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In order to maintain its leadership position in the Brazilian Banking Industry, Banco do Brasil plans and carries out businesses based on products and services which meet the real and potential needs of the market. These needs have led BB to develop modern products which, in addition to profitability, offer security and convenience to its clients.

This vision of the market, a constant theme in this report, is dealt with in a special way in this chapter. The following is a brief description of how the Brazilian economy and the world economy have behaved in 2010, also providing an outline of the expectations for the future in the financial and banking markets. Thereafter, we go into details of the main products and services offered by Banco do Brasil and their performance in 2010. Access the main Bank's website (, to learn more about our products and services. Additionaly, you can find detailed information on our performance and results in the Investor Relations website (

Economic and Sector Scenario

National and International Economic Scenario

The year 2010 brought a recovery in global economic activity, after the crisis of 2008, considered by many to be the most severe since the Great Depression, that took place in the first decades of the 20th-century. Emerging markets displayed more dynamism in their recovery, while developed countries recovered more slowly; United States, Japan and the central economies of the Euro Zone experienced high levels of unemployment, low interest rates and the potential risk of deflation.

Doubts with regard to the fiscal sustainability of some European countries, particularly Greece, Ireland, Portugal and Spain, in 2010 also affected global financial stability. Despite the creation of the European Financial Stabilization Fund, with the objective of coming to the rescue of heavily indebted countries in the region, and the results which were in principle satisfactory, uncertainty continued to persist about fiscal vulnerability in Europe.

To bring new life into the American economy, the US monetary authorities adopted a new package for the expansion of liquidity focused on the purchase of sovereign debt securities. The excess supply of money caused the dollar to devalue in the international markets, giving rise to a number of reactions, basically of a protectionist nature, by various countries in response to the loss of competitiveness for their exports.

The depreciation of the US dollar, in turn, had a positive impact on the main commodity prices, which combined with supply shocks, produced adverse inflationary effects in emerging markets. In this group of countries could be seen a strong economic recovery trend led by China, India and Brazil. It is not by chance that in many of these nations, there was a reversal in the anti-cyclic policies adopted during 2008/2009, in order to combat the adverse effects of the crisis.

The Brazilian economy reacted more quickly, principally based on the good performance of the labour and credit markets, the main drivers for domestic demand. During the year, unemployment rates fell to an historic low since the beginning of the new series which began in 2002, while the net creation of positions in the formal job market reached a new historic high. In this scenario, there was a significant expansion in credit, the offering of which was led by banks in the public sector, reaching a level of close to 47% of Gross Domestic Product (GPD).

Reflecting this favourable scenario, the growth in the Brazilian economy in 2010 reached 7.5% (see table), its highest level since 1986 (also 7.5%). In this way, the Country ended the decade 2001-2010 with an annual average growth rate of 3.6%, above the average for the previous decade (1991-2000), when GDP, taking market prices, grew by an average of 2.6%. On the supply side, the strongest growth was seen in industry and commerce, while from the demand side, the leading growth areas were family consumption and investments.

GDP Growth

  2005 2006 2007 2008 2009 2010
GDP (% change over 12 months) 3.20 4.00 6.10 5.20 -0.60 7.50

This quick expansion in demand, even though partially accompanied by an increase in imports, contributed in conjunction with pressure coming from food prices, to inflation exceeding the central target for 2010, defined by the Government at 4.5%. The variation in the IPCA, however, remained within the tolerance range in the inflation target system, whose upper limit was stipulated at 6.5% for the calendar year.

Variation in Extended National Consumer Price Index (IPCA)

In response to the acceleration in prices and the consequent deterioration in future inflation expectations, from April to July the Brazilian Central Bank carried out a brief adjustment in the basic interest rate, taking the Selic rate up from 8.75% p.a. to 10.75% p.a.

