As filed with the Securities and Exchange Commission on June 30, 2009.May 10, 2010.

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 20-F

¨o REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g)
OF THE SECURITIES EXCHANGE ACT OF 1934
OR

xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended:  December 31, 20082009
OR

¨o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number:  1-152276

¨o SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

ITAÚ UNIBANCO HOLDING S.A. (*)
(Exact name of Registrant as specified in its charter)
(*) Former corporate name Banco Itaú Holding Financeira S.A.
N/A
(Translation of Registrant’s name into English)

Federative Republic of Brazil
(Jurisdiction of incorporation)

Praça Alfredo Egydio de Souza Aranha, 100
04344-902 São Paulo, SP, Brazil
(Address of principal executive offices)

Alfredo Egydio Setubal (Investor Relations Officer)
e-mail: aes-drinvest@itau.com.braes-drinvest@itau-unibanco.com.br
Telephone number: +55-11-5019-1549
 

Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of each share:Name of each exchange on which registered:
Preferred Share, without par valueNew York Stock Exchange*
American Depositary Shares (as evidenced byNew York Stock Exchange
American Depositary Receipts), each 
representing 1(one) Share of Preferred Stock 

*Not for trading purposes, but only in connection with the listing of American Depositary Shares pursuant to the requirements of the Securities and Exchange Commission.
 

Securities registered or to be registered pursuant to Section 12(g) of the Act:
None.
 
Securities for which there is a reporting obligation
pursuant to Section 15(d) of the Act:
None.

The number of outstanding shares of each class of stock of ITAÚ UNIBANCO HOLDING S.A., as of December 31, 20082009 was:
2,081,169,5232,289,284,273 Common Shares, no par value per share (*)
2,015,464,0402,238,061,437 Preferred Shares, no par value per share (*)
(*) Includes the issuance of 527,750,941 common shares and 614,237,130 preferred shares, in light of the association with Unibanco, according to the extraordinary stockholders’ meeting dated November 28, 2008.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes         x        No         ¨o

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
Yes         ¨o          No         x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

Yes         x        No         ¨o

 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer         x         Accelerated filer         ¨o          Non-accelerated filer         ¨o

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
 
U.S. GAAP x
International Financial Reporting Standards

as issued by the International Accounting

Standards Board ¨o
Other ¨o

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
 
Item 17         ¨o          Item 18         x


If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes          ¨o               No                 x


 
TABLE OF CONTENTS
 
  Page
PART I
 PART I
   
ITEM 1IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS76
   
ITEM 2OFFER STATISTICS AND EXPECTED TIMETABLE76
 
  
ITEM 3KEY INFORMATION76
   
3A.Selected Financial Data76
3B.Capitalization and Indebtedness1312
3C.Reasons for the Offer and Use of Proceeds1312
3D.Risk Factors1312
   
ITEM 4INFORMATION ON THE COMPANY
1 197
   
4A.History and Development of the Company1719
4B.Business Overview2021
4C.Organizational Structure7883
4D.Property, Plants and Equipment7883
   
ITEM 4AUNRESOLVED STAFF COMMENTS7883
   
ITEM 5OPERATING AND FINANCIAL REVIEW AND PROSPECTS7883
   
5A.Operating Results7883
5B.Liquidity and Capital Resources9499
5C.Research and Development, Patents and Licenses, Etc.101106
5D.Trend Information101106
5E.Off-Balance Sheet Arrangements101106
5F.Tabular Disclosure of Contractual Obligations102107
   
ITEM 6DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES102107
   
6A.Directors and Senior Management102107
6B.Compensation108113
6C.Board Practices109115
6D.Employees116119
6E.Share Ownership117121
   
ITEM 7MAJOR STOCKHOLDERSSHAREHOLDERS AND RELATED PARTY TRANSACTIONS118122
   
7A.Major StockholdersShareholders118122
7B.Related Party Transactions119124
7C.Interests of Experts and Counsel122127
   
ITEM 8FINANCIAL INFORMATION122127
   
8A.Consolidated Financial Statements and Other Financial Information122127
8B.Significant Changes124130
   
ITEM 9THE OFFER AND LISTING124130
   
9A.Offer and Listing Details124130
9B.Plan of Distribution126132
9C.Markets126132
9D.Selling StockholdersShareholders131137
9E.Dilution131138
9F.Expenses of the Issue131138
   
ITEM 10ADDITIONAL INFORMATION131138

3

10A.Share Capital131138
10B.Memorandum and Articles of Association131138
10C.Material Contracts140146
2
10D.Exchange Controls142146
10E.Taxation143147
10F.Dividends and Paying Agents150153
10G.Statement by Experts150154
10H.Documents on Display151154
10I.Subsidiary Information151154
   
ITEM 11QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK152155
   
ITEM 12DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES160164
   
12A.Debt Securities160164
12B.Warrants and Rights160164
12C.Other Securities160164
12D.American Depositary Shares160164
   
PART II
 PART II
   
ITEM 13DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES160166
   
ITEM 14MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS160166
   
ITEM 15CONTROLS AND PROCEDURES161167
   
ITEM 16[RESERVED]162167
   
16A.Audit Committee Financial Expert162167
16B.Code of Ethics162168
16C.Principal Accountant Fees and Services163168
16D.Exemptions from the Listing Standards for Audit Committees164169
16E.Purchases of Equity Securities by the Issuer and Affiliated Purchasers164169
16F.Change in Registrant’s Certifying Accountant164169
16G.Corporate Governance165170
   
PART III
 PART III
   
ITEM 17FINANCIAL STATEMENTS168173
   
ITEM 18FINANCIAL STATEMENTS168173
   
ITEM 19EXHIBITS169174

43

 
INTRODUCTION
 
On November 3, 2008, the controlling stockholdersshareholders of Itaúsa – Investimentos Itaú S.A., or Itaúsa, and of Unibanco Holdings S.A., or Unibanco Holdings, entered into an agreement to combine the financial operations  (the “Association”) of Banco Itaú S.A. (which new corporate name is(now Itaú Unibanco S.A. as explained below)), Unibanco Holdings and its subsidiary Unibanco - União de Bancos Brasileiros S.A., or Unibanco. This transaction was approved by theThe Central Bank approved the transaction on February 18, 2009.  In viewFor purpose of generally accepted accounting principles in the relevance and impact of such transaction, the scope of Central Bank´s analysis contemplated a detailed assessment of the businesses of each financial group, their structure and the market impact of their combination. For USGAAP purposes,United States, or U.S. GAAP, the consummation date of the transaction iswas February 18, 2009. For further information on the Association, see “Item 4A. History and Development of the Company – Recent Developments – Association between Itaú and Unibanco Financial Groups” and “Item 10C. Material Contracts – Association between Itaú and Unibanco Financial Groups.”
 
All references in this annual report to (1) “Itaú Unibanco Holding,” “Itaú Holding,” ”we,” “us,” or “our,” are to Itaú Unibanco Holding S.A. (the new corporate name of(formerly Banco Itaú Holding Financeira S.A., since the extraordinary stockholders’ meeting held on April 24, 2009, which new name is subject to the approval of the Central Bank)) and its consolidated subsidiaries, as applicable; (2) “Itaú Unibanco,” are to Itaú Unibanco S.A. (the new corporate name of Banco Itaú S.A., or Banco Itaú, since the extraordinary stockholders’ meeting held on April 30, 2009, which new name is subject to the approval of the Central Bank)) and its consolidated subsidiaries, as applicable; (3) the “Itaú Financial Group” are to Itaú Holding and all of its subsidiaries before the Association; (4) the “Unibanco Financial Group” are to Unibanco Holdings and all of its subsidiaries before the Association; (5) the “Brazilian government” are to the federal government of the Federative Republic of Brazil, (6) “preferred shares” and “common shares” are to our authorized and outstanding shares of preferred stock and common stock, designated as ações preferenciais and ações ordinárias, respectively, each without par value, (7) “ADSs” are to our American Depositary Shares (one ADS represents one preferred share), (8) the “real,” “reais” or “R$” are to Brazilian reais, the official currency of Brazil, (9) “US$,” “dollars” or “U.S. dollars” are to United States dollars, and (10) “JPY” are to Japanese Yen.
 
As of December 31, 20082009 and June 15, 2009,May 4, 2010, the commercial market rate for purchasing U.S. dollars was R$ 2.33701.7412 to US$1.00 and R$ 1.94581.7557  to US$1.00, respectively.
 
We have prepared our consolidated financial statements included in this annual report under Item 18, in accordance with generally accepted accounting principles in the United States, or U.S. GAAP, as of December 31, 20082009 and 2007,2008, and for the years ended December 31, 2009, 2008 2007 and 2006.2007.
 
We use accounting practices adopted in Brazil for reports to Brazilian stockholders,shareholders, in filings with the Brazilian Securities Commission (Comissão de Valores Mobiliários), or the CVM, for the determination of dividend payments, and for the determination of tax liability. Accounting practices adopted in Brazil differ significantly from U.S. GAAP, and you should consult your own professional advisers for an understanding of the differences between accounting practices adopted in Brazil and U.S. GAAP, and how those differences might affect your analysis of our financial position and results of operations.your investment.
 
Our fiscal year ends on December 31, and references in this annual report to any specific fiscal year are to the twelve-month period ended December 31 of such year.
 
Certain industry data presented in this annual report hashave been derived from the following sources: the Central Bank System (Sistema do Banco Central), or SISBACEN, a database of information provided by financial institutions to the Central Bank; the Brazilian association of leasing companies (Associação Brasileira de Empresas de Leasing), or ABEL; the Brazilian government development bank (Banco(Banco Nacional de Desenvolvimento Econômico e Social), or BNDES; the nationalBrazilian financial and capital markets association of investment banks (Associaç(Associação NacionalBrasileira das Entidades dos BancosMercados Financeiros e de Investimento)Capitais) , or ANBID;ANBIMA; and the insurance sectorindustry regulator (Superintendê(Superintendência de Seguros Privados), or SUSEP.
 
You should assume that the information appearing in this annual report is accurate only as of the date to which it refers or as of the date of this annual report, as the case may be. Our business, financial condition, results of operations and prospects may have changed since that date.

5


FORWARD-LOOKING STATEMENTS

This annual report includes forward-looking statements, principally in “Item 3D. Risk Factors,” “Item 4B. Business Overview” and “Item 5. Operating and Financial Review and Prospects.” We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends affecting our business. These forward-looking statements are subject to risks, uncertainties and assumptions including, among other risks:
 
•           
the performance of the Brazilian and worldwide economy in general
 
•           
effects of the global financial markets and economic crisis
 
•           
increases in defaults by borrowers and other loan delinquencies
 
•           
4
increases in the provision for loan losses
 
•           
decrease in deposits, customer loss or revenue loss
 
•           
our ability to sustain or improve our performance
 
•           
cost and availability of funding
 
•           
changes in interest rates which may, among other effects, adversely affect margins
 
competition in the banking, financial services, credit card services, insurance, asset management and related industries
 
• government regulation and tax matters
 
• adverse legal or regulatory disputes or proceedings
 
• credit, market and other risks of lending and investment activities
 
• changes in regional, national and international business and economic conditions and inflation, and international business and economic conditions and inflation
 
• other risk factors as set forth under “Item 3D. Risk Factors.”
 
The words “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “expect” and similar words are intended to identify forward-looking statements. We undertake no obligation to update publicly or revise any forward-looking statements because of new information, future events or otherwise. In light of these risks and uncertainties, the forward-looking information, events and circumstances discussed in this annual report might not occur. Our actual results and performance could differ substantially from those anticipated in our forward-looking statements.

65


 
ITEM 1
ITEM 1IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
 
Not applicable.

ITEM 2
ITEM 2OFFER STATISTICS AND EXPECTED TIMETABLE
 
Not applicable.

ITEM 3
ITEM 3KEY INFORMATION
 
3A. Selected Financial Data
 
You should read the following selected financial data in conjunction with the “Introduction” and “Item 5. Operating and Financial Review and Prospects” included in this annual report.
 
We maintain our books and records in reais, the official currency of Brazil, and prepare our financial statements for statutory and regulatory purposes in accordance with accounting practices adopted in Brazil. Accounting principles and standards generally applicable under accounting practices adopted in Brazil include those established by Brazilian Corporate Law (Law No. 6,404/76, as amended, including Law No. 11,638/07), by the federal accounting council (Conselho Federal de Contabilidade), or CFC, and interpretative guidance issued by the Brazilian professional body of independent accountants (Instituto dos Auditores Independentes do Brasil), or IBRACON and standards issued by the Accounting Pronouncements Committee (Comitê de Pronunciamentos Contábeis), or CPC, which is a technical body that has issued, since 2007 accounting standards that should take into account the convergence with international accounting standards. For financial institutions, such as Itaú Unibanco Holding, accounting practices adopted in Brazil include the rules and regulations of the National Monetary Council (Conselho Monetário Nacional), or CMN, and of the Central Bank. Those accounting principles and standards, in the case of listed companies under the jurisdiction of the CVM, are complemented by certain additional instructions issued periodically by the CVM. In addition, the CVM and other regulatory entities, such as SUSEP and the Central Bank, the Brazilian banking regulator, provide additional industry-specific guidelines. The authority to establish accounting standards for financial institutions, such as Itaú Unibanco, rests with the CMN and the Central Bank and, as a result, accounting standards issued by the CPC and other bodies are applicable to financial institutions only oncewhen approved by the Central Bank and as from the dates established by the Central Bank.
 
We have prepared consolidated balance sheets as of December 31, 20082009 and 20072008 and related consolidated statements of income, of comprehensive income, of cash flows and of changes in stockholders’shareholders’ equity for the years ended December 31, 2009, 2008 2007 and 2006,2007, all stated in reais,in accordance with U.S. GAAP. The U.S. GAAP financial statements are included in this annual report and are referred to as the consolidated financial statements or the U.S. GAAP financial statements. The consolidated financial statements as of December 31, 20082009 and 20072008 and for the years ended December 31, 2009, 2008 2007 and 20062007 included in this annual report have been audited by PricewaterhouseCoopers Auditores Independentes, an independent registered public accounting firm, as stated in their report appearingincluded elsewhere in this annual report.
 
We have prepared audited financial statements in accordance with U.S. GAAP as of and for the years ended December 31, 2009, 2008, 2007, 2006 2005 and 2004.2005.
 
On November 12, 2008, Itaú Unibanco entered into an agreement with Itaúsa, then our controlling stockholder at that timeshareholder and now one of our current controlling stockholders,shareholders, pursuant to which Itaú Unibanco acquired part of Itaúsa’s ownership interest in Itaúsa Export S.A., or Itaúsa Export and Itaúsa Europa S.A., or Itaúsa Europa. The transaction is accounted for as a transaction between entities under common control that resulted in a change in reporting entity under U.S. GAAP. As a result, retroactively restatement of prior yearyears financial statement isstatements was required to present the combined financial statement of Itaú Unibanco with Itaúsa Export and Itaúsa Europa as if the transaction had taken place onoccurred in the beginning of the first year end period presented.presented in this annual report. Accordingly, the U.S. GAAP financial statements as of and for the yearsyear ended December 31, 2007, and 2006, included in this annual report and for the year ended December 31, 2006 not included herewith, were adjusted to reflect the impact of this transaction. However, we have not restated financial information under “Item 3A. Selected Financial InformationData” and other sections of this annual report as of December 31, 2005 and 2004 and for the yearsyear then ended has not been restated to reflect the combination of Itaúsa Export and Itaúsa Europa as if it had occurred on those periods considering the burdenduring this period. We believe it would be burdensome to compile suchthe information for such prior periods and thethere would be a reduced impact of those entities in the consolidated financial information. See note 3 to the consolidated financial statements for additional information.

