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Delivering growth and value

Delivering growth and value. Business Unit Brazil of C&CC. Fabio Barbosa SEVP - CEO of BU Brazil. June 14, 2004. Table of Contents. Current Brazilian Business Environment Overview of ABN AMRO Brazil Overview C&CC Brazil Financial Performance

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Delivering growth and value

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  1. Delivering growth and value Business Unit Brazil of C&CC Fabio Barbosa SEVP - CEO of BU Brazil June 14, 2004

  2. Table of Contents Current Brazilian Business Environment Overview of ABN AMRO Brazil Overview C&CC Brazil Financial Performance Sustainability Outlook 2004 / 2005 Appendices

  3. Commitment to orthodox monetary policy has enabled stability to return The inflationary pressures due to the exchange rate overshooting receded significantly and are expected to stabilize along 2004 forecast • Dec 04 forecast • BRL/USD (eop) 3.05 (maintained) • IPCA 12M 6.8% (revised from 6.0%) BRL / USD IPCA% • Dec 05 forecast • BRL/USD (eop) 3.25 (maintained) • IPCA 12M 4.5% (revised from 5.1%) Sources: Brazilian Central Bank, IBGE, ABN AMRO

  4. The current account is now well under control The current account accumulated a USD5.8 billion surplus in 12 months ended in April (1.1% GDP). From 1999 to April 2004, the current account adjustment was equivalent to USD31.1 billion (5.8% GDP) driven mainly by exports. USD billion Sources: Brazilian Central Bank

  5. The surplus of the current account allows to repay the IMF debt In USD billion Sources: Brazilian Central Bank, ABN AMRO

  6. Market volatility does not reflect Brazil’s ability to withstand shocks Brazil is in much better shape to deal with adverse external factors, compared to mid-90s and early 00s • Floating FX regime • Fiscal Responsibility Law • Social Security Reform • New Payments System • Capital Markets Reform … and currently.. FX Denominated Debt / Total Debt % Source: Brazilian Central Bank

  7. The government controls a comfortable majority in Parliament Source: Santa Fé, ABN AMRO

  8. Public support for the government remains high Approval ratings have fallen, but are still at respectable levels Government’s Approval Rating (%) Still high approval rating Source: CNT / Sensus, ABN AMRO President Lula’s Approval Rating (%) Source: CNT / Sensus, ABN AMRO

  9. Restored finance and strong government will facilitate reforms • Continuous effort to complete reforms • Revision of mortgage legal framework • New regulation to reduce number of court actions against the financial system regarding principal and interest • New Bankruptcy Law • Judiciary reform • Public and Private Partnership regulation • Power sector framework

  10. As a result, steady GDP growth seems to be finally achievable GDP started to recover in Q303 albeit at a slower pace than expected. Recovery has been led by the manufacturing sector, responding to lower interest rates and robust external demand Sources: IBGE

  11. Expected decline in inflation will allow further interest rate cuts Central Bank will likely continue to gradually ease monetary policy in 2004, reducing interest rates with caution and assessing recovery of economic activity forecast • Dec 04 forecast • Selic (eop) 14.5% pa (revised from 13.5%) • IPCA 12M 6.8% (revised from 6.0%) IPCA% Selic% • Dec 05 forecast • Selic (eop) 12% pa (maintained) • IPCA 12M 4.5% (revised from 5.1%) Source: Brazilian Central Bank, IBGE, ABN AMRO

  12. Economic stability and low interest rates will unleash the growth potential Total Credit to Private Sector / GDP1 Declining interest rates will enable significant volume growth in the still underdeveloped Brazilian banking market; The penetration of total credit shows a large long term growth potential Sources: World Bank, European Union Web site, IBGE Credit to the Private Sector * Period EOP Balance in BRL billion Growth nominal 2002 365 +13% 2003 395 +8% 1Q04 408 +1.5% * does not include external financing to the private sector Source: Brazilian Central Bank, ABN AMRO

