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BRAZIL BANKS LARGE BANKS

Initiation of Coverage | 20 April 2012

Research

Banco Bradesco: A shelter from the storm

Bradesco

Source: Bloomberg for Closing Price, Company data and Espirito Santo Investment Bank Research for estimates. Priced as at market close on 17 April 2012

Source: Bloomberg Analyst Gustavo Schroden +55 11 3074 7356 - [email protected] [BES Securities do Brasil, S.A – CCVM]

Mateus Renault +55 11 3074 7412 - [email protected] [BES Securities do Brasil, S.A – CCVM] FOR IMPORTANT DISCLOSURE INFORMATION, INCLUDING DISCLOSURES RELATED TO THE U.S. DISTRIBUTOR OF THIS REPORT, PLEASE REFER TO THE FINAL PAGES OF THIS REPORT Please refer to page 35 of this report for important disclosures, analyst certifications and additional information. Espirito Santo Investment Bank does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. This research report has been prepared in whole or in part by research analysts based outside the US who are not registered/ qualified as research analysts with FINRA.

We initiate coverage of Banco Bradesco with a BUY rating and a FV of R$35.0/sh, giving 14.4% upside potential. We believe that the bank may surprise the market by accelerating the improvement in its operating expenses in 2012E. Given the currently unfavourable environment for BZ banks, we have a relative preference for Bradesco owing to its lower-risk loan portfolio and proven track record. We highlight that Bradesco has a well diversified portfolio, its bottom line is less dependent on interest income in the long term (helped by the insurance business) and it has a strong track record in challenging economic environments. We estimate 12E EPS growth of 12.5% (6.3% above consensus) and a 2012E ROE of 21.2%.

We may see good news in the short term We believe that Bradesco may positively surprise the market. We highlight that an improvement in other expenses (i.e., marketing and SG&A) should partially offset the negative impact of organic expansion on 2012E EPS. We also note that most of the investments related to network expansion were already made in 4Q11 and, as a consequence, we forecast an improvement in operating expenses earlier than the street. (For 2012E, we forecast a 10% increase in operating expenses.) However, we do not rule out pressure on operating expenses as a consequence of its organic growth plan. Bradesco will face a challenge as it looks to continue expanding its distribution network (mainly across regional borders), while at the same time maintaining its operating expenses under control.

Profitability is still high, despite a potential negative effect from margin compression in 2012E. The bank has reported a 7-year historical average ROE of 24.6%. In 2012E, although the bank’s results may be negatively affected by margin compression due to the credit mix, with a large share of loan concessions in less profitable segments and competition from state-owned banks + pressure on operating expenses (although to a lesser extent than in 2011), we estimate an ROE of 21.2% and a 22.5% sustainable ROE in the long term. In relative terms, asset quality may bring good news in 2012E. Bradesco’s loan portfolio is well diversified and, as a consequence, we think it has the lowest risk in comparison with its peers. The fact that large companies represented 38% of Bradesco’s total portfolio, individuals 31% and small and mid-sized companies (SMEs) 30% as of Dec/11 has led us to estimate the lowest increase in loan loss expenses (19.7%) in 2012E of the banks in our coverage universe.

Risk/reward supports our preference for Bradesco. At the end of 2011, Bradesco’s shares were trading at a premium to its peers on P/BV, which narrowed in 1Q12, owing in our view to the market pricing in the negative impact of organic expansion on the bank’s Opex. BBDC4’s share price has fallen by -.021% versus the average of BZ large cap banks of +0.4% YTD. Taking into account our assumption that Bradesco may surprise positively on the Opex side, we see Bradesco as offering the best risk-reward balance of the large-cap banks under our coverage. Our forecast for 12E ROE of 21.2% and 12.5% YoY EPS growth and the current 12E P/BV of 1.8x look attractive vs the bank’s EPS estimates. On our fair value of R$35.0/sh (22.5% sustainable ROE), the bank trades on a P/BV of 2.1x, or 14.4% potential upside, which supports our BUY rating.

BUY 14.4% upsideFair Value (R$/sh) 35.0Bovespa, Bloomberg BBDC4, BBDC4 BZ Share Price (R$/sh) 30.58Market Capitalisation (m) 116,750Free Float 59.9%

Year to Dec, R$ 2010A 2011A 2012E 2013ETotal gross interest income (m) 67,826 90,091 90,101 104,451Net Interest Income (m) 33,059 39,320 43,932 48,005Loan loss expenses (m) (8,703) (10,237) (12,251) (13,643)NPLs / Average loans 4.2% 4.9% 4.5% 4.5%Net profit (adjusted) 10,022 11,029 12,603 14,253NIM recurring 6.2% 6.1% 5.8% 5.6%ROE (recurring) 21.8% 21.6% 21.2% 21.1%ROA (recurring) 1.7% 1.6% 1.5% 1.5%EPS 2.61 2.93 3.30 3.73

At Current Price: 2010A 2011A 2012E 2013EPE (x) 11.7 10.4 9.3 8.2PE pre Provisions Profit per Share (x) 6.2 5.5 4.7 4.2PBV (x) 2.4 2.1 1.8 1.6Dividend Yield (%) 2.9% 3.2% 4.3% 4.9%Payout ratio (%) 33.6% 34.4% 40.0% 40.0%At Fair Value: 2010A 2011A 2012E 2013EPE (x) 13.4 11.9 10.6 9.4Price Pre Provisions Profit per Share (x) 7.1 6.3 5.4 4.8PBV (x) 2.8 2.4 2.1 1.9Dividend Yield (%) 2.6% 2.8% 3.8% 4.3%

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Dec‐10 Feb‐11 Apr‐11 Jun‐11 Aug‐11 Oct‐11 Dec‐11

Market Relative Performance

BBDC4 Ibovespa

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Table of Contents Section 1: Investment Summary ............................................................................................................................................................................................. 3

Section 2: Valuation ................................................................................................................................................................................................................ 4

Banco Bradesco ..................................................................................................................................................................... Erro! Indicador não definido.

Growth may be challenging ahead... ................................................................................................................................................................................. 7

...Operating Expenses still affect earnings...but may be a good surprise ......................................................................................................................... 7

...however, in relative terms, asset quality may bring good news in 2012E... ................................................................................................................... 8

...Insurance business should play an important role in the coming years; however, the lower Selic rate should affect the segment’s profitability ......... 9

Main Assumptions ........................................................................................................................................................................................................... 12

Key Figures ..................................................................................................................................................................................................................... 13

Risk Factors .................................................................................................................................................................................................................... 14

Banco Bradesco at a glance ........................................................................................................................................................................................... 15

Neutral stance on Brazilian Large Cap Banks ...................................................................................................................................................................... 20

Section 3: Macroeconomics: Between a rock and a hard place ........................................................................................................................................... 23

Section 4: Credit prospects for 2012 .................................................................................................................................................................................... 25

4.1: Credit Growth may be lower than in 2011 ................................................................................................................................................................ 25

4.2: Asset Quality: We still have concerns about NPLs .................................................................................................................................................. 26

4.3: Margins: Affected by competition from state-owned banks + credit mix .................................................................................................................. 29

4.3.1:Lower spreads may hit margins sooner than previously expected ........................................................................................................................ 29

4.3.2: Credit Mix .............................................................................................................................................................................................................. 30

4.4: Basel III: Transition schedule of capital requirements in Brazil ................................................................................................................................ 31

This document is priced as at 17/04/2012, unless otherwise stated

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Section 1: Investment Summary

We initiate on Bradesco with a BUY rating and Fair Value of R$35.0/sh. We believe the bank may surprise the market by accelerating the improvement in its operating costs and we also like its relatively low-risk loan portfolio. We select Bradesco as our top pick among Brazilian large cap banks. Profitability is still high despite a potential negative effect from margin compression in 2012E. The bank has reported a 7-year historical average ROE of 24.6%. Although the bank’s 2012E results may be negatively affected by margin compression due to the credit mix (with a significant share of loan concessions in less profitable segments), higher competition from state-owned banks, higher loan loss provisions and operating expenses pressure, we estimate a 2012E ROE of 21.2%. Our long-term sustainable ROE forecast is 22.5%, making Bradesco the second-most profitable bank in our coverage universe (behind Itau Unibanco), but with lower risks in the short term, in our view. We believe that Bradesco may surprise the market. We highlight that the control of other expenses, such as marketing and SG&A, should partially offset the negative impact of organic expansion on 2012E EPS. In addition, we note that most of the investments related to network expansion were already completed in 4Q11 and we expect an improvement in operating expenses earlier than the street (2012E EPS 6% above consensus). We forecast a 10% increase in operating expenses in 2012E.

We do not rule out pressure on operating expenses as a consequence of the bank’s organic growth plan. Bradesco will face the challenge of continuing the organic growth of its distribution network, mainly to conclude the rebuilding of its presence across regional borders, while at the same time maintaining control over its operating expenses. The bank has been working to rebuild its distribution network after losing the Banco Postal auction in Jul/11. Our main concern is not with the absolute number of branches + service points to be opened (as we note that Bradesco has already regained a large part of service points lost – with a 33% increase in its branch network in 2H11), but the time required for the new branches and service points to mature. We highlight that these branches should take at least 8 months to reach their breakeven point, according to Bradesco’s guidance. Thus, we expect Bradesco to gradually reduce its operating expenses over the year, but with an 8-month delay before these new distribution channels start to generate positive results.

In relative terms, asset quality may bring good news in 2012E. Bradesco’s loan portfolio is well diversified (large companies, SMEs and individuals accounted for 38%, 30% and 31% of Bradesco’s total portfolio as of Dec-11) and, as a consequence, should offer the lowest risk in 2012 in comparison with its peers under our coverage.

Insurance segment could offset pressure, but 12E should be challenging. The large share of the insurance business in the bank’s results reduces its dependency on banking services and the risk of a sharp drop in the bank’s income led by an unfavorable credit cycle. However, the lower Selic rate in 2012E will likely affect insurers’ financial results. For 2012, we note that contributions from the insurance business are unlikely to boost Bradesco’s consolidated income. We estimate an increase of 18.5% YoY in 12E insurance income vs 21.5% YoY in 2011. Risk/reward ratio supports our preference. As of the end of 2011 Bradesco’s shares were trading at a P/BV premium to its peers that has since narrowed in 1Q12, when we think the market priced in the negative impact of organic expansion on the bank’s Opex. BBDC4’s share price has fallen by 0.21% YTD, a 1.3% underperformance versus the average of BZ large cap banks. Taking into account our expectation that Bradesco may surprise positively on the Opex side, we see Bradesco as offering the best risk/reward balance of the banks under our coverage. Our forecast for 12E ROE of 21.2% and 12.5% YoY EPS growth, together with the current 12E P/BV of 1.8x, look attractive vs the bank’s EPS estimates. Based on our fair value of R$35.0/sh (22.5% of sustainable ROE), the bank trades on a P/BV of 2.1x, with 14.4% potential upside, which supports our BUY rating.

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Section 2: Valuation

TABLE 1. RECOMMENDATION SUMMARY

Source: Espírito Santo Investment Bank Research for estimates and Bloomberg; Priced as at market close on 17 April 2012

TABLE 2. ESPIRITO SANTO INVESTMENT BANK RESEARCH VS. MARKET CONSENSUS

Source: Espírito Santo Investment Bank Research estimates and Bloomberg consensus estimates; Priced as at market close on 17 April 2012

TABLE 3. SHARE PRICE PERFORMANCES (R$)

Source: Bloomberg; Priced as at market close on 17 April 2012

TABLE 4. MULTIPLES SUMMARY

Source: Espírito Santo Investment Bank Research estimates for covered stocks and Bloomberg consensus estimates for not rated stocks; Priced as at market close on 17 April 2012 (*) Bloomberg consensus average for top 5 banks based on market cap

Bradesco BBDC4 BUY 30.58 35.0 14.4% 116.7 59.9 204.6

Itaú Unibanco ITUB4 NEUTRAL 31.5 38.8 23.2% 142.2 53.9 291.9Banco do Brasil BBAS3 NEUTRAL 23.4 31.7 35.5% 66.9 30.5 191.1Santander Brasil SANB11 NEUTRAL 15.8 19.2 21.3% 60.0 22.8 51.1

Company Ticker RatingPrice

(R$/sh)FV

(R$/sh)Free

Float (%)

ADTV (90 days)

(R$ m)

Upside Pot. (%)

Mkt Cap (R$ bn)

12E 13E 12E 13E 12E 13E 12E 13E 12E 13E 12E 13E 12E 13E

Bradesco 3.3 3.7 9.3 8.2 3.1 3.6 9.8 8.6 6.3% 4.6% -5.9% -4.4% 1.8 1.6

Itaú Unibanco 3.5 4.2 9.0 7.6 3.7 4.2 8.6 7.5 -4.1% -1.2% 4.3% 1.2% 1.8 1.5Banco do Brasil 4.1 4.5 5.8 5.2 4.2 4.7 5.5 5.0 -4.1% -4.8% 4.3% 5.1% 1.0 0.9Santander Brasil 1.8 2.2 8.6 7.3 1.7 2.0 9.3 8.0 8.4% 9.3% -7.7% -8.5% 1.1 1.0

ESIBR vs. Consensus

Company EPS (R$/sh) P/E (x) EPS (R$/sh) P/E (x) EPS (R$/sh) P/E (x)ESIBR Consensus

P/BV

ESIBR

High Low

Current 1M 12M YTD (52 Weeks) (52 Weeks)

ITUB4 31.5 -18.4% -12.9% -6.3% 38.6 24.8 -18.4%

BBAS3 23.4 -18.3% -11.6% 0.1% 29.3 21.6 -20.3%

SANB11 15.8 -15.8% -9.5% 6.2% 19.3 12.6 -18.3%

BBDC4 30.6 -7.6% -0.5% -0.21% 33.1 24.7 -7.6%

CIEL3 61.9 3.8% 87.2% 31.0% 65.1 32.5 -5.0%

RDCD3 32.6 -5.2% 61.1% 15.1% 35.3 19.7 -7.7%

IBOV 62,699 -7.4% -5.2% 10.5% 68,394 48,668 -8.3%

From High

2011 2012E 2013E 2011 2012E 2013E 2011 2012E 2013E 2011 2012E 2013EUS Banks(*) 9.0 9.9 10.4 14.3 5.1 19.6 10.8 10.4 8.7 1.0 1.0 0.9European Banks (*) 4.7 6.9 8.8 ‐4.0 25.3 23.8 14.4 9.9 7.4 0.8 0.7 0.7Latam Banks (*) 24.4 22.7 22.6 4.4 8.2 12.7 14.6 13.5 12.0 3.0 2.7 2.4Bradesco 21.6 21.2 21.1 14.2 12.5 13.1 10.4 9.3 8.2 2.1 1.8 1.6Itau Unibanco 22.0 20.8 21.7 11.9 8.7 18.4 9.8 9.0 7.6 2.0 1.8 1.5Banco do Brasil 20.2 18.8 18.7 2.9 5.7 10.5 6.1 5.8 5.2 1.1 1.0 0.9Santander Brasil 12.7 13.5 14.5 ‐2.2 15.2 17.6 9.9 8.6 7.3 1.2 1.1 1.0Banrisul 21.9 21.5 21.7 26.2 9.1 14.3 7.9 7.3 6.4 1.6 1.4 1.2Banco Pine 21.3 23.8 23.5 9.3 26.7 10.3 9.4 7.4 6.7 1.3 1.2 1.1Daycoval 15.6 17.2 17.1 6.4 17.0 4.8 7.7 6.5 6.2 1.1 1.0 0.9ABC Brasil 16.7 17.1 17.4 15.7 9.7 16.5 7.2 6.6 5.6 1.1 1.1 0.9Bic Banco 13.6 11.8 13.7 ‐26.3 ‐3.9 23.9 6.2 6.4 5.2 0.8 0.8 0.7Cruzeiro do Sul 15.1 ‐ ‐ 7.5 14.0 1.9 11.4 10.0 9.8 1.8 1.6 1.5Paraná Banco 37.3 ‐ ‐ 9.7 7.1 18.5 9.5 8.8 7.5 1.1 1.0 0.9Panamericano 10.0 13.8 ‐ ‐ 22.1 37.8 12.8 10.5 7.6 ‐ ‐ ‐

PBV(x)Banks

ROE (%) EPS YoY growth (%) PE(x)

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TABLE 5. ESIBR ESTIMATES: COMPARABLES TABLE

Source: Espírito Santo Investment Bank Research for estimates and Bloomberg

Gross Loans (growth YoY) Banco Bradesco Itau Unibanco Santander Brasil Banco do Brasil Average2011A 17.1% 19.1% 19.2% 18.0% 18.3%2012E 19.2% 14.3% 15.7% 19.8% 17.3%2013E 15.2% 14.9% 16.0% 17.0% 15.7%2014E 14.0% 13.8% 15.9% 14.6% 14.6%

NII (growth YoY) Banco Bradesco Itau Unibanco Santander Brasil Banco do Brasil Average2011A 18.9% 12.1% 16.3% 8.3% 13.9%2012E 11.7% 12.8% 13.4% 11.1% 12.3%2013E 9.3% 12.9% 12.5% 11.9% 11.6%2014E 9.2% 10.2% 15.6% 13.2% 12.1%

NIM (%) Banco Bradesco Itau Unibanco Santander Brasil Banco do Brasil Average2011A 6.1% 7.8% 8.2% 5.5% 6.9%2012E 5.8% 7.5% 7.8% 5.1% 6.5%2013E 5.6% 7.3% 7.7% 4.8% 6.3%2014E 5.4% 7.1% 7.9% 4.8% 6.3%

LLP / Gross Loans Book (%) Banco Bradesco Itau Unibanco Santander Brasil Banco do Brasil Average2011A 3.8% 3.6% 4.8% 2.8% 3.8%2012E 3.8% 3.8% 5.2% 3.3% 4.1%2013E 3.7% 3.8% 4.9% 3.1% 3.9%2014E 3.6% 4.0% 4.7% 3.1% 3.8%

Cost to Income (%) Banco Bradesco Itau Unibanco Santander Brasil Banco do Brasil Average2011A 49.9% 43.7% 47.1% 42.8% 45.9%2012E 48.5% 42.1% 42.5% 42.2% 43.8%2013E 49.0% 40.4% 41.4% 43.4% 43.6%2014E 48.7% 39.5% 41.1% 42.8% 43.0%

EPS (R$/sh) Banco Bradesco Itau Unibanco Santander Brasil Banco do Brasil Average2011A 2.93 3.21 1.59 3.84 2.892012E 3.30 3.51 1.83 4.06 3.172013E 3.73 4.15 2.15 4.48 3.632014E 4.23 4.87 2.41 4.98 4.12

EPS (% growth YoY) Banco Bradesco Itau Unibanco Santander Brasil Banco do Brasil Average2011A 14.2% 11.9% ‐2.2% 2.9% 6.7%2012E 12.5% 9.3% 15.2% 5.7% 10.7%2013E 13.1% 18.4% 17.6% 10.5% 14.9%2014E 13.4% 17.3% 11.9% 11.1% 13.4%

ROE (%) Banco Bradesco Itau Unibanco Santander Brasil Banco do Brasil Average2011A 21.6% 22.0% 12.7% 20.2% 19.1%2012E 21.2% 20.8% 13.5% 18.8% 18.6%2013E 21.1% 21.7% 14.5% 18.7% 19.0%2014E 21.1% 22.3% 14.8% 18.5% 19.2%

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Source: Company data, Bloomberg and Espirito Santo Investment Bank Research for estimates; priced as at 17 April 2012

VALUATION – GORDON GROWTH MODEL

Source: Company data, Bloomberg, Espírito Santo Investment Bank Research for estimates. Priced as at 17/04/2012.