76


U.S. GAAP Selected Financial Data

This information is qualified in its entirety by reference to the consolidated financial statements included in Item 18.

Income Statement Dataof Income
 
  For the Year Ended December 31, 
   2009  2008  2007  2006  2005 
      (in millions of R$) 
Net interest income  40,691   21,141   21,332   17,043   12,610 
Allowance for loan and lease losses  (15,372)  (9,361)  (5,542)  (5,147)  (2,637)
Net interest income after allowance for loan and lease losses  25,319   11,780   15,790   11,896   9,973 
Fee and commission income  13,479   8,941   7,832   6,788   5,705 
Equity in earnings of unconsolidated companies, net  (9)  474   476   566   583 
Insurance premiums, income on private retirement plans and on capitalization plans  8,132   3,917   3,500   3,479   2,681 
Other non-interest income (1)  18,834   2,443   5,207   3,781   2,988 
Operating expenses (2)  (20,590)  (12,579)  (11,177)  (10,051)  (7,684)
Insurance claims, changes in reserves for insurance operations, for private retirement plans and acquisition costs  (6,452)  (3,301)  (2,509)  (2,663)  (2,233)
Other non-interest expenses (3)  (15,253)  (8,131)  (7,341)  (5,347)  (4,567)
Net income before taxes on income, net income attributable to noncontrolling interest, extraordinary item and cumulative effect of a change in  an accounting principle  23,461   3,544   11,778   8,449   7,446 
Taxes on income  (8,849)  1,334   (4,147)  (2,434)  (1,941)
Extraordinary item (recognition in income of excess of net assets acquired over purchase price), net of tax effect  -   -   29   -   - 
Cumulative effect of a change in accounting principle, net of tax effect  -   -   -   -   3 
Net income  14,612   4,878   7,660   6,015   5,508 
Net income attributable to noncontrolling interest  (527)  (29)  2   22   (55)
Net income attributable to Itaú Unibanco  14,085   4,849   7,662   6,037   5,453 

  For the Year Ended December 31, 
  
2008
  2007  2006  2005  
2004
 
  (in millions of R$) 
Net interest income  21,141   21,332   17,043   12,610   9,856 
Allowance for loan and lease losses  (9,361)  (5,542)  (5,147)  (2,637)  (867)
Net interest income after allowance for loan and lease losses  11,780   15,790   11,896   9,973   8,989 
Fee and commission income  8,941   7,832   6,788   5,705   4,343 
Equity in earnings of unconsolidated companies, net  474   476   566   583   299 
Insurance premiums, income on private retirement plans and on capitalization plans  3,917   3,500   3,479   2,681   2,445 
Other non-interest income (1)  2,443   5,207   3,781   2,988   2,908 
Operating expenses (2)  (12,579)  (11,178)  (10,051)  (7,684)  (6,594)
Insurance claims, changes in reserves for insurance operations, for private retirement plans and acquisition costs  (3,301)  (2,509)  (2,663)  (2,233)  (2,544)
Other non-interest expense (3)  (8,131)  (7,341)  (5,347)  (4,567)  (3,498)
Net income before taxes on income, minority interest, extraordinary item and cumulative effect of a change in  an accounting principle  3,544   11,778   8,449   7,446   6,348 
Taxes on income  1,334   (4,147)  (2,434)  (1,941)  (1,673)
Minority interest  (29)  2   22   (55)  (43)
Extraordinary item (recognition in income of excess of net assets acquired over purchase price), net of tax effect  -   29   -   -   2 
Cumulative effect of a change in accounting principle, net of tax effect   -   -   -   3   - 
Net income  4,849   7,662   6,037   5,453   4,634 
(1) Other non-interest income consists of net trading income, (losses), net, net gain (loss) on sale of available-for-sale securities, net gain (loss) on foreign currency transactions, net gain (loss) on transaction of foreign subsidiaries and other non-interest income.
(2) Operating expenses consist of salaries and employee benefits and administrative expenses.
(3) Other non-interest expenses consist of depreciation of premises and equipment, amortization of other intangible assets, and other non-interest expense.

87


Earnings and Dividend per Share Information (4)

 For the Year Ended December 31,  For the Year Ended December 31, 
 
2008
  2007  2006  2005  2004  2009  2008  2007  2006  2005 
 (in R$, except number of shares)     (in R$, except number of shares) 
Basic earnings per share (1)(2):                              
Common 1.63  2.56  2.13  1.94  1.63  3.25  1.49  2.32  1.93  1.76 
Preferred 1.63  2.56  2.13  1.94  1.63  3.25  1.49  2.32  1.93  1.77 
Diluted earnings per share (1)(2):                                        
Common 1.63  2.54  2.11  1.93  1.63  3.24  1.48  2.31  1.92  1.75 
Preferred 1.63  2.54  2.11  1.93  1.63  3.24  1.48  2.31  1.92  1.75 
Dividends and interest on stockholders’ equity per share (1)(3):                    
Dividends and interest on shareholders’ equity per share (1)(3):                    
Common 1.28  0.75  0.78  0.66  0.48  0.92  1.16  0.68  0.71  0.60 
Preferred 1.28  0.75  0.78  0.66  0.48  0.92  1.16  0.68  0.71  0.60 
Weighted average number of shares outstanding (per share) (4):                                        
Common  1,553,418,582   1,553,451,604   1,503,722,701   1,513,428,204   1,516,867,375   2,192,530,134   1,708,760,440   1,708,796,764   1,654,094,971   1,664,771,024 
Preferred  1,413,491,898   1,444,978,181   1,336,680,540   1,295,285,379   1,321,781,475   2,143,753,894   1,554,841,088   1,589,475,999   1,470,348,594   1,424,813,917 

(1) Earnings per share have been computed following the “two class method” set forth by the Statement on Financial Accounting Standards, or FAS, Nº. 128 “EarningsASC 260 Earnings Per Share.”  See “Item 10B. Memorandum and Articles of Association” for a description of the two classes of stock.
(2) See note 20 to the consolidated financial statements for a detailed calculation of earnings per share.
(3) Under Brazilian Corporate Law we are allowed to pay interest on stockholders’shareholders’ equity as an alternative to paying dividends to our stockholders.shareholders.  See “Item 10E. Taxation – Interest On Stockholders’shareholders’ Equity” for a description of interest on stockholders’shareholders’ equity.
(4) Due to the bonus sharestock dividend effected in 2009, 2008, 2007 and 2005, we present the 2008, 2007, 2006 and 2005 and 2004 information is presented  after giving retroactive effect to the stock split approved on August 22, 2005,  and the stock split approved on August 27, 2007, and the bonus sharestock dividend approved on April 23, 2008.2008 and the stock dividend approved on April 24, 2009 which was carried out on August 28, 2009.

 For the Year Ended December 31,  For the Year Ended December 31, 
 
2008
  2007  2006  2005  2004  2009  2008  2007  2006  2005 
 (in US$)     (in US$) 
Dividends and interest on stockholders’ equity per share (1)(2):               
Dividends and interest on shareholders’ equity per share (1)(2):               
Common  0.55   0.42   0.36   0.28   0.18   0.53   0.50   0.38   0.33   0.26 
Preferred  0.55   0.42   0.36   0.28   0.18   0.53   0.50   0.38   0.33   0.26 

(1) Under Brazilian Corporate Law we are allowed to pay interest on stockholders'shareholders' equity as an alternative to paying dividends to our shareholders. See "Item 10E. Taxation - Brazilian Tax Considerations - Interest on Stockholders'shareholders' Equity" for a description of interest on stockholders'shareholders' equity.
(2) Translated into US$ fromreaisat the commercial exchange rate established by the Central Bank at the end of the year in which dividends or interest on stockholders’shareholders’ equity were paid or declared, as the case may be.

98


Balance Sheet Data

Assets

 As of December, 31  As of December, 31 
 2008  2007  2006  2005  2004  2009  2008  2007  2006  2005 
    (in millions of R$)           (in millions of R$) 
Cash and due from banks (1)  3,492   3,187   2,851   1,776   1,743   5,355   3,492   3,187   2,851   1,776 
Interest-bearing deposits in other banks  49,677   38,288   26,236   19,833   14,557   89,085   49,677   38,288   26,236   19,833 
Securities purchased under resale agreements  44,783   21,309   8,668   6,389   6,580   56,714   44,783   21,309   8,668   6,389 
Central Bank compulsory deposits  11,314   17,214   15,136   13,277   10,571   13,869   11,314   17,214   15,136   13,277 
Trading assets, at fair value  66,483   40,524   28,095   16,478   11,995   73,529   66,483   40,524   28,095   16,478 
Available-for-sale securities, at fair value  28,445   18,825   13,560   8,369   8,013   41,263   28,445   18,825   13,560   8,369 
Held-to-maturity securities, at amortized cost  1,325   1,428   1,589   1,428   3,483   1,762   1,325   1,428   1,589   1,428 
Loans and leases  169,700   116,459   83,759   55,382   42,682   245,736   169,700   116,459   83,759   55,382 
Allowance for loans and lease losses  (12,202)  (7,473)  (6,426)  (3,933)  (2,811)  (19,968)  (12,202)  (7,473)  (6,426)  (3,933)
Investments in unconsolidated companies  2,398   1,859   1,350   2,621   2,509   4,321   2,398   1,859   1,350   2,621 
Premises and equipment, net  2,965   2,755   2,884   2,486   2,574 
Premises and equipments, net  4,572   2,965   2,755   2,884   2,486 
Goodwill and intangible assets, net  7,099   7,583   6,613   3,402   2,781   37,280   7,099   7,583   6,613   3,402 
Other assets    25,896    17,848    15,850    11,925    10,936   45,570   25,896   17,848   15,850   11,925 
Total assets  401,375   279,806   200,167   139,433   115,613   599,088   401,375   279,806   200,167   139,433 
                                        
Average interest-earning assets (2)  287,667   200,127   145,387   103,248   84,929   453,883   287,667   200,127   145,387   103,248 
Average non-interest-earning assets (2)  46,662   41,587   28,688   29,603   26,525   60,812   46,662   41,587   28,688   29,603 
Average total assets (2)  334,329   241,714   174,074   132,851   111,454   514,695   334,329   241,714   174,074   132,851 

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Liabilities

  As of December, 31 
  2008  2007  2006  2005  2004 
  (in millions of R$) 
Non-interest bearing deposits  24,106   28,134   19,102   12,347   10,737 
Interest bearing deposits  126,696   53,491   42,076   35,517   27,536 
Securities sold under repurchase agreements  49,492   23,399   10,888   6,771   6,786 
Short-term borrowings  54,277   48,178   30,983   17,433   12,354 
Long-term debt  37,672   31,027   21,068   14,804   14,739 
Insurance claims reserves, reserves for private retirement plans and reserves for capitalization plans  4,766   5,394   5,242   5,023   4,654 
Investment contracts  24,322   18,630   14,252   10,188   6,905 
Other liabilities   44,412    33,944    26,934    17,616    14,154 
Total liabilities  365,743   242,197   170,546   119,699   97,865 
Minority interest in consolidated subsidiaries  1,245   1,354   1,430   1,413   1,037 
Stockholders’ equity:                    
Common shares (3)  7,372   5,948   4,575   4,575   4,387 
Preferred shares (4)  9,882   8,560   8,560   3,979   3,968 
Total capital stock  17,254   14,508   13,135   8,554   8,355 
Other stockholders’ equity (5)  17,133   21,747   15,055   9,767   8,356 
Total stockholders’ equity  34,387   36,255   28,190   18,321   16,711 
Total liabilities and stockholders’ equity  401,375   279,806   200,167   139,433   115,613 
                     
Average interest-bearing liabilities (2)  230,083   151,391   104,073   76,418   65,553 
Average non-interest-bearing liabilities (2)  68,394   57,431   46,934   38,694   30,577 
Total average stockholders’ equity (2)  35,852   32,892   23,068   17,739   15,324 
Total average liabilities and stockholders’ equity (2)  334,329   241,714   174,074   132,851   111,454 
  As of December, 31 
   2009  2008  2007  2006  2005 
      (in millions of R$) 
Non-interest bearing deposits  25,884   24,106   28,134   19,102   12,347 
Interest bearing deposits  165,024   126,696   53,491   42,076   35,517 
Securities sold under repurchase agreements  66,174   49,492   23,399   10,888   6,771 
Short-term borrowings  80,725   54,277   48,178   30,983   17,433 
Long-term debt  58,976   37,672   31,027   21,068   14,804 
Insurance claims reserves, reserves for private retirement plans and reserves for capitalization plans  13,487   4,766   5,394   5,242   5,023 
Investment contracts  38,063   24,322   18,630   14,252   10,188 
Other liabilities  68,721    44,412    33,944    26,934   17,616 
Total liabilities  517,054   365,743   242,197   170,546   119,699 
shareholders’ equity:                    
Common shares (3)  21,046   7,372   5,948   4,575   4,575 
Preferred shares (4)  24,208   9,882   8,560   8,560   3,979 
Total capital stock  45,254   17,254   14,508   13,135   8,554 
Other shareholders’ equity (5)  24,023   17,133   21,747   15,055   9,767 
Total shareholders’ equity of Itaú Unibanco  69,277   34,387   36,255   28,190   18,321 
Noncontrolling interest  12,757   1,245   1,354   1,430   1,413 
Total equity  82,034   35,632   37,609   29,621   19,734 
Total liabilities and equity  599,088   401,375   279,806   200,167   139,433 
                     
Average interest-bearing liabilities (2)  382,880   230,083   151,391   104,073   76,418 
Average non-interest-bearing liabilities (2)  70,272   68,394   57,431   46,934   38,694 
Total average equity (2)  61,544   35,852   32,892   23,068   17,739 
Total average liabilities and equity (2)  514,695   334,329   241,714   174,074   132,851 
 
(1) Includes restricted cash in the amount of R$84 million, R$89 million, R$144 million, R$ 44 million and R$ 29244 million as of December 31, 2008, 2007, 2006 and 2005, and 2004, respectively. We had no restricted cash in December 31, 2009.
(2) See “Item 4B. Business Overview - Selected Statistical Information – Average Balance Sheet and Interest Rate Data” for more detailed information on our average assets, liabilities and stockholders’shareholders’ equity for the years ended December 31, 2009, 2008 2007 and 2006.2007.
(3) Common shares issued, no par value: 1,553,418,5822,289,286,475 as of December 31, 2009; 1,708,760,440 as of December 31, 2008; 1,566,250,6401,722,875,704 as of December 31, 2007; 1,514,908,5501,666,399,405 as of December 31, 2006; 1,514,908,5502006 and 1,666,399,405 as of December 31, 2005 and 1,517,188,825 as2005. As of December 31, 2004.2009 we held 2,202 shares in treasury. We did not hold any shares in treasury as of December 31, 2008. As of December 31, 2007, 2006 2005 and 2004,2005, we held 10,265,646; 12,491,808; 10,969,55811,292,211; 13,740,989 and 1,582,750,12,066,514, shares in treasury, respectively. QuantityWe restated the quantity of shares has been retroactively restated to reflect the  the stock splits effected on August 22, 2005 and October 1, 2007 and the bonus share approved on April 23, 2008.
(4) Preferred shares issued, no par value: 1,459,989,910 as of December 31, 2008; 1,488,739,910 as of December 31, 2007; 1,488,739,910 as of December 31, 2006; 1,317,444,675 as of December 31, 2005 and 1,372,444,675 as of December 31, 2004.  As of December 31, 2008, 2007, 2006, 2005 and 2004, we held  58,763,000; 36,675,620; 49,452,850; 61,360,000 and 56,274,500 shares in treasury, respectively. Quantity of shares has been retroactively restated to reflect the stock splits effected on August 22, 2005 and October 1, 2007, and the share bonusstock dividend approved on April 23, 2008.2008 and the stock dividend approved on April 24, 2009 which was carried out on August 28, 2009.
(4) Preferred shares issued, no par value: 2,281,649,744 as of December 31, 2009; 1,605,988,901 as of December 31, 2008; 1,637,613,901 as of December 31, 2007; 1,637,613,901 as of December 31, 2006 and 1,449,189,143 as of December 31, 2005.  As of December 31, 2009, 2008, 2007, 2006 and 2005, we held  43,588,307; 64,639,300; 40,343,182; 54,398,135 and 67,496,000 shares in treasury, respectively. We restated the quantity of shares retroactively  to reflect the stock splits effected on August 22, 2005 and October 1, 2007, the stock dividend approved on April 23, 2008 and the stock dividend approved on April 24, 2009 which was carried out on August 28, 2009.
(5) Other stockholders’shareholders’ equity includes treasury stock, additional paid-in capital, other accumulated comprehensive income, appropriated and unnappropriated retained earnings.