  13. Table of Contents Current Brazilian Business Environment Overview of ABN AMRO Brazil Overview C&CC Brazil Financial Performance Sustainability Outlook 2004 / 2005 Appendices

  14. ABN AMRO Brazil is a client led institution • Training • Competitive market conditions • Engagement in decision-making process Since the acquisition of Banco Real we have updated our IT infrastructure to competitive standards • Client knowledge • Segmentation Spreading ABN AMRO Corporate Values • Respect • Professionalism • Integrity • Teamwork Sustainability Model

  15. Leveraging the local, regional and international presence to serve clients ABN AMRO has leading positions and strong market shares in the full range of financial services • Retail Banking Largest foreign institution by branches, loans and deposits • Consumer Finance Largest car financier in Brazil • Commercial Banking Maintains relationship with +2500 companies • Insurance 7th largest insurer; 5th largest pension fund by reserves • Wholesale Banking Relationship with +400 largest corporation in Brazil • Asset Management 4th largest privately owned; R$25.1 bio in AUM as of Mar 04 All data in the overview section are in Brazilian GAAP, in BRL and include all businesses of ABN AMRO Brazil - WCS and C&CC

  16. Leveraging on business units to grow the franchise • As of 1Q04 • 34% of individuals current accounts were from Payrolls • 29% of individual current accounts were from Mini Branches Retail Payroll Commercial and Wholesale 3 1 Cross-selling of financial services, loan and investment products Main banker Current Accounts Acquisition - Individuals and Suppliers (SMEs) Higher entry barrier Mini Branch Mini Branch 2 3 2 1 Capturing of Value Chain opportunities through closer client knowledge and Supplier relations Payroll Loans

  17. The performance has been very good notwithstanding economic difficulties Total Assets Total Loans in BRL million in BRL million Annual CGR 25.6% Annual CGR 29.9% Net Income in BRL million 336 Cayman Effect (positive) Cayman Effect (negative) 57 Average inflation in period: 8.3% pa All data in this slide are in Brazilian GAAP, in BRL and include all businesses of ABN AMRO Brazil - WCS and C&CC

  18. Results are underpinned by good efficiency ratios On a standalone basis ABN AMRO showed a significantly lower efficiency ratio in 2003 (55.7% w/o Sudameris), the integration of Sudameris impacts this ratio temporarily. Efficiency Ratio ABNAMRO Fee Revenue/ Personnel Expenses All figures based on Brazilian GAAP as published by each institution

  19. The franchise continues to deliver high ROE All figures based on Brazilian GAAP as published by each institution

  20. Retail is a key growth engine of the franchise ABN AMRO is stronger in the southeast, the wealthiest and most populated region of Brazil. Our strategy is to focus on this region and on the major Brazilian cities. C&CC Revenue Breakdown Ranking Dec 03 Branch Network (includes Mini Branches) 1 Bradesco 5,167 2 Itau 3,172 3 ABN AMRO 1,947 4 Santander* 1,909 5 HSBC* 1,516 6 Unibanco 1,279 * June 2003 figures Mini Branches: Branches in company premises

  21. The growth of the retail loan book has been robust and relatively cycle proof Consolidated Credit Portfolio (per business) BRL billion Growth 1Q04/1Q03 w/ Sudameris w/o Sudameris Retail +97% +31% Consumer Finance +5% Stable -5% Commercial and Wholesale +61% All data in the overview section are in Brazilian GAAP, in BRL and include all businesses of ABN AMRO Brazil - WCS and C&CC

  22. This performance is due to above average acquisition of wealthy clients Market Structure - Bankarized Individuals Average Account Revenue (per segment) ABN AMRO Individual Clients Acquisition (per segment) Index: Average Revenue Classic Account = 100

