Quarterly Management Discussion & Analysis (MDA300905.pdf)

Analysis of the Consolidated Net IncomeNet income in the third quarter of 2005In the third quarter of 2005, Itaú achievedconsolidated net income of R$ 1,352 million, whichrepresents a 1.4% increase over the previous quarter.As of September 30, 2005, the parent company's netequity amounted to R$ 15,229 million, which led toan annualized return on equity (ROE) of 40.5%.Total assets added up to R$ 144,671 million as ofSeptember 30, 2005, remaining practicallyunchanged in relation to the closing balance of theprevious quarter. The annualized return on totalassets (ROA) reached 3.8%, while this percentage was3.7% p.a. at the end of the second quarter.Assets targeted towards meeting the demand forcredit accounted for 38.4% of total assets at theclose of the third quarter, while the share of these inJune corresponded to 36.2%, which evidences theintense process of change in the composition of theassets, with the objective of expanding transactionscapable of generating a larger sustained contributionto results.The vehicle financing portfolio was the highlight thisquarter. It showed strong growth of 15.3%, whichbrought a significant expansion of Itaú's market sharein this segment, which reached 17.4% in June 2005.The net income achieved in this period reflectsbasically the important contribution coming fromthe strategy of expanding and altering the mix of thecredit portfolio. This was the main factor responsiblefor the growth of the financial margin over the lastfew quarters.StrategyIn the last few quarters, Itaú has been undergoing anintense process of changes, the strategic objectiveof which is to create new bases for the generation ofincome in a probable future scenario where interestrates lower than those currently practiced shouldprevail, together with an improvement in the ratingof Brazilian sovereign risk.The Bank's new initiatives are founded on confidencein the future and in the development of Brazil. Theeconomic prospects, favorable for consumption,reinforce the belief in the strategy of expandingcredit and augment the possibilities for achievingconsistent results in the long term. Furthermore, Itaúis also supported by the following strategic pillars: (i)robust sources of revenues not derived from thefinancial intermediation activity, associated with thespecialization, diversification and quality of theproducts and services offered by the differentsegments of the Bank, which are based on meetingthe specific needs of the various kinds of customer;(ii) a focus on costs, represented by a constant effortto rationalize processes and to reduce expenses; and(iii) growth in the operations of insurance, pensionplans and capitalization, which have been showinga good performance, driven in particular by the VGBLand PGBL pension plan products.The Bank's new investments have implied an increasein the number of employees, the development ofoperational and commercial infrastructure, andincurring new operating expenses. On the otherhand, they are expanding the customer base, thevolume of credit granted - reflected positively in thefinancial margin - and banking service fees -particularly those arising from the cross-selling ofproducts -, resulting in an amply favorablecontribution to the formation of net income. Theexpectation for the next two years is that these newareas of business will succeed in adding 6 millionnew potential non current account holdingcustomers to Itaú's base.With regard to Itaú BBA, the prospects for anexpansion of the capital market are creatingopportunities for acting as a provider of InvestmentBanking services, which may increase the share ofservice fees from the present 5% of the total to 15%to 20% in the next five years, with a less pronouncedincrease in the granting of credit.Foreign Exchange and InterestA favorable macroeconomic scenario in Brazil andabroad made it possible for the Monetary PolicyCommittee - Copom to start the process of reducingthe basic interest rate (Selic). Accordingly, at theSeptember meeting, the basic interest rate wentdown from 19.75% p.a. to 19.50% p.a., signaling theend of the monetary squeeze cycle.In the third quarter of 2005, the real continued thesame tendency of appreciation against the US dollarobserved in the previous quarters. At the end of theperiod, the US dollar was quoted at R$ 2.2222, whileas of June 30, 2005 the quotation was R$ 2.3504,which corresponds to a 5.5% variation in the quarter.Macroeconomic IndicesEMBI Brazil 344 411 466 344 466CDI 4.7% 4.6% 3.9% 14.1% 11.7%Exchange Rate -5.5% -11.8% -8.0% -16.3% -1.1%Exchange Rate (Quotation in R$) 2.2222 2.3504 2.8586 2.2222 2.8586IGPM -1.5% 0.2% 3.3% 0.2% 10.3%Savings (TR + 6% p.a.) 2.4% 2.3% 2.1% 6.9% 6.0%13 Management Discussion and AnalysisBanco Itaú Holding Financeira S.A.