ITUB

Business Context and Reporting Period

This filing covers the consolidated financial results of Itau Unibanco Holding S.A. for the first quarter ended March 31, 2003. The period was marked by significant corporate restructuring, including the conclusion of the association with Banco BBA Creditanstalt (creating Banco Itaú-BBA) and the acquisition of 99.99% of Banco Fiat S.A. The Brazilian economy showed signs of stabilization under the new administration, with accumulated inflation at 5.1% (IPCA) and a strengthening of the Brazilian Real.

Key Financial Metrics

Key Ratios:

• Annualized Return on Equity (ROE): 31.8% (vs. 28.3% in Q1 2002)
• Return on Assets (ROA): 2.5%
• Efficiency Ratio: 40.1% (improved from 55.4% in Q1 2002)
• Liquidity Ratio (Basel): 19.7%
• Non-Performing Loans (NPL): 4.2% of total portfolio

Material Changes vs. Prior Period

• Acquisitions and Consolidation: The significant growth in assets and loans (42.5% and 42.6% respectively) is primarily driven by the consolidation of Banco BBA and Banco Fiat portfolios. Banco Fiat's acquisition added R$ 10.6 billion to the loan portfolio, though it had no impact on the P&L except for goodwill amortization.
• Profitability Surge: Operating income increased 174.3% year-over-year, driven by higher net income from financial operations and banking service fees. Recurring net income more than doubled.
• Provisions: The allowance for loan losses increased to R$ 3.128 billion (7.9% of total loans), exceeding non-accrual loans by R$ 1.477 billion. An additional provision of R$ 545 million was created to neutralize potential asset deterioration due to market volatility.
• Extraordinary Items: Net income was reduced by an extraordinary loss of R$ 532 million, primarily due to the full amortization of goodwill related to the Banco Fiat acquisition and the standardization of risk ratings for newly acquired portfolios.

Guidance, Outlook, and Risks

Management Commentary: Management highlighted the successful integration of BBA and Fiat, strengthening the bank's position in corporate banking, private banking, and auto financing. The efficiency ratio improved to 40.1%, reflecting controlled administrative expenses despite consolidation.

Risks and Contingencies:

• Foreign Exchange Risk: The bank maintains a net foreign exchange position of approximately US$ 761 million. Management has established an additional provision of R$ 545 million to cover potential losses if the Real appreciates to R$ 2.80/USD.
• Argentina Exposure: Banco Itaú Buen Ayre reported a recurring net loss of R$ 3 million in the quarter due to the valuation of the Argentine Peso against the USD. Management estimates a potential loss range of R$ 37.5 million to R$ 159.7 million on the credit portfolio, though current provisions cover these exposures.
• Interest Rate Risk: The Central Bank of Brazil raised the base interest rate (Selic) to 26.5% p.a. to combat inflation, impacting funding costs.

Investor Verification Checklist

• Acquisition Integration: Verify the progress of integrating Banco BBA and Banco Fiat operations and the realization of expected synergies.
• Provision Adequacy: Confirm the sufficiency of the R$ 545 million additional provision against potential currency fluctuations and the R$ 1.477 billion cushion over non-accrual loans.
• Argentina Exposure: Monitor the stability of the Argentine Peso and the bank's exposure to sovereign risk in that region.
• Goodwill Amortization: Assess the impact of future goodwill amortization from acquisitions on recurring earnings.
• Regulatory Capital: Verify that the Risk-Based Capital ratio of 19.7% remains well above the 11.0% regulatory minimum under changing BACEN resolutions.