In addition to this, in the last quarter of the year, Central Bank announced a package of preventative measures including, among other aspects, an increase in the compulsory deposit requirement on demand and term deposits, and an increase in the risk weighting factor for lending operations to private individuals. According to Brazilian Central Bank, this combination of measures is aimed at perfecting existing regulation instruments, maintaining the stability of the Brazilian Banking Industry, and allowing the continuing sustainable development of the credit market.

Basic Interest Rates

Source: Central Bank of Brazil

Banking Industry in Brazil

With the resumption in investment following the crisis, and the intensification of competition between banks, 2010 had various moves in the financial market.

One of the main areas was the card business. In this area, three moves came in the wake of the government actions to increase competition in the sector: the creation of a new card brand (Elo), by BB and Bradesco, with a focus on the low-income section of the public, the partnership by Santander with the company GetNet, which also entered into the dispute with Cielo and Redecard and the efforts made to make Hipercard a national brand name (still very linked to the Northeast). Despite the significant growth in the last few years in the number of cards and card sales, the Country still has an enormous potential (by 2014, the market is likely to double in size).

In the credit segment, the banks have been focusing their strategies on payroll loans, real-estate loans, vehicle financing and loans to micro and small businesses.

In the payroll loan segment, expectations are that ratio with respect to GDP will double by 2020 (today it is 4.3%), based on growth estimates for the economy and the improvement in employment levels.

Real-estate lending continues to grow at a rapid rate, likely to reach around R$500 billion by 2014, according to the Brazilian Association of Real Estate Credit and Savings (ABECIP). However, a challenge to be overcome is the creation of new financing instruments, seeing that savings funds are likely to meet demand only to 2012.

The segment of micro and small business has been served by an increasing amount of branch specialization, the hiring of managers and investment in training. According to Serasa Experian, demand for lending by these companies increased by 21.4% between Dec/09 and Sep/10, with the rate of payment punctuality being 95.5%, while the number of business failures registered dropped by 41.9%.

In terms of spreading the use of banking services and the drive to capture clients from the low-income sector, there have been a number of significant moves. Part of the sector believes that the best way of creating a banking relationship is through credit cards, particularly in partnerships with major stores and supermarkets. While other organizations believe that the opening of branches in regions with high population density (such as in needy communities), appointing banking representatives and, particularly the use of cellular phones, represent the quickest ways of reaching this public audience.

Another area in which Brazilian financial institutions see great potential is that of micro-insurance, with low premiums which could make insurance more popular, reaching a larger number of people. The opening of the new client service outlets continues to be one of the strategies of the main banks, in terms of sales channels.

The year also saw the end of the banking branch merger process of Itaú/Unibanco, Santander/Real and BB/Nossa Caixa.

The movements is carried out by the banks were reflected in their figures for 2010. The assets of the main players increased by an average of 14.0%, compared to 2009. The total funds in the Brazilian Banking Industry (consolidated figures I and II from Central Bank) amounted to R$3,140 billion, with the 10 top banks in the Country representing 86.5% of this total, compared to 85.4% in December 2009.

Total lending came to R$1.6 trillion as at the end of December 2010, up 20% of the year, representing 46.7% of GDP.

Prospects for the Next Few Years

In the macro environment:
1. Strengthening of Brazilian companies, generation of jobs, incomes and consumption, and an improvement in the main national social indicators;
2. Changes in the behaviour of consumers due to increasing longevity and new social and family arrangements.

In the financial industry:
1. Increasing competition in the banking market; customization and differentiation of products;
2. The implementation from 2012, of "free option" banking in Brazil;
3. Consolidation of the large banks;
4. Expansion in the transnational operations of national banks;
5. Increase in the amount of funding raised in the capital markets by companies in the Corporate and Middle Market segments;
6. Increase in the regulation of the financial system, to international agreements and norms issued by the national banking authorities;
7. Increased training of banking employees;
8. Growth in the practice and extent of variable remuneration in the financial industry;
9. Increase in new labor relationship arrangements due to the complexity of the people's management of labour.