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The Brazilian banking industry has experienced a major structural change, evolving from operating in a high-inflation environment in the 1980s and early 1990s, to operating in a low-inflation environment combined with more macroeconomic and monetary stability from 1994 onwards, when the real was introduced as Brazil's currency.

The monetary stability achieved in 1994 led to sustained growth in credit demand in Brazil. This growth, combined with the loss of inflationary profits, caused the banking industry to improve its efficiency ratios and increase revenues from services. As a result, the banking industry entered a period of rationalization and consolidation. The Brazilian Government has been monitoring this process closely, creating programs aimed at protecting the average Brazilian citizens, including measures to ensure the solvency of institutions and increase competition among private banks. The Brazilian Government also reduced entry restrictions to foreign banks in the Brazilian market.

In the last three years, in particular since the second half of 2008, the global banking industry was seriously affected by the financial crisis, which contributed significantly to the reduction of the assets of this industry. The effects of the crisis in Brazil were relatively moderate in comparison with the effects in the United States and Europe. While liquidity in the Brazilian banking sector was, in a certain manner, affected by the financial global crisis, the Central Bank assured availability of enough liquidity in the Brazilian market during this period of instability through several measures, mainly in the fourth quarter of 2008.

Despite that Brazil still has a low penetration ratio in terms of persons utilizing banking products when compared to more developed countries, such penetration has been increasing over the last few years. According to FEBRABAN, approximately 40 million Brazilians have no access to banking services.

The table below shows the evolution of the volume of loans within the Brazilian financial system which are granted by financial institutions with funds not required to be used for any particular purpose under applicable regulation.

Consumer loans⁽¹⁾⁽²⁾ Corporate Loans⁽³⁾ Total

As of December 31, (R$ billions) (%) of total loans (R$ billions) (%) of total loans (R$ billions)

2001 ... 69.9 36.0 124.2 64.0 194.1

2002 ... 76.2 35.9 136.2 64.1 212.4

2003 ... 88.1 39.3 136.1 60.7 224.2

2004 ... 113.3 41.7 158.1 58.3 271.4

2005 ... 155.2 45.6 185.4 54.4 340.6

2006 ... 191.8 46.8 217.6 53.2 409.5

2007 ... 240.2 45.9 283.5 54.1 523.7

2008 ... 277.6 41.5 391.5 58.5 669.1

2009 ... 323.8 49.2 397.8 50.8 721.6

2010 ... 417.3 47.4 462.7 52.6 880.1

2011 ... 505.7 47.7 554.8 52.3 1,060.4

2001 to 2011 CAGR ... 21.8 – 16.1 – 18.5

(1) Overdraft loans, consumer credit, real estate loans, loans for acquiring goods, credit cards and others.

(2) This category is comparable to our individual and consumer loans, purchased consumer loans portfolios and other loans operations.

(3) This category is comparable to our operations other than individual and consumer loans, purchased consumer loans portfolios and other loans.

Source: Central Bank

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Source: World Bank data, 2008.

Main Financial Institutions Brazilian Regulatory Authorities

The Brazilian financial system is subject to several regulatory and supervisory authorities, including the CMN, the Central Bank, the CVM, the SUSEP and PREVIC, which are subordinated to several entities and institutions.

Private Sector Financial Institutions

The private financial sector of the Brazilian financial system includes, among others, multi-service banks, commercial banks, investment banks, credit, finance and investment companies, securities dealers, stock brokerage firms, real estate financing companies, leasing companies and factoring companies.

As of February 29, 2012, according to the Central Bank's website, there were 2,191 financial institutions regulated and supervised by the Central Bank, including:

• 21 Commercial Banks—financial institutions that receive current account deposits, grant short- and medium-term loans and are engaged in wholesale and retail banking;

• 14 Investment Banks—financial institutions specialized in medium- and long-term loans and asset management services. These banks do not hold demand deposits and their main sources of funding are time deposits or foreign loans for local onlending. Their main lending transactions are working capital and loans for fixed capital, securities underwriting and trading, interbank deposits and onlending of foreign loans; and

• 139 Multi-Service Banks—financial institutions authorized to engage in multiple financial activities pursuant to applicable laws and regulations governing each type of activity, such as commercial, investment and loan transactions. Such banks are authorized to provide a full range of commercial and investment banking services (including securities underwriting and trading), leasing and other services, such as real estate loans and fund management.

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Public Sector Financial Institutions

Despite the privatization process both at federal and state levels, the Brazilian Government and several state governments still control many major commercial banks and financial institutions, with the purpose of encouraging the development of the Brazilian economy, primarily with respect to the agricultural, industrial and housing sectors. Such institutions hold a substantial portion of deposits and assets in the financial system and play a major role in relation to savings accounts, mortgage notes and agricultural loans. In addition, development banks act as regional development agencies.