  23. Table of Contents Current Brazilian Business Environment Overview of ABN AMRO Brazil Overview C&CC Brazil Financial Performance Sustainability Outlook 2004 / 2005 Appendices

  24. Since the acquisition of Banco Real the client base increased by nearly 50% Besides the strong organic growth, Sudameris acquisition has accelerated the process million clients

  25. The desired critical mass has been reached with the Sudameris deal ABN AMRO is the 4th largest privately owned Brazilian bank by total loans and assets, and 3rd by deposits Top Privately Owned Banks Figures in Brazilian GAAP Loans in BRL billion Assets in BRL billion Deposits in BRL billion Dec. 03 Mar 04 Dec. 033 Mar 04 Dec. 033 Mar 04 1 Bradesco 54.3 54.9 176.1 161.0 58.0 59.2 2 Itau 38.7 38.9 118.7 127.0 36.7 34.6 3 Unibanco 27.9 27.3 69.9 71.5 25.4 27.4 4 ABN AMRO 27.2 27.3 55.4 55.6 26.7 26.1 5 Santander 16.3 NA 58.9 NA 18.00 NA All figures based on Brazilian GAAP as published by each institution

  26. Sudameris added more scale in wealthy retail clients and SMEs Financial assets are concentrated in a small percentage of the population. The wealthiest 2% hold almost half of net financial assets. Individual Clients - Mix Jan 2004 Client Base Jan 2004 22% 26% 51%

  27. Our retail growth strategy consists in providing differentiated services

  28. Our retail model is relationship driven Sole Proprietors PJ (up to R$20m) PJ (up to R$100k) • Focus: • Tailoring offers to needs and potential of all segments • Strengthening customer relationships • 3. Managing ‘migration’ from segment to segment over client’s lifetime • 4. Growth in Especial and PJ • 5. Efficiency in Classico • 6. “Aspiration” in Premium Selected Payroll to all Segments Premium Premium R$4001–8000 Van Gogh R$8001+ Especial University Students Lower R$1201–2000 Upper R$2001-4000 Clássico Near-term growth potential Lower R$0–700 Upper R$701-1200

  29. Relationship’s costs and revenues have to be calibrated 1. Deposits + Investments - Credit Outstanding = Net Financial Assets; 2. Booz Allen & Hamilton Estimates. MfV Analysis; 3. Banco Real Segments - market segment definitions differ slightly

  30. Our service offer calibrated to our clients needs These changes: 1) Bring products and services in-line with customer expectations and market 2) Strengthen relationship management capabilities To From “In-line with market” product and service offer “Better than market” product and service offer n n Classico Limited product range; debit card, instalment credit, and Broad range of products including n n (Low Income) savings account (w/ limited additions for Upper/ University) multifunction cards, check books, etc. Direct channels with Greeters; access to staffed Call Full branch and channel access served by n n Center for questions; and informative communication assistants and managers Proactive relationship managers with a higher manager to Core product vehicles include Realmaster, Especial n n client ratio and trained managers, assistants and greeters RealParcelado, and credit cards (Mass Affluent) Proactive and frequent offer in every direct channel, Full branch access served by managers n n branches and direct mailing Full channel access n Delivery by ATM’s, Call Center, Internet, Banco24Horas, n checkbook and branches Debit cards as a foundation of the offer n Premium/ “In-line with market” product and service offer n n “Lower than market” product and service offer Van Gogh Training, developing and hiring managers observing a new, Core product vehicles include Realmaster and n n (Affluent) higher manager to clients ratio RealParcelado Branch rebuilding or remodelling to deliver select number Full branch access served by managers n n of “Van Gogh” and “Premium” Branches Full channel access n Specialised managers with clear responsibility and n accountability; specialised Call Center support PJ Explicit segmentation and focus on high potential clients No explicit segmentation n n (SME) (R$100k + turnover) Package discounts by investment level n Automated credit tools and proactive direct channel Exclusive area in branch served by managers n n availability (lower PJ)