Summary Financial Information

Banco Bradesco Valuation Metrics (Year End Dec) 2010A 2011A 2012E 2013E 2014E 2015E

Rating BUY P/E (x) 11.7 10.4 9.3 8.2 7.2 6.2BRL Fair Value (R$/sh): 35.0 Price / Pre Provisions Profit per Share (x) 6.2 5.5 4.7 4.2 3.7 3.3ADR Fair Value , (USD/ADR): 20.0 P/BV (x) 2.4 2.1 1.8 1.6 1.4 1.3BRL Share Price R$/sh: 30.6 ROE (recurring) (%) 21.8% 21.6% 21.2% 21.1% 21.1% 21.7%BRL Upside / Downside potential: 14.4% NIM(recurring) (%) 6.2% 6.1% 5.8% 5.6% 5.4% 5.2%ADR Share Price R$/sh: 17.5 Dividend Yield (%) 2.9% 3.2% 4.3% 4.9% 5.5% 6.5%ADR Upside / Downside potential: 14.4% Payout Ratio (%) 33.6% 34.4% 40.0% 40.0% 40.0% 40.0%

Bovespa BBDC4 Key Ratios (%)NYSE BBD Tier 1 ratio 13.1% 13.0% 12.7% 12.6% 12.5% 12.6%Bloomberg BBDC4 BZ Leverage Ratio (loans/equity) 4.8 4.8 5.1 5.1 5.2 5.1

Cost income ratio 49.4% 49.9% 48.5% 49.0% 48.7% 46.8%NPLs / Gross loans 5.7% 5.9% 6.0% 5.8% 5.5% 5.0%

Share in issue (m) 3,817.8 ROE (recurring) 21.8% 21.6% 21.2% 21.1% 21.1% 21.7%Market Cap (R$ m) 116,749.6 ROA (recurring) 1.7% 1.6% 1.5% 1.5% 1.5% 1.6%

NIM(recurring) (%) 6.2% 6.1% 5.8% 5.6% 5.4% 5.2%BV2010A (R$ m) 48,042.9BV per share 2010A (R$) 12.6

P&L Summary (R$ m) 2010A 2011A 2012E 2013E 2014E 2015ENet Interest Income 33,059 39,320 43,932 48,005 52,426 57,535

Forthcoming Catalysts Total non interest income 13,739 15,194 19,009 23,410 27,210 29,7761Q12 Earnings 23-Apr-12 Total gross operating income 46,798 54,514 62,941 71,415 79,636 87,312

Pre provisions net operating income 23,673 27,323 32,431 36,408 40,839 46,482BES Securities Research Analyst Net Loan loss expenses (8,703) (10,237) (12,251) (13,643) (15,228) (16,579)Gustavo Schroden Post provision profit 14,970 17,086 20,180 22,765 25,611 29,904+ 55 11 3074 7356 Pre tax profit 15,088 17,231 20,441 23,055 25,928 30,[email protected] Net profit (recurring) 9,804 11,199 12,603 14,253 16,166 18,880

Recurring EPS (R$) 2.6 2.9 3.3 3.7 4.2 4.9Mateus Renault+ 55 11 3074 [email protected] Growth rates (%) 2010A 2011A 2012E 2013E 2014E 2015E

Operating Income 9.0% 15.4% 18.7% 12.3% 12.2% 13.8%Revenues Breakdown (2011) EPS 36.5% 14.2% 12.5% 13.1% 13.4% 16.8%

BV / share 15.1% 15.7% 13.6% 13.5% 13.5% 13.9%Loan Portfolio 20.7% 16.5% 19.2% 15.2% 14.0% 13.4%

Balance Sheet Summary (R$ m) 2010A 2011A 2012E 2013E 2014E 2015ETotal Remunerated Assets 592,803 702,527 807,090 914,594 1,035,285 1,163,167Loan Portfolio 230,614 268,668 320,200 368,754 420,233 476,660Shareholders' Equity 48,043 55,582 63,144 71,695 81,395 92,723BV/Share (R$) 12.6 14.6 16.5 18.8 21.3 24.3RWA 380,844 474,172 544,747 617,307 698,768 785,081Tier 1 equity (%) 13.1% 13.0% 12.7% 12.6% 12.5% 12.6%BIS Ratio (%) 14.7% 15.1% 15.1% 14.4% 13.8% 14.2%

Income Interest, 61.4%

Fee Income, 24.8%

Insurance and Others,

13.8%

ValuationUS risk‐free rate (30‐yr. bond yield) 3,8%Brazil Risk Premium (EMBI Brazil) 2,0%Equity risk premium 5,5%Beta 1,0CoE (US Dollar) 10,7%Differential over inflation 2,5%Ke nominal (a) 13,4%ROAE (long‐term sustainable) (b) 22,5%Real CAGR Net Income (2016 ‐ 2020) 13,0%Nominal Growth Rate Terminal Value (c) 6,5%Book Value (1Q12E) (d) 15,1 Fair Value (R$/share) (e) = [(b) ‐ (c ) / (a) ‐ (c )] x (d) 35,0 Current Price (R$/sh) 30,6 Upside/Downside ‐ potential 14,4%Number of Shares(m) 3.818

ROE / g 4,5% 5,5% 6,5% 7,5% 8,5%20,5% 27,0 28,5 30,5 33,0 36,621,5% 28,7 30,4 32,7 35,5 39,722,5% 30,4 32,4 35,0 38,2 42,923,5% 32,0 34,2 37,1 40,6 45,824,5% 33,7 36,1 39,3 43,2 48,9

Gordon Growth Model (Book Value as of 1Q12E)

We derive our fair value for Bradesco shares via a Gordon Growth Model. We derive a fair P/BV multiple of 2.3x for Bradesco, assuming a sustainable ROE of 22.5%, 13.4% Ke (risk-free rate of 3.8%, country risk of 200bps, and a beta of 1.0), and a 6.5% sustainable growth rate. Applying our derived fair P/BV multiple to the bank´s 1Q12E book value, we arrive at our fair value of R$35.0/share.

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Growth may be challenging ahead... We believe that in 2012E, Bradesco will pursue strong growth to recover from losing the Banco Postal auction to Banco do Brasil. We forecast loan growth of 19% in 2012E, 15% in 2013E and 14% in 2014E. For 2012E, the bank guides for loan portfolio growth of between 18% and 22% with slightly higher growth in the companies’ segment. We believe the expansion in the companies’ credit portfolio is likely to be led by loan concessions to SMEs, in line with the trend in 2011, when the SME portfolio grew 6.7p.p above the consolidated loan book (23.2% vs 16.5%). In the individuals segment, we believe the bank will focus on payroll-deductible loans and reduce the rate of auto loan concessions, reflecting the bank’s concern regarding the high delinquency rate of this credit line.

...Operating Expenses still affect earnings...but may be a good surprise

Bradesco faces the challenging of continuing the organic growth of its distribution network (mainly across regional borders), while at the same time maintaining control over operating expenses. Bradesco lost around 6,233 service points after losing the Banco Postal auction held in June-11.

We are not concerned with the absolute number of branches, as – on our calculations – Bradesco has already recovered a large part of the service points lost and the distribution network may reach its previous level by the end of this year. Taking into consideration only new branches (full branches) that may be launched by December 2012 (+100) and new Bradesco Express service points (+5,000 – based on the average for the past two years), Bradesco may reach 41,077 distribution points. Since June-11, the bank has added 2,379 branch and network points (269 full branches and 2,379 Bradesco Express). See table below:

TABLE 6. EVOLUTION OF BRADESCO´S BRANCHES CHART 1. REGIONAL DISTRIBUTION OF BRADESCO´S BRANCHES (DEC-11)

Source: Brazilian Central Bank and Espírito Santo Investment Bank Research for estimates

Source: Brazilian Central Bank and Espírito Santo Investment Bank Research

The costs associated with this organic growth plan and the time required for these new branches to mature are our main concerns for the Bradesco story. Bradesco will no longer pay R$350m in fees to the Postal Offices (Banco Postal); however, the 1,000 branches + service points opened in 2H11 will put pressure on costs over 2012E, as the bank will still have to pay its standard expenses (such as personnel expenses and infrastructure expenses) while these branches will take at least 8 months to break even. Thus we expect Bradesco to gradually reduce its operating expenses over the year, but with an 8-month delay before these new distribution channels start to generate positive results. Assuming an average cost of R$350,000 per branch, Bradesco has already committed R$350m (equal to the amount previously paid to the Postal Offices).

The costs associated with organic growth are significant. However, we note that, as of the end of 2011, the bank had incurred higher operating expenses not only due to costs related to its organic expansion, but also due to the increase in other lines, such as SG&A and marketing (which reflected Bradesco’s efforts to: (i) retain Banco Postal’s clients; and (ii) strengthen the bank’s presence in RJ after the acquisition of BERJ (State Bank of Rio de Janeiro, acquired in May-11 for R$1.8bn), which should not recur in 2012, in our view. The bank also stated that it will focus on reducing day-to-day operating expenses which – coupled with the improvement in the aforementioned lines – should partially offset the organic growth expenses this year and relieve some of the pressure on the bank’s EPS.

In 4Q11, opex increased 8.5% QoQ, including organic growth expenses; however, these expenses grew 25.5% QoQ and accounted for 10.2% of total opex. For FY11, while total opex increased 17.4% YoY, organic growth expenses increased by 67.8% YoY. We estimate 10.2% growth in the bank´s operating expenses in 2012. See the charts below:

Types of Branches Jun‐11 Jan‐12 Dec‐12E Branches (full) 3,676 3,945 4,045 Service Point 1,659 1,660 1,660 Banco Postal 6,227 ‐ ‐ Bradesco Express 29,263 31,372 35,372 Total 40,825 36,977 41,077

34%

30%

22%

10%4%

Breakdown of organic growth per region (1,000 branches + service points)

Southeast Northeast South North Mid‐west

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CHART 2. BRADESCO’S OPEX CHANGES – QOQ CHANGE CHART 3. BRADESCO’S OPEX CHANGES

Source: Company data and Espírito Santo Investment Bank Research

Source: Company data and Espírito Santo Investment Bank Research for estimates

...however, in relative terms, asset quality may bring good news in 2012E...

In our opinion, Bradesco’s loan portfolio is well diversified and, as a consequence, we believe it has the lowest risk in comparison with its peers in 2012. As of December’11, large companies represented 38% of the bank’s total portfolio, individuals 31% and SMEs 30%. Loans to large companies are generally seen as being lower risk in comparison with other types of credit. We also note the high diversification in the individuals’ portfolio and note that there is no one segment with a share exceeding 30%. We see the SME segment as profitable, but portfolio diversification is key to avoiding potentially strong losses.

CHART 4. BRADESCO´S LOAN PORTFOLIO BREAKDOWN CHART 5. BRADESCO´S LOANS FOR INDIVIDUALS BREAKDOWN

Source: Company data, Espírito Santo Investment Bank Research

Source: Company data and Espírito Santo Investment Bank Research

CHART 6. ASSET QUALITY – BRAZILIAN BANKS (2012E)We expect Bradesco to show the lowest increase in loan loss expenses (20%) of the banks in our coverage universe in 2012, due to its well balanced and lower-risk loan portfolio. For the large cap banks, we estimate an average increase in loan loss provisions expenses of 27.2% in 2012E. We believe that the higher growth plus lower selectivity may deteriorate Banco do Brasil´s asset quality at a faster rate versus its peers.

We estimate a 42.8% increase in loan loss provision expenses for Banco do Brasil, or a loan loss provisions over total loans ratio of 3.3%. For Santander Brasil and Itau Unibanco, we estimate LLP expenses growth of 26% and 20%, respectively.

Source: Espírito Santo Investment Bank Research for estimates

7.6%9.3% 8.5%

25.5%

4Q09 / 3Q09 4Q10 / 3Q10 4Q11 / 3Q11

Opex change

Total Opex Organic Growth Expenses

6.0 6.6 7.2 8.5 10.113.3 14.66.9

8.29.3

11.513.4

12.714.4

13.014.8

16.6

20.0

23.525.9

29.0

2007 2008 2009 2010 2011 2012E 2013E

Bradesco's Opex (R$ bn)

Personnel Expenses Other administrative expenses

38% 38% 38% 38% 38% 39% 39% 39% 38%

34% 34% 35% 34% 33% 33% 32% 32% 31%

27% 27% 28% 28% 29% 29% 29% 29% 30%

4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11

Bradesco's loan portfolio breakdown

Large Companies Individuals SMEs

23.1% 24.3% 24.1% 24.7% 25.6% 26.1% 26.4% 26.5% 26.8%

17.4% 16.2% 16.5% 15.9% 17.1% 16.0% 16.1% 16.0% 16.6%

20.1% 22.1% 23.8% 24.8% 24.9% 26.1% 26.7% 27.0% 26.6%3.3% 3.3% 3.6% 3.9% 4.2% 4.7% 5.2% 5.9% 6.6%36.1% 34.1% 32.0% 30.6% 28.1% 27.1% 25.6% 24.6% 23.4%

4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11

Bradesco's Loans for Individuals Breakdown

Auto loans Credit Card Personnel Credit Mortgage Other

3.8% 3.8% 5.2%3.3%

19.7% 20.1%

26.1%

42.8%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

Bradesco Itau Unibanco Santander Brasil Banco do Brasil

Asset Quality ‐ BZ banks

LLP expenses / Loans, gross, (%) LLP expenses growth (%)

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...Insurance business should play an important role in the coming years; however, the lower Selic rate should affect the segment’s profitability

CHART 7. INSURANCE BUSINESS

Bradesco’s insurance business accounted for over 30% of the bank’s consolidated net income in 2011. Bradesco’s strong position in the sector (the bank holds a c.25% market share in terms of premium issued) should allow it to benefit from the growth we expect for the segment in the coming years. We highlight that, despite the recent boost (insurance premiums had a CAGR of c.13% in the past 10 years), the national insurance market is still underpenetrated (the ratio of total insurance premiums to GDP is 3% vs. 8% in the US and 7% in Germany as of end- 2010) and we see room for significant expansion. Currently, Brazil is the 15th largest global insurance market, according to Bradesco.


In our view, the high share of the insurance business in the bank’s results reduces its dependency on banking services and the risk of a sharp drop in the bank’s income led by an unfavourable credit cycle. However, we highlight that the low Selic rate will likely negatively affect the profitability of the investment portfolio of the insurers. For 2012E, our economic department forecasts an average Selic rate of 9.3%, 230bps below the 2011 average. In 2011, 65% of the insurance business net income came from financial gains.