In addition to ourselves, the most important Brazilian Government-controlled banks are:

• Banco Nacional de Desenvolvimento Econômico e Social—BNDES: the main agent of the Brazilian Government's investment policy, providing long-term financing for companies of all sizes to support their respective cash expenditure programs.

• Caixa Econômica Federal: the main agent of the Brazilian Government's housing policy. Caixa Econômica Federal accepts demand and savings deposits and provides housing finance, participating in urban infrastructure projects and consumer lending.

• Banco do Brasil: the largest bank in Latin America in terms of assets. Banco do Brasil provides a full range of commercial and retail banking services to all levels of government, businesses in general and consumers.

In addition to the institutions above, the following are also considered part of the public sector within the Brazilian financial system: (i) state and regional development banks; (ii) state savings banks; and (iii) federal and state-controlled commercial and multi-service banks.

Our Principal Markets

The Brazilian Consumer Lending Market

According to the Central Bank, total loan transactions with consumers (which, for our purposes, includes our individual and consumer and other credit operations portfolios), increased by an average of 21.4% between 2007 and 2010 (CAGR), reaching R$417.1 billion as of December 31, 2010. At that date, credit to consumers and financing of vehicles represented 85.2% of the total consumer credit transactions. Credit to individuals continued its expansion in 2011, reaching R$244.2 billion as of December 31, 2011.

The table below shows the growth of consumer lending outstanding in Brazil by product:

As of December 31, Total ... 505.7 100.0 417.3 100.0 323.8 100.0 277.6 100.0 240.2 100.0 20.5%

(1) CAGR—Compound Annual Growth Rate.

Source: Central Bank.

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Overdraft Facilities

Overdraft facilities have higher interest rates than other financing alternatives. The overdraft contract is renewed on a monthly basis and the overdue interest is incorporated into the principal amount of the loan, if not paid by the due date.

Consumer Credit

Consumer credit is frequently used by consumers who have limited access to credit facilities and is characterized by high interest rates due to the high default rates. Credit is made available in a lump sum to the consumer who repays the loan in monthly installments.

Financing for Vehicles

The vehicle financing market is dominated by the large retail banks, which have gradually taken over the position that was held in the past by the financial companies of vehicles manufacturers. Interest rates in this market are highly competitive. Smaller institutions in this market primarily focus on the used car market. Default rates are relatively low and loans are secured by the financed asset, which can be repossessed and publicly auctioned in the event of default.

Credit Card Financings

The large retail banks are the major players in the credit card financing market. Credit card financings have high rates of default and, consequently, interest rates for consumers are high.

Credit Plans

In-store financing still is the most fragmented of all consumer financing segments in Brazil. Historically, large retailers financed their consumers' purchases, but retailers and banks have recently entered into joint ventures in connection with those financings. In-store financing can be used for durable goods, such as construction materials and home appliances, as well as non-durable goods, such as clothing and food items.

Rural and Agricultural Credit Market

Agribusiness plays a strategic role in the Brazilian economy, primarily by generating funds for the country's trade balance from exports. The agricultural credit market is subject to current regulations and legislation and to the rules set forth by the Rural Credit Manual (the "MCR"). Rural credit operations are considered to be those in which National Rural Credit System ("SNCR") institutions supply funds for the purposes specified in the MCR and in accordance with its provisions.

The main objectives of agricultural credit are to: (i) foster agricultural investments in the production, storage, processing and industrialization of agricultural and livestock farming products; (ii) favor the timely and appropriate funding of agricultural and livestock farming production and commercialization; (iii) strengthen the agricultural sector; and (iv) encourage the introduction of rational methods in the production system, aiming at increasing productivity, improving the standard of living of agricultural communities and adequately protecting the soil.

Rural credit can be used for the following purposes: (i) funding; (ii) investment; and (iii) commercialization. Funding credit is used for covering normal production cycle expenses. Investment loans are used for investing in goods or services, the benefits of which are reflected over various production cycles.

Commercialization loans are to cover expenses during the post-production phase or to convert into cash the receivables coming from the sale or delivery of products by the producers or their cooperatives.

The funds earmarked for the agricultural sector are divided into regulated and non-regulated funds.

Operations secured by regulated funds are subject to the CMN's normal financial charges, in accordance with the underlying goods to which the loans refer.

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The regulated agricultural credit funds include: (i) compulsory funds, calculated on demand deposits and subject to the compulsory payments made by financial institutions; (ii) official credit operations, monitored by the Ministry of Finance; (iii) the rural savings account, the worker protection fund and the "extra-market" investment fund, when in connection with operations subsidized by the Brazilian Government in the form of financial charges' equalization; and (iv) others that may be specified by the CMN.

Financial charges on operations covered by non-regulated agricultural credit funds can be freely negotiated between the borrower and the lender.

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REGULATION OF THE BRAZILIAN BANKING INDUSTRY