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Selected Consolidated Ratios (%)

 For the Year Ended December 31,  For the Year Ended December 31, 
 
2008
  2007  2006  2005  2004  2009  2008  2007  2006  2005 
Profitability and performance                              
Net interest margin (1)  7.3   10.7   11.7   12.2   11.6   9.0   7.3   10.7   11.7   12.2 
Return on average assets (2)  1.5   3.2   3.5   4.1   4.2   2.7   1.5   3.2   3.5   4.1 
Return on average stockholder's equity (3)  13.5   23.3   26.2   30.7   30.2 
Return on average equity (3)  22.9   13.5   23.3   26.2   30.7 
Efficiency ratio (4)  60.3   49.4   51.2   53.2   56.7   45.3   60.3   49.4   51.2   53.2 
                                        
Liquidity                                        
Loans and leases as a percentage of total deposits (5)  112.5   142.7   136.9   115.7   111.5   128.7   112.5   142.7   136.9   115.7 
                                        
Capital                                        
Total equity as a percentage of total assets (6)  8.6   13.0   14.1   13.1   14.5   11.6   8.6   13.0   14.1   13.1 

(1) Net interest income divided by average interest-earning assets.  See “Item 4B. Business Overview - Selected Statistical Information – Average Balance Sheets and Interest Rate Data” for more detailed information on our average assets, liabilities and stockholders’shareholders’ equity for the years ended December 31, 2009, 2008 2007 and 2006.2007.
(2) Net income attributable to Itaú Unibanco divided by average total assets.  See “Item 4B. Business Overview - Selected Statistical Information – Average Balance Sheet and Interest Rate Data” for more detailed information on our average assets, liabilities and stockholders’shareholders’ equity for the years ended December 31, 2009, 2008 2007 and 2006.2007.
(3) Net income attributable to Itaú Unibanco divided by average stockholder’s equity.  See “Item 4B. Business Overview - Selected Statistical Information – Average Balance Sheet and Interest Rate Data” for more detailed information on our average assets, liabilities and stockholders’shareholders’ equity for the years ended December 31, 2009, 2008 2007 and 2006.2007.
(4) Salaries and employee benefits, administrative expenses, other non-interest expense (except expenses with respect to the social integration program (Programa de Integração Social), or PIS, the contribution for social security financing (Contribuição para Financiamento da Seguridade Social), or COFINS, and tax on services (Imposto sobre Serviços), or ISS), amortization of other intangible assets plus depreciation of premises and equipment as a percentage of the aggregate of net interest income, fee and commission income, insurance premiums, income on private retirement plans and on capitalization plans, trading income (losses), net gain (loss) on sale of available-for-sale securities, net gain (loss) on foreign currency transactions, net gain (loss) on translation of foreign subsidiaries and other non-interest income less insurance claims, changes in reserves for insurance operations, for private retirement plans and acquisition costs and taxes (consisting of  ISS, PIS and COFINS).
(5) Loans and leases as of year-end divided by total deposits as of year-end.
(6) As of year-end.

Exchange Rates
 
Before to March 14, 2005, under Brazilian regulations, foreign exchange transactions were carried out on either the commercial rate exchange market or the floating rate exchange market. The commercial market was reserved primarily for foreign trade transactions and transactions that generally required prior approval from the Central Bank, such as registered investments by foreign persons and related remittances of funds abroad (including the payment of principal and interest on loans, notes, bonds and other debt instruments denominated in foreign currencies and registered with the Central Bank). The floating rate exchange market generally applied to specific transactions for which Central Bank approval was not required. Rates in the two markets were generally the same. On March 4, 2005, the CMN, through Resolution No. 3,265 effective March 14, 2005, as updated by CMN Resolution No. 3,568 of May 29, 2008, unified the two markets and allowed the exchange rate to float freely for all purposes. Recently, CMN issued Resolutions No. 3,844 and No. 3,845, both dated March 3, 2010, and the Central Bank issued Circulars No. 3,491, No. 3,492 and No. 3,493, all dated March 24, 2010, which consolidate and simplify certain exchange rules and related procedures. Currently, the Brazilian foreign exchange system allows the purchase and sale of foreign currency and the performance of international transfer oftransfers in reaisby any personindividual or legal entity, regardless of the amount, subject to certain regulatory procedures.
The Brazilian government may impose temporary restrictions on the conversion of Brazilian currency has duringinto foreign currencies and on the last decades experienced frequent and substantial variationsremittance to foreign investors of proceeds from their investments in relationBrazil. Brazilian law allows the government to impose these restrictions whenever there is a serious imbalance in Brazil’s balance of payments or there are reasons to foresee a serious imbalance. We cannot predict whether the U.S. dollar and other foreign currencies. Between 2000 and 2002, the real depreciated significantly against the U.S. dollar, reaching an exchange rate of R$ 3.5333 per US$1.00 at the end of 2002.  Between 2003 and mid-2008, the real appreciated significantly against the U.S. dollar due to the stabilization of the macro-economic environment and a strong increase in foreign investment in Brazil, with the exchange rate reaching R$ 1.6344 per US$1.00 in August 29, 2008.  In the context of the crisisBrazilian government will impose remittance restrictions in the global financial markets since mid-2008, thefuture. The real depreciated 31.9%may depreciate or appreciate substantially against the U.S. dollar in 2008, reaching R$ 2.3370 per US$1.00 on December 31, 2008. On March 31, 2009, the future.
As of May 4, 2010, the U.S. dollar- real exchange rate was R$ 2.3152 per1.7557 to US$1.00. The Central Bank has intervened occasionally to control instability in foreign exchange rates. The real may depreciate or appreciate against the U.S. dollar substantially. See “Risk Factors – Risks Related to Brazil – Exchange rate instability may adversely affect the Brazilian economy and the market price of our preferred shares and ADSs.”

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The following table sets forth information on the commercial market rate for U.S. dollars as reported by the Central Bank for the periods and dates indicated.

  Exchange Rate of Brazilian Currency per US$ 1.00 
Year Low  High  Average (1)  Year-End 
2005  2.1633   2.7621   2.4125   2.3407 
2006  2.0586   2.3711   2.1679   2.1380 
2007  1.7325   2.1556   1.9300   1.7713 
2008  1.5593   2.5004   1.8335   2.3370 
2009  1.7024   2.4218   1.9905   1.7412 

Source:  Central Bank
(1) Represents the average of the exchange rates on the last day of each month during the relevant period.

  Exchange Rate of Brazilian Currency per US$ 1.00 
Month Low  High  Average (1)  Year-End 
November 2009  1.7024   1.7588   1.7262   1.7505 
December 2009  1.7096   1.7879   1.7503   1.7412 
January 2010  1.7227   1.8748   1.7798   1.8748 
February 2010  1.8046   1.8773   1.8416   1.8110 
March 2010  1.7637   1.8231   1.7858   1.7810 
April 2010  1.7306   1.7806   1.7566   1.7306 
May 2010 (through May 4)  1.7315   1.7557   1.7436   1.7557 
  Exchange Rate of Brazilian Currency per US$ 1.00 
Year 
Low
  High  Average (1)  Year-End 
2004  2.6544   3.2051   2.9171   2.6544 
2005  2.1633   2.7621   2.4125   2.3407 
2006  2.0586   2.3711   2.1679   2.1380 
2007  1.7325   2.1556   1.9300   1.7713 
2008  1.5593   2.5004   1.8335   2.3370 

Source:  Central Bank
(1) Represents the average of the exchange rates on the last day of each month during the relevant period.

  Exchange Rate of Brazilian Currency per US$ 1.00 
Month Low  High 
January 2009  2.1889   2.3803 
February 2009  2.2446   2.3916 
March 2009  2.2375   2.4218 
April 2009  2.1699   2.2899 
May 2009  1.9730   2.1476 
June,15 2009  1.9301   1.9476 
Source:  Central Bank

3B.        
3B.Capitalization and Indebtedness
 
Not applicable.

3C.         
3C.Reasons for the Offer and Use of Proceeds
 
Not applicable.

3D.        
3D.Risk Factors
 
TheAn investment in our preferred shares and ADSs involves a high degree of risk. You should carefully consider the risks described below are not the only ones we face.before making an investment decision. Our business, financial condition and results of operations or financial condition could suffer ifbe materially and adversely affected by any of these risks materializes and, as a result, the tradingrisks. The market price of our preferred shares and ADSs could decline.decline due to any of these risks or other factors, and you may lose all or part of your investment. The risks described below are those that we currently believe may materially affect us.

Risks Relating to Brazil
 
The Brazilian government has exercised, and continues to exercise, influence over the Brazilian economy.  This involvement,influence, as well as Brazilian political and economic conditions, maycould adversely affect us and the market price of our preferred shares and ADSs.
 
The Brazilian government from time to time intervenes in the Brazilian economy and makes changes in policies and regulations. The Brazilian government’s actions to control inflation and other policies and regulations have involved,in the past included, among other measures, increases in interest rates, changes in tax policies, control of some prices,price controls, capital controls limits on selected imports and, prior to the current floating exchange regime, currency devaluations. Our business, financial condition, and results of operations may be materially and adversely affected by changes in policypolicies or regulations involving or affecting factors, such as:
 
•           
·interest rates;
 
•           currency fluctuations;
·reserve requirements;
 
•           inflation;

1312


•           domestic capital and credit market liquidity;
•           tax policies and rules;
volatility of exchange rates, exchange controls, and restrictions on remittances abroad, such as those that were briefly imposed in 1989 and early 1990; and
 
•           other political, social and economic developments in or affecting Brazil.
·capital requirements and liquidity of capital and credit markets;
 
·general economic growth, inflation and currency fluctuations;
·tax policies and rules;
·restrictions on remittances abroad and other exchange controls;
·increases in unemployment rates, decreases in wage and income levels and other factors that influence our customers’ ability to meet their obligations to us; and
·other political, social and economic developments in Brazil.
As a bank in Brazil, the vast majority of our income, expenses, assets and liabilities are directly tied to interest rates. Therefore, our results of operations and financial condition are significantly affected by inflation, interest rate fluctuations and related government monetary policies, all of which may have a material adverse effect on the growth of the Brazilian economy and on us, including our loan portfolio, our cost of funding and our income from credit operations.
In addition, changes in government may result in changes in policy that may affect us.  Uncertainty over whether the Brazilian government in the future will implement changes in policies or regulations affecting these and other factors in the future may contribute to economic uncertainty in Brazil and to heightened volatility in the Brazilian securities markets and in the securities of Brazilian issuers, which in turn may adversely affecthave a material adverse effect on us and the market price of our preferred shares and ADSs.
 
Government interventions, including efforts to combat inflation, may causeInflation and fluctuations in the interest rates that could adversely affect the market price of our preferred shares and ADSs.have a material adverse effect on us.
 
Interest Inflation and interest rates volatility have caused adverse effects in Brazil. While the Brazilian government has been able to keep inflation close to target levels in the last 12 years, we cannot assure you that it will continue to be able to do so and there is no guarantee that future administrations will be able to so.
 In addition, Brazil has experienced high interest rates, which have fluctuated significantly in Brazil. Between 2005 and 2008,2009, the base interest rate established by the Central Bank, which is the benchmark interest rate payable to holders of securities issued by the Brazilian government and traded at the Special Clearing and Settlement System (Sistema(Sistema Especial de Liquidação e Custódia), or the SELIC rate,"SELIC rate"), varied between 17.75%19.75% per year and 13.75%8.75% per year. Public expectations regarding possible future governmental actions in the economy, government intervention in the foreign exchange market and the effects of the downturn in the global financial markets have caused and may continue to cause interest rates to fluctuate. In addition, if Brazil experiences fluctuations in rates of inflation in the future, our costs and net margins may be adversely affected, and government measures to combat inflation may include tightening monetary policy with high interest rates which may harm our business. Increases in the SELIC rate could adversely affect us by reducing the demand for credit, increasing our cost of funds and increasing the risk of customer default (to the extent these effects are not offset by increased margins).default. Conversely, decreases in the SELIC rate could also adversely affect us by decreasing revenues on interest-earning assets and loweringif the decreases lower our margins. Also, changes in reserve requirement or unexpected large variations in inflation may adversely affect us.
Public expectations regarding possible future governmental actions in the economy, the intervention in the foreign exchange market, attempts to fix the value of the real, or the effects of the global financial markets crisis caused and may cause the interest rate to fluctuate.  If Brazil experiences fluctuations in the interest rate, our costs and net margins may be affected, which may adversely affect the market price of our preferred shares and ADSs.

Exchange rate instability may adversely affecthave a material adverse effect on the Brazilian economy and the market price of our preferred shares and ADSs.us.
 
The Brazilian currency has fluctuatedfluctuates in relation to the U.S. dollar and other foreign currencies during the last four decades. Throughout this period, thecurrencies. The Brazilian government has in the past implemented various economic plans and utilized a number of exchange rate regimes, including sudden devaluations, periodic mini-devaluations in which the frequency of adjustments has ranged from daily to monthly, floating exchange rate systems, and dual exchange rates coupled with exchange controls.  Since 1999, Brazil has adopted a floating exchange rate system with sporadic interventions by the Central Bank in buying or selling foreign currency.  From time to time, the exchange rate between the Brazilian currency and the U.S. dollar and other currencies has fluctuated significantly.  For example, the real depreciated 15.7% and 34.3% against the U.S. dollar in 2001 and 2002, respectively, and appreciated 22.3%, 8.8%, 13.4%, 9.5% and 20.7% against the U.S. dollar in 2003, 2004, 2005, 2006 and 2007, respectively.  InMore recently, in 2008, the real depreciated 31.9%24.2% against the U.S. dollar.  AsIn 2009, the real appreciated 34.2% against the U.S. dollar from an exchange rate of R$2.3370 per US$1.00 as of December 31, 2008 the U.S. dollar-realto an exchange rate wasof R$ 2.33701.7412 per US$1.00.  As1.00 as of June 15, 2009, U.S. dollar-realDecember 31, 2009.  The average exchange rate in 2009 was R$1.94581.99 per US$1.00.1.00 compared to an average exchange rate of R$1.84 per US$1.00 in 2008.
 
Additionally, some
13
Some of our assets and liabilities are denominated in, or indexed to, foreign currencies, especially the U.S. dollar.  If the Brazilian currency depreciates, we will incur gains onAs of December 31, 2009, 9.6% of our total liabilities and 10.8% of our total assets were denominated in, or indexed to, a foreign currencies, and,currency. Although as of December 31, 2009, our material foreign investments were economically hedged in order to mitigate effects arising out of foreign exchange volatility, including the potential tax impact of those investments, there can be no assurance that those hedge strategies will remain in place or will offset those effects.  Therefore, a depreciation of the Brazilian currency could have several adverse effects on the other hand, we will incurus, including (i) losses on our liabilities denominated in or indexed to foreign currencies, (ii) impairments to our ability to pay our dollar-denominated or dollar-indexed liabilities by making it more costly for us to obtain the foreign currency required to pay those obligations, (iii) impairments to the ability of our borrowers to repay dollar-denominated or dollar-indexed liabilities to us and (iv) negatively affect the market price of our securities portfolio.  Conversely, an appreciation of the Brazilian currency could cause us to incur losses on our assets denominated in or indexed to foreign currencies.  Therefore, depending on the circumstances, either a depreciation or appreciation of the real could have a material adverse effect on us and the market price of our preferred shares and ADSs.
 