That said, to sustain its results at the same level reported in 2011, we believe insurers in general must improve their operating efficiency in 2012 or allocate larger portions of their portfolios to alternative investments with higher yields. Therefore, although we see Bradesco’s lower dependency on the banking services’ results as a positive, we note that the insurance business is unlikely to boost Bradesco’s consolidated income until at least 2012E. We estimate growth of 18% YoY in the segment’s net income in 2012.

However, it is worth noting that more than 50% of Bradesco’s insurance premiums come from life and pension plans, followed by health (24%). We believe these segments, despite the regulatory risks, are unlikely to face a fierce competitive environment like that seen in auto insurance (a price-driven segment) in recent years, reducing the downside risk at Bradesco’s unit.

As the overall favourable economic environment may be maintained in the coming years, with the maintenance of Brazilian households’ income growth and low unemployment rates, we think the outlook for the industry in terms of premiums issued should be positive.

From now on, planned infrastructure investments in the country should expand business opportunities for the insurance business as it offers P&C (property and casualty) and auto insurance plans to lower income individuals.

Insurance Business Unit

Bradesco operates in the insurance segment through several different units that comprise Grupo Bradesco Seguros e Previdência, which was founded at the beginning of the 1980’s. It is currently the largest insurance conglomerate in Latin America, with a c.25% share in the Brazilian market (including life and pension plans’ premiums), according to data released by ANS and Susep.

Bradesco Seguros provides a range of insurance products to individuals and corporate clients on an individual basis or under corporate agreements. Bradesco Seguros’ products include health, life, personal accident, automobile insurance and other assets, with health insurance comprising the largest share of this business.

27,7%30,6%

32,8% 32,5%

40,6%

21,5%

18,0%15,0%

0,0%

5,0%

10,0%

15,0%

20,0%

25,0%

30,0%

35,0%

40,0%

45,0%

2010 2011 2012E 2013E

Bradesco: Insurance Business

Bradesco Insurance / Bradesco Net IncomeBradesco Insurance net income(YoY growth)

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Bradesco Insurance Business Segments

NB All market share details as of 2011 Source: Companies and Espirito Santo Investment Bank Research

The majority of the premiums come from the southeast region, where the insurance market is more developed and concentrated. This region also accounts for the largest share of Brazilian GDP (nearly 60% as of 2009 – last data reported- according to IBGE). The figure to the right shows the insurance group’s premiums by region.

FIGURE 1. INSURANCE GROUP’S LOAN BOOK BREAKDOWN PER REGION (AS

OF DEC-11)

Source: Company data and Espirito Santo Investment Bank Research

In the last decade, Bradesco’s insurance business has been well positioned and has taken advantage of its parent’s banking network to benefit from the growth in the Brazilian insurance market. Despite the increasing competition in the insurance segment from the end of 2001 to the end of 2010, Bradesco has kept its market share nearly stable at 24–25%. The premiums written in the Brazilian market increased by 234% in this period, from R$37.7bn to R$125.7bn, according to the ANS and Susep.

CHART 8. BZ MARKET PREMIUMS AND BRADESCO’S MARKET SHARE

Source: Company

Bradesco Seguros e

Previdência

Bradesco Vida e Previdência

Bradesco Saúde

Bradesco Capitalização

Bradesco Auto/RE

North: 5% of GDPMarket Share: 32%Premiums of the Insurance Group: 2.4%

Middle-west: 9% of GDPMarket Share: 20%Premiums of the Insurance Group: 5.1%

South: 17% of GDPMarket Share: 17%Premiums of the Insurance Group: 9.4%

Southeast: 56% of GDPMarket Share: 27%Premiums of the Insurance Group: 73.9%

Northeast: 13% of GDPMarket Share: 25%Premiums of the Insurance Group: 9.1%

37.654

125.668

9.150

31.078

2001 2010

Market Bradesco

CAGR: 14.3%

Bradesco's market share: 24.3%

Bradesco's market share: 24.7%

Holds a market share of c. 32% in terms of income from Brazilian private pension plans and VGBL. Has more than 2.1 million private pension plan and VGBL plan participants and 22.4 million personal accident and life insurance policyholders, totaling around 24.6 million customers.

Market share of c. 50%. Has nearly 8.7 million clients with high share of corporate policies in the consolidated portfolio (94.4%). ~39 thousand Brazilian companies as clients. Also operates through its two subsidiaries Mediservice and Odontoprev, which has a partnership with Banco do Brasil.

Market share of c. 21%. Offer savings bonds according to the profile and budget of clients. Products vary in accordance with the payment conditions (lump-sum or monthly), contribution term, frequency of drawings and premium amounts. Operates mainly through the offer of Pé Quente Bradesco family of products.

Market share of c. 10.5%. In segments related to Property Insurance, the bank has been renewing the insurance programs of its major clients through partnerships with brokers specialized in the segment and fostering a closer relationship with Bradesco Corporate and Bradesco Empresas. In the Auto/RFC line, despite the strong competition in the segment the bank has a c. 14% market share ranking 3rd.

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At Bradesco Seguros e Previdencia, most of the revenue (c. 56% as of Dec/11) comes from the life and pension plans’ operations. As this segment has a greater net margin than the other insurance lines (except for the saving bonds business), its share in consolidated net income is even higher – reaching c.60% in FY11. From 4Q05 to 4Q11, the segment’s net income had a CAGR of 12.3% and by the end of last year in total it accounted for 28% of Bradesco’s consolidated net income.

CHART 9. BZ MARKET: WRITTEN PREMIUMS’ BREAKDOWN (DEC 11) CHART 10. BZ INSURANCE SEGMENT ROAE AND COMBINED RATIO

Source: Company and Espírito Santo Investment Bank Research

Source: Bloomberg and Espírito Santo Investment Bank Research

Based on 2012E P/E multiples, Bradesco’s insurance business’ market value is R$32.9bn, or 2.3% of our potential upside for Bradesco. We also present a sensitivity analysis which shows that a 16% change in the average P/E 2012E multiple of listed Brazilian insurance companies of 9.0x (based on Bloomberg consensus estimates) would impact Bradesco’s valuation by 3.9%. We also note that if we used the average P/E 2012E multiple of 11.1x for the 25 largest full insurance companies in the US and Europe, the market value of the insurance business would be R$40.6bn and would represent 4.4% of Bradesco’s 2012E potential upside.

TABLE 7: Bradesco - INSURANCE BUSINESS VALUATION

Priced as at 17/04/2012 Source: Espirito Santo Investment Bank Research for estimates and Bloomberg Consensus estimates for (*) both Sulamérica (SULA11, not rated) and Porto Seguro (PSSA3, not rated), two Brazilian Insurance Companies listed on the BM&FBovespa as peers for BB’s Insurance Business

TABLE 8: BRADESCO’S INSURANCE BUSINESS SENSITIVITY ANALYSIS FY2012E

Source: Bloomberg consensus estimates for listed Brazilian stocks and Global Insurance Companies average 2012E P/Es, Espirito Santo Investment Bank Research for estimates

56,1%

1,1%8,1%

10,5%

24,2%

Written Premiums (12M11)

Life and Pension Plans

Other Lines

Saving Bonds

Auto and P&C

Health

29,1 29,1 27,1

26,0 26,086

85,885,9

85,3

85,1

84,6

84,8

85

85,2

85,4

85,6

85,8

86

86,2

15

17

19

21

23

25

27

29

31

12M07 12M08 12M09 12M10 12M11

ROAE (%) Combined Ratio (%)

Grupo Bradesco Insurance Value 2010 2011 2012E

(1) Bradesco total Income (R$ millions) 9,804 11,199 12,603

(2) Bradesco Insurance Income as % of bank´s total Income 29.6% 28.0% 29.0%(3) = (1) x (2) (R$ millions) 2,904 3,136 3,655 (4) Insurance Segment P/E (x) (*) 9.0

(5) = (3) x (4) = Bradesco Insurance Value (R$ millions) 26,119 28,203 32,874

(6) = Bradesco's Insurance Value as % of Bradesco Valuation 19.5% 21.1% 24.6%

Bradesco Valuation (R$ millions) 133,618 133,618 133,618

Bradesco's valuation upside potential 14.4%

Bradesco's insurance upside potential (R$ millions) 4,722

Bradesco insurance as % of bank´s potential upside 3.5%

Change in P/E P/E (x) Insurance Value (R$ mi) Bank´s Valuation (R$ mi) Change in Bank´s Valuation

-16% 7.6 27,614 128,358 -3.9%-8% 8.3 30,244 130,988 -2.0%-4% 8.6 31,559 132,303 -1.0%

0% 9.0 32,874 133,618 0.0% Bradesco Insurance Value (R$ millions) 40,570

4% 9.4 34,189 134,933 1.0% Bradesco's valuation upside potential 2012 14.4%

8% 9.7 35,504 136,248 2.0% Bradesco's insurance upside 2012 (R$ millions) 5,827

23% 11.1 40,570 141,314 5.8% Bradesco's insurance as % of bank potential upside 4.4%

Insurance Business Sensitivity Analysis for YE 2012

Global Insurance Companies P/E 2012E

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Main Assumptions

Loan growth: We forecast loan growth of 19% in 2012E, 15% in 2013E and 14% in 2014E for Bradesco. For 2012E, we believe that Bradesco may focus on the companies’ segment. We believe expansion in the companies’ credit portfolio is likely to be led by loan concessions to SMEs, following the same trend seen in 2011, when the SME portfolio grew 6.7% above the consolidated loan book (23.2% vs 16.5%). In the individuals segment, we believe the bank will focus on payroll-deductible loans, enjoying the greater capacity it now has to offer this type of credit to public employees in the state of Rio de Janeiro after its acquisition of BERJ (State Bank of Rio de Janeiro, acquired in May-11 for R$1.8bn). We also believe that the auto loan growth rate may slow as a reflection of the bank’s concerns about the high delinquency rate in the segment.

Asset quality: We forecast Bradesco’s provision expenses/loans ratio flat this year, at 3.8%. We estimate NPLs (>90 days non-performing loan) to increase 10bps from 5.9% in 2011 to 6.0% in 2012E. We believe that Bradesco’s diversified loan portfolio combined with estimated lower exposure to higher risk lines (e.g. auto loan) may reduce the pressure on the bank’s delinquency rates.

CHART 11: BRADESCO LOAN GROWTH CHART 12: BRADESCO ASSET QUALITY – LLP EXPENSES AND NPLS

Source: Company data, Espírito Santo Investment Bank Research for estimates


Net Interest Margin: we forecast Bradesco’s net interest margin to decrease by 25bps YoY, reaching 5.8% in 2012E. We estimate narrowing margins in 2012 for all of the banks in our coverage universe (except Santander Brasil), largely owing to the greater exposure of the banks to low-risk operations and the lower benchmark interest rate (SELIC).

Fee Income: We forecast a slight reduction in the growth rate due to the recent introduction of new rules from the Brazilian Central Bank asking for more transparency in fees charged. Although these new rules may lead to a fall in fees, we believe that card fees may grow by around 10% in the next few years. We estimate 12% YoY growth in 2012E for Bradesco versus 14% in 2011.

CHART 13: BRADESCO NET INTEREST MARGIN CHART 14: BRADESCO FEE INCOME



230.6268.7

320.2368.8

420.2

20.7%

16.5%

19.2%

15.2%

14.0%12%

14%

16%

18%

20%

22%

24%

0.0

100.0

200.0

300.0

400.0

500.0

2010 2011 2012E 2013E 2014E

Loan Portfolio Growth

Loans, gross (ex‐sureties and guarantees) (R$ bn) % growth

3.8% 3.8% 3.8% 3.7%

5.7% 5.9% 6.0% 5.8%

2010 2011 2012E 2013E

Asset Quality

LLP expenses/Loans, gross (%) NPL/Loans, gross (%)

6.2% 6.1% 5.8% 5.6%

0%

1%

2%

3%

4%

5%

6%

7%

8%

2010 2011 2012E 2013E

Net Interest Margin (% annual) 14.3%13.8%

11.3%

13.5%

5%

7%

9%

11%

13%

15%

2010 2011 2012E 2013E

% growth YoY, Fee Income

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CHART 15: BRADESCO OPERATING EXPENSES Operating Expenses: We forecast a 10.2% YoY increase in operating expenses in 2012 based on the impact of organic growth. We highlight that, although most of the new branches were launched in 2H11, it takes at least 8 month for these branches to break even. Bradesco will face net losses over most of 2012 arising from these new distribution channels. However, the improvement in other expenses should partially offset this pressure on margins.


Key Figures

TABLE 9: BANCO BRADESCO KEY FIGURES

Source: Company for historical figures and Espírito Santo Investment Bank Research for estimates

20,9%

17,5%

10,2%11,8%

5%

10%

15%

20%

25%

2010 2011 2012E 2013E

% growth YoY, Operating Expenses

Profitability 2010A 2011A 2012E 2013E 2014E 2015ERecurring Net Income (R$ million) 9.804 11.199 12.603 14.253 16.166 18.880 ROAE (recurring), % annualized 21,8% 21,6% 21,2% 21,1% 21,1% 21,7%ROAA (recurring), % annualized 1,7% 1,6% 1,5% 1,5% 1,5% 1,6%NIM (Net Interest Margin), % annualized 6,2% 6,1% 5,8% 5,6% 5,4% 5,2%NIM ‐ after LLP, % annualized 4,6% 4,5% 4,2% 4,0% 3,8% 3,7%Effective tax rate 30,5% 30,4% 33,0% 33,0% 32,5% 32,5%

Assets quality 2010A 2011A 2012E 2013E 2014E 2015ELoans, gross, (R$ million) 230.614 268.668 320.200 368.754 420.233 476.660 % growth, YoY 20,7% 16,5% 19,2% 15,2% 14,0% 13,4%Loans, average, (R$ mill ion) 210.802 249.641 294.434 344.477 394.494 448.447 % growth, QoQ 13,7% 18,4% 17,9% 17,0% 14,5% 13,7%Non‐performing loans, (NPL), (R$ million) 13.100 15.796 19.212 21.388 23.113 23.833 % growth, QoQ ‐5,4% 20,6% 21,6% 11,3% 8,1% 3,1%NPL / Loans, gross, % 5,7% 5,9% 6,0% 5,8% 5,5% 5,0%Loan Loss Provisions, LLP, (R$ million) 16.290 19.540 23.202 25.871 29.049 34.128 % growth, QoQ ‐0,1% 20,0% 18,7% 11,5% 12,3% 17,5%LLP / Loans, gross, % 7,1% 7,3% 7,2% 7,0% 6,9% 7,2%LLP / Average Loans, % 7,7% 7,8% 7,9% 7,5% 7,4% 7,6%LLP / NPL, % 124,4% 123,7% 120,8% 121,0% 125,7% 143,2%LLP Expenses, (R$ million) (8.703) (10.237) (12.251) (13.643) (15.228) (16.579) LLP expenses / Loans, gross, % 3,8% 3,8% 3,8% 3,7% 3,6% 3,5%

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Risk Factors Operating Expenses: Although we believe that in the bank may start to reduce its operating expenses by 4Q12E with the possibility of efficiency improvements, we see a risk that these expenses could remain at high levels for several months following the end of organic expansion based on unplanned spending. Asset quality: We see auto loans and the SME segment as higher risk, mainly owing to systemic risks, and any changes in these segments could affect our NPL estimates and provision expenses, reducing our EPS forecasts. Change in regulatory environment: Although we see Bradesco’s current BIS ratio as comfortable and we believe that the bank will be able to meet the Basel III requirements without compromising its growth plans, we note that any BCB measure aiming to slow loan concessions (e.g., increases in capital and reserve requirements) or to reduce the bank’s leverage may negatively affect the bank’s share price. We highlight that at the end of 2010, the BCB adopted macro-prudential measures increasing the reserve requirements and the risk weighting factor (FPR). Although some of these measures have already been reversed, we do not rule out further actions from the BCB on this front. Payroll Deductions: This type of loan, despite being a seemingly attractive niche market, is subject to government regulation with respect to limits on fees, term of operations and the level of debt permitted relative to the salary of the borrower, especially with regard to INSS pensioners. In 2008, these operations were subject to government regulations that stipulated limits on this type of lending. Changes in monetary policy and economic risks: A major change in Brazil’s monetary policy, leading to changes in interest rates, exchange rates and inflation, could adversely affect the bank’s operations, because it would likely have a direct effect on current and future levels of loan growth and the delinquency rate. Economic hard landing: Given that we are living in the shadow of a global economic slowdown, we do not rule out the possibility that lower domestic GDP growth could affect credit growth, asset quality, funding costs and margins.

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Banco Bradesco at a glance

History

Banco Bradesco was founded in 1943 in the state of São Paulo by Amador Aguiar under the name Banco Brasileiro de Descontos. The bank initially focused on small merchants, public employees and low-income individuals. In an aggressive move in the 1970s, Bradesco incorporated 17 smaller banks, consolidating its position as the largest private Brazilian bank at the time. Over the following decades, Bradesco has also stood out nationally due to its investments in IT systems dedicated to the banking sector.

Grupo Bradesco de Seguros e Previdência – a segment of the bank that operates in the insurance, supplementary pension and savings bond segments – was created in the 1980s. In 1988, the bank incorporated its housing loan subsidiaries, its investment bank, and its finance company, making it a multiple bank and changed its name to Banco Bradesco S.A.