  31. Credit cards is a key product for the mass affluent ABN AMRO (including Sudameris) has a market share of 6.5% of the credit card transaction volume and 4% of the cards in force, therefore has a higher than average utilisation ratio and a solid base for growth # of Cards Transaction Volume Source: ABECS, Mastercard, Visa market research

  32. Credit cards have a significant growth potential ...and a solid base for growth # Credit Cards Transaction Volume BRL million million All data in the overview section are in Brazilian GAAP, in BRL and include all businesses of ABN AMRO Brazil - WCS and C&CC

  33. Debit cards enable to generate volumes with our retail client base Brazil Debit cards have grown faster than other electronic payment methods, largely due to low income bankarization. 2003 transaction volume was up 59% ABN AMRO Debit card business grew 63% in 2003, exceeding the debit market growth ratio, reducing check processing costs # Debit Cards million Source: Visane, ABN AMRO

  34. We have created a true multi-channel platform to best serve our clients • Direct Channels include: call center, Internet, ATMs • Direct Channels/ Total Transactions • 74% in 1Q04 (up from 50% in 1998) • Branch Transactions/ Total Transactions • 21% in 1Q04 (down from 23% in 4Q01) • Direct Channel Availability • 99% in 1Q04 (up from 97% in 4Q01) • Internet Users • Individuals 34% in 1Q04 (up from 17% in 4Q01) • Corporates 79%in 1Q04 (up from 17% in 4Q01)

  35. Distribution and differentiation have become key competitive advantages Created in 2002 by the Financial Executives Magazine, e-finance award is intended recognize the most prominent financial institutions in the implementation of infra-structure solutions, IT and telecom applications 2003 categories: Internet Banking, Business Platform, Outsourcing Strategy, Branch BackOffice Solutions 2004 categories: Retail Internet Banking, New Call Center Technologies, Mobile Mini Branch • Reliability • Transparency • Accessability Driver of client satisfaction for mass affluent and client profitability for low income

  36. Our strategy and employees have created a valuable brand Ranking “MOST VALUABLE BRAZILIAN BRANDS” Source: Interbrand - Dinheiro Publication

  37. Table of Contents Current Brazilian Business Environment Overview of ABN AMRO Brazil Overview C&CC Brazil Financial Performance Sustainability Outlook 2004 / 2005 Appendices

  38. The current performance is impacted by the integration of Sudameris Figures in Dutch GAAP in BRL million 1Q2003 4Q2003* 1Q2004 1Q04/ 1Q03 1Q04/ 4Q03 Revenues 1,284 1,562 1,654 28.8% 5.9% Expenses (814) (1,115) (1,129) 38.7% 1.3% Operating Profit 469 447 525 11.9% 17.5% Provisions (149) (222) (237) 59.1% 6.8% Oper. Profit before Taxes 320 225 288 -10% 28% Taxes (88) 20 (49) Cayman Effects 57 11 (7) Net Profit 172 204 198 15.1% Efficiency Ratio 61.7% 69.5% 66.7% All data in this slide are in Dutch GAAP in BRL for C&CC Brazil

  39. Spreads are declining but volumes are growing Assets 20,000 15,000 R$ million 10,000 5,000 0 Q2 Q3 Q4 Q2 Q3 Q4 Q2 Q3 Q4 Q2E Q3E Q4E 2001 Q1 2002 Q1 2003 Q1 2004 Q1E 2005 AVG Overdrafts Personal Loans Auto Loans Other Products - PJ Though spreads have declined, volumes have sustained solid growth and are expected to grow further

  40. The integration is going smoothly and delivers the expected synergies • Integration plans are being executed by 18 Integration Fronts (8 already completed) • Integration process is on track with BRL120.7 mio synergies captured as of Mar 2003 (annualised cost reduction) • 53%of annualised cost reduction is related to FTE reduction and the balance related to other expenses Total Synergies Captured BRL million Planned Actual