Developments and the perception of risk of other countries especially the United States and emerging market countries, may adversely affect the Brazilian economy and the market price of Brazilian securities, including our preferred shares and ADSs.securities.
 
Economic and market conditions in other countries, including the United States, the European Union countries and other emerging market countries,markets, may affect into varying degrees the market value of securities of Brazilian issuers.  Although economic conditions in these countries may differ significantly from economic conditions in Brazil, investors’ reactions to developments in these other countries may have an adverse effect on the market value of securities of Brazilian issuers.issuers, the availability of credit in Brazil and the amount of foreign investment in Brazil.  Crises in the United States, the European Union and other emerging market countriesmarkets may diminish investor interest in securities of Brazilian issuers, including Itaú Unibanco Holding.  This could adversely affect the market price of our preferred shares and ADSs,securities, and could also make it more difficult for us to access the capital markets and finance our operations in the future on acceptable terms or at all.
 

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The globalBanks located in countries considered to be emerging markets may be particularly susceptible to disruptions and reductions in the availability of credit or increases in financing costs, which could have a material adverse impact on our financial crisis has had significant consequences for Brazil, including stock, interestcondition.  In addition, the availability of credit to entities that operate within emerging markets is significantly influenced by levels of investor confidence in such markets as a whole and any factor that impacts market confidence (for example, a decrease in credit market volatility, a general economic slowdown, and volatile exchange rates, that among others may, directlyratings or indirectly, adverselystate or central bank intervention in one market) could affect the market price or availability of Brazilian securities, including our preferred shares and ADSs.funding for entities within any of these markets.

Risk Factors Relating to Us and the Banking Industry
 
We are vulnerableexposed to effects of the disruptions and volatility in the global financial markets and the economies in those countries where we do business, especially Brazil.
 
The financial global markets have deteriorated sharply since the end of 2007. Major financial institutions, including some of the largest global commercial banks, investment banks and insurance companies have been experiencing significant difficulties, especially lack of liquidity and depreciation of financial assets. These difficulties have constricted the ability of a number of major global financial institutions to engage in further lending activity and have caused losses. In addition, defaults by, and even rumors or questionsdoubts about the solvency of certain financial institutions and the financial services industry generally have led to market-wide liquidity problems and could lead to losses or defaults by, and bankruptcies of, other institutions.
 
Although our direct exposure to external financial institutions has been significantly reviewed, weWe are vulnerableexposed to the disruptions and volatility in the global financial markets because of their effects on the Brazilian financial and economic environment in the countries in which we operate, especially Brazil, such as thea slowdown in the economy, thean increase in the unemployment rate, thea decrease in the purchasing power of the Brazilian populationconsumers and the lack of credit availability. TheseWe lend primarily to Brazilian borrowers and these effects could materially and adversely affect our customers and increase our non-performing loans and, as a result, increase the risk associated with our lending activity.  Since the last quarter of 2008,activity and require us to make corresponding revisions to our risk management and loan loss reserve models. For example, in 2009, we have experienced an increase in our non-performing loans particularlyoverdue above 90 days from 3.9% of total loans on December 31, 2008 to 5.6% on December 31, 2009.
The global financial downturn has had significant consequences for Brazil and the other countries in which we operate, including stock, interest and credit market volatility, a general economic slowdown, and volatile exchange rates that may, directly or indirectly, adversely affect the market price of Brazilian securities and have a material adverse effect on us. In addition, institutional failures and disruption of the financial market in Brazil and the other countries in which we operate could restrict our loansaccess to individualsthe public equity and small- and medium-sized companies.debt markets.
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Continued or worsening disruption or volatility in the global financial markets could lead to further increase negative effects on the Brazilian financial and economic environment in Brazil and the other countries in which we operate, which could have a material adverse effect on us.
 
Integration of acquired or merged businesses involves certain risks that may have a material adverse effect on us.
We have engaged in a number of mergers and acquisitions in the past and may make further acquisitions as part of our growth strategy in the Brazilian financial services industry. Recently, these transactions included the merger between Itaú and Unibanco (announced in the last quarter of 2008, approved by the Central Bank in the first quarter of 2009 and which is pending approval by Brazilian anti-trust authorities).  We believe that these transactions will contribute to our continued growth and competitiveness in the Brazilian banking sector.
 Any acquisition and merger of institutions and assets involves certain risks, including the risk that:
·integrating new networks, information systems, personnel, financial and accounting systems, risk and other management systems, financial planning and reporting, products and customer bases into our existing business may run into difficulties or unexpected costs and operating expenses;
·we may incur unexpected liabilities or contingencies relating to the acquired businesses, which may not be fully recovered from our counterparties in the merger or acquisition agreement;
·antitrust and other regulatory authorities may impose restrictions or limitations on the terms of the acquisition or merger, require disposition of certain assets or businesses or withhold their approval of the transaction; and
·we may fail to achieve the expected operation and financial synergies and other benefits from the mergers or acquisitions.
If we fail to achieve the business growth opportunities, cost synergies and other benefits we expect from mergers and acquisition transactions, or incur greater integration costs than we have estimated, our results of operations and financial condition may be materially and adversely affected.
Changes in applicable law and regulation may adversely affecthave a material adverse effect on us.
 
Brazilian banks, including us, are subject to extensive and continuous regulatory review by the Brazilian government, principally by the Central Bank. We have no control over applicable law and government regulations, which govern all aspects of our operations, including regulations that impose:
 
•           minimum capital requirements;
·minimum capital requirements
 
•           compulsory  reserve requirements;
·  reserve and compulsory deposit requirements
 
•           funding restrictions;
·  minimum levels for federal housing and rural sector lending
 
•           lending limits, earmarked lending and other credit restrictions; and
·  funding restrictions
 
•           accounting and statistical requirements.
·  lending limits, earmarked lending and other credit restrictions
·  limits on investments in fixed assets
·  corporate governance requirements
·  limitations on charging of commissions and fees by financial institutions for services to retail customers and the amount of interest financial institutions can charge
·  accounting and statistical requirements
·  other requirements or limitations in the content of the global financial crisis.
 
The regulatory structure governingfor Brazilian financial institutions, including banks, broker-dealers, leasing companies and insurance companies, is continuously evolving. Parts of our business that are not currently subject to government regulation may become regulated and there are several legislative proposals to that effect currently under consideration in the Brazilian congress.  Disruptions and volatility in the global financial markets resulting in liquidity problems at major international financial institutions could lead the Brazilian government to change laws and regulations applicable to Brazilian financial intuitions based on these international developments.  The amendment of existing laws and regulations or the adoption of new laws and regulations could adversely affecthave a material adverse effect on us, including our ability to provide loans, make investments or render certain financial services. See “Item 4B. Business Overview – Regulation and Supervision - - Regulation by the Central Bank.”
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Tax reforms may have a material adverse impact on our results of operations.
The Brazilian government frequently enacts reforms to tax and other assessment regimes. These reforms include the enactment of new taxes or assessments, changes in the bases of calculation or rates of assessments, including rates applicable solely to the banking industry, and occasional enactment of temporary taxes for designated governmental purposes. For example, in October 2009, the Brazilian government imposed a 2.0% tax on the inflow of monies for investments in the Brazilian capital markets. The effects of these changes and any other changes that could result from the enactment of additional tax reforms cannot be quantified.  These changes, however, may reduce our volume of operations, increase our costs or limit our profitability.
Furthermore, these changes have produced uncertainty in the financial system which may increase the cost of borrowing and may contribute to an increase in our non-performing loan portfolio.
 
The increasingly competitive environment and consolidations in the Brazilian banking industry may have ana material adverse effect on us.
 
The markets for financial and banking services in Brazil are highly competitive. We face significant competition from other large Brazilian and international banks, including an increase in competition from Brazilian public banks. Competition has increased as a result of recent consolidations among financial institutions in Brazil and as a result of new regulations by CMN that facilitate the customer’s ability to switch business between banks.  See “Item 4B. Business Overview – Regulation and Supervision.” The increased competition may materially and adversely affect us by, among other things, limiting our ability to retain our existing consumer base, increase our customers’customer base and to expand our operations, reducing our profit margins on banking and other services and products we offer, and increasing competition forto the extent it limits investment opportunities.

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ChangesIncreases in reserve and compulsory deposit requirements may adversely affecthave a material adverse effect on us.
 
The Central Bank has periodically changed the level of reserves and compulsory deposits that financial institutions in Brazil are required to maintain with the Central Bank.  The Central Bank may increase the reservesreserve and compulsory deposits requirements in the future or impose new reserve or compulsory deposit requirements.
 
TheReserve and compulsory deposit requirements reduce our liquidity to make loans and other investments.  In addition, the compulsory deposits generally do not yield the same return as other investments and deposits because:
 
•           a portion of compulsory deposits do not bear interest;
·  a portion of compulsory deposits do not bear interest;
 
•           
·  a portion of compulsory deposits must be held in Brazilian federal government securities; and
 
•           a portion of compulsory deposits must be used to finance government programs, including a federal housing program and rural sector subsidies.
·  a portion of compulsory deposits must be used to finance government programs, including a federal housing program and rural sector subsidies.
 
Our compulsory deposits for demand deposits, savings deposits and time deposits were R$ 11 billion asAs of December 31, 2008.2009, we had R$9,827 million in interest-bearing compulsory deposits and R$4,042 million in non-interest-bearing compulsory deposits. Any increase in the compulsory deposits requirements may reduce our ability to lend funds and make other investments and, as a result, may adversely affecthave a material adverse effect on us.  For more detailed information on compulsory deposits, see “Item“ Item 4B. Business Overview – Selected Statistical Information – Central Bank Compulsory Deposits.”
Changes in the profile of our business may have a material adverse effect on our loan portfolio.
As of December 31, 2009, our loan and financing portfolio was R$245,736 million compared to R$169,700 million as of December 31, 2008.  Our allowance for loan losses was R$19,968 million representing 8.1% of our total loan portfolio, as of December 31, 2009, compared to R$12,202 million, representing 7.2% of our total loan portfolio, as of December 31, 2008.  The quality of our loan portfolio is subject to changes in the profile of our business resulting from organic growth and our merger and acquisition activity and is dependent on domestic and, to a lesser extent, international economic conditions.  Adverse changes affecting any of the sectors to which we have significant lending exposure, political events within and external to Brazil and the variability of economic activity may have a material adverse impact on our business and our results of operations.  Furthermore, our historic loan loss experience may not be indicative of our future loan losses.
In addition, our strategy includes efforts to significantly expand our loan portfolio as well as increase the number of clients, particularly individuals and small and middle-market companies, that we serve. Certain financial products we offer to individuals and other clients are generally characterized by higher margins, but also higher risks of default. An increase in our loan portfolio, as well as a shift to higher margins and higher risk products, could   result in increased default rates, which could have a material adverse effect on us.
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The value of our investment securities and derivatives positions are subject to market fluctuations due to changes in Brazilian or international economic conditions and may produce material losses.
As of December 31, 2009, investment securities represented R$116,554 million, or 19.5% of our assets, and derivative financial instruments, which are used to hedge against risks in each of our business areas, represented R$5,549 million, or 0.9% of our assets, and realized and unrealized gains and losses have had and will continue to have a significant impact on our results of operations.  These gains and losses, which we record when investments in securities are sold or are marked to market (in the case of trading securities) or when our derivative financial instruments are marked to market, may fluctuate considerably from period to period and are affected by domestic and international economic conditions. If, for example, we have entered into derivatives transactions to protect against decreases in the value of the real or in interest rates and the real increases in value or interest rates increase, we may incur financial losses. We cannot predict the amount of realized or unrealized gains or losses for any future period, and variations from period to period have no practical analytical value in helping us to make such a prediction.  Those losses could materially and adversely affect our results of operations and financial condition.  Gains or losses on our investment portfolio may not continue to contribute to net income at levels consistent with recent periods or at all, and we may not successfully realize the appreciation or depreciation now existing in our consolidated investment portfolio or any portion thereof. 
 
Exposure to Brazilian federal government debt could have ana material adverse effect on us.
 
Like many other Brazilian banks, we invest in debt securities of the Brazilian government. As of December 31, 2008,2009, approximately 9%7.0% of our total assets, and 36%36.2% of our securities portfolio, (in U.S. GAAP basis), was comprised of debt securities issued by the Brazilian government. Any failure by the Brazilian government to make timely payments under the terms of these securities, or a significant decrease in their market value, will have a material adverse effect on us.
 
If our pricing expectations are incorrect or our reserves for future policyholder benefits and claims are inadequate, the profitability of our insurance and pension products or our results of operations and financial condition may be materially and adversely affected.
Our insurance and pension plan business sets prices and establishes reserves for many of our insurance and pension products based upon actuarial or statistical estimates. The pricing of our insurance and pension products and the insurance and pension plans reserves carried to pay future policyholder benefits and claims are each based on models that include many assumptions and projections which are inherently uncertain and involve the exercise of significant judgment, including as to the levels of and timing of receipt or payment of premiums, contributions, benefits, claims, expenses, interest credits, investment results, interest rates, retirement, mortality, morbidity and persistency. Although we frequently review the pricing of our insurance and pensions products and the adequacy of our insurance and pension plans reserves, we cannot determine with precision the ultimate amounts that we will pay for, or the timing of payment of, actual benefits, claims and expenses or whether the assets supporting our policy liabilities, together with future premiums and contributions, will be sufficient for payment of benefits and claims. Significant deviations in actual experience from our pricing assumptions could have a material adverse effect on the profitability of our insurance and pension plans products. In addition, if we conclude that our reserves, together with future premiums, are insufficient to cover future policy benefits and claims, we would be required to increase our reserves and incur income statement charges for the period in which the determination is made, which may have a material adverse effect on our results of operations and financial condition.
Our market, credit and operational risk management policies, procedures and methods may not be fully effective in mitigating our exposure to unidentified or unanticipated risks.
Our market, credit and operational risk management policies, procedures and methods, including our statistical modeling tools, such as value at risk (VAR), stress test and sensitive analyses, may not be fully effective in mitigating our risk exposure in all economic market environments or against all types of risk, including risks that we fail to identify or anticipate. Some of our qualitative tools and measures for managing risk are based upon our use of observed historical market behavior.  We apply statistical and other tools to these observations to quantify our risk exposures. These qualitative tools and measures may fail to predict future risk exposures. These risk exposures could, for example, arise from factors we did not anticipate or correctly evaluate in our statistical models. This would limit our ability to manage our risks. Our losses thus could be significantly greater than the historical measures indicate.  In addition, our quantified modeling does not take all risks into account.  Our more qualitative approach to managing those risks could prove insufficient, exposing us to material unanticipated losses.  If existing or potential customers believe our risk management is inadequate, they could take their business elsewhere. This could harm our reputation as well as our revenues and profits.
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In addition, our businesses depend on the ability to process a large number of transactions securely, efficiently and accurately.  Losses can result from inadequate personnel, inadequate or failed internal control processes and systems, information systems failures or breaches or from external events that interrupt normal business operations.  We also face the risk that the design of our controls and procedures for mitigating operational risk proves to be inadequate or is circumvented.
We may incur losses associated with counterparty exposure.
We face the possibility that a counterparty will be unable to honor its contractual obligations. These counterparties may default on their obligations due to bankruptcy, lack of liquidity, operational failure or other reasons.  This risk may arise, for example, from entering into reinsurance agreements or loan facilities or other credit agreements under which counterparties have obligations to make payments to us; executing currency or other trades that fail to settle at the required time due to non-delivery by the counterparty or systems failure by clearing agents, exchanges, clearing houses or other financial intermediaries.  In addition, we routinely transact with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, mutual and hedge funds and other institutional clients.
Our controlling stockholdershareholder has the ability to direct our business and affairs.business.
 