In 1995, in a partnership with Visa, Banco Real, Banco do Brasil and Banco Nacional, which announced its bankruptcy that same year, Bradesco created a company to manage the Visa system in Brazil with a Visa affiliated merchant network called Companhia Brasileira de Meios de Pagamento (CBMP), which later became Cielo (NEUTRAL, FV R$56.4). Currently, Bradesco holds a 28.6% voting stake in the company, equal to the stake held by Banco do Brasil.

For Bradesco, the second half of the 1990s and the 2000s were marked by intense M&A activity, when the bank stepped up its acquisition of public and private financial institutions focused on credit for consumption and for public employees. Bradesco also started to expand its portfolio of services to other financial segments (including new insurance lines and private pension plans) during this period. Currently, c.30% of the bank’s operating results come from the insurance business.

CHART 16. BRADESCO – ACQUISITION HISTORY

Source: Company and Espírito Santo Investment Bank Research

2002

2003

2005

2000 1997 2006

2007

2008

Banco de Crédito Nacional (BCN): R$ 1.14bn

Banco Boa Vista: R$ 0.95bn

Banco Mercantil de SP: R$ 1.6bn

Banco Bilbao Viscaya Argentaria Brasil (BBV): R$ 2.6bn Banco Zogbi: R$ 0.6bn

Banco do Estado do Ceará: R$ 0.7bn

Signs agreement to assume Brazil operations of American Express card: R$ 1.0bn

Banco BMC: R$ 0.8bn

Ágora Corretora: R$ 0.8bn

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Business Overview

Bradesco has the second-largest national branch network in Brazil (market share of c.22.1%), with more than 4,600 branches throughout the country. In 2H11, the bank opened more than 1,000 branches as part of an effort to compensate for the loss of Banco Postal’s banking services posts. The bank is present in all Brazilian municipalities through its branches, banking service posts and ATM network. Bradesco also operates abroad through its subsidiaries in the US, Europe, Asia and Latin America.

Bradesco has historically been known for organic growth and we think this will continue to be the bank’s strategy. Bradesco has stated that it intends to increase its exposure to small and medium-sized Brazilian emerging cities in the coming years.

FIGURE 2. BRANCHES- MARKET SHARE PER REGION – AS OF DEC-11

Source: Company

The bank’s operations are divided into two main areas: (i) banking services; and (ii) insurance services, management of complementary private pension plans and savings bonds. As of Dec/11, 72% of Bradesco’s net income came from banking services while 28% came from insurance activities.

CHART 17. NET INCOME BREAKDOWN AS OF DEC-11 FIGURE 4. BRADESCO’S OPERATIONS

Source: company and Espírito Santo Investment Bank Research


Banking services

The bank has the third-largest loan portfolio in the Brazilian Financial System, with a market share of 17.0% as of Dec/11, behind only Banco do Brasil and Itau Unibanco.

Individuals: The bank’s clients are divided into three segments (Private Bank, Prime and Retail) depending on their monthly income and amount invested. As of Dec11, the individuals segment represented 31% of the bank’s consolidated loan portfolio.

The individuals’ loan book is well diversified when compared with other large cap banks. The segments with the highest % are auto-loans, where Bradesco has a market share of c. 14%, and personnel credit, which saw great growth in 2010 (48% YoY) and increased its share in the consolidated portfolio significantly. Together, both represent more than 50% of the individuals’ loan book (also considering payroll-deductible loans).

North: 28.6%

Middle-west: 21.8%

South: 19.2%Southeast: 21.5%

Northeast: 26.3%

Brazil: 22.1%

Branches – Market share per region

Insurance; 28,0%

Fees; 26,0%

Loans; 30,0%

Securities; 8,0%

Funding; 8,0%

Banking; 72%

Banking Activity Insurance, ComplementaryPrivate Pension plans, and

Saving Bonds

•Deposit-taking activities•Individual and Corporate Banking Services•Credit Operations•Credit and Debit Cards•Leasing Operations•Investment Banking•International Banking•Asset Management•Consortium Services

•Life and accident insurance•Health Insurance•Automobile Insurance•Property Insurance•Casualty Insurance•Pension plans, including individual and corporate plans•Certificated Savings Plans•Pension Investment Contracts

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CHART 18. INDIVIDUALS’ SEGMENTS CHART 19. INDIVIDUALS’ LOAN BOOK BREAKDOWN (2011)



Credit for companies: As in the individuals segment, the clients/companies are divided into three segments (Corporate, Businesses and Retail) depending on their annual revenue. The segment represents 69% of the consolidated 2011 loan portfolio.

If we consider the expanded loan book (including Sureties and Guarantees), the SMEs segment accounts for 42% of the companies’ loan portfolio while the remaining 58% represents credit concessions for large companies. The credit lines that account for the largest % of the loan book are Sureties and Guarantees, Working capital and Commercial Portfolio.

CHART 20. COMPANIES’ SEGMENTS CHART 21. COMPANIES’ LOAN BOOK BREAKDOWN (2011)



Insurance: Grupo Bradesco Seguros was founded at the beginning of the 1980’s. Currently it is the largest insurance conglomerate in Latin America, with a share of c. 25% in the Brazilian market (also including life and pension plans’ premiums), according to data released by ANS and Susep.

Bradesco Seguros provides a range of insurance products to individuals and corporate clients on an individual basis or under corporate agreements, in which employees are insured. Bradesco Seguros’ products include health, life, personal accident, automobile insurance and other assets, with health insurance comprising the largest portion of its insurance area.

The insurance segment has the competitive advantage of using Bradesco’s wide banking network to distribute its insurance products. The use of banking channels also favors its operating margins, as the company is less dependent on independent insurance brokers to sell its products. In 2011, the company reported net income of R$ 3.2bn for the insurance segment (+10.2% YoY) or 29% of Bradesco’s consolidated result. As of Dec/11, the combined ratio of Grupo Bradesco Seguros was 85.3%.

PRIVATE BANK

PRIME

RETAIL

Monthly income income starting at R$ 7,000 or investment starting at R$ 80,000

Minimun investment ofR$ 3 million

Monthly income income up to R$ 7,000

26%

12%6%

17%

16%

Auto loans

Personal loans

Agro

Credit card

Payroll‐deductible Loans

CORPORATE

EMPRESAS

RETAIL

Gross annual revenue from R$ 30 million to R$ 250 million

Gross annual revenueover R$ 250 million

Gross annual revenue up to R$ 30 million

17,0%

13,0%

10%

4%

4,0%

19,0%

Working capital

BNDES onlendings

Abroad

Export Financing

Overdraft accounts

Sureties and Guarantees

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Ownership Structure

Banco Bradesco’s share capital totals R$30.1bn, consisting of 3.8bn shares equally divided into voting and non-voting shares. The bank’s controlling block, comprising Cidade de Deus, Fundação Bradesco and NCF Participações owns 73.8% of the total voting shares and 38.1% of total capital. The free float is 59.9%. Fundação Bradesco is Bradesco’s major shareholder as it holds a direct and indirect voting stake of 56.5% and 29.4% of total capital. The holding company Cidade de Deus Participações has the largest direct stake, as can be seen in the table below. However, as the holding is controlled by the Aguiar family (21.9%), Fundação Bradesco (33.2%) and Nova Cidade de Deus (44.9%), when the consolidated figure is considered we note that Fundação Bradesco is the largest shareholder, followed by the Aguiar family, which owns 11.4% of the voting shares.

TABLE 10. BRADESCO CURRENT SHAREHOLDER STRUCTURE

Source: Company data

FIGURE 5. BRADESCO CURRENT OWNERSHIP STRUCTURE

Source: Company data

Shareholder Structure (000) V % V NV %NV Total % TotalCidade de Deus 932,991 48.8% 1,526 0.1% 934,518 24.4%Fundação Bradesco 325,831 17.0% ‐ 0.0% 325,831 8.5%NCF 156,804 8.2% 47,126 2.5% 203,930 5.3%Bank of Tokyo Mitsubishi 47,557 2.5% ‐ 0.0% 47,557 1.2%BES 16,807 0.9% ‐ 0.0% 16,807 0.4%Free float 429,921 22.5% 1,859,279 97.2% 2,289,199 59.9%Treasury 2,487 0.1% 4,466 0.2% 6,953 0.2%Total 1,912,397 100.0% 1,912,397 100.0% 3,824,795 100.0%

Ownership Structure

Fundação Bradesco

NCF

Bank of TokyoMitsubishi

Free Float

48.6% V0.1%NV24.3% Total

Cidade de Deus

BES

Banco Bradesco

17% V8.5% Total

8.2% V2.5%NV5.3% Total

22.5% V97.2% NV59.9% Total

2.5% V1.2% Total

0.9% V0.4% Total

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Means of Payment

The card industry in Brazil is still young, although it has experienced a significant boost in recent years. In our view, double-digit growth in financial transaction volumes should be sustainable until at least the end of 2016E, driven by the same factors that have benefited the sector so far, i.e.: i) private consumption growth; ii) growing population with access to financial services; iii) an increase in the use of cards as a means of payment; and iv) low exposure to international markets.

Bradesco operates through the entire card business chain, as the bank – in addition to being one of the biggest national card issuers – holds a 28.6% stake in Cielo (the biggest BZ merchant acquirer in terms of volume transacted) and 50.0% of ELO, a card brand created through a joint venture with Banco do Brasil that focuses on low income classes.

Given this trend, Bradesco aims to increase its overall revenues from cards by keeping its strong position in the cards segment and benefiting from the potential growth in the market.

On our estimates, Bradesco’s share in Cielo represents 0.9% of our potential upside. Our analysis is based on the 28.6% stake the bank has in Cielo. On our estimates, Cielo’s fair value is R$30.8bn and the bank’s stake is worth R$8.8bn, or 6.6% of Bradesco’s fair value.

TABLE 11. VALUATION OF MEANS OF PAYMENT DIVISION

Source: Espírito Santo Investment Bank Research for estimates for estimates and Bloomberg

Cielo is the leading company in the merchant acquiring and payment processing industry in Brazil by credit and debit card transaction volumes. Cielo also has the largest domestic coverage in the industry, with approximately 1.9 million active merchants in more than 98.9% of Brazilian municipalities.

In 2010, the company began to capture the transactions of the three largest international brands: Visa, MasterCard and Amex. Cielo also has partnerships with regional brands Sorocred, Policard and Good Card, international brand JCB (Japan Credit Bureau), Visa Vale, ELO, Ticket and Aura.

TABLE 12. CIELO’S SHAREHOLDER STRUCTURE

Source: Company

CHART 22. BRAZIL: NUMBER OF TRANSACTIONS BY MEANS OF PAYMENT CHART 23. BRAZIL: CARD PENETRATION IN BRAZIL IS LOW...

Source: ABECS and Brazilian Central Bank

Source: ABECS and Brazilian Central Bank

Means of Payment Value

(1) Cielo Fair Value (R$ millions) 30,771.9

(2) Stake of Bradesco in Cielo 28.6%

(3) = (1) x (2) (R$ millions) 8,800.8

(4) = % of Bradesco´s FV 6.6%

Bradesco Valuation (R$ millions) 133,519

Bradesco's valuation upside potential 14.4%

Bradesco acquiring business upside potential (R$ millions) 1,264

Bradesco Means of Payment as % bank´s potential upside 0.9%

Shareholder´s Structure # Voting Shares %Controlling Shareholder´s 781,973,371 57.3% ‐‐Banco Bradesco 390,986,637 28.6% ‐‐Banco do Brasil 390,986,734 28.6%Free‐float 578,312,663 42.4%Treasury 4,497,766 0.3%Total 1,364,783,800 100.0%

1.1 1.41.6 1.9

2.53.2

3.74.4

5.3

6.17.1

2.6 2.6 2.42.2

2.1 1.9 1.7 1.5 1.41.2 1.1

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Brazil: Number of Transactions (bn)

Cards Checks

14%15%

17%19%

21%23%

24%

2004 2005 2006 2007 2008 2009 2010

Card spend as a percentage of household consumption in Brazil

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Neutral stance on Brazilian Large Cap Banks

Neutral stance on Large Cap Brazilian Banks: Current environment not supportive The rally observed in the first half of 1Q12 in some BZ large cap bank shares (and Brazilian equities overall) was driven largely by macroeconomic events, such as: i) the Selic rate trending lower; ii) forecast higher GDP growth rate in 2012; and iii) higher international liquidity, led by monetary loosening in the US and Europe. As the lower Selic rate and the low GDP growth are already incorporated into our estimates, we make no changes to our EPS and ROE forecasts for 2012E for any of the banks already under our coverage. However, after the aforementioned outperformance, BZ banks shares dropped rapidly as a result of increasing government pressure for lower spreads via state-owned banks. In our opinion, despite this recent fall in bank share prices we believe that the overall risk-reward ratio is unattractive in light of our view that in 2012E, BZ banks in general will see: i) lower credit growth than in 2011; ii) lower interest rates and net interest margins (NIM); iv) higher loan loss provision expenses (LLP); v) lower ROEs; and vi) poorer EPS growth. We have NEUTRAL ratings on Itau Unibanco, Santander Brasil and Banco do Brasil, but rate Bradesco BUY

Given the currently unfavourable environment for BZ banks, we have a relative preference for Bradesco owing to its lower-risk loan portfolio and proven track record. We highlight that Bradesco has a well diversified portfolio, long term its bottom line is less dependent on interest income (helped by the insurance business) and a strong track record in challenging economic environments.

We maintain our NEUTRAL ratings on Itau Unibanco (FV R$38.8) Santander Brasil (FV R$19.2) and Banco do Brasil (FV R$31.7) and select Bradesco as our top pick in the sector.

CHART 24. BZ BANKS: SHARE PRICE PERFORMANCES YTD CHART 25. BZ BANKS: 12E EPS GROWTH

Source: Bloomberg; Priced as at 17 April 2012


Lower consolidated credit growth... on average, we expect BZ large cap banks will see growth of 17% in 2012E – 200bps below 2011. Our rationale is that most BZ private banks will take a more conservative approach to lending owing to concerns about asset quality and the pace at which the Brazilian population is leveraging up through banking and retail loans. However, as we believe that Bradesco is in the process of recovering lost ground after losing the Banco Postal auction to Banco do Brasil, the bank will likely pursue strong growth in 2012. We estimate higher loan book growth in 2012E for BBDC4 (19.2% vs. 16.5% in 2011), with slightly higher growth in the companies’ segment. We also believe that the expansion in the companies’ credit portfolio is likely to be led by loan concessions to SMEs, following the trend seen in 2011.

Lower NIM... We estimate an average reduction of 33bps in NIMs in 2012E for the four large cap BZ banks under our coverage. For the banking sector as whole, we believe that the combination of: i) lower growth; ii) a lower Selic rate; iii) lower interest rates; and iii) credit mix (lower risks) should decrease NIMs for BZ large cap banks in 2012E. We estimate that Banco do Brasil will see its NIM fall by 40bps as a consequence of higher growth. We forecast Itau Unibanco and Santander Brasil to see their NIMs fall by 30bps. Bradesco may report a reduction of 25bps in its NIM in 12E. We believe more selectivity in lending money will translate into higher interest rates.

‐6.3%

0.1%

6.2%

‐0.21%

10.5%

ITUB4

ITUB4

BBAS3 SANB11

BBDC4

IBOV

12.5%

9.3%

15.2%

5.7%

0.0%

5.0%

10.0%

15.0%

20.0%

2012/2011

EPS growth (2012E)

Bradesco

ItauUnibanco

Santander Brasil

Banco do Brasil

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CHART 26. BZ BANKS 12E CREDIT GROWTH CHART 27. BZ BANKS 12E NIM



Higher LLP expenses... We forecast LLP expenses as a % of the loan book to increase by 29bps on average in 2012E. In our opinion, NPLs may increase given the path taken by the Brazilian government, combined with the consumption behaviour and debt burden of Brazilian households. We think NPLs in Brazil have reached a peak and may stabilize after 1H12E. We see households’ debt servicing (principal + interest) at 22.64% as of December 2011 as concerning – mainly due to the fact that debt payments are now the second-highest expense in Brazilian households’ budgets. We estimate that Banco do Brasil may suffer the largest increase in its ratio (from 2.8% to 3.3%), due to its auto loans portfolio and efforts to increase its activities in credit cards and overdraft accounts. We forecast Bradesco – due to its well balanced (risk vs spreads) loan portfolio – to show the lowest increase in 2012E (2bps). We forecast this ratio to increase by 20bps YoY for both Itau Unibanco and Santander. ...poorer EPS growth and lower ROEs... as a consequence of: i) lower credit growth; ii) higher LLP expenses; and iii) lower NIMs, we estimate average 12E EPS growth of 10.5% for the four large cap banks in our coverage universe. We expect Santander Brasil to report the highest 12E EPS growth (+15.2%), based mainly on lower non-recurring items that should positively affect non-operating expenses. We forecast lower 12E ROEs for Bradesco (21.2% vs 21.6% in 2011), Itau Unibanco (20.8% vs 22% in 2011) and Banco do Brasil (18.8% vs 20.2% in 2011).