  41. Sudameris Acquisition & Integration • ABN AMRO acquired 94.57% of Banco Sudameris Brasil S.A. in a R$ 2.2 billion transaction: R$ 527 million cash and balance through share exchange for ABN AMRO Real shares (11.58%) • Estimated synergies: R$ 300 mln p.a. starting in 2005 • Global integration plan designed June 2003 along with due diligence • Creation of 18 working fronts, of which 8 have fully executed, 6 depend on other migrations (e.g. IT) and 4 are currently detailing migration. • Fronts already integrated: Audit, Asset Management, Private, Compliance, Legal, Treasury, Insurance and Consumer Finance • Implementation started as of closing in December 2003 • ABN AMRO is ahead of schedule regarding implementation, capturing synergies both in the scope of revenues, personnel and administrative expenses

  42. Sudameris Acquisition & Integration • In October 2003 a career orientation program was created to support personnel reallocation • A ‘Best Practice’ approach is being followed, e.g. for FX and Trade Finance Sudameris’ integrated operational model will be adopted • Complementary businesses will be maintained, e.g. Sudameris retail driven equity brokerage is already fully operational under ABN AMRO • The two banks/operations shall be fully integrated by year end 2004

  43. Client led growth will continue to produce quality earnings In a scenario of declining interest rates ABN AMRO has pursued to build on its loan portfolio, expanding client relationship and capturing cross-selling opportunities Loans / Total Assets Ratio All figures based on Brazilian GAAP as published by each institution

  44. Growth will be value creative as a result of sound credit policies The expansion of the lending business was implemented with no prejudice to asset quality; performance of the the loan portfolio is fully within market standards. Non-performing Loans >90 days Market ABN AMRO Source: Brazilian Central Bank

  45. Table of Contents Current Brazilian Business Environment Overview of ABN AMRO Brazil Overview C&CC Brazil Financial Performance Sustainability Outlook 2004/ 2005 Appendices

  46. The Dynamics of Sustainability Governo ABN AMRO has a leading role in creating and delivering sustainable value Government Client Employees Society ABN AMRO Labor Union Shareholders Media Community Suppliers Environment

  47. Key Initiatives for Sustainability Core Business Linked Initiatives • New financing products directed to social and environmental projects • Assessment of the social and environmental risk of ABN AMRO clients • MicroCredit - Credit offering to population traditionally excluded by the financial sector • Ethical Investment Fund investing in socially and environmentally responsible enterprises Management Initiatives • Eco-efficiency / environmental management (e.g. recycling) • Staff Diversity initiatives • Supply Chain • Engagement and mobilization of suppliers • Social and environmental criteria as a key factor in the choice of supply chain partners • Bi-annual publication of Brazilian Sustainability Report Social Initiatives • 70% of our financial donations are destined to public education and the remaining 30% to initiatives in income generation, environment and diversity • Wherever possible, we encourage our employees to be engaged in our social action initiatives

  48. Table of Contents Current Brazilian Business Environment Overview of ABN AMRO Brazil Overview C&CC Brazil Financial Performance Sustainability Outlook 2004/ 2005 Appendices

  49. Outlook 2004 / 2005 • Inflation under control • (IPCA forecast 6.8% 2004; 4.5% 2005) • Revised from 6.0% 2004; 5.1% 2005 • Pick-up of economic growth • (GDP forecast 3.7% 2004; 3.6% 2005) • Lower foreign exchange volatility • (BRL/USD forecast 3.05 eop 2004; 3.25 eop 2005) • maintained • Lower interest rates • (Selic forecast 14.5% eop 2004; 12.0% eop 2005) • Revised from 13.5% eop 2004; maintained for 2005 • Growing credit portfolio, offsetting lower margins and maintaining standards of credit quality • (credit portfolio growth forecast for 2004 in the range of 20%)

  50. Thank You

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