term economic growth.
In short, the economic performance in 2004 resulted from a favorable conjunction
of commercial and financial external factors, a responsible set of macroeconomic
policies adopted by the government of President Luiz Inácio Lula da Silva,
and advancements in institutional and structural changes which Brazil attained
during previous administrations.
Unibanco, just like other Brazilian banks that prepared for the new times,
performed well in 2004. Total assets reached R$79.35 billion, stockholders'
equity rose to R$8.1 billion, credit portfolio to R$31.8 billion and total deposits
to R$33.5 billion. Earnings grew 22% over 2003, to R$1,283 million, for a 16.8%
annualized return on average net equity (20.1% in the fourth quarter alone,
indicating a favorable trend).
The evolution of positive results along 2004 caught the eyes of the market.
On September 1st Bovespa announced the new composition of IBrX-50 index, representing
the 50 most traded stocks. The Unit (UBBR11) was added to the IBrX-50 on that
date, with a 2.724% weight, equivalent to the 11th position
in the index. Proof that inclusion in the IBrX-50 was a step in the right direction
to increase the Units' liquidity in the local market, is that their relative
weight increased to 2.926% when the index was rebalanced for the four-month
period of January to April 2005.
Yet another step, extremely important to the liquidity of the Units, was the
announcement, on December 3rd, 2004, of a secondary public offering of approximately
46 million Units held by Commerzbank and BNL, representing 6.6% of Unibanco's
total capital.
The offer closed early in 2005 with extraordinary success. The demand for the
tendered Units surpassed offer by 5 to 1. About one hundred institutional investors
signed the offer book. Demand from individual investors involved 1,653 bids.
The operation yielded over R$718 million, besides significantly increasing the
Units float.
The outstanding response to the public offer, from both local and foreign investors,
demonstrates the markets' favorable outlook of the change process underway at
Unibanco. As the bank's chief executive remarked on February 4th, "Some
of the most sophisticated investors in Brazil and abroad signed up and purchased
Unibanco stock. Many of them bought Units for the first time ever. We surmounted,
with the offer, the old predicament, that our stock was held only by emerging
markets dedicated funds. Now we are in the portfolio of large investors, who
trade in stocks from the largest companies in the world".
Unibanco continues to fully explore the potential of the universal bank model,
in which synergies and cross-selling in Retail, Wholesale, Insurance and Pensions
and Wealth Management are at work. The synergy opportunities are compelling,
given Unibanco's significant market share in each of these businesses.
The Retail area, with its fully-owned subsidiaries and joint-ventures, reaches
more than 18 million individual clients, over 450,000 small and medium companies;
its credit portfolio stands at R$18 billion. The Wholesale area serves about
2,000 large companies with a complete range of products, projects and services,
holding a R$14 billion credit portfolio.
Unibanco AIG, a joint-venture with US-based giant AIG, with 8% market share,
is the leader in corporate risk and pioneer in the development of new products.
The Wealth Management unit manages R$33 billion in third-party assets (4.8%
market share), and is second in private banking, with 9.3% of the total assets
under management.
Unibanco was a pioneer and is one of the Brazilian leaders in consumer financing,
through its subsidiaries and joint-ventures. This winning strategy was rolled
out years ago. It continued to evolve in 2004, with the acquisition of Hipercard,
for R$630 million, announced March 1st, the operational agreement with Bompreço
S.A. (Wal-Mart); the joint-venture with the Sonae group to establish a financing
company; and the partnership restructuring of the Credicard group, wrapped up
on December 29.
This last one was a major deal. Unibanco sold its 33% stake back to the two
remaining original partners in Credicard (and Orbitall) for approximately R$1.7
billion (17 times earnings, 10.4 times equity). Redecard, the Credicard subsidiary
in charge of the electronic transmission of credit card transactions, and therefore
the relationship with retailers, was not part of the deal. The proceeds were
used to build up Unibanco's balance sheet (amortizing goodwill balances, bolstering
provisioning for non-performing loans, covering restructuring expenses and fiscal
contingencies), further increasing its traditional solidity and improving earnings
per share.