CHART 28. BZ BANKS 12E LLP EXPENSES GROWTH


19.8% 19.2%

14.3%15.7%17.0%

15.2% 14.9%16.0%

Banco do Brasil Bradesco Itau Unibanco Santander Brasil

Credit Growth Forecast

12E 13E 12E Average 13E Average

6.9%

6.2% 6.1%5.8%

5.6%

8.4% 8.2%

7.8%7.5% 7.3%

8.1% 7.9%

8.2%7.8%

7.7%

6.6%

6.0%

5.5%

5.1%4.8%

4.5%

5.0%

5.5%

6.0%

6.5%

7.0%

7.5%

8.0%

8.5%

9.0%

2009 2010 2011 2012E 2013E

NIM % ‐ Brazilian Banks


19.7% 20.1%26.1%

42.8%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

2012/2011

LLP Expenses growth (2012E)

BradescoItauUnibanco

Santander Brasil

Banco do Brasil

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CHART 29. HISTORICAL MULTIPLES

Source: Company data, Bloomberg and Espirito Santo Investment Bank Research








1.50

1.75

2.00

2.25

2.50

2.75

Jan‐09 May‐09 Sep‐09 Jan‐10 May‐10 Sep‐10 Jan‐11 May‐11 Sep‐11 Jan‐12

BBDC4 ‐ P/BV ‐ historical(x)

BBDC4 BBDC4 Average +SD ‐SD

2.1xAverage: 2.2x

7.8

8.8

9.8

10.8

11.8

12.8

BBDC4 12m‐FWDP/E

Average = 10.2X

9.9X

At FV

0.750

1.500

2.250

Oct‐09 Apr‐10 Oct‐10 Apr‐11 Oct‐11 Apr‐12

SANB11 - P/BV - historical(x)

SANB11 SANB11 average +SD ‐SD

Average: 1.5x

1.2x

6.0

8.0

10.0

12.0

14.0

16.0

18.0SANB11 12m‐FWD

P/E

Average = 11.5x

9.8x

At FV

1.5

2.5

3.5

Jan‐09 Jul‐09 Jan‐10 Jul‐10 Jan‐11 Jul‐11 Jan‐12

ITUB4 - P/BV - historical(x)

ITUB4 ITUB4 Average +SD ‐SD

1.9x

Average: 2.6x

7.0

8.0

9.0

10.0

11.0

12.0

13.0

14.0

15.0ITUB4 12m‐FWD

P/E

Average = 11.1x At FV

0.8

1.8

Jan‐09 Jul‐09 Jan‐10 Jul‐10 Jan‐11 Jul‐11 Jan‐12

BBAS3 - P/BV - historical(x)

BBAS3 BBAS3 Average +SD ‐SD

1.1x

Average: 1.5x

5.0

5.5

6.0

6.5

7.0

7.5

8.0

8.5

9.0

9.5

10.0BBAS3 12m‐FWD

P/E

Average = 6.7x

5.8x

At FV

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Section 3: Macroeconomics: Between a rock and a hard place

We think the Brazilian government is in a difficult position, as it tries to reheat the economy while at the same time addressing rising inflation. After the weak 2011 GDP growth (+2.7% YoY, with most of the weakness in 2H11), the government started to take measures to stimulate domestic consumption, and thereby boost GDP. The anti-cyclical measures started in August-11, when the Brazilian Central Bank surprised the market and cut the Selic rate by 50bps to 12.00% pa. After four additional cuts, the Selic rate is currently at 9.00% pa, and potentially on a declining trend. Our economics department forecasts 9.0% pa as of Dec-12E. However, the real challenge is stimulating domestic consumption while keeping inflation under control. Despite the drop in inflation at the end of 2011 and beginning of 2012, the consumer price index is still at high levels. Our main concern is not with the percentage at the end of the year, but with an upward trend from Aug-12E. According to our economics department, the inflation index (IPCA) may be at 5.4% by the end of the year, however, as we mentioned, inflation in Dec-12E may be at 0.55% MoM vs 0.30% MoM in Aug-12E.

CHART 30. MONETARY POLICY – SELIC RATE VS. INFLATION (IPCA) CHART 31. MONETARY POLICY – SELIC RATE VS. INFLATION (IPCA)

Source: Brazilian Central Bank and Espírito Santo Investment Bank Research for estimates Source: Brazilian Central Bank and Espírito Santo Investment Bank Research for estimates

Along with cuts in interest rates and increasing inflation concerns, the Brazilian government has taken other anti-cyclical measures. In November-2011, the Brazilian Central Bank released adjustments in the requirements to the calculation of risk weighted assets (RWA) and reduced the capital required for individual credit operations with maturities below 60 days, partially reversing some macro-prudential measures adopted at the end of 2010, meaning relief for the BIS ratio of Brazilian banks and stimulating credit. In addition, in December-11, the Brazilian government cut the financial transaction tax (IOF) on credit for individuals from 3.0% to 2.5%, aiming to reduce the cost of credit for consumption. We believe credit may be the most important tool to reheat the Brazilian economy. Our macroeconomic forecasts GDP growth of 3.5% in 2012E and we estimate credit growth of 17% for the market.

CHART 32. BRAZILIAN GDP GROWTH VS CREDIT DYNAMIC CHART 33. BRAZILIAN GDP GROWTH VS CREDIT DYNAMIC

Source: Brazilian Central Bank and BESI economics team for estimates Source: Brazilian Central Bank and Espírito Santo Investment Bank Research

9,0%

5,24%

0,00%

1,00%

2,00%

3,00%

4,00%

5,00%

6,00%

7,00%

8%

10%

12%

14%

16%

18%

20%

22%

24%

Dec‐05 Dec‐06 Dec‐07 Dec‐08 Dec‐09 Dec‐10 Dec‐11 Dec‐12

Inflation (IPCA %)Selic Rate (%)Monetary Policy ‐ Selic Rate vs Inflation

Selic rate Inflation (IPCA)

Start of anti‐cyclical measures

0,86%

1,07%

0,91%

0,75%0,83%

0,15%

0,53%0,55%

0,00%

0,20%

0,40%

0,60%

0,80%

1,00%

1,20%

Jan‐11

Feb‐11

Mar‐11

Apr‐11

May‐11

Jun‐11

Jul‐1

1

Aug‐11

Sep‐11

Oct‐11

Sep‐11

Dec

‐11

Jan‐12

Feb‐12

E

Mar‐12E

Apr‐12

E

May‐12E

Jun‐12

E

Jul‐1

2E

Aug‐12

E

Sep‐12

E

Oct‐12E

Nov

‐12E

Dec

‐12E

Monetary Policy ‐ IPCA monthly expectation

CDI (monthly) IPCA (monthly)

Start of anti‐cyclical measures

4,0%

6,1% 5,2%

‐0,6%

7,5%

2,7%3,5%

20,7%

27,8%31,1%

15,2%

20,6%19,0% 17,0%

0,0%

5,0%

10,0%

15,0%

20,0%

25,0%

30,0%

35,0%

‐1,0%

0,0%

1,0%

2,0%

3,0%

4,0%

5,0%

6,0%

7,0%

8,0%

2006 2007 2008 2009 2010 2011 2012E

Annual Credit growth (%)

Annual GDP growth %

Brazilian GDP and Credit Dynamic

GDP (growth YoY) Credit (growth YoY)

2.5%

5.4%7.6% 7.5%

6.3%

4.9%

3.7%

1.4%

2.6%

5.3%5.5% 5.7%

2.9%

4.6%

5.3%5.10%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11

Quarterly Credit growth

Quarterly GDP growth

Brazilian GDP and Credit Dynamic

GDP (growth QoQ) Credit (growth QoQ)

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At the same time, we think the BCB may need to cool down economic activity to control the upward trend of inflation. We do not rule out the adoption by the Brazilian Central Bank of macro-prudential measures (as happened at the end of 2010), i.e. higher reserve requirements and more capital requirements for individual operations before an increase in the Selic rate. That said we think that Brazilian monetary authorities may impose credit growth restrictions on Brazilian banks in 4Q12E.

TABLE 13. MACROECONOMIC ASSUMPTIONS

Source: BESI economics team for historical figures and estimates

Macroeconomic Assumptions - Espirito Santo Investment Bank 2009 2010 2011 2012E 2013E 2014E 2015E 2016E

Real GDP Grow th -0.33% 7.53% 2.73% 3.50% 4.00% 4.00% 4.00% 4.00%

Selic Target - Interest Rate 8.75% 10.75% 11.00% 9.00% 10.50% 8.92% 8.50% 8.50%

Selic - Average Interest Rate 9.93% 9.78% 11.62% 9.31% 10.06% 8.92% 8.50% 8.50%

Selic - Real Interest Rate 5.39% 3.65% 4.80% 3.78% 4.03% 3.56% 3.33% 3.33%

Inflation (IPCA) 4.3% 5.9% 6.5% 5.3% 5.8% 5.2% 5.0% 5.0%

FX Rate - End of Period 1.74 1.67 1.88 1.75 1.80 1.85 1.90 1.95

FX Rate - Average (R$/USD) 1.99 1.76 1.67 1.75 1.78 1.83 1.88 1.93

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Section 4: Credit prospects for 2012

4.1: Credit Growth may be lower than in 2011

Despite the efforts of the Brazilian government, we believe that credit growth in 2012 may be lower than in 2011. We also believe that public banks may fill an important role over the year with the mandate to support consumption at a higher level, while private banks may take a more conservative approach. The public banks have increased their stake in the total Brazilian credit system by 170bps between Feb11 and Feb12 and reached a 43.8% share as of Feb-12.

CHART 34. CREDIT BY OWNERSHIP - STAKE CHART 35. CREDIT BY OWNERSHIP - YOY CHANGE



The Brazilian Central Bank’s estimates for 2012E show credit growth of 12% for private banks and 19% for public banks. We are estimating 17% credit growth overall in 2012E vs 19% in 2011. However, it is important to highlight that Banco do Brasil and Bradesco have pulled up our average credit growth forecast. As an anti-cyclical player, we expect Banco do Brasil’s credit portfolio to grow the most in 2012E (19.8%), followed by Bradesco (+19.2%) based on its organic growth. We forecast growth rates of 15.7% and 14.3% for Santander Brasil and Itau Unibanco, respectively. We expect Itau Unibanco to report relatively low growth as we expect it to take a more conservative approach following the significant increase in NPLs last year.

CHART 36. BRAZILIAN CREDIT AMOUNT AND GROWTH CHART 37. BRAZILIAN BANKS CREDIT GROWTH



We also believe that credit for consumption may be the principal driver of growth in 2012, noting: i) payroll-deductible loans; ii) direct consumer credit (CDC); and iii) mortgage lines. We believe that we may see a reduction in the pace in auto loan growth for private banks, but public banks see the same rate of growth observed in 2011. We also expect public banks to be more aggressive in credit cards and overdraft accounts, mainly after the recent Banco do Brasil and Caixa Economica Federal’s (not-listed) CEOs announcement of lower interest rates for these credit lines. With respect to credit for companies, we believe that lines for small and mid cap companies may grow at higher rates than credit for large companies. The recent foreign issuances made by large companies seem to support our view, as they may reduce large companies’ demand for credit.

34,1% 37,1% 41,7% 42,0% 43,8%

43,9% 42,2% 40,3% 40,7% 39,0%

22,0% 20,6% 18,0% 17,3% 17,2%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Feb-08 Feb-09 Feb-10 Feb-11 Feb-12

Credit by ownership - stake%

Foreign Sector Private-Sector Public-Sector

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Feb-08 Aug-08 Feb-09 Aug-09 Feb-10 Aug-10 Feb-11 Aug-11 Feb-12

Credit by ownership - Change YoY

Public-Sector Private-Sector Foreign Sector

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

(200.00)

300.00

800.00

1,300.00

1,800.00

2,300.00

YoY grow

th (%

)

Cred

it Balance (R$

bn)

Credit Balance vs Credit Growth

Credit Balance YoY growth

19.8% 19.2%

14.3%15.7%17.0%

15.2% 14.9%16.0%

Banco do Brasil Bradesco Itau Unibanco Santander Brasil

Credit Growth Forecast

12E 13E 12E Average 13E Average

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CHART 38. BRAZILIAN CREDIT BALANCE AND GROWTH CHART 39. BRAZILIAN CREDIT BREAKDOWN



4.2: Asset Quality: We still have concerns about NPLs

We believe NPLs may increase in 2012 given the expansionary approach by the Brazilian government for 2012, combined with the consumption behaviour and debt burden of Brazilian households. We agree with the commonly held view that aggregate national figures and the outlook for this year (lower interest rates + lower inflation + 14% increase in the minimum wage) suggest an improved scenario for Brazilian banks’ NPLs in 2012. However, our study of non-aggregate national figures suggests Brazilian banks’ asset quality may remain at risk. We see households’ debt service (principal + interest), at 22.3% as of December 2011, as concerning. Our assumption takes into consideration households’ consumption expectations versus their average income evolution and committed income. We note:

• Brazilian households’ debt service is at an unsustainable level, in our view; as of December-11, it was 22.3% and represented the second-highest expense in Brazilian Households’ budgets.

• The apparent willingness of Brazilian households to increase their consumption in 2012 may lead to a overspending in 2012 and, as a consequence, the use of disposable income to support this spending could put pressure on their ability to make debt payments.

• The recent pace of average income growth has shown signs of a slowdown and may not be sufficient to support Brazilian households’ planned consumption over 2012.

Brazilian Households’ debt service is at an unsustainable level, in our view

Our analysis indicates that Brazilian households’ debt servicing 22.3%is the second-highest expense in their monthly budgets, behind only home expenses (27.7%). We think that Brazilian households may be incurring debts not only to purchase durable goods, but also to finance current and regular expenses, which could be a worrying trend, in our view, because household incomes may not be sufficient to cover regular expenses, which could raise the level of debt service to unsustainable levels and lead to overspending. Furthermore, Chart 40 below shows the evolution of NPLs for individuals and households’ debt servicing and we can see that during the credit crisis NPLs increased due to macro conditions (unemployment rate). However, in 2011, they increased following a rise in households’ debt servicing levels, while the unemployment rate was on a declining trend over the year.

CHART 40. BZ HOUSEHOLDS’ DEBT SERVICE VERSUS NPLS CHART 41. BZ HOUSEHOLDS’ BUDGET


Source: IBGE, IPEA and Espirito Santo Investment Bank Figures as of December-11

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12

Credit by Segment - Change YoY

Credit for Individuals Credit for Companies Earmarked

41,4%46,8%

58,6%

53,2%

40%42%44%46%48%50%52%54%56%58%60%

Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10

Brazilian Credit Distribution

% Individuals %Companies

-540bps

+540bps

5,0

5,5

6,0

6,5

7,0

7,5

8,0

8,5

9,0

0,0

5,0

10,0

15,0

20,0

25,0

NPLs for individu

als %

Hou

seho

lds' deb

t service %

BZ Households' debt service versus NPLs for Individuals

Household debt service (principal) Household debt service (interests) NPLs Individuals

27.7%

22.3%15.3%

15.2%

5.6%

4.3%2.3%

1.7%5.3%

BZ households' budget ‐ Average Income:R$1,623.00 (monthly)

Home

Loan

Food

Transports

Healthy

Clothes

Education

Leisure

Other

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Consumption plans may lead to overspending

The second point that makes us concerned about banks’ asset quality is the apparent intention of Brazilian households to increase their consumption in 2012. According to a December 2011 survey (Index of Brazilian Household Expectation – IEF) conducted by the Brazilian Institute of Applied Economic Research (IPEA) in December 2011, 57.4% of households (up 1.8p.p. versus November) believe that now is a good time to buy durable goods. The same survey indicated that 92.3% of households (up 2.5p.p. versus November) have no plans to increase their borrowing or financing to purchase goods over the next 3 months. In our opinion, these figures are contradictory because, according to our study, Brazilian household budgets are almost fully committed, with limited room to increase consumption in the short term without resorting to borrowing or other financing. We think this represents a potential pitfall, as Brazilian households will need to either increase their debts or use their disposable income to support the additional consumption. (However, the use of disposable income to support spending would pressure their capacity to make debt payments.)

Average rate of income growth has shown signs of a slowdown

Our third area of concern is the average income of Brazilian households. Despite the recent changes, we have seen a cooling in annual growth. Between May-11 and July-11, the YoY growth of average income remained stable before starting to slow in August-11, showing a slight recovery in Dec-11 (see Chart 42 below). We think the recent pace of average income growth has shown signs of a slowdown and may not be sufficient to support Brazilian households’ planned consumption over 2012. Furthermore, we have seen Brazilian households’ average expenses growing at a higher rate than their average income. The CAGR 2006/2011 of average expenses was 11.9%, vs 3.3% for average income.

CHART 42. BZ HOUSEHOLDS’ AVERAGE INCOME UNTIL DEC-11 CHART 43. AVERAGE INCOME VS AVERAGE EXPENSES

Source: Brazilian Central Bank and Espírito Santo Investment Bank Research (latest available data)

Source: Brazilian Central Bank and Espírito Santo Investment Bank Research (latest available data)

We also note that lower interest rates have a limited impact on Brazilian banks’ interest rates and the historical data demonstrate that the decline in the trend line of the Selic rate over the period is steeper than the trend line for Brazilian banks’ spreads, as shown in Chart 44. With respect to inflation, although we expect it to be lower this year than in 2011, the market expectation (median consensus estimate in the Central Bank Focus Report) is still high, at 5.32%, and our macroeconomics department forecasts 5.4% by the end of 2012. We see a challenge for the Brazilian government to control inflation following the 14% increase in the minimum wage at the beginning of 2011 and inflation at the top of the target range in 2011 and likely to stay around 5.5% in 2012E. This leads us to conclude that Brazilian banks’ NPLs may not decrease by as much as generally expected.

