2. Privatization in the Brazilian Banking Sector Tadeu Nunes Marcio Passos Diane Nakayama-Shapiro Terence Tong Debbie Vann

3. Agenda Introduction Introduction Brazil’s Economy Brazil’s Economy Brazil’s Banking Sector Brazil’s Banking Sector Banespa Banespa Potential Bidders Potential Bidders Our valuation Our valuation Post Mortem Post Mortem

4. Introduction Introduction Brazil’s Economy Brazil’s Economy Brazil’s Banking Sector Brazil’s Banking Sector Banespa Banespa Potential Bidders Potential Bidders Our valuation Our valuation Post Mortem Post Mortem Economy

5. Brazil Brazil 8th largest economy in the World 53% of Latin America’s GDP 170 million inhabitants São Paulo 35% of Brazil’s GDP 36 million inhabitants

6. Brazil: Economy Brazil: Economy Background Background Recent History Recent History –Real Plan introduced in 1994 –Currency devalued in Jan. 1999 Forecast Forecast –GDP growth at 4-4.5% for next 3 years –FX Rate stable (market forecasts) –Presidential Elections in 2002 –Still with the “Emerging Markets” label –Rating is B1 by Moody’s and BB- by S&P

7. Brazil: Inflation Long history of high inflation and not successful economic plans Since the Real Plan inflation has been under control, reaching very low average yearly inflation (5%)

8. Introduction Introduction Brazil’s Economy Brazil’s Economy Brazil’s Banking Sector Brazil’s Banking Sector Banespa Banespa Potential Bidders Potential Bidders Our valuation Our valuation Post Mortem Post Mortem Banking Sector Banking Sector

9. Brazilian Banking Sector Federal Federal –Owns the 2 largest Brazilian Institutions State Owned State Owned –Each state used to have its own “financial institution” –Vast majority have been privatized Private Private –Largely dominated by 3 Brazilian institutions –Over 70 foreign banks

10. Brazilian Banking Sector Banking Sector by Assets Private Banks – 52% State Banks – 48% Bradesco, Itau & Unibanco – 20% Foreign Institutions – 23% Others – 9%

11. Most Recent Transaction Banestado, on Oct 20 th Banestado, on Oct 20 th –Largest privatization to date –Set the stage for Banespa’s auction –377 branches, 92% in Parana State –550,000 clients

12. Most Recent Transaction Had Itau paid USD 846 (USD 27 million more), they would have saved USD 32 million by avoiding the “live auction” Sealed BidLive Auction

13. Recent M&A Activity Over 40 transactions since 1995.

14. Introduction Introduction Brazil’s Economy Brazil’s Economy Brazil’s Banking Sector Brazil’s Banking Sector Banespa Banespa Potential Bidders Potential Bidders Our valuation Our valuation Post Mortem Post Mortem Banespa

15. Banespa’s vital statistics Largest state owned bank and 5 th largest in Brazil in Deposit Share and 40 th “largest” in Net Income

16. Privatization November 20, 2000 November 20, 2000 Rio de Janeiro Stock Exchange Rio de Janeiro Stock Exchange 60% voting capital x 30% total capital 60% voting capital x 30% total capital BRL 1.85 billion (USD 990 million) BRL 1.85 billion (USD 990 million)

17. Introduction Introduction Brazil’s Economy Brazil’s Economy Brazil’s Banking Sector Brazil’s Banking Sector Banespa Banespa Potential Bidders Potential Bidders Our valuation Our valuation Post Mortem Post Mortem Competition

18. Potential Bidders

19. Introduction Introduction Brazil’s Economy Brazil’s Economy Brazil’s Banking Sector Brazil’s Banking Sector Banespa Banespa Potential Bidders Potential Bidders Our valuation Our valuation Post Mortem Post Mortem What is a reasonable bid?

20. Cost of Capital Risk Adjustments Risk Adjustments –Concentration risk –Government bond portfolio –Exposure to inflation and FX

21. Valuation (USD) Some +ve skew

22. Revenue & FX Revenue upside potential, and capped downside to reflect growth opportunity Inflation effects in model seen in the exchange rate distribution

23. Sensitivity Analysis (USD) rE 16.00%16.80%18.00%19.00%20.00% Size90%5,640.846 5,174.751 4,561.749 4,113.857 3,711.652 Premium80%5,563.087 5,096.992 4,483.990 4,036.098 3,633.893 Probability70%5,485.329 5,019.233 4,406.232 3,958.339 3,556.134 60%5,407.570 4,941.474 4,328.473 3,880.580 3,478.375 50%5,329.811 4,863.715 4,250.714 3,802.821 3,400.617 (million)

24. Valuation Matrix (BRL) Valuation Matrix (BRL) What would you bid?

25. So, what happened? BBVA, Citibank, Fleet Boston,Itau & HSBC did not submit bids BBVA, Citibank, Fleet Boston,Itau & HSBC did not submit bids Bradesco bid BRL 1.86 billion Bradesco bid BRL 1.86 billion Unibanco bid BRL 2.10 billion Unibanco bid BRL 2.10 billion Santander bid BRL 7.05 billion – 281% premium over reserve price

26. Valuation Matrix (BRL) What was the bid?

27. Santander Rationale Project America Project America –Sao Paulo is key to project success and they have very little presence in the region. Banespa is a “perfect match” for the current Santander branch network Banespa is a “perfect match” for the current Santander branch network

28. Location & # of branches

29. Santander Rationale Project America Project America –Sao Paulo is key to project success and they have very little presence in the region. Banespa is a “perfect match” for the current Santander branch network Banespa is a “perfect match” for the current Santander branch network If they did not acquire Banespa, they would lose the best growth opportunity If they did not acquire Banespa, they would lose the best growth opportunity Control premium to ensure priority on minority share tender Control premium to ensure priority on minority share tender

30. Market Reaction Santander Auction Date IBEX – Madrid Index

31. Q&A

32. Market Reaction BanespaAuction date

33. Expected synergies

34. Minority shares January 2, 2001 January 2, 2001 –Santander tendered offer of BRL 2.5 billion –58.6% premium over December 28 th closing price –Expected close in March-April 2001