Unibanco's presence in the credit card market remains robust: 8 million active
cards issued by fully owned subsidiaries, 9.5 million private-label cards, besides
self-sufficiency to process all of the above.
The strategic focus on higher-margin, larger growth-potential business led
it to a nearly five-fold increase in client-base in only five years (18.2 million
currently from 3.7 million in 1999), including the bank, its subsidiaries (Fininvest,
Unicard and Hipercard) and its joint-ventures (PontoCred, LuizaCred, Redecard
and Sonae). Unibanco is also a party in several strategic partnerships (with
Wal-Mart, Ipiranga and Martins, among others). This financing network has demonstrated
a vast potential to spur cross-sales and increase the conglomerate's presence
in a high-potential market as Brazil, where the credit/GDP ratio currently stands
at 27% compared with 67% in Chile, 80% in Canada, over 100% in Malaysia and
South Korea and above 120% in Germany and United States. Unibanco is extraordinarily
well-positioned to benefit from the compelling credit growth prospects in the
country.
It was precisely the quest to improve its positioning and readiness to make
the most of future challenges that led Unibanco to undergo a wide-ranging process
of restructuring in its 80th anniversary. Pedro Moreira Salles took over as
chief executive in the context of a sweeping business realignment that did not
involve just the staff or restricted itself to the bank's four major business
areas. Other areas have been either created or consolidated: Risk and Macroeconomic
Research; Legal, Auditing, Compliance and Government Relations; Planning, Control
and Operations; People; and Corporate Communication.
The Board of Directors in 2004 welcomed Armínio Fraga and Joaquim Francisco
de Castro Neto. Both bring to the board their extraordinary professional experiences,
recognized technical expertise and a devotion to the goals of excellence that
drive Unibanco. Pedro Moreira Salles remains on the board as Vice-President,
position occupied at the time by the author of this Letter, who moved up as
Chairman, the fourth in the bank's history.
With these changes, Unibanco defined its new challenge, to be attained in 2006,
which is, in a nutshell: a rate of return on average equity of 20%, or R$2 billion
profit on an average equity of R$10 billion in that year. A hefty challenge,
a clear goal and a staff that is deeply committed to attain it.
The Executive Board and the Board of Directors are fully committed to take
the necessary actions to reach the targeted result. The pledge involves focus
on cost reduction, budget execution, efficiency indices, internal audits and
a constant concentration on client services, counting on the dedication of the
staff and the quality of investor relations. The bank in 2004 created the Auditing
Committee, led by a Board member and two external members, in charge of following
the work of the independent auditors and the internal auditors and overseeing
the quality of internal controls and financial statements.
The Executives and the Board realize that Unibanco must continuously adapt
its position to the competitive environment, assessing performance vis-à-vis
that of its best competitors, aware of the best market practices and pursuing
excellence in the analysis of the multiple risks involved in banking. Executives
and board also fully realize the degree to which the bank's activity is affected
by the prospects of the Brazilian economy, in its turn strongly influenced by
the wider context of the international economy.
As for the global economy, it is expected to perform relatively well in 2005,
though not as well as in 2004, which was extraordinary for global growth and
imparted a momentum that should partially carry into this year. The inevitable
rise in American interest rates could reduce the appetite for risk. The volatility
between major currencies should not subside, in view of the magnitude of the
U.S. balance of payments imbalances, its high fiscal deficit and the lowest
rate of domestic savings in its history. There are lingering uncertainties regarding
the sustainability of Asia's high economic growth rates, the relatively modest
rates of growth in European economies, and the evolution of oil prices, at the
whims of political instability in the Middle East.
The good news is that the Brazilian economy and its financial system are today
poised to endure turbulence and volatility, due to the factors previously discussed,
that have gradually reduced the economic vulnerabilities, either actual or perceived.
The current government has been responsibly building upon the advancements achieved
by the Brazilian society. It is crucial that these advancements continue. And
there are reasons to believe that this will be the case, in face of the recent
experience, which allow us to look to 2005 and beyond with prudent confidence.
Confidence in the future of the country. And in Unibanco's future.
Cordially,
PEDRO SAMPAIO MALAN
Chairman of the Board of Directors
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