CHART 44. CONSOLIDATED SPREADS VS SELIC CHART 45. INFLATION AND SELIC RATE



‐1,0%

0,0%

1,0%

2,0%

3,0%

4,0%

5,0%

6,0%

7,0%

1.400,0

1.450,0

1.500,0

1.550,0

1.600,0

1.650,0

1.700,0 YoY growth

(R$)

BZ Households' Average Income

Households Average Income Households Average Income (YoY growth)

0,0%

2,0%

4,0%

6,0%

8,0%

10,0%

12,0%

14,0%

16,0%

18,0%

4Q06

1Q07

2Q07

3Q07

4Q07

2Q08

2Q08

3Q08

4Q08

1Q09

2Q09

3Q09

4Q09

1Q10

2Q10

3Q10

4Q10

1Q11

2Q11

3Q11

Evolution of Brazilian Households' Average Expenses vs Average Income (YoY)

Average Expenses (Consumption) Average Income

CAGR 06/11: 11.9%

CAGR 06/11: 3.3%

y = -0.0361x + 29.977

y = -0.1067x + 21.917

5

10

15

20

25

30

35

5

10

15

20

25

30

35

Jan-01Jan-02Jan-03Jan-04Jan-05Jan-06Jan-07Jan-08Jan-09Jan-10Jan-11

Selic (%p.a.)Spreads (%p.a.)

Spread x Selic Rate

Spreads Selic Linear (Spreads) Linear (Selic)

0,0%

2,0%

4,0%

6,0%

8,0%

10,0%

12,0%

14,0%

16,0%

18,0%

20,0%

0,0%

1,0%

2,0%

3,0%

4,0%

5,0%

6,0%

7,0%

2005 2006 2007 2008 2009 2010 2011 2012E 2013E

Selic %

IPCA

%

Inflation and Selic rate

IPCA Selic

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We also think it is important to note that NPLs are currently at practically the same level as that observed during the credit crisis in 2008/2009, whereas macro conditions have improved considerably since then. During the past 12 months, consolidated NPLs have increased 140bps and NPLs for individuals have increased 161bps. We think that the NPLs do not exclusively reflect macro conditions. We are not ruling out the effects of changes in the unemployment rate, Selic rate, GDP growth and inflation, but now include the mix of loans (more SMEs in the banks’ portfolios implying greater risk) and the consumption behaviour (individuals increasing their consumption and raising the risks of overspending).

CHART 46. NPLS (> 90 DAYS) - CONSOLIDATED CHART 47. NPLS (> 90 DAYS) - COMPANIES CHART 48. NPLS (> 90 DAYS) - INDIVIDUALS

Source: Brazilian Central Bank and Espirito Santo Investment Bank Research

Below we show how BZ banks’ asset quality has deteriorated in 2011. We highlight that, on average, the NPLs of the four largest banks increased 23% YoY.

TABLE 14. BRAZILIAN BANKS ASSET QUALITY ANALYSIS

Source: Company data, Espírito Santo Investment Bank Research

0,00

1,00

2,00

3,00

4,00

5,00

6,00

7,00

Dec

‐07

Feb‐08

Apr‐08

Jun‐08

Aug‐08

Oct‐08

Dec

‐08

Feb‐09

Apr‐09

Jun‐09

Aug‐09

Oct‐09

Dec

‐09

Feb‐10

Apr‐10

Jun‐10

Aug‐10

Oct‐10

Dec

‐10

Feb‐11

Apr‐11

Jun‐11

Aug‐11

Oct‐11

Dec

‐11

Brazilian NPLs ‐ Consolidated

+97bps

Credit Crisis

0,00

0,50

1,00

1,50

2,00

2,50

3,00

3,50

4,00

4,50

Dec

‐07

Feb‐08

Apr‐08

Jun‐08

Aug‐08

Oct‐08

Dec

‐08

Feb‐09

Apr‐09

Jun‐09

Aug‐09

Oct‐09

Dec

‐09

Feb‐10

Apr‐10

Jun‐10

Aug‐10

Oct‐10

Dec

‐10

Feb‐11

Apr‐11

Jun‐11

Aug‐11

Oct‐11

Dec

‐11

Brazilian NPLs ‐ Companies

Credit Crisis +7ps

0,00

1,00

2,00

3,00

4,00

5,00

6,00

7,00

8,00

9,00

Brazilian NPLs ‐ Individuals

Credit Crisis

+188bps

Banco do Brasil Asset Quality 4Q10 1Q11 Chg. QoQ 2Q11 Chg. QoQ 3Q11 Chg. QoQ 4Q11 Chg. QoQ Chg. YoY

Gross Loans 358,366 364,659 1.8% 383,378 5.1% 402,555 5.0% 422,989 5.1% 18.0%

Non‐performing loans (above 90 days) 8,164 7,658 ‐7.1% 7,668 0.1% 8,454 10.3% 8,883 5.1% 8.8%

Loan loss provisions 17,315 17,016 8.4% 17,734 4.2% 18,611 4.9% 19,015 2.2% 9.8%

Loan loss provisions expenses 2,139 2,630 23.0% 3,047 15.9% 3,259 7.0% 2,892 ‐11.3% 35.2%

Coverage Ratio 212% 222% 24.6 p.p. 231% 9.1 p.p. 220% ‐11.1 p.p. 214% ‐6.1 p.p. 2.0 p.p.

Loan loss provisions / Gross Loans 4.8% 4.7% 0.0 p.p. 4.6% 0.0 p.p. 4.6% 0.0 p.p. 4.5% ‐0.1 p.p. ‐0.3 p.p.Loan loss provisions expenses / Gross Loans 0.6% 0.7% 0.1 p.p. 0.8% 0.1 p.p. 0.8% 0.0 p.p. 0.7% ‐0.1 p.p. 0.1 p.p.

Bradesco Asset Quality 4Q10 1Q11 Chg. QoQ 2Q11 Chg. QoQ 3Q11 Chg. QoQ 4Q11 Chg. QoQ Chg. YoY

Gross Loans 230,619 239,912 4.0% 250,834 4.6% 260,471 3.8% 268,668 3.1% 16.5%

Non‐performing loans (above 90 days) 8,302 8,648 4.9% 9,172 6.1% 9,839 7.3% 10,478 6.5% 26.2%



Coverage Ratio 196% 194% ‐4.0 p.p. 189% ‐4.2 p.p. 194% 4.7 p.p. 186% ‐7.5 p.p. ‐9.7 p.p.

Non‐performing loans / Gross Loans 3.6% 3.6% ‐2.1 p.p. 3.7% 0.1 p.p. 3.8% 0.1 p.p. 3.9% 0.1 p.p. 0.3 p.p.Loan loss provisions / Gross Loans 1.0% 1.0% ‐0.1 p.p. 1.0% 0.0 p.p. 1.1% 0.1 p.p. 1.0% ‐0.1 p.p. 0.0 p.p.

Itau Unibanco Asset Quality 4Q10 1Q11 Chg. QoQ 2Q11 Chg. QoQ 3Q11 Chg. QoQ 4Q11 Chg. QoQ Chg. YoY

Gross Loans 333,427 344,855 3.4% 360,108 4.4% 382,236 6.1% 397,012 3.9% 19.1%



Loan loss provisions expenses 2,409 4,380 11.8% 5,107 16.6% 4,972 ‐2.6% 5,453 9.7% 126.4%

Coverage Ratio 157% 173% ‐24.8 p.p. 166% ‐7.2 p.p. 156% ‐9.1 p.p. 153% ‐3.5 p.p. ‐4.3 p.p.

Non‐performing loans / Gross Loans 4.2% 3.7% ‐1.9 p.p. 4.0% 0.3 p.p. 4.1% 0.1 p.p. 4.2% 0.1 p.p. 0.0 p.p.Loan loss provisions / Gross Loans 0.7% 1.3% ‐0.1 p.p. 1.4% 0.1 p.p. 1.3% ‐0.1 p.p. 1.4% 0.1 p.p. 0.7 p.p.

Santander Brasil Asset Quality 4Q10 1Q11 Chg. QoQ 2Q11 Chg. QoQ 3Q11 Chg. QoQ 4Q11 Chg. QoQ Chg. YoY

Gross Loans 165,379 169,911 2.7% 175,837 3.5% 188,389 7.1% 194,040 3.0% 17.3%




Coverage Ratio 135% 143% 0.4 p.p. 143% 0.5 p.p. 141% ‐2.0 p.p. 137% ‐3.6 p.p. 2.1 p.p.

Non‐performing loans / Gross Loans 3.9% 4.0% ‐1.7 p.p. 4.3% 0.3 p.p. 4.3% 0.0 p.p. 4.5% 0.2 p.p. 0.6 p.p.Loan loss provisions / Gross Loans 1.2% 1.6% ‐0.1 p.p. 1.7% 0.1 p.p. 1.6% ‐0.1 p.p. 1.5% ‐0.1 p.p. 0.3 p.p.

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4.3: Margins: Affected by competition from state-owned banks + credit mix

In 2012, we expect margins of Brazilian large cap banks we cover to be under pressure,due to pressure on state-owned banks to reduce interest rates and spreads and also the credit mix.

4.3.1: Lower spreads may hit margins sooner than previously expected

At the beginning of April 2012, Banco do Brasil and Caixa Economica Federal (CEF, not listed) announced their package of interest rate reductions. The lower interest rates will be applied to the individual and SME segments. The measures were more aggressive than those announced by the state-owned banks in 2008/09, aimed at avoiding a sharp slowdown in economic activity. The purpose of the measure is to reduce the cost of credit in Brazil and to stimulate banks to reduce their spreads.

Private banks have already responded to the announced measures. On 17 and 18 April, Santander Brasil, Bradesco and Itau Unibanco announced lower interest rates. However, we note that these banks are offering lower interest rates for their current client base and reducing them at a gradual pace, depending on the percentage to be financed and the maturity of the loan. The reduction could be 10p.p., but only if the client financed 50% of the goods to be acquired, for example.

We believe that the private banks have only two options: (i) reduce interest rates; or (ii) lose market share. We note that as part of the effort to push down banking spreads, the public banks have offered lower interest rates to clients that move their bank accounts. At first sight, this is likely to force private banks to reduce their spreads to retain clients. We also highlight that the credit portability (a mechanism that allows the transfer of a loan taken in a bank to another which offers better contractual terms) although still unusual has grown consistently in Brazil.

We regard the announcements as negative for the profitability of the banking industry overall, as we see the measures as too aggressive and we think they should lead to increasing banking competition. If the state-owned banks keep interest rates low – reducing the spreads – for a long period of time (which we would expect to happen if the current government remains in power), we may see a new competitive banking scenario in Brazil with lower profitability or a higher market share of public banks.

We already assume a reduction in spreads in the long term for all of the banks we cover. However, the recent announcements could bring forward the decrease and/or make it less gradual than we previously forecast. In other words, the drop in the banks’ NIM could be sharper and start faster than we forecast.

We have carried out a sensitivity analysis to measure the potential impact of a reduction in net interest income on the banks’ 2012E EPS (see below):

TABLE 15. BBDC4 SENSITIVITY ANALYSIS (R$) TABLE 16. BBAS3 SENSITIVITY ANALYSIS (R$)

Source: Espirito Santo Investment Bank Research for estimates


TABLE 17. SANB11 SENSITIVITY ANALYSIS (R$) TABLE 18. ITUB4 SENSITIVITY ANALYSIS (R$)



BBDC4 NIM EPS 2012 EPS 2012 chg%Our base case 5.8% 3.30 0.0%

‐20bps 5.6% 3.04 ‐7.9%‐30bps 5.5% 2.95 ‐10.5%‐40bps 5.4% 2.87 ‐13.1%‐50bps 5.3% 2.75 ‐16.7%

BBAS3 NIM EPS 2012E EPS 2012E (% chg)Our base case 5.1% 4.06 0.0%

‐20bps 4.9% 3.85 ‐5.2%‐30bps 4.8% 3.66 ‐9.8%‐40bps 4.7% 3.34 ‐17.7%‐50bps 4.6% 3.22 ‐20.6%

SANB11 NIM EPS 2012 EPS 2012 chg%Our base case 7.8% 1.83 0.0%

‐20bps 7.6% 1.73 ‐5.6%‐30bps 7.5% 1.64 ‐10.4%‐40bps 7.4% 1.59 ‐13.0%‐50bps 7.3% 1.56 ‐14.8%

ITUB4 NIM EPS 2012 EPS 2012 chg%Our base case 7.5% 3.51 0.0%

‐20bps 7.3% 3.35 ‐4.5%‐30bps 7.2% 3.22 ‐8.2%‐40bps 7.1% 3.09 ‐11.9%‐50bps 7.0% 2.96 ‐15.7%

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4.3.2: Credit Mix

The credit lines that Brazilian banks will focus on in 2012 in the individuals segments with typically lower interest rates, such as: i) mortgage; ii) payroll-deductible loans; and iii) direct consumption credit (CDC), and the efforts by public banks to reduce the interest rates on credit cards and overdraft accounts may put pressure on their margins. According to the Central Bank, as of January-12, overdraft account interest rates were at 185.9% pa, and mortgage interest rates were the lowest at 13.9% pa.

CHART 49. LOANS FOR INDIVIDUALS – INTEREST RATES TABLE 50. LOANS FOR INDIVIDUALS – INTEREST RATES (AS OF JAN-12)



Within credit for companies, we think that SMEs may be the focus of Brazilian Large cap banks. Although the SMEs segment has higher interest rates than large corporates, working capital is the most important type of credit offered to SMEs and the interest rates are the lowest in the segment’s range. According to the Central Bank, as of January-121, overdraft account interest rates were the highest, at 109.1% pa, and working capital rates were the lowest, at 26.0% pa. Please see the chart and table below:

CHART 51. LOANS FOR COMPANIES – INTEREST RATES TABLE 52.LOANS FOR COMPANIES – INTEREST RATES (AS OF JAN-12)



0

20

40

60

80

100

120

140

160

180

200

Oct‐11 Nov‐11 Dec‐11 Jan‐12

Loans for Individuals ‐ Interest Rates (% p.a.)

Overdraft Accounts Personnel Credit (including credit cards) Auto Loans CDC Payroll‐Deductible Mortgage

Loans for Individuals ‐ Type of Credit % pa Overdraft Accounts 185,9 Personnel Credit (including credit cards) 50,3 CDC 28,40 Payroll‐deductible Loans 27,50 Auto Loans 26,8 Mortgage 13,91

0

20

40

60

80

100

120

Oct‐11 Nov‐11 Dec‐11 Jan‐12

Loans for Companies ‐ Interest Rates (% p.a.)

Overdraft Account Promissory Notes Trade Receivables Hot money Working Capital

Loans for Companies ‐ Type of Credit % pa Overdraft Account 109,1 Promissory Notes 55,80 Trade Receivables 40,9 Hot money 33,5 Working Capital 26,0

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CHART 53. NET INTEREST MARGIN – BRAZILIAN BANKS

In a scenario of lower margins, we estimate an average reduction in BZ banks’ NIMs of 33bps in 2012E. We note that Santander Brasil and Itau Unibanco have reported the highest NIMs over the past three years and we forecast this trend to be maintained over the next two years. Our view is based on: i) lower interest rates; ii) credit mix; iii) selectivity; and iii) banks’ credit portfolio expansion plans. After the recent announcements by some BZ banks of lower interest rates, we believe Banco do Brasil could adopt a more aggressive stance to be in line with the BZ government’s policy viewpoint. As for private banks, we believe that the announced lower interest rates, may be less pronounced than those of the stated-owned banks.


4.4: Basel III: Transition schedule of capital requirements in Brazil

On 17 February 2012, the Brazilian Central Bank (BCB) published its new guidelines for the implementation of Basel III in Brazil. Our first take is positive for Brazilian large cap banks because it delays the start of deductions from Tier 1 capital (common equity) to January 2014 from July 2012, as originally indicated by the BCB in February 2011. We note that the new guidelines are in line with international standards (Basel III recommendations). The BCB has opened the guidelines up for public comment for the next 90 days and thus they could still be modified.

We maintain our view that Brazilian large cap banks will be able to meet the updated requirements without compromising their growth plans. We see Santander Brasil as being in a better position vs its peers, followed by Bradesco, Itau Unibanco and Banco do Brasil. Banco do Brasil is in the weakest position vis a vis the new guidelines, in our opinion. As of Dec/2011, Santander Brasil’s BIS II ratio was 19.9%, Itau Unibanco’s was 16.4%, Bradesco’s was 15.1% and Banco do Brasil’s was 14.0%.