Itaú Unibanco Participações S.A., orAs of December 31, 2009, IUPAR, our principal stockholder, currently ownscontrolling shareholder, directly 51%owned 51.0% of our shares of common stock and 25.5%25.8% of our total capital stock.  See “Item 7A. Major Stockholders.Shareholders.” As a result, IUPAR has the power to control us, including the power to elect our directors and officers and determine the outcome of any action requiring stockholdershareholder approval, including transactions with related parties, corporate reorganizations and the timing and payment of dividends.  In addition, IUPAR is jointly controlled by Itaúsa, which is controlled by the Egydio de Souza Aranha family, and the former controlling shareholders of Unibanco, the Moreira Salles family.  The interests of IUPAR, Itaúsa and the Egydio de Souza Aranha and Moreira Salles families may be different from your interests as a shareholder or holder of ADS.
 
We are subject to regulation on a consolidated basis and may be subject to liquidation or intervention on a consolidated basis.
 
The Central Bank treats us and our subsidiaries and affiliates as a single financial institution for regulatory purposes. While our consolidated capital base provides financial strength and flexibility to our subsidiaries and affiliates, their activities could indirectly put our capital base at risk. In particular, any investigation of, or intervention by the Central Bank in, the affairs of any of our subsidiaries and affiliates are also likely tocould have an adverse impact on our other subsidiaries and affiliates and ultimately on us.
 
Risks Relating to the Preferred Shares and the ADSs
 
The relative volatility and illiquidity of the Brazilian securities markets may substantially limit your ability to sell the preferred shares underlying the ADSs at the price and time you desire.
 
Investing in securities that trade in emerging markets, such as Brazil, often involves greater risk than investing in securities of issuers in the United States or in other countries, and these investments are generally considered to be more speculative in nature.  The Brazilian securities market is substantially smaller, less liquid, more concentrated and can be more volatile than major securities markets in the United States or in other countries. We have not made any credit operations in the U.S. subprime market, including any collateralized debt obligations, however, the recent crisis in the United States subprime market may expose us to risk, as a result of a greater volatility in the Brazilian securities market. Accordingly, although you are entitled to withdraw the preferred shares underlying the ADSs from the depositary at any time, your ability to sell the preferred shares underlying the ADSs at a price and time at which you wish to do so may be substantially limited. There is also significantly greater concentration in the Brazilian securities market than in major securities markets such as the United States or in other countries. The ten largest companies in terms of market capitalization represented 54%54.7% of the aggregate market capitalization of the BM&FBOVESPA S.A. –  Bolsa de Valores, Mercadorias e Futuros , or BOVESPA,BM&FBOVESPA, as of December 31, 2008.2009. The top ten stocks in terms of trading volume accounted for 46.1%45.8%, 45.8%53.1% and 53.1%44.8% of all shares traded on the BOVESPABM&FBOVESPA in 2006, 2007, 2008 and 2008,2009, respectively.

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The preferred shares and ADSs generally do not have voting rights.
 
Under Brazilian Corporate Law and our bylaws, holders of preferred shares, and therefore of the ADSs, are not entitled to vote at meetings of our stockholders,shareholders, except in limited circumstances. See “Item 10B. Memorandum and Articles of Association.”
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Holders of ADSs may be unable to exercise preemptive rights with respect to our preferred shares.
 
We may not be able to offer our preferred shares to U.S. holders of ADSs pursuant to preemptive rights granted to holders of our preferred shares in connection with any future issuance of our preferred shares unless a registration statement under the Securities Act is effective with respect to the preferred shares and preemptive rights, or an exemption from the registration requirements of the Securities Act is available. We are not obligated to file a registration statement relating to preemptive rights with respect to our preferred shares, and we cannot assure you that we will file any such registration statement. If a registration statement is not filed and an exemption from registration does not exist, The Bank of New York Mellon, as depositary, will attempt to sell the preemptive rights, and you will be entitled to receive the proceeds of the sale. However, these preemptive rights will expire if the depositary does not sell them in a timely manner, and U.S. holders of ADSs will not realize any value from the granting of the preemptive rights. For more information on the exercise of your rights, see “Item 10B. Memorandum and Articles of Association – Preemptive Rights on Increase in Preferred Share Capital.”
 
If you surrender your ADSs and withdraw preferred shares, you risk losing the ability to remit foreign currency abroad and certain Braziliantax advantages.
 
As a holder of ADSs, you benefit from the electronic certificate of foreign capital registration obtained by the custodian for our preferred shares underlying the ADSs in Brazil, which permits the custodian to convert dividends and other distributions with respect to the preferred shares into non-Brazilian currency and remit the proceeds abroad. If you surrender your ADSs and withdraw preferred shares, you will be entitled to continue to rely on the custodian’s electronic certificate of foreign capital registration for only five business days from the date of withdrawal. Thereafter, upon the disposition of or distributions relating to the preferred shares, you will not be able to remit abroad non-Brazilian currency unless you obtain your own electronic certificate of foreign capital registration or you qualify under Brazilian foreign investment regulations that entitle some foreign investors to buy and sell shares on Brazilian stock exchanges without obtaining separate electronic certificates of foreign capital registration. If you do not qualify under the foreign investment regulations you will generally be subject to less favorable tax treatment of dividends and distributions on, and the proceeds from any sale of, our preferred shares. If you attempt to obtain your own electronic certificate of foreign capital registration, you may incur expenses or suffer delays in the application process, which could delay your ability to receive dividends or distributions relating to our preferred shares or the return of your capital in a timely manner. Moreover, should you surrender your ADSs and withdraw preferred shares, applicable regulations require you to enter into corresponding exchange transactions and pay taxes on these exchange transactions. The depositary’s electronic certificate of foreign capital registration may also be adversely affected by future legislative changes.

ITEM 4INFORMATION ON THE COMPANY
 
ITEM 4 INFORMATION ON THE COMPANY
4A.History and Development of the Company
 
4A.         HistoryItaú Unibanco Holding S.A.’s legal and Development of the Company
The Company
We trace our origins to 1944, when members of the Egydio de Souza Aranha family, or the Egydio de Souza Aranha Family, founded Banco Federal de Crédito S.A. in São Paulo. Since 1973 we have operated through Banco Itaú (whose corporatecommercial name is Itaú Unibanco Holding S.A.). As We were incorporated on September 9, 1943 and registered with the São Paulo State Board of December 31, 2008, we were the largest private bank in Brazil in terms of market capitalization, according to the BOVESPA.

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Itaú Unibanco's majority ownership is held by IUPAR, a holding company controlled by Itaúsa and by Companhia E. Johnston de Participações, which is a holding company controlled by the former controlling stockholders of Unibanco, the Moreira Salles Family.
Our corporate name as stated in our certificate of incorporation is Itaú Unibanco Holding S.A., which is also the name that we use in our operations to identify ourselves.Trade under number NIRE 35300010230. We are organized as a publicly held corporation for an unlimited period of time under the laws of the Federative Republic of Brazil. Our head offices are located at Praça Alfredo Egydio de Souza Aranha, 100, Torre Olavo Setubal, 04344-902, São Paulo, SP, Brazil and our telephone number is +55-11-5019-1267. Investor information can be found on our website at http://www.itauunibancoir.com/docs.  Information contained on our website is not incorporated by reference in, and shall not be considered a part of, this annual report.  Our agent for service of process in the United States is the general manager of our New York branch, which is located at 540 Madison Avenue, New York, NY 10022-3721.

Recent DevelopmentsGeneral
 
Association betweenThe Itaú andFinancial Group traces its origins to 1944, when members of the Egydio de Souza Aranha family founded Banco Federal de Crédito S.A. in São Paulo. Unibanco Financial GroupsGroup was founded by members of the Moreira Salles family in 1924, making it Brazil’s oldest non-state owned bank at the time of the Association with the Itaú Financial Group.

On November 3, 2008, the controlling stockholdersshareholders of Itaúsa and of Unibanco Holdings entered into an association agreement to combine the operations of Itaú and Unibanco financial groups, or the Association.

Financial Groups. To effect the Association, Itaú and Unibanco financial groupswe carried out a corporate restructuring pursuant to which Unibanco Holdings and its subsidiary Unibanco became wholly owned subsidiaries of Itaú Unibanco through a series of transactions:

(i)the merger of all shares of E. Johnston into Itaú Unibanco;
(ii)the merger into Itaú Unibanco of all shares of Unibanco Holdings that were not indirectly held by Itaú Unibanco;
(iii)the merger into Itaú Unibanco of all shares of Unibanco that were not indirectly held by Itaú Unibanco; and
(iv)the merger of all shares of Itaú Unibanco into Itaú Unibanco Holding.

A merger of shares means “incorporação de ações”, as defined by Brazilian Corporate Law 6,404/76. Merger of shares under Brazilian Corporate Law is a corporate restructuring where one company (“A”) exchange its shares for shares of another company (“B”), and as a consequence theThe shareholders of B become shareholders of A, and A becomes the sole shareholder of B.
The stockholderseach of Itaú Unibanco Holding, Itaú Unibanco, E. Johnston Representação e Participações S.A., or Companhia E. Johnston, Unibanco Holdings and Unibanco approved the transactionscorporate reorganization at an extraordinary stockholders’shareholders’ meetings held on November 28, 2008. The transactions were approved by the Central Bank in February 2009, and the minutes of the stockholders meetings reflecting the2009. The Association is pending approval of the merger of shares were registered by the Commercial Registry of the State of São Paulo in March 2009.Brazilian anti-trust authorities ( Conselho Administrativo de Defesa Econômica ),   or CADE.
 
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The shares of Itaú Unibanco Holding, including the ones exchangedthose issued in exchange for shares originally issued byof Unibanco and Unibanco Holdings, began being tradedcommenced trading under the same symbol on March 31, 2009. In May 2009, the trading symbols (“tickers”) were standardized to “ITUB” on all the stock exchanges where Itaú Unibanco Holding’s securities are listed.
At the extraordinary stockholders’shareholders’ meeting held on November 28, 2008, our stockholdersshareholders approved the change of theour corporate name from Banco Itaú Holding Financeira S.A. to Itaú Unibanco Banco Múltiplo S.A. At the extraordinary stockholders’shareholders’ meeting held on April 24, 2009, our stockholdersshareholders approved a further change of our corporate name to Itaú Unibanco Holding S.A. Finally, at the extraordinary shareholders’ meeting held on April 30, 2009, the shareholders of Itaú Unibanco approved the change of the corporate name Itaú Unibanco Banco Múltiplo S.A. to Itaú Unibanco Holding S.A., which is still subject to approval by the Central Bank.

At the extraordinary stockholders’ meeting held on April 30, 2009, our stockholders approved the change of the corporate name Banco Itaú S.A. to Itaú Unibanco S.A., which is still subject to approval by the Central Bank.
Acquisition of Itaúsa Export and Itaúsa Europa

The Association referred to above required as a condition precedent for its consummation that Itaú Unibanco Holding acquired all stockAs of Itaúsa Export and Itaúsa Europa thatDecember 31, 2009, we were directly held by Itaúsa, the controlling stockholder at that time of Itaú Unibanco Holding, Itaú Unibanco, Itaúsa Export and Itaúsa Europa. On November 12, 2008, Itaú Unibanco entered into an agreement with Itaúsa for the acquisition of a 77.77% total and 80.00% voting interest of Itaúsa Export and of a 12.13% total and voting interest of Itaúsa Europa (Itaúsa Europa, itself is a subsidiary of Itausa Export).  Itaúsa Export is a private holding company domiciledlargest bank in Brazil which holds a controlling interest in Itaúsa Europa. Itaúsa Europa is a private holding company domiciled in Portugal. See note 3(a)based on market capitalization according to our consolidated financial statements for additional information.

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Bloomberg.

Competitive Advantages
Our business strategy is to take advantage of scale gains, profitability and maximization of efficiency to create economic value.
ThroughSince the Association, Itaú and Unibanco financial groupswe have been working on the opportunity to enhance and combine their strengths. Itaú Unibanco’s priority is to integrate the Brazilian activitiesintegration of the Itaú and Unibanco financial groups within two to three years, to increase their synergies and become a global financial player with a privileged position to gain access to low-cost funding sources.
Itaú Unibanco Holding has designated a team of executive officers to expeditiously integrate the operations of the Itaú and Unibanco financial groups.two banks. The team is composed of their principal executive officers, divided into 19 working groups to combine the best practices of each institution.  Itaú Unibanco Holding is taking advantage of its large experiencemain integration initiatives in mergers and acquisitions to integrate the operations and teams of both financial groups.2009 included:
 
In January 2009, we announced•    the adoption of a new corporate governance structure by the board of directors
•    the integration of the ATM machinescorporate, investment banking, brokerage, asset management, vehicle lending, private banking and treasury divisions, which have been operating on an unified basis since the first quarter of Itaú and Unibanco financial groups, allowing our customers to make withdrawals, as well as to check their account balances and bank statements in a larger number of machines, which has largely benefited our customers.2009
 
We have also started•    the interconnection of ATMs
•    reporting under a single annual report and the adoption of unified corporate governance policies and risk management.

In addition, in the second half of 2009, we began the integration process of Unibanco branches under the technology systems by defining the platforms that will prevail. The Itaú“Itaú” brand and Unibanco financial groups have traditionally stood out for their continuous and significant investments in banking technology. The Association will maximize these investments and will therefore provide us with a competitive advantage.  The costs associated with the development of new solutions and technologies will be reduced given scale gains resulting from the Association.  Some of the solutions that have not yet been viable due to high development costs will become feasible when applicable to a larger customers’ base.
Given our nationwide presence in Brazil and large number of customers, we expect to be ablecomplete this process by the end of 2010.

Recent Developments
In April 2010, Itaú Unibanco issued subordinated notes worth US$1 billion at the fixed rate of 6.20% per annum maturing in 2020. The notes were offered only to use our assets at a unprecedented level of efficiencyqualified institutional investors in the Brazilian financial industry. The increaseU.S. and to non-U.S. investors outside the United States, and may not be offered or sold in our customers’ base allows usthe secondary market and/or U.S. territory due to enhance our efficiency in numerous processes that, for scale reasons, have not yet been optimized.  Our customers will benefit both from the offer of new types of products and services and from the implementation of more sophisticated processes.  We will maintain Itaú and Unibanco financial groups’ branches and adapt them to our customers’ expectations and needs.  We have integrated treasury operations and corporate and investment banking operations, materializing the opportunity of synergy gains associated with the Association.
Accounting for the transaction with Unibanco under U.S. GAAP
The Association was approved by the Central Bank on February 18, 2009. Due to the relevance and impact of the transaction, the scope of the Central Bank’s analysis contemplated a detailed assessment of the businesses of each financial group, their structure and the market impact of their combination. For USGAAP purposes, the consummation date of the transaction is February 18, 2009.

For U.S. GAAP purposes, the transaction will be accounted in 2009 for as a purchase business combination with Itaú Unibanco Holding being the accounting acquirer and Unibanco Holdings and Unibanco being the entities acquired.  See Note 3(a) to our consolidated financial statements.