We think the most positive news in the updated guidelines is a delay in the start of deductions from Tier I capital (common equity) from July 2012 to January 2014, with minimum percentages of deductions as follows: 20% from Jan/2014, 40% from Jan/2015, 60% from Jan/2016, 80% from Jan/2017 and 100% from Jan/2018. The least positive news, in our view, is related to the required countercyclical capital buffer that could start in Brazil before Basel III recommendations (2016), according to the BCB guidelines. The BCB has proposed that it start in 2014 (+0.625%), with the 2.5% countercyclical capital buffer required by BIS to be reached in 2017 (two years before the international standard).

The BCB also recommended some adjustments to Tier I capital (common equity or CET I). We highlight: i) fiscal credits (deferred) linked to temporary differences that are above 10% of adjusted Tier I have to be deducted, although the new guidelines mention that they can be adjusted by fiscal liabilities (deferred); ii) surplus from pension plans (recognized) has to be excluded from Tier I capital only if the bank does not have unrestricted access to the proceeds (negative for Banco do Brasil). Most of the deductions remained the same versus the report released in February 2011 and in this case we point out that the BCB maintained the deductions related to consolidated financial institutions, which means that it does not include controlled companies or insurance companies.

6,9%

6,2% 6,1%5,9%

5,7%

8,4% 8,2%

7,8%7,5% 7,3%

8,1% 7,9%

8,2%7,8%

7,7%

6,6%

6,0% 5,5%5,1%

4,8%4,5%

5,0%

5,5%

6,0%

6,5%

7,0%

7,5%

8,0%

8,5%

9,0%

2009 2010 2011 2012E 2013E

NIM % ‐ Brazilian Banks


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TABLE 21. BASEL III IMPLEMENTATION TIMETABLE VERSUS BRAZILIAN CENTRAL BANK

Source: Febraban (¹) Deferred tax assets, intangible assets, goodwill etc.

TABLE 22. INCORPORATION OF 2019 ADJUSTMENTS INTO BIS III DEC-11 FIGURES FOR BANKS IN OUR COVERAGE UNIVERSE

Source: Companies for historical figures and and Espírito Santo Investment Bank Research calculations

Basel III ‐ BIS and Brazilian Central Bank jan/11 jan/12 jan/13 jan/14 jan/15 jan/16 jan/17 jan/18 As of Jan/19

VI ‐ "Countercyclical Buffer" ‐ ‐ ‐ up to 0.625% up to 1.25%

BIS = 8.0% CB = 9.875%

BIS = 8.0% CB = 9.25%

BIS = 8.0% CB = 8.625%

Requirement (g) = (b) + (f) ‐ ‐BIS = 8.0% CB = 11.0%

BIS = 8.0% CB = 11.0%

Minimum Total Capital (Tier I + II) (f) ‐ ‐BIS = 8.0% CB = 11.0%

BIS = 8.0% CB = 11.0%

BIS = 8.0% CB = 8.0%

BIS = 8.0% CB = 11.0%

up to 1.875% up to 2.5% up to 2.5% up to 2.5%

BIS = 8.625% CB = 10.5%

BIS = 9.25% CB = 10.5%

BIS = 9.875% CB = 10.5%

BIS = 10.5% CB = 10.5%

BIS = 8.0% CB = 11.0%

BIS = 6.0% CB = 6.0%

BIS = 6.0% CB = 6.0%

BIS = 6.0% CB = 6.0%

BIS = 6.0% CB = 6.0%

BIS = 6.0% CB = 6.0%

Minimum Tier I Capital (e) ‐ ‐BIS = 4.5% CB = 5.5%

BIS = 5.5% CB = 5.5%

BIS = 7.0% CB = 7.0%

40% 60% 80% 100% 100%Phase‐in deductions from CET(¹) (d) ‐ ‐ 20%

Requirement (c) = (a) + (b) ‐ ‐BIS = 3.5% CB = 4.5%

BIS = 4.0% CB = 4.5%

BIS = 4.5% CB = 4.5%

BIS = 5.125% CB = 5.125%

BIS = 5.75% CB = 5.75%

BIS = 6.375% CB = 6.375%

BIS = 4.5% CB = 4.5%

BIS = 4.5% CB = 4.5%

BIS = 4.5% CB = 4.5%

BIS = 4.5% CB = 4.5%

Capital Conservation Buffer (b) ‐ ‐ ‐ ‐ ‐

Minimum Common Equity Capital Ratio (CET 1) (a) ‐ ‐BIS = 3.5% CB = 4.5%

BIS = 4.0% CB = 4.5%

BIS = 4.5% CB = 4.5%

0.625% 1.250% 1.875% 2.500%

BIS III ratio ‐ figures as of Dec‐11 anticipating 2019 adjustments Itau Unibanco Santander Brasil (*) Banco do Brasil Bradesco(**)

(=) Shareholder´s Equity (a) 71.347 49.611 60.615 55.581.664

(‐) Intangible (b) (3.906) (2.174) (8.567) (2.516)

(‐) Tax losses (c) (4.918) (2.221) (3.279) (513)

(‐) Other (d) (2.257) (3.217) (5.908) 2.600

(=) Shareholders Equity´s after adjustments (e) = (a) + (b) + (c) + (d) 60.266 41.998 42.861 55.581.235

(=) 10% of compensation over (f) = (c) x 10% 492 222 328 261

(=) Shareholder´s Equity after 10% of compensation (g) = (e) + (f) 60.758 42.221 43.189 55.414

(‐) Temporary differences (h) (18.057) (9.566) (15.516) (12.176)

(=) Equity Tier I (i) = (g) +(h) 42.701 32.654 27.673 43.241

(=) Tier II ‐ subordinated debt (j) 21.842 6.642 15.211 12.865

(=) Total Referential Equity (k) = (i) + (j) 64.542 39.297 42.884 56.106

(=) Remunerated Weighted Assets (l) 568.693 276.648 575.682 474.172

(‐) Fiscal Losses 300% (m) 14.754 6.664 9.837 1.539

(‐) Intangible 100% (n) 3.906 2.174 8.567 2.516

(‐) 10% of compensation 250% (o) 1.230 555 820 654

(=) Adjusted RWA (p) = (l) + (m) + (n) + (o) 541.860 267.254 563.755 470.440

Tier I ratio (q) = (i) / (p) 7,9% 12,2% 4,9% 9,2%

Tier I + II ratio (r) = (k) / (p) 11,9% 14,7% 7,6% 11,9%

(*) excluding goodwill

(**) Excluding approximately R$8bn of insurance company

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Banco do Brasil (BBAS3) Valuation Methodology We derive our Fair Value for Banco do Brasil shares via a Gordon Growth Model. We derive a target P/BV multiple of 1.4x for Banco do Brasil, assuming a sustainable ROE of 18.5%, 14.3% Ke (risk-free rate of 3.8%, country risk of 200bps, and a beta of 1.0), and a 6.5% sustainable growth rate. Applying our derived target P/BV multiple to our book value, we arrive at our fair value of R$31.7/share. Risk factors Changes in monetary policy and economic risks: A major change in Brazil’s monetary policy, leading to changes in interest rates, exchange rates and inflation, could adversely affect the bank’s operations, because it would likely have a direct effect on current and future levels of loan growth and the delinquency rate. Influence of controlling shareholder: the fact that BB is controlled by the Federal Government means that from time to time BB may be required to implement economic policy, which may involve: i) working in less economically attractive segments; ii) Setting the trend for lower spreads; iii) providing direct access to credit for agricultural workers at less profitable rates for the bank despite revenue equalisation; iv) offering credit at times of reduced liquidity; and v) accepting changes in top management. Capital Adequacy: Although BB has access to the National Treasury as a source of funds (through capital increases), its BIS ratio is currently the lowest among its domestic peers. Given this risk, we would not rule out the possibility of a capital increase via a share issue in the long term, which could potentially have a negative impact on ROE over the next few years. Agribusiness Portfolio: The agribusiness has risks that cannot be controlled by BB, such as: i) climatic conditions; ii) the price of products; and iii) input costs. Given these risks, it should be noted that the bank's agribusiness portfolio is exposed to potential losses.

Banco Itau Unibanco (ITUB4) Valuation Methodology We derive our fair value for Itau Unibanco shares via a Gordon Growth Model. We derive a fair P/BV multiple of 2.2x for Itau Unibanco, assuming a sustainable ROE of 23.5%, 13.4% Ke (risk-free rate of 3.8%, country risk of 200bps, and a beta of 1.0), and a 6.5% sustainable growth rate. Applying our derived fair P/BV multiple to the bank´s 1Q12E book value, we arrive at our fair value of R$38.8/share. Risk factors Economic hard landing: we do not rule out economic measures leading to a hard landing in 2012, affecting credit growth, asset quality, funding costs and margins. Asset quality: we see auto loans and the SME segment as higher risk, due mainly to systemic risks, and any changes could affect our NPL estimates and provisions expenses, reducing our EPS forecasts. Expenses and efficiency ratio: although Itau Unibanco has an ambitious plan to improve its efficiency ratio, based on the completed integration process with Unibanco, synergies and scale gains, there is a risk it will not meet our expectations. The tender offer for Redecard brings execution and integration risks. Banco Santander Brasil (SANB11) Valuation Methodology We use derive our fair value for Santander Brasil via a two-step methodology. First, we use a Gordon Growth Model to value the bank. We derive a fair P/BV11 multiple of 1.3x for Santander Brasil, assuming a sustainable ROE of 17.0% (in line with our long-term outlook), 14.2% Ke (risk-free rate of 3.8%, country risk of 200bps, and a beta of 1.03), and a 6.5% sustainable growth rate. Applying our derived fair P/BV multiple to our 2Q11 book value, we arrive at R$17.7/share. Second, we add the R$4.1bn present value of the economic value of fiscal benefits resulting from the goodwill on the Banco ABN Real acquisition, which gives R$1.4/share. We use the same cost of equity of 14.2% to discount the flow. Risk factors Economic hard landing: we do not rule out economic measures leading to a hard landing in 2012, affecting credit growth, asset quality, funding costs and margins. Asset quality: we see auto loans and the SME segment as higher risk, mainly owing to systemic risks, and any changes could affect our NPL estimates and provisions expenses, reducing our EPS forecasts. Execution risks: a major acquisition usually comes with risks attached to synergy gains and execution. We therefore focus on the growth strategy’s execution risks, based on: i) a lower number of branches than its peers; ii) some regions are already saturated in terms of competition; iii) it has a low presence in regions with higher GDP growth; and iv) it needs to consolidate its franchises. Controlling shareholder influence: Santander Spain, as detailed in Santander Brasil’s public offering prospectus in 2009, has a great deal of influence over Santander Brasil’s operations. This influence covers: i) management appointments; ii) policy setting; iii) transfer of control of subsidiaries or shares; and iv) approval of corporate reorganizations, acquisitions, disposal of assets and payment of dividends. This may reduce the bank’s competitiveness compared to the local banks. Dilution risk: according to Brazilian rules, the minimum free float is 25% and Santander Brasil’s current outstanding shares represent 18.5% of the total. Its controlling shareholders signed an agreement to increase its Brazilian subsidiary’s free float to 25% by 2014, giving rise to dilution risk. There is a risk that Santander Spain may feel compelled to sell part of its stake in Santander Brasil sooner than expected given the current macro environment. Bradesco (BBDC4) – full explanation of the valuation methodology and risk factors can be found in the body of the report We derive our fair value for Bradesco shares via a Gordon Growth Model. We derive a fair P/BV multiple of 2.3x for Bradesco, assuming a sustainable ROE of 22.5%, 13.4% Ke (risk-free rate of 3.8%, country risk of 200bps, and a beta of 1.0), and a 6.5% sustainable growth rate. Applying our derived fair P/BV multiple to the bank´s 1Q12E book value, we arrive at our fair value of R$35.0/share. Risk factors Economic hard landing: we do not rule out economic measures leading to a hard landing in 2012, affecting credit growth, asset quality, funding costs and margins. Asset quality: we see auto loans and the SME segment as higher risk, due mainly to systemic risks, and any changes could affect our NPL estimates and provisions expenses, reducing our EPS forecasts. Expenses and efficiency ratio: Although we believe that in the bank may start to reduce its operating expenses by 4Q12E with the possibility of efficiency improvements, we see a risk that these expenses could remain at high levels for several months following the end of organic expansion based on spending. Change in regulatory environment: Although we see Bradesco’s current BIS ratio as comfortable and we believe that the bank will be able to meet the Basel III requirements without compromising its growth plans, we note that any BCB measure aiming to slow loan concessions (e.g., increases in capital and reserve requirements) or to reduce the bank’s leverage may negatively affect the bank’s share price. We highlight that at the end of 2010, the BCB adopted macro-prudential measures increasing the reserve requirements and the risk weighting factor (FPR). Although some of these measures have already been reversed, we do not rule out further actions from the BCB on this front. Payroll Deductions: This type of loan, despite being a seemingly attractive niche market, is subject to government regulation with respect to limits on fees, term of operations and the level of debt permitted relative to the salary of the borrower, especially with regard to INSS pensioners. In 2008, these operations were subject to government regulations that stipulated limits on this type of lending.

Companies mentioned (priced as at 17/4/2012) Banco Itau Unibanco (ITUB4, R$31.5, NEUTRAL, FV R$38.8) Banco Bradesco (BBDC4, R$30.58, BUY, FV R$35.0) Banco do Brasil (BBAS3, R$23.38, NEUTRAL, FV R$31.7) Banco Santander Brasil (SANB11, R$15.8, NEUTRAL, FV R$19.2) Cielo (CIEL3, R$61.85, NEUTRAL, FV R$ 56.4) Banco Espirito Santo (BES PL, Eur 0.62, Restricted)

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Source: Bloomberg for closing prices, Espírito Santo Investment Bank Research for ratings and fair values

Source: Bloomberg for closing prices, Espírito Santo Investment Bank Research for ratings and fair values.

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BBAS3

BBAS3 Brasil ON

Date Rating Fair Value Closing Price05-M ar-09 BUY 20.3 13.3

28-Apr-09 NEUTRAL 20.3 18.4

29-Jul-09 NEUTRAL 23.3 23.2

22-Oct-09 BUY 39.0 31.1

27-Jan-10 BUY 39.5 27.6

03-M ar-10 NOT RATED - -

31-M ay-10 RESTRICTED - 26.0

13-Sep-10 NOT RATED - -

14-Dec-10 BUY 41.4 31.2

12-M ay-11 BUY 41.1 29.2

23-Aug-11 BUY 33.1 25.1

11-Nov-11 BUY 32.8 24.7

27-Feb-12 BUY 31.7 27.8

12-M ar-12 NEUTRAL 31.7 28.8

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SANB11SANB11 SANTANDER PN

Date Rating Fair Value Closing Price17-Dec-09 NEUTRAL 25.7 22.3

27-Jan-10 NEUTRAL 25.2 22.0


25-abr-11 NEUTRAL 21.6 18.2

9-mai-11 NEUTRAL 21.4 18.5

23-Aug-11 NEUTRAL 16.7 14.0

11-Jan-11 NEUTRAL 17.1 15.0

02-Feb-12 BUY 19.2 16.2

12-M ar-12 NEUTRAL 19.2 18.8

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ITUB4

Share Price FV

Date Rating Fair Value Closing Price23-Jul-08 BUY 40.3 31.2

04-Sep-08 BUY 41.2 26.7

23-Oct-08 NEUTRAL 31.0 17.8

04-Nov-08 BUY 31.0 25.8

10-Feb-09 BUY 28.5 22.5

06-Apr-09 SELL 25.5 25.5

28-Apr-09 SELL 25.3 25.6

29-Jul-09 NEUTRAL 32.7 30.4

22-Oct-09 NEUTRAL 39.3 36.7

27-Jan-10 NEUTRAL 39.6 35.8


25-abr-11 BUY 46.8 37.9

9-mai-11 BUY 46.5 37.4

23-Aug-11 BUY 35.3 26.7

11-Nov-11 BUY 39.5 32.7

14-Feb-12 NEUTRAL 38.8 36.3

BBDC4 BRADESCO PN

Date Rating Fair Value Closing Price20-Apr-12 BUY 35.0 30.6

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IMPORTANT DISCLOSURES This report was prepared by Espírito Santo Investment Bank Research, a global brand name for the equity research teams of Banco Espírito Santo de Investimento, S.A., with headquarter in Lisbon, Portugal, of its Branches in Spain and Poland and of its affiliates BES Securities do Brasil, S.A – Corretora de Câmbio e Valores Mobiliários, in Brazil, and Execution Noble Limited, in the United Kingdom, all authorized to engage in securities activities according to each domestic legislation. All of these entities are included within the perimeter of the Financial Group controlled by Espírito Santo Financial Group S.A. (“Banco Espírito Santo Group”). Analyst Certification Each research analyst primarily responsible for the content of this research report, in whole or in part, certifies that with respect to each security or issuer that the analyst covered in this report: (1) all of the views expressed accurately reflect his or her personal views about those securities or issuers; the issuers were not previously informed about the content of the recommendation included in this research report and the assumptions were not validated by the issuers; (2) no part of his or her compensation is directly or indirectly related to: (a) the specific recommendations or views expressed by that research analyst in the research report; and/or (b) any services provided or to be provided by Banco Espírito Santo de Investimento, S.A. and/or by any of its affiliates to the issuer of the securities under recommendation. Moreover, each of the analysts hereby certifies that he or she has no economic or financial interest whatsoever in the companies subject to his or her opinion and does not own or trade any securities issued by the latter. Explanation of Rating System

12-MONTH RATING DEFINITION

BUY Analyst expects at least 10% upside potential to fair value, which should be realized in the next 12 months

NEUTRAL Analyst expects upside/downside potential of between +10% and -10% to fair value, which should be realized in the next 12 months.

SELL Analyst expects at least 10% downside potential to fair value, which should be realized in the next 12 months

SHORT TERM RATING DEFINITION

ST POSITIVE Analyst expects the stock price to appreciate in value within 3 months of the rating assignation because of a specifically identified catalyst(s) or event(s)

ST NEGATIVE Analyst expects the stock price to decline in value within 3 months of the rating assignation because of a specifically identified catalyst(s) or event(s)

For further information on Rating System please see “Definitions and distribution of ratings” on: http://www.espiritosantoib-research.com. Ratings Distribution Espirito Santo Investment Bank Research hereby provides the distribution of the equity research ratings in relation to the total Issuers covered and to the investment banking clients as of end of March 2012.

As at end Mar 2012 Total ESIB Research Total Investment Banking Clients (IBC)

Recommendation Count % of Total Count % of IBC % of Total

Buy 215 46.4% 33 63.5% 7.1%

Neutral 172 37.1% 17 32.7% 3.7%

Sell 73 15.8% 0 0.0% 0.0%

Restricted 2 0.4% 2 3.8% 0.4%

Under review 1 0.2% 0 0.0% 0.0%

Total 463 100% 52 100%

As at end Mar 2012 Total ESIB Research Total Investment Banking Clients (IBC)

Recommendation Count % of Total Count % of IBC % of Total

Short Term Positive 0 0% 0 0% 0%

Short Term Negative 0 0% 0 0% 0%

Total 0 0% 0 0% Share Prices Share prices are as at the close of business on the day preceding publication, unless otherwise specified. Coverage Policy Espírito Santo Investment Bank Research reserves the right to choose the securities it expresses opinions on. The main criteria to choose such securities are: 1) markets in which they trade 2) market capitalisation 3) liquidity, 4) sector suitability. Espírito Santo

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Investment Bank Research has no specific policy regarding the frequency in which opinions and investment recommendations are released. Representation to Investors Espírito Santo Investment Bank Research has issued this report for information purposes only. This material constitutes "investment research" for the purposes of the Markets in Financial Instruments Directive and as such contains an objective or independent explanation of the matters contained in the material. Any recommendations contained in this document must not be relied upon as investment advice based on the recipient's personal circumstances.. This report is not, and should not be construed as an offer or a solicitation to buy or sell any securities or related financial instruments. The investment discussed or recommended in this report may be unsuitable for investors depending on their specific investment objectives and financial position. The material in this research report is general information intended for recipients who understand the risks associated with investment. It does not take account of whether an investment, course of action, or associated risks are suitable for the recipient. This research report does not purport to be comprehensive or to contain all the information on which a prospective investor may need in order to make an investment decision and the recipient of this report must make its own independent assessment and decisions regarding any securities or financial instruments mentioned herein. In the event that further clarification is required on the words or phrases used in this material, the recipient is strongly recommended to seek independent legal or financial advice. Where an investment is denominated in a currency other than the investor’s currency, changes in rates of exchange may have an adverse effect on the value, price of, or income derived from the investment. Past performance is not necessarily a guide to future performance. Income from investments may fluctuate. The price or value of the investments to which this report relates, either directly or indirectly, may fall or rise against the interest of investors. Any recommendation and opinion contained in this report may become outdated as a consequence of changes in the environment in which the issuer of the securities under analysis operates, in addition to changes in the estimates and forecasts, assumptions and valuation methodology used herein. The securities mentioned in this publication may not be eligible for sale in some states or countries. All the information contained herein is based upon information available to the public and has been obtained from sources believed to be reliable. However, Espírito Santo Investment Bank Research does not guarantee the accuracy or completeness of the information contained in this report. The opinions expressed herein are Espírito Santo Investment Bank Research present opinions only, and are subject to change without prior notice. Espírito Santo Investment Bank Research is not under any obligation to update or keep current the information and the opinions expressed herein nor to provide the recipient with access to any additional information. Espírito Santo Investment Bank Research has not entered into any agreement with the issuer relating to production of this report. Espírito Santo Investment Bank Research does not accept any form of liability for losses or damages which may arise from the use of this report or its contents. Ownership and Material Conflicts of Interest Banco Espírito Santo de Investimento, S.A. and/or its Affiliates (including all entities within Espírito Santo Investment Bank Research) and/or their directors, officers and employees, may have, or have had, interests or qualified holdings on issuers mentioned in this report. Banco Espírito Santo de Investimento, S.A. and/or its Affiliates may have, or have had, business relationships with the companies mentioned in this report. However, the research analysts may not purchase or sell securities or have any interest whatsoever in companies subject to their opinion. Banco Espírito Santo Group has a qualified shareholding (1% or more) in EDP, Novabase, Portugal Telecom, ZON Multimédia and Semapa. Portugal Telecom has either a direct or indirect qualified shareholding (2% or more) in Banco Espírito Santo, S.A. and Lloyds Banking Group has a shareholding of 3.3% in Espírito Santo Investment Holdings Limited. Bradesco has an indirect qualified shareholding (4.8%) in Banco Espírito Santo, S.A. and has a direct qualified shareholding (20%) in BES Investimento do Brasil, S.A., the parent company of BES Securities do Brasil S.A. CCVM. BES Securities do Brasil S.A. CCVM does not hold a direct or indirect stake in the capital of the company (companies) that are subject of analysis(es)/recommendation(s) in this report, but the Banco Espírito Santo Group within which it is inserted, holds, directly and in some cases indirectly, 1% or more of the equity securities of the following companies: Cia. Providência Indústria e Comércio, Bradesco and Vila Velha S/A and its associated company UNIPAR. With the exception of the companies mentioned before, BES Securities do Brasil S.A. CCVM does not hold direct or indirect stakes in the capital of the other companies that are subject of analysis(es)/recommendations in this report, and it was not involved in the acquisition, alienation and intermediation of securities issued by these companies in the market. Pursuant to Polish Ministry of Finance regulations we inform that Banco Espírito Santo Group companies and/or Banco Espírito Santo de Investimento, SA Branch in Poland do not have a qualified shareholding in the Polish Securities Issuers mentioned in this report higher than 5% of its total share capital. Mr. Ricardo Espírito Santo Silva Salgado, the CEO of Banco Espírito Santo, S.A. and Chairman of Banco Espírito Santo de Investimento, S.A., is a board member of Bradesco since June 2003. The Chief Executive Officer of Banco Espírito Santo de Investimento, S.A., Mr. José Maria Ricciardi, is a member of EDP’s General and Supervisory Board. Mr. Rafael Valverde, a member of the board of Banco Espírito Santo de Investimento, S.A., is a non-executive board member of EDP Renováveis. Mr. Ricardo Abecassis Espírito Santo Silva, a member of the board of Banco Espírito Santo de Investimento, S.A., is a board member of BHG. Mr. Antônio Bornia, the Vice-Chairman of Bradesco, is a board member of Banco Espírito Santo, S.A. since 2010. Banco Espírito Santo de Investimento, S.A and/or its subsidiaries are liquidity providers for Novabase and Altri. Banco Espírito Sano de Investimento, S.A. and/or its subsidiaries participate or have participated, as a syndicate member in share offerings of Brisa, Banca Civica, Sonae Sierra Brasil, S.A (a subsidiary of Sonae SGPS), EDP Brazil, and JBS, Autometal, Inpar,

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Lopes, PDG Realty, Tecnisa, BR Properties, Even, Sonae, Direcional, Brasil Brokers, Hypermarcas, Estácio, Banco do Brasil, Brasil Insurance, Ecorodovias, Julio Simões, Magnesita, Magazine Luiza, Mils, Minerva, Multiplus, OSX Brasil, Petrobras, HRT Petróleo, Queiroz Galvão, CAB, Fleury, Droga Raia, Arezzo, BR Malls, Kroton Unit, Gerdau, Metal Gerdau, Brasil Pharma, QGEP Part, Unipar and HRTP and Burford Capital, IQE plc. and ACM Shipping Plc, and Kredyt Inkaso S.A., Giełda Papierów Wartościowych S.A. (the Warsaw Stock Exchange S.A.) and Bank Gospodarki Żywnościowej S.A., in the last 12 months. Banco Espírito Santo de Investimento, S.A. and/or its subsidiaries participate or have participated, as a syndicate member in the bond issues of the following companies: Abengoa, EDP and Portugal Telecom, JHSF, Cemig, Eletrobrás, ABC Brasil, Bradesco, Panamericano, Pine, Julio Simões, Sabesp, and as an entity organizing the issuance of bond issues of Kredyt Inkaso S.A in the last 12 months. Banco Espírito Santo de Investimento, S.A. and/or its subsidiaries provided investment banking services to the following companies: Abertis, Acciona ACS, Altri, Banca Civica, BBVA, Brisa, Dinamia, EDP, EDP Brazil, EDP Renováveis, Endesa, Ferrovial, Ibersol, Inditex, Jerónimo Martins, Martifer, Mota-Engil, Portugal Telecom, REN, Sacyr Vallehermoso, Semapa, Sonaecom, Sonae SGPS, Teixeira Duarte and ZON Multimédia, and Budimex SA, Grupa Lotos S.A., PKO and Kredyt Inkaso S.A and Ambev, JBS, Embraer, Autometal, PDG Realty, Tecnisa, BR Properties, Even, Sonae, Brasil Brokers, Hypermarcas, Cemig, Eletrobras, ABC Brasil, Bradesco, Banco do Brasil, Panamericano, Pine, Ecorodovias, OHL, Gerdau, Braskem, Petrobras, Unipar, HRT Petróleo, Fleury, Tim, Droga Raia, Arezzo BR Malls, Kroton Unit, Gerdau, Metal Gerdau, Brasil Pharma and ACM Shipping, AGA Rangemaster Group, Burford Capital, Caledonian Trust, Forum Energy, GlobeOp Financial Services, Impax Asset Management Group, ImmuPharma, India Hospitality Corp., IPSA, IQE, The Local Shopping REIT Plc ,Palmaris Capital, Novae Group Plc Shaftesbury Plc., SVG Capital, Ted Baker Workspace Group Plc and Flybe Group Plc, in the last 12 months. Banco Espírito Santo Group has been a partner to Mota-Engil in the infrastructure business in Portugal and other countries. Mota-Engil and Banco Espírito Santo Group, through ES Concessões, S.G.P.S., S.A., have created a joint holding company – Ascendi – for all stakes in transportation infrastructure concessions, in Portugal and abroad. Banco Espírito Santo de Investimento, S.A. provided, or continues to provide, investment banking services to Ascendi. Banco Espírito Santo de Investimento, S.A. and/or its subsidiaries do and seek to provide investment banking or other services to the companies referred to in this research report. As a result, investors should be aware that a conflict of interest may exist. Market Making UK Execution Noble Limited is a Market Maker in companies covered and may sell to or buy from customers as principal in certain financial instruments listed or admitted to listing on the London Stock Exchange. For information on Companies to which Execution Noble Limited is a Market Maker please see “UK Market Making” on http://www.espiritosantoib-research.com. Confidentiality This report cannot be reproduced, in whole or in part, in any form or by any means, without Espírito Santo Investment Bank Research’s specific written authorization. This report is confidential and is intended solely for the designated addressee. Therefore any disclosure, replication, distribution or any action taken in reliance on it, is prohibited and unlawful. Receipt and/or review of this research report constitutes your agreement not to redistribute, retransmit, or disclose to others the contents, opinions, conclusion, or information contained in this report (including any investment recommendations, estimates or price targets without first obtaining express permission from an authorized officer of Banco Espírito Santo de Investimento, S.A. Regulatory Authorities For information on the identity of the Regulatory Authorities that supervise the entities included within Espírito Santo Investment Bank Research please see http://www.espiritosantoib-research.com.

IMPORTANT DISCLOSURES FOR U.S. PERSONS This report was prepared by Espírito Santo Investment Bank Research, a global brand name for the equity research teams of Banco Espírito Santo de Investimento, S.A., with headquarter in Lisbon, Portugal, of its Branches in Spain and Poland and of its affiliates BES Securities do Brasil, S.A – Corretora de Câmbio e Valores Mobiliários, in Brazil, and Execution Noble Limited, in the United Kingdom, all authorized to engage in securities activities according to each domestic legislation. Neither Banco Espírito Santo de Investimento, S.A. nor these affiliates are registered as a broker-dealer in the United States and therefore, is not subject to U.S. rules regarding the preparation of research reports and the independence of research analysts. This report is provided for distribution to U.S. institutional investors in reliance upon the exemption from registration provided by Rule 15a-6 of the U.S. Securities Exchange Act of 1934, as amended. This report is confidential and not intended for distribution to, or use by, persons other than the addressee and its employees, agents and advisors. E.S. Financial Services, Inc. is the U.S. distributor of this report. E.S. Financial Services, Inc. accepts responsibility for the contents of this report, subject to the terms set out below, to the extent that it is delivered to a U.S. person other than a major U.S. institutional investor. Any U.S. person receiving this report and wishing to effect securities transactions in any security discussed in the report should do so only through E.S. Financial Services, Inc.

Bradesco

20 April 2012

FIT FOR A NEW ERA

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Contact Information: Garreth Hodgson Senior Managing Director /Head of Sales (212) 351-6054 [email protected] Eva Gendell Vice President (212) 351-6058 [email protected] Joseph Mcglone Vice President (212) 351-6061 [email protected] Joy Bejasa Vice President (212) 351-6055 [email protected] Lisa Gottardo Executive Director (212) 351-6060 [email protected] Mike Maione Executive Director (212) 351-6067 [email protected] MikeWilliams Vice President (212) 351-6052 [email protected] Pedro Marques Vice President (212) 351-6051 [email protected] Poorva Upadhyaya Assistant Vice President (212) 351-6056 [email protected]

E.S. Financial Services, Inc. New York Branch 340 Madison Avenue, 12th Floor New York, N.Y. 10173 Each analyst whose name appears in this report certifies the following, with respect to each security or issuer that the analyst covers in this report: (1) that all of the views expressed in this report accurately reflect the personal views of the analyst about those securities and issuers; and (2) that no part of the compensation of the analyst was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by the analyst in this report. The analysts whose names appear in this report are not registered or qualified as research analysts with the Financial Industry Regulatory Authority ("FINRA") and may not be associated persons of E.S. Financial Services, Inc. and therefore may not be subject to the applicable restrictions under FINRA Rules on communications with a subject company, public appearances and trading securities held by a research analyst account. Ownership and Material Conflicts of Interest Banco Espírito Santo de Investimento, S.A. and/or its Affiliates and/or their directors, officers and employees, may have, or have had, interests or qualified holdings on issuers mentioned in this report. Banco Espírito Santo de Investimento, S.A. and/or its Affiliates may have, or have had, business relationships with the companies mentioned in this report. For a complete list of the covered Issuers in which Banco Espírito Santo de Investimento, S.A. or its Affiliates hold stakes in excess of 1% and for information on possible material conflicts of interest arising from investment banking activities please see “Important disclosures for US persons” on http://www.espiritosantoib-research.com. Receipt of Compensation For information on Receipt of Compensation from subject Issuers please see “Important disclosures for US persons” on http://www.espiritosantoib-research.com. Representation to Investors Espírito Santo Investment Bank Research has issued this report for information purposes only. All the information contained therein is based upon information available to the public and has been obtained from sources believed to be reliable. However, Espírito Santo Investment Bank Research does not guarantee the accuracy or completeness of the information contained in this report. The opinions expressed herein are our present opinions only, and are subject to change without prior notice. Espírito Santo Investment Bank Research is not under any obligation to update or keep current the information and the opinions expressed herein. This report is not, and should not be construed as an offer or a solicitation to buy or sell any securities or related financial instruments. The investment discussed or recommended in this report may be unsuitable for investors depending on their specific investment objectives and financial position. Where an investment is denominated in a currency other than the investor’s currency, changes in rates of exchange may have an adverse effect on the value, price of, or income derived from the investment. Past performance is not necessarily a guide to future performance. Income from investments may fluctuate. The price or value of the investments to which this report relates, either directly or indirectly, may fall or rise against the interest of investors. Any recommendation and opinion contained in this report may become outdated as a consequence of changes in the environment in which the issuer of the securities under analysis operates, in addition to changes in the estimates and forecasts, assumptions and valuation methodology used herein. The securities mentioned in this publication may not be eligible for sale in some states or countries. Espírito Santo Investment Bank Research does not accept any form of liability for losses or damages which may arise from the use of this report. Please note that investing in any non-U.S. securities or related financial instruments discussed in this research report may present certain risks. The securities of non-U.S. issuers may not be registered with the U.S. Securities and Exchange Commission or subject to regulation in the United States. Information on such non-U.S. securities or related financial instruments may be limited. Foreign companies may not be subject to audit and reporting standards and regulatory requirements comparable to those in the United States.

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