Therefore, the consolidated financial statements as of and for the years ended December 31, 2008, 2007 and 2006, prepared in accordance with U.S. GAAP, included elsewhere in this annual report, do not present any effects from the Association and do not consolidate the results of operations in our consolidated statement of income or the financial position in our balance sheet of Unibanco Holdings and Unibanco.  The financial statements for the year ending December 31, 2009 will consolidate Unibanco Holdings and Unibanco as from the date of consummation of the transaction.  For further information, See “Item 10C. Material Contracts – Association between Itaú and Unibanco Financial Groups.”

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Acquisition of Redecard control
On February 20, 2009, Banestado Participações, Administração e Serviços Ltda., Unibanco Participações Societárias S.A., Unibanco and Dibens Leasing S.A. – Arrendamento Mercantil (subsidiaries of Itaú Unibanco and jointly referred to as “Itaú Unibanco”), and Banco Citibank S.A., or Citibank, controlling stockholders of Redecard S.A., or Redecard, entered into an agreement pursuant to which: (i) Citibank was authorized to sell the shares held in Redecard through a public offering and (ii) Citibank granted to Itaú Unibanco the option to privately acquire 24,082,760 shares of Redecardtrading restrictions. This financing aims at the price per share of the public offering. The option was exercised on March 23, 2009 and the settlement of the acquisition occurred privately on the day of settlement of the public offering (March 30, 2009). After the exercise of the option, Itaú Unibanco became the sole controlling stockholder of Redecard, holding approximately 50% plus one share of Redecard’s capital stock.
Capital Expenditures
See “Item 5B. Liquidity and Capital Resources – Capital Expenditures” for a discussionexpansion of our capital expenditures for the last three fiscal years.base, thus enabling a higher growth of loan and financing operations.

Statistical Disclosure by Bank Holding Companies
 
See “Item 4B. Business Overview – Selected Statistical Information” for additional information relating to our business.

Capital Expenditures and Divestitures

In 2007, we sold equity interests held in (i) Serasa S.A., or Serasa, (ii) Redecard, (iii) Bovespa Holding S.A., or Bovespa Holding, and (iv) Bolsa de Mercadorias e Futuros – BM&F S.A., or BM&F, which are summarized below.
Serasa
In June 2007, we disposed of part of our interest in the capital stock of Serasa to Experian Brasil Aquisições Ltda., or Experian Brasil, a Brazilian subsidiary of Experian Solutions, Inc. Serasa is a leading provider in Brazil of analytical and information products and services for credit and business support. The disposition corresponded to 1,321,371 shares comprising 35.5% of the total shares of Serasa. On the same date, we and another bank (Bradesco group) formed BIU Participações S.A., or BIU, for the purpose of holding the Serasa shares owned by us and the other bank. On October 11, 2007, BIU sold an additional 11,025 shares of Serasa to Experian Brasil. We received approximately R$1,230 million as a result of both transactions. As of December 31, 2009, Itaú Unibanco indirectly owned, through BIU, 16.1% of the total capital stock of Serasa and the right to appoint two members to Serasa’s board of directors.
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Redecard
In July 2007, Banco Itaucard S.A. and Unibanco Participações Societárias S.A. sold approximately 107.6 million common shares (16.4% of the total capital) of Redecard, generating revenue of R$1,680 million after taxes. Subsequently, on March 2009 we obtained control of Redecard.
Bovespa Holding
In October 2007, in connection with the initial public offering of Bovespa Holding, Itaú Unibanco and Itaú BBA sold 11.4 million shares of Bovespa Holding and Unicard Banco Múltiplo S.A., or Unicard, sold 23.3 million shares of Bovespa Holding for R$23.00 per share. The transaction generated income after taxes of R$164 million for Itaú Unibanco Holding and R$320 million for Unibanco Holdings. Since the merger of BM&F with Bovespa Holding in 2008, the name of Bovespa Holding has been BM&FBOVESPA.  As of December 31, 2009, we held 3.0% of the capital stock of BM&FBOVESPA.
BM&F
In November 2007, in connection with the initial public offering of BM&F, Itaubank Distribuidora de Títulos e Valores Mobiliários S.A., or Itaubank Distribuidora, Itaú Corretora de Valores S.A., or Itaú Corretora, Itaú Unibanco and Itaú BBA sold 10.4 million shares of BM&F and Unicard sold 4.5 million shares of BM&F for R$20.00 per share. In addition, prior to the initial public offering of BM&F, Itaubank Distribuidora, Itaú Corretora, Itaú Unibanco and Itaú BBA sold 3.4 million shares for R$11.00 per share to GA Latin America Investments LLC and Unicard sold 1.5 million shares for R$11.00 per share to General Atlantic Private Equity Group. These transactions generated income after taxes of R$150 million for Banco Itaú Holding and R$62 million for Unibanco Holdings. Since the merger of BM&F with Bovespa Holding in 2008, the name of BM&F has been BM&FBOVESPA.
In 2009, we sold equity interests held in (i) Unibanco Saúde Seguradora S.A., and (ii) Allianz Seguros S.A.
Unibanco Saúde Seguradora S.A.
On December 16, 2009, Itaú Seguros S.A., or Itaú Seguros, and Itaú Unibanco entered into an agreement with a subsidiary of Tempo Participações S.A. for the sale of all the shares of Unibanco Saúde Seguradora S.A., held by Itaú Seguros and Itaú Unibanco, for R$55 million. Depending on the performance of Unibanco Saúde Seguradora S.A. in the 12-month period after the closing date of the transaction, Itaú Seguros and Itaú Unibanco may be entitled to an additional payment of up to R$45 million. The Brazilian antitrust authorities approved the transaction in December 2009. The National Agency of Supplemental Health (Agência Nacional de Saúde Suplementar), or ANS, approved the transaction on April 1, 2010. The closing of the transaction occurred on April 29, 2010.
Allianz Seguros S.A.
On December 29, 2009, Allianz South America Holding B.V. entered into an agreement with Itaú Unibanco Holding for the purchase for R$109 million of the 14.03% indirect interest that Itaú Unibanco Holding held in Allianz Seguros S.A. The transaction was closed on January 14, 2010 and approved by the antitrust authority in March 2010. We notified SUSEP of the transaction.
See “Item 5B. Liquidity and Capital Resources–Capital–Capital Expenditures” for a discussion of our capital expenditures for the last three fiscal years.

4B.           Business Overview
 
Our four principal categories of operations are (i) banking, (including retail bankingwhich includes commercial bank through Itaú Unibanco and corporate and investment banking through Banco Itaú BBA S.A., or Itaú BBA, and consumer credit to non-account holding customers through Banco Itaucred Financiamentos S.A., or Itaucred), (ii) credit cards, (iii) asset managementnon accounts holders and (iv) insurance, private retirement plansour corporate and capitalization plans, a type of savings plan.treasure activities. We provide a wide variety of credit and non-credit products and services directed towards individuals, small and middle-market companies and large corporations.
 
As of December 31, 2008,2009, we also had the following positions in the Brazilian financial services industry:were:
·the largest private bank in Brazil based on market capitalization according to Bloomberg
 
the third largest insurance group based on written premiums, excluding health insurance and Free Benefit Generating Plan – Life (Vida Gerador de Benefícios Livres), or VGBL, according to SUSEP,
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the largest private manager of pension fund assets in Brazil, based on assets under management, according to ANBID,
·the largest private manager of pension fund assets in Brazil, based on assets under management, according to ANBIMA
 
the largest manager of private bank client assets, according to ANBID,
·the largest mutual fund manager among private banks in Brazil based on our assets under management, according to ANBIMA
 
the largest leasing company in Brazil in terms of present value of lease operations, according to ABEL, and
·the largest  manager of private bank client assets, according to ANBIMA
 
·the largest leasing company in Brazil (measured by of present value of lease operations), according to ABEL
the largest provider of securities services to third parties, according to ANBID.
·the largest provider of securities services to third parties in Brazil, according to ANBIMA
·one of the largest insurance groups in Brazil based on direct premiums, excluding health insurance and VGBL, a type of private retirement plan, according to SUSEP.
 
In addition, the brand name “Itaú” was rated the second most valuable brand name in Latin AmericaBrazil by InterbrandBrand Finance and Brand Analytics in 2008, a consulting company specialized in the value of business brands worldwide.2009. The “Itaú” brand iswas also listed as one ofincluded in the 35 highest valued brands of financial institutions worldwide, according to the consulting company Brand Finance.2009 Brands Yearbook: The 100 Most Prestigious Firms in Brazil, organized by Brazilian magazine Época Negócios .  We were also one of Brazil’s Most Admired Companies, and the winner of bank category, in the annual survey about the companies that most respect customers in Brazil in 2008 in the retail bank category.  The study was conducted by the sixth consecutive year by the Brazilian Carta Capital magazine Consumidor Moderno together with TNS InterScience.survey.  We were also awarded the qualityLatin America’s Best Managed Company, and Best Company in banking services award (“Prêmio Qualidade em Bancos”)Corporate Governance, by the Brazilian magazine Banco Hoje.

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Brazil-Euromoney.

Our Ownership Structure
 
We are a financial holding company controlled by Itaú Unibanco Participações S.A., IUPAR, a holding company jointly controlled by (i) Itaúsa, which controls one of the largest private business groups in Brazil, and the former controlling stockholders of Unibanco, the Moreira Salles Family.  See “Item 4A. History and Development of the Company – Recent Developments – Association of Itaú and Unibanco Financial Groups” and “Item 10C. Material Contracts – Association between Itaú and Unibanco Financial Groups.”  Itaúsa is a holding company controlled by members of the Egydio de Souza Aranha Familyfamily, and (ii) Companhia E. Johnston de Participações, which is a holding company controlled by the former controlling shareholders of Unibanco, the Moreira Salles family. Itaúsa also owns directly 36%36.2% of the shares of our common stock. See “Item 7A. Major Stockholders.Shareholders.” Prior to the Association with Unibanco we were controlled by Itaúsa. Itaúsa holds equity interests in several companies active in the financial and real estate industries, as well as the lumber, ceramic, chemical and electronics industries. Its major companies in terms of revenues are Itaú Unibanco Holding and its subsidiaries operating in the financial and insurance industries, Duratex S.A. in the wood and ceramics industry, Itautec S.A. in the electronics industry, Elekeiroz S.A. in the chemical industry and Itaúsa Empreendimentos S.A., a small business in the real estate industry. The Egydio de Souza Aranha Familyfamily beneficially owns 60.9% of shares of common stock and 17.8% of shares of preferred stock of Itaúsa. The shares of common stock and preferred stock of Itaúsa are traded on the BOVESPA.BM&FBOVESPA.
Organization of the Itaú Unibanco Group
The following chart is a simplified overview of the direct and indirect ownership structure of the Itaú Unibanco Group as of December 31, 2009:
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Notes:
Ownership percentages above refer to the total of direct and indirect participations.  All of the above companies are based in Brazil, except Banco Itaú Argentina S.A. (located in Argentina), Banco Itaú Europa, S.A. (located in Portugal), Banco Itaú Chile S.A. (located in Chile) and Banco Itaú Uruguay S.A. (located in Uruguay).
 
Operations

The table below presents revenues in U.S. GAAP from each offor our three business areassegments for each of the years ended December 31, 2009, 2008 2007 and 2006.2007. According to note 32 to the consolidated financial statements, we have eight business segments in three different business areas. The Itau business area embodies the followingnow disclose four operational segments: Banking, Credit Cards – Account Holders Clients, Insurance, Private Retirement and Capitalization Plans and Asset Management and Investment Services. TheCommercial Bank, Itaú BBA, business area is dedicated to corporate segment activities. The Itaucred business area embodies the Vehicles Financing activities,Consumer Credit, Cards – Non- Account Holders Clients and the Taií, our low income consumer segment. In 2009, as consequence of our association with Unibanco, we will review our business areasCorporation and segments.Treasury.

(in millions of R$)(in millions of R$) 
 (in millions of R$)  2009  2008  2007 
 
2008
  2007  2006 
Itaú (1)
 24,605  20,355  18,172 
Commercial Bank (1)
  37,473   25,359   20,355 
Interest income from loans and leases 17,639  14,559  12,966   30,154   18,391   14,559 
Fee and commission income 6,967  5,796  5,206   7,319   6,967   5,796 
Itaú BBA 5,535  2,134  1,942   4,956   4,783   2,134 
Interest income from loans and leases 5,147  1,779  1,665   4,352   4,395   1,779 
Fee and commission income 388  355  277   603   388   355 
Itaucred 10,126  8,241  6,020 
Consumer Credit  19,632   10,126   8,241 
Interest income from loans and leases 8,540  6,560  4,715   14,075   8,540   6,560 
Fee and commission income 1,586  1,681  1,305   5,557   1,586   1,681 

(1) Including retail for all years presented. Information for the years ended December 31, 2009, 2008 2007 and 20062007 includes revenues from corporate banking activities which have not yet been transferred to Itaú BBA.

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We mainly carry out our business activities in Brazil. We do not break down our revenues by geographic market within Brazil. Our revenues consisting of interest income from loans and leases, fee and commission income and insurance premiums, income on private retirement plans and capitalization plans are divided between revenues earned in Brazil and abroad. The information in the table below is presented after eliminations on consolidation.

 (in millions of R$) 
(in millions of R$)(in millions of R$) 
 2008  2007  2006  2009  2008  2007 
Interest income from loan and leases 31,326  22,898  19,346   48,582   31,327   22,898 
Brazil 25,187  19,643  17,762   45,261   25,924   19,643 
Abroad 6,139  3,255  1,584   3,320   5,403   3,255 
Fee and commission income 8,941  7,832  6,788   13,479   8,941   7,832 
Brazil 8,337  7,485  6,632   12,853   8,337   7,485 
Abroad 604  347  156   627   604   347 
Insurance premiums, income on private retirement plans and on capitalization plans 3,916  3,500  3,479   8,132   3,917   3,500 
Brazil 3,911  3,500  3,479   8,091   3,912   3,500 
Abroad 5  -  -   41   5   - 

 
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The table below presents revenues abroad by business categories for each of the years ended December 31, 2009, 2008 2007 and 2006:2007:

(in millions of R$)(in millions of R$) 
 (in millions of R$)  2009  2008  2007 
 2008  2007  2006 
Itaú - Banking 5,417  2,585  1,020 
Commercial Bank  3,200   5,417   2,585 
Argentina 379  205   159   282   379   205 
Chile 1,112  539   -   610   1,112   597 
Uruguay 1,688  323   -   252   1,694   724 
Other companies abroad (1) 2,238  1,518   861   2,056   2,232   1,059 
Itaú BBA  1,216   953   709   675   481   953 
Other companies abroad (1) 1,216  953   709   675   481   953 
Itaú - Credit Card  114   63   11 
Itaú Unibanco - Credit Card  112   114   63 
Argentina 22  11   11   19   22   11 
Uruguay 92  52   -   79   92   52 
Chile  14   -   - 

(1) Includes BFB Overseas, NV;Banco Itaú Europa International, or BIEI, Itaú Unibanco’s Grand Cayman, New York, Tokyo and Nassau branches, Itaú BBA’s Nassau branch, Itaú BBA’s Uruguai branch, Itaú Unibanco Holding’s Grand Cayman branch, the Unibanco Grand Cayman Branch, BIEL Holdings AG, IPI—Itaúsa Portugal Investimentos, SGPS Lda. Itaú Europa Luxembourg Advisory Holding Company S.A., Itaúsa Europa, Itaú Europa, SGPS, Lda., Itaúsa Portugal —SGPS S.A., Banco Itaú Europa., BIE Bahamas., Banco Itaú Europa Luxembourg, Banco Itaú Europa Fund Management Company S.A.; Itau Bank Ltd; Grand Cayman – Agência; New York – Agência; BIE - Bank & Trust, Ltd; Banco Itaú Europa Luxembourg S.A.; Banco Itaú Europa S.A.; Itaú USA Securities, Inc.;, BIEL Fund Management Company S/A; Banco Itaú BBA S.A. Nassau Branch; Agência Tokyo;, BIE Cayman, Ltd; BancoBIEI, IES, Unibanco — União de Bancos Brasileiros (Luxembourg) S.A., Itaú Madeira Investimentos, SGPS, Ltda, BIE Directors, Ltd, BIE Nominees, Lda, Brazcomp 1 Limited, Fin Trade, Kennedy Director International Services S.A., Federal Director International Services S.A., Bay State Corporation Limited, Cape Ann Corporation Limited; BFB Overseas N.V., BFB Overseas Cayman, Ltd., Itau Bank Ltd., ITB Holding Cayman;Ltd., Jasper International Investment LLC, Unibanco Cayman Bank Ltd., Unicorp Bank & Trust Ltd., Unibanco Securities, Inc., UBB Holding Company, Inc., Uni-Investments Inter. Corp., Unipart Partic. Internac. Ltd, Rosefield Finance Ltd., Interbanco, Afinco Americas Madeira, SGPS, Soc. Unipessoal Ltda., Itaú Asset Management S.A., Sociedad Gerente de Fondos Comunes de Inversión, Zux Cayman Company Ltd., Zux SGPS, Lda,, Agate SARL, Topaz Holding Ltd., Itaú USA Inc., Itaú International Investment LLC, ITrust Servicios Financieros S.A., Albarus S.A., BancoDel Paraná S.A., Amethyst Holding Ltd., Garnet Corporation, Itaú Securities Holding (new name of Zircon Corporation), Spinel Corporation, Tanzanite Corporation, Itaú Sociedad de Bolsa S.A., Peroba Ltd., Mundostar S.A., Karen International Ltd., Nevada Woods S.A., Itaú Asia Securities Ltd; BIE Bank & Trust Bahamas Ltd; Banco Itau Europa Internacional;Ltd., Líbero Trading International Ltd., Itaú USA Securities, Inc., Itaú Middle East Securities Ltd; Itaú EuropaLimited, Unipart B2B Investments, S.L., Tarjetas Unisoluciones S. A. de Capital Variable, Proserv— Promociones Y Servicios S.A. de C. V. and Itau UK Securities Inc.; Banco Itau S.A. Nassau Branch.Ltd.

Itaú Unibanco Holding
 
Overview
 
We provide a broad range of banking services to a diversified customers’ base of individuals and corporate customers. We provide these services on an integrated basis through Itaú Unibanco and Itaú BBA and Itaucred.BBA.
 
Within banking and financing operations, we have created three segments,different distribution channels, each of which specializes infocused on a different type of customer. These areas are:
 
• 
Retail Banking, through Itaú Unibanco, comprising:comprising different specialized customer service areas
 
•           
Retail banking (individuals and very small businesses)
 
•           
Personnalité (high income individualsindividual banking)
 
•           
Private bank (wealthy individuals)
 
•           Small business banking (UPJ, or Unidade de Pessoa Jurídica)

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•           
Middle-market banking (medium-sized businesses)
 
• 
Corporate clients and investment banking, through Itaú BBA
 
• 
Consumer credit to non-account holdingholders customers through Itaucred
 
These specialized areas enable us to provide our customers with customized banking products and services, which we believe enhance our competitive position in each of these areas.
 
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Itaú Unibanco
 
We provide services mainly in the following areas:
 
• 
Retail banking
 
• 
Public sector
 
• 
Personnalité
 
• 
Private bank
 
• 
Very small business banking
Small business banking
• Middle-market banking
 
• Credit cards
Middle-market banking
 
• Asset management
Credit cards
 
• Institutional
Real estate financing
 
• 
Asset management
Corporate social responsibility
Securities services for third parties
• Brokerage
 
• 
Brokerage
Insurance, private retirement plans and capitalization products

Retail Banking
 
Our core business is retail banking, which mainly serves individuals with monthly income below R$7,000.  As of December 31, 2009, we had over 13.7 million customers and to a lesser extent, very small business customers.
4,465 branches and customer site branches under the “Itaú” and “Unibanco” brands.  Our retail business is a key source of fundingbanking operations are present in all Brazilian states and a significant interest and fee income generator for us. Through our extensive branch network, we provided services toin cities that altogether represented more than 10.7 million customers80.0% of Brazil’s individual domestic consumption as of December 31, 2008.2009.  Our margins from these operations surpass the middle-market, corporate customers and credit operations.strategy is to offer higher quality banking products to our retail banking customers.
 
Retail customers are dividedIn the second half of 2009, we began the project of converting “Unibanco” brand branches to the “Itaú” brand.  We converted approximately 50 branches during 2009.  As of December 31, 2009, there were 950 remaining branches under the “Unibanco” brand.  During 2010, we will intensify the conversion process and intend to convert approximately 160 branches per month starting in the following categories:June 2010.
 
•           Individual customers (who are sub-divided based on a relationship scoring system); We classify our retail clients in accordance with their income and profile:
 
•           Customers with account management (who have an annual income between R$ 48,000 and R$ 84,000) and;
·Itaú retail customers, who earn less than R$4,000 per month;
 
•           Very small business customers (annual revenues below R$ 500,000).
·Itaú Uniclass customers, who earn more than R$4,000 and less than R$7,000 per month; and
 
Our goal in our retail business is to be customer-focused, as our retail customers are potential users of all
·Specialized account managers provide services to Itaú Uniclass customers who have access to certain customized products.  We created this segment after the Association and we expect Itaú Uniclass to be present in some of our retail branches across Brazil and increase the number of our customers.
For the year ended December 31, 2009, credit products represented 67.0% of our consolidated revenue from retail banking, products and services. We are engaged in promotional activities through which we offer specific new productswhile investments represented 24.0% and services to existing customers who we believe would benefit from these products. Based on the customer’s profile, we determine what marketing and distribution channels strategies are likely to be the most effective ones. We use our retail system as an all-inclusive distribution channel for all ourother fee-based products and services. Thus, unlike some of our competitors, we offer credit cards, property, accident and life insurance, automobile credit loans, private retirement plans, asset management and capitalization plans in our branches through the same employees who provide services to customers to meet their traditional banking needs.represented 9.0%.

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The continuing levels of low inflation that began in mid-1994 forced Brazilian banks, including ourselves, to rely more on fee income and less on the “float”, the net income earned by banks on non interest bearing liabilities and on the time it takes for checks and other instruments to clear the interbank settlement system. In the last few years we have experienced a steady growth in our loan portfolio, due to gross domestic product, or GDP, growth and lower inflation rates.
Approximately 5% of our retail credit to individual customers consists of overdrafts on checking accounts, which provides us with a higher spread than the average rate of our loan portfolio.  We also extend personal loans for general purposes, including the purchase of major domestic appliances, which generally are not insured. In addition, we extend consumer credit loans for the purchase of vehicles.  We generally require that these loans have as collateral the financed vehicle.  Our consumer credit loans for purchases in general mature within 48 months (20 months on average), and can be contracted through our Automated Teller Machines, or ATMs. Our consumer credit loans for the purchase of motor vehicles mature from 24 to 60 months. Our loans to individual customers and customers with account management totaled approximately R$ 79 billion as of December 31, 2008, or approximately 46% of our total loan portfolio.
 
Very Small Business Banking
 
At the end of 2005, we had set up 150 unitsoffices in the city of São Paulo to provide specialized services to companies with annual revenues below R$500,000.  In 2006, we expanded our services to over 80 locations throughout the interior of the State of São Paulo, followed by 94 additional unitsoffices in the State of Rio de Janeiro.  In 2007, we expanded our services into the States of Minas Gerais and Paraná.  In 2008 and 2009, we continued this expansion and set up additional offices focused on very small business banking.
 
TheOur very small business banking office managers of these units are trained to offer customized solutions and provide detailed counselingadvice on all products and services to customers as well as to very small and small companies.  We intendOur strategy is to profit fromcapture the largely unexplored business potentialmarket opportunity of this segmentcustomer base by meeting the needs of these companies and their owners, particularly with respect to the management of cash flow and credit facilities.  In 2007, we expanded into the States of Minas Gerais and Paraná, bringing the total number of managers to 700 and the number of customers served to 220,000. Credit facilities increased, in general, by approximately 45%.
 
We currentlySince the Association, we have been consolidating offices and customer service in the very small business banking segment.  As of December 31, 2009, we had over 820 units430 very small business banking offices located throughout Brazil and approximately 1,1251,700 managers working for over 360,000537,000 small business customers.  In 2009,2010, we planexpect to have approximately 1,600 managers working for over 470,000continue to consolidate our very small business customers.banking operations and to increase the number of managers.
 
The credit facilities we provide to very small businesses increased by approximately 92.8% in 2009.  Loans to very small businesses totaled R$5,444 million as of December 31, 2009.

Public Sector
 
We were one of the pioneers among the private banks to operate in the public sector business. We were also the private bank pioneer in conducting the first operation of royalties anticipation to a state government. Our public sector business has a structure dedicated exclusively tooperates in all areas of the public sector, including federal, state and municipal levels of government (in the Executive, Legislativeexecutive, legislative and Judicial branches.judicial branches). As of December 31, 2009, we have 2,500 public sector customers. To service this segment,these customers, we use platforms that are separatedseparate from the retail banking branches, with exclusive teams of specially trained managers who offer customized solutions in tax collection, foreign exchange services, administration of public agency assets, payments to suppliers, payroll for civil and military servants and retiring of duties.  As a result of the use ofretirement. Based on these platforms, we have a significant amount of business in this segment,with public sector clients, particularly in those Brazilian states where we acquired privatized, previously state-owned financial institutions.
In 2008, our public sector business conducted a detailed study on our customers’ businesses, focusing on the bidding, public budget, fiscal responsibility law and other areas. As a result of this study, we implemented initiatives that strengthened our strategy of sustainable growth, based on generating and maintaining customer loyalty by offering a complete set of financial products and services to customers of the public sector through the convenience of our service network.

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Itaú Personnalité
 
WeThrough Itaú Personnalité, we were one of the pioneersfirst banks in the Brazilian banking industryBrazil to provide a personalized treatmentservices to high-income individuals (individuals who earn more than R$ 5,000 per month and have investments in excess of R$ 50,000). Since 1996, Itaú Personnalité, or Personnalité, is our division that offers specialized services to satisfy the complex demands of these customers.individuals.
 
Itaú Personnalité’s value proposition consists inof offering (1)(i) an advisory service by the Personnalitéits managers, who understand the specific needs of these customers,customers; and (2)(ii) a large portfolio of exclusive products and services, which are available through a dedicated and network of located in the main Brazilian cities, which is composedcities. Composed of exclusivedistinctive and sophisticatedspecifically designed branches. OurThrough this dedicated network of 167 branches, Itaú Personnalité’s customer base reached approximately 534,000 individuals as of December 31, 2009. Itaú Personnalité customers may also usehave access to Itaú Unibanco’sUnibanco network branches network and Itaú Unibanco’s ATMs throughout the country.
 
Since its establishment in 1996, Itaú Personnalité has been expanding its market share in the high-income segment.individuals market.  In 2006, withas a result of the acquisition of BankBoston’s operations inBankBoston Brazil by Itaú, Itaú Personnalité consolidated its leadership in the high-income individuals market.
 
Through an exclusive networkAs a repositioning strategy, in September 2009, Itaú Personnalité raised its client target to high-income individuals who earn more than R$7,000 per month or have investments in excess of 165 branches, Personnalité’s customers’ base reached 483,100 as of December 31, 2008, representing R$ 68.1 billion in assets under management, deposits and other accounts.80,000.

Private Bank
 
Itaú Unibanco Private Bank is thea leading Brazilian bank in the internationalglobal private banking industry, providing financial advisory services to approximately 16,200 Latin-American customers.22,200 Latin American customers as of December 31, 2009. Our 491620 employees are focused on offering financial consulting services to customers with at least US$ 250,000200,000 in assets available to investment.investment assets. In addition, we provide our customers havewith a full range of traditional banking products and services available.services.
 
Financial advisory services are provided by teams of experienced private bankers,relationship managers located in Brazil, Miami, Argentina, Uruguay, Chile and Paraguay, and supported by wealth managementinvestment specialists, who recommend the most appropriate solutions for each individual risk profile. Local market products include time deposits, mutual funds, treasury productsOur private banking client base is composed of clients from Brazil, Argentina, Venezuela, Chile, Uruguay, Ecuador, Paraguay, Mexico, and brokerage. other Latin American countries.
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We serve our customers’ needs for offshore private bankingwealth management solutions in three major jurisdictions through two independent institutions that are fully dedicated to international private banking and are controlled byinstitutions: in the United States through Banco Itaú Europa S.A.,International, or BancoBIEI, and Itaú Europa:Europa Securities, or IES; in Luxembourg through Banco Itaú Europa Luxembourg S.A.(“BIEL”); and Banco Itaú Europa International, located in Miami. Banco Itaú Europa International has customers from Argentina, Brazil, Chile, Mexico, Uruguay, Venezuelathe Caribbean, through BIE Bank & Trust in the Bahamas, or BIE Bahamas, and a few other countries.Unicorp Bank & Trust in Cayman, or UBT Cayman.
 
We manage individual portfolios on a non-discretionary basis, subject to guidelines agreed upon with each customer. Portfolios managed by Itaú Private Bank may includealso invest in mutual funds managed by other financial institutions which have more flexibility in a totally open structure.making investment decisions. Fees earned from our private banking customers are, in most cases, based ona function of the assets under management.
 
As of December 31, 2008,2009, our private banking activity both in Brazil and abroadfor Latin American clients had assets under management equivalent to US$ 25.5 billion,R$ 97,548.0 million, including US$ 4.7 billion booked at Banco Itaú Europa Luxembourg, US$ 3.84 billion booked at Banco Itaú Europa International, MiamiR$13,945.2 million in BIEL, R$6,809.6 million in BIEI and US$ 0.7 billion at Banco Itaú Uruguay S.A., or Banco Itaú Uruguay.IES and R$2,128.6 million in BIE Bahamas and UBT Cayman.
 
According to Euromoney magazine, in 2009, for the second time in the last three years, Itaú Unibanco Private Bank was ranked best in offering private banking services and products to Brazilian clients.
Also, in 2008, the renowned magazine Private Banker International recognized Itaú Unibanco Private Bank as “The Outstanding Private Bank - The Americas,” for 2008 during the outstandingglobal financial crisis and in 2009 Itaú Private Bank was named the “The Outstanding Private Bank - Latin America”, which shows consistent recognition of our strong performance in our target market. According to the 2010 Annual Private Banking and Wealth Management Survey, coordinated by Euromoney magazine, Itaú Private Bank was recognized as offering “The Best Private Banking Overall Services” in Brazil for the second consecutive year. In the latest ranking published in the February 2010 edition of Euromoney magazine, Itaú Private Bank was also named “Best Private Banking Services Overall” in Chile and Top 5 “Best Private Banking Services Overall” in Latin America. Itaú Private Bank also remains the only private bank forin Brazil to be among the Americas.finalist organizations in the Brazilian National Quality Award ( Prêmio Nacional de Qualidade 2007 ).

Small Business Banking
 
Our relationshipWe have structured our relationships with small business customers hasthrough the use of specialized offices since 2001.  As of December 31, 2009, we had a specific structure since 2001.
We have 244 units277 offices located nationwide in Brazil and nearly 1,3001,600 managers who workworked for over 160,000260,000 companies with annual revenues from R$ 540,000500,000 to R$6 million. In 2009,2010, we planexpect to have around 1,800 managers working for over 206,000continue to consolidate our small business customers.

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banking operations and to expand our offices geographically.
 
All our managers are certified by ANBID,ANBIMA, and throughout the year they receive training to improve their knowledge, which allows them to offer the best solutions for each customer profile. Our customers rely on our ability to provide products, terms and especially rates customized to their needs.
 
Since 2006, all new customer account openings underwent a stringent analysis procedure. In 2007, to strengthen our efficiency in this segment, we revisited our policy to improve approval of loans and repossession of collateral.
Loans to very small and small businesses totaled R$ 6.1 billion18,330 million as of December 31, 2008.2009.

Middle - - Market Banking
 
We maintain relationships withbelieve the Association has strengthened our middle-market banking position. We selected the best products and services of each bank to offer to our customers and dedicated managers to serve our customers to meet their needs.
As of December 31, 2009, we have approximately 61,000104,000 middle-market corporate customers that representrepresented a broad range of Brazilian companies located in over 100 cities.75 cities in Brazil. Our middle-market customers are generally companies with annual revenues abovefrom R$6 million. We offer our middle-market customers collection services and electronic payment services. We are ablemillion to provide these services with a high level of efficiency for virtually any kind of payment, including Internet office banking. We charge collection fees and fees for making payments, such as payroll, on behalf of our customers.R$150 million.
 
We offer a full range of financial products and services to middle-market customers, including deposit accounts, investment options, insurance, private retirement plans and credit products. Credit products include investment capital loans, working capital loans, inventory financing, trade financing, foreign currency services, equipment leasing services, letters of credit and guarantees.  We also carry out financial transactions on behalf of middle-market customers, including interbank transactions, open market transactions and futures, swaps, hedging and arbitrage transactions. We havealso offer our middle-market customers collection services and electronic payment services.  We are able to provide these services for virtually any kind of payment, including Internet office banking.  We charge collection fees and fees for making payments, such as payroll, on behalf of our customers.
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As of December 31, 2009, we had over 8801,300 managers specializedspecializing in the middle-market segmentcustomers and we intend to hire over 150 more. Theseincrease this number in 2010.  At December 31, 2009, these managers workworked from one of the 157213 specialized offices located at key office branches. In addition,branches and we planintend to open approximately 15 branches during 2009.further increase the number of these specified offices in 2010.
 
Consistent with customary lending practices in Brazil, our loan portfolio to our middle-market customers is composed predominantly short-term.  Our spreads on middle-market loans tend to be higherof short-term products, defined as having a maturity of less than the margins on our loans to corporate customers.12 months. Loans to middle-market customersbusinesses totaled approximately R$ 22.2 billion37,219 million as of December 31, 2008.2009.

Credit Cards
We are the leading company in the Brazilian credit card market, based on transaction volume as of December 31, 2009. Our credit card brands “Itaucard” and “Hipercard,” offer a wide range of products to 23.4 million customers as of December 31, 2009, including both account holders customers and non-account holders customers. In the year ended December 31, 2009, the transaction volume of credit cards was R$84,938 million, a 17.8% increase from the prior year. The results of customer transactions by non-account holders customers are reported in the consumer credit division.
 
Our main challenges in the credit card business are to continually increase theour cardholder base of cardholders and improve our portfolio profitability. TheTo this end, our credit card division focuses on the development of new products, the enhancement of partnerships, cross-selling of financialbanking and insurance products and sales through differenta variety of channels.
 
Orbitall ServiçosTo enhance market opportunities in the credit card segment, we entered into partnerships with Marisa S.A. and Vivo S.A. and C&C Casa e Processamento de Informações Comerciais S.A., or Orbitall, a data-processing company established itself as an attractive service provider to banksConstrução Ltda. For further information on these partnerships, see “—Commercial Agreements, Associations and retail networks. Over 29 million cards were processed in 2008.Partnerships.”

In December 31, 2008, our card portfolio reached 17.9 million cards and the volume of the transactions was R$ 49.9 billion. We maintained the leadership with 23.2% of market share in terms of volume of transactions, according to the Brazilian Association of Services and Credit Cards Companies (Associação Brasileira das Empresas de Cartões de Crédito e Serviços), or ABECS.
Asset ManagementReal Estate Financing
 
As of December 31, 2008,2009, we had approximately R$8,510 million in outstanding real estate loans. Given our expectation of growth over the next several years in the mortgage market in Brazil, we are investing in the operational platform in order to reduce costs and improve quality for our customers. We are also developing our distribution channels for mortgage loans by focusing on our branch network and developing our relationships with real estate brokers. According to Brazilian regulations, financial institutions are required to allocate at least 65% of their savings accounts balances to fund mortgage financing, of which 80% must be used to finance properties with value lower than R$500,000 and must have annual interest rates lower than 12%.
We use different distribution channels to reach our customers, including our Itaú Personnalité branches and real estate brokers. Itaú Unibanco Holding has partnerships with two of the largest real estate brokers in Brazil: Lopes and Coelho da Fonseca. These long-term partnerships provide us with exclusive real estate financing origination at a large number of locations throughout Brazil.

Asset Management
According to ANBIMA, as of December 31, 2009, we were the largest mutual fund manager among private banks in Brazil based on our assets under management. As of that date, we had total net assets under management of R$ 154.9 billion297,987 million on behalf of approximately 1.41.5 million customers.  We also provide portfolio management services for pension funds, corporations, private bank customers and foreign investors. According to ANBID,ANBIMA, as of December 31, 20082009, we were the largest manager of private bank clientclients’ assets and the largest private manager of pension fund assets in Brazil, based on our assets under management.  As of December 31, 2008,2009, we had R$ 105.6 billion176,363 million of net portfolio assets under management for pensions,pension funds, corporations and private bank customers.
 
We offerOur fees are based on the average net asset value of the funds under management, which we calculate on a daily basis. Fees generally average approximately 2.74% per year for funds from individuals and manage 8620.2% to 0.5% per year for funds from companies.  Fees for portfolio management services are privately negotiated and vary depending on the size and investment parameters of the funds under management.
As of December 31, 2009, we offered and managed about 1,478 mutual funds, which are mostly fixed-income and money market funds. For individual customers, we offer 60offered 157 funds to our retail customers and 46approximately 300 funds to our Itaú Personnalité customers. Private banking customers may invest in over 500600 funds, including those offered by other institutions. OurItaú BBA’s capital markets executive areagroup also provides tailor madetailor-made mutual funds to institutional, corporate and private banking customers.

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In December 2008,November 2009, Fitch Ratings, one of the largest international rating agencies in Brazil, maintained its AM1M1 (bra) rating (the highest rating granted to an asset manager) forof our asset management segment.area.  We have been atin the top rating category since July 2003.

InstitutionalCorporate Social Responsibility
 
At the end of 2008, the mutual fundThe Itaú Social Excellence Fund ( Fundo Itaú Excelência Social, or FIES, awarded twenty five non-governmental organizations focused on the development of educational projects. Each organization received an amount between US$ 62,200 and US$ 107,300. Since its launchlaunched in 2004, is a socially responsible investment fund, investing in the FIES has destined moreshares of companies with superior corporate social responsibility practices with the goal of obtaining higher long-term returns than US$ 4.75 millionthose offered by the main Brazilian financial market indices. In addition to 58analyzing the risks and returns of companies, fund managers take into account three fundamental criteria in relation to companies: corporate social programs.activities; environmental protection practices and good corporate governance practices. Every year the fund manager donates part of its accumulated asset management fees to social projects in the following categories: environmental education, employment education and childhood education.
 
As of December 31, 2009, FIES was launched withhad net assets of R$365 million, and the objectivefund donated more than R$3.3 million in 2009, which corresponded to offer an investment alternative in a mutual fund while meeting ethical and social purposes. Ethics is a key element on the selection of the companies of the portfolio, following protection principles of social responsibility: corporate governance, social practices and environment protection.
In addition, 50% of the fund’s management fee is directedfrom July 1, 2008 to socialJune 30, 2009.  The 19 projects focusedchosen to receive this donation were divided into two investment categories, with 16 non-governmental organizations receiving R$100,000 each and three non-governmental organizations receiving R$150,000 each, and almost R$1.3 million spent on child, environmental and labor education,consulting.  The projects are selected by the consultingfund advisory council, of the fund. The industry figures of December 2008 show that FIESwhich is one of thecomposed by market leaders and specialists in its category in Brazil, with a market share of 32.8%. FIES offers to its investors an optimal combination of remarkable returns with acorporate social commitment.responsibility.
 
Securities Services for Third Parties
 
We provide securities services for third parties in the Brazilian capital markets, where we act as custodian, transfer agent orand registered holder. In 2008,December 2009, we were ranked the top provider of securities services in Brazil to third parties by ANBID. The market value of securities services asANBIMA.
As of December 31, 2008 was approximately2009, Itaú Unibanco held assets of R$ 1.5 trillion. As685,360 million in connection with securities services for third parties, representing 28.5% of the same date, we acted as transfer agent for 236 Brazilian companies.  Among the companies listedmarket based on the BOVESPA, we have a market share of 60% as transfer agent.  We were also the registered holder of debentures for 124 contracts.
assets held. Our broad range of products relates to both domestic and international custody. Our productsservices include acting as transfer agent, providing services relating to debentures and promissory notes, custody and control services for mutual funds, pension funds and portfolios, and providing trustee services and non-resident investor services, and acting as custodian for depositary receipt programs.
 
Our processing systemIn 2009, we acted as custodian and transfer agent for 438 companies and as the registered holder with respect to 145 transactions.  As of December 31, 2009, our specialized staff of 611reached 659 employees manages more than 10,920managing portfolios for mutual funds, institutional investors and private portfolios and approximately 7 million investor accounts of mutual funds and companies as transfer agent.portfolios.
 
Brokerage
 
Itaú Corretora de Valores S.A., or Itaú Corretora has been providing brokerage services since 1965, with operations on BOVESPA, and on the Brazilian Futures and Commodities Market (Bolsa de Mercadorias e Futuros), or BM&F.
Itaú Corretora has positioned itself as “the Brazilian specialist” with high quality research offering a wide range of financial products and displaying an extensive distribution capacity, covering from retail customers to domestic and foreign institutional investors.
&FBOVESPA.  We also provide brokerage services to international customers through Itaú Securities Inc., our broker-dealer operations in New York, through Banco Itaú Europaour London Branch,branch, and through our broker dealerbroker-dealers in Hong Kong Itaú Asia Securities Limited and through our broker dealer in Dubai, Itaú Middle East Securities.Dubai.
 
For the year ended December 31, 2009, Itaú Corretora’s highlightsCorretora was ranked third on the BM&FBOVESPA in 2008 were:
·First place in the ANBID ranking for the distribution of domestic fixed-income products in the Brazilian capital markets, with a total volume of R$ 9.5 billion and  a market share of 29.3%;
·Participated in the distribution of six equity public offerings coordinated by Itaú BBA. The group was ranked first in the ANBID ranking for the distribution of equity in the Brazilian capital markets with 25% market share;
·Third place in the Institutional Investor’s “The 2008 All-Brazil Research Team”;

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·Fourth place among the research brokers in terms of trading volume in 2008 in the BOVESPA; and
·Third place among the brokers controlled by large commercial banks in Brazil in terms of trading volume in 2008 in the BM&F.
equity trading volume and third among brokers controlled by large commercial banks in Brazil in commodities and futures trading volume.

Insurance, Private Retirement and Capitalization Products
 
Insurance
 
As of December 31, 2008,2009, according to SUSEP, we were one of the third largest insurance groupgroups in Brazil based on writtendirect premiums, excluding health insurance and VGBL, according to SUSEP. As ofa private retirement plan providing annuity benefits. For regulatory purposes VGBL is considered life insurance. For the year ended December 31, 2008,2009, our writtendirect premiums totaled approximately R$ 3.4 billion. We also carry out insurance operations, through our ownership of a 14% equity interest in Allianz Seguros S.A., a general insurance company.6,715 million.
 
TheOur main segmentslines of our insurance business are life automobile, homeownersinsurance (excluding VGBL; see “Private Retirement Plans”), property and property for smallcasualty insurance and medium companies. Lifevehicle insurance, which accounted for 32.2%31.4%, 27.5% and 27.3% of direct premiums, earned by Itaú Seguros S.A. and Itaú Vida e Previdência S.A and automobile, homeowners and property insurancerespectively, for small and medium companies accounted for 31.8%, 5.5% and 4.9%, respectively, of premiums earned by Itaú Seguros S.A., as ofthe year ended December 31, 2008. In addition, we offer customized2009. Our policies to large companiesare sold by Itaú-XL Seguros Corporativos S.A. We also retain a minor portfolio of health insurance policies.
Life
According to SUSEP we were the third largest insurance group in this segment, accounting for R$ 1.08 million of written premiums as of December 31, 2008, which represents a market share of 9%.
We sell almost all policies of this segment through our banking operations, representing 71.4% of total life premiums as of December 31, 2008.  We also sell group life insurance for commercial and industrial companies, through independent local brokers, which corresponded to 17.7% of total life premiums as of December 31, 2008. In order to increase our activities in this segment we seek to improve management of our customers’ relationship to reduce the number of policy cancellations. We also seek to develop products tailored to the customer’s profile, who can either be an account holding customer, a customer who we contact through telemarketing, an internet customer, or an ATM or bank teller terminal user. In addition, we focus on offering loan payment protection insurance to cover loan operations of consumer products, such as vehicles,multinational brokers and other credit operations.
Property: Homeowners and Automobile
We are the market leader in property insurance to homeowners, with a market share of 19% and written premiums of R$ 177 million, as of December 31, 2008. We sell policies mainly through our banking operations, which corresponded to 85.4% of total premiums as of December 31, 2008, and through independent local brokers, which corresponded to 12% of total premiums as of December 31, 2008.
As of December 31, 2008, we had a 6.3% market share in automobile insurance with written premiums of R$ 964 million. We sell policies mainly through independent local brokers, which corresponded to 93.7% of total premiums as of December 31, 2008. In order to increase our market share in this segment, we seek to strengthen our relationship with independent local brokers, which are the most important distribution channel in this segment, sharing strategies with them to sell automobile policies to our customers. The increase in our market share will also contribute in obtaining scale gains and reducing operational costs.
Large Risks
In September 2006, we and XL Capital Ltd., one of the major insurance companies worldwide in the large risk segment, formed a new insurance company, Itaú XL Seguros Corporativos S.A., or Itaú XL, which carries out operations in the large risk commercial and industrial insurance markets in Brazil. We intend to increase our market share in the large risk segment through independent local brokers and through multinational brokerage firms.
channels.  We reinsure a portion of the risks we underwrite, particularly large marine property marine and casualty risks that exceed the retention limits we have chosenestablished within the limits of the regulations.regulatory limits. Risks that exceed the retention limit must be assignedceded to local/admitted/eventual reinsures according to the Complementarylicensed Brazilian reinsurers in accordance with complementary Law No.126No. 126 published on January 15, 2007 and the SUSEP regulationregulations published on December 17, 2007.

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Our strategy to increase our level of penetration in the Brazilian insurance market depends on the markets in which we operate. In the high risk market, we intend to enhance our market share through independent local brokers and multinational brokerage firms. For individuals and small and medium company markets, we focus on operations within our banking client base banc assurance operations, to increase customer penetration. We are working on improving banc assurance operations in property and casualty insurance for small and medium companies.  Our customer relationship management has implemented several advances and the development of specific products for different segments allows more efficient use of each marketing channel (our branches, telemarketing, Internet, ATMs and bank teller terminals).
 
In November 2008, Unibanco entered into an agreement with American International Group, Inc., or AIG, regarding the exchange of shares that Unibanco and AIG respectively held in certain Brazilian insurance companies, as follows:  (i) Unibanco acquired, for US$820.0 million, the shares held by AIG in Unibanco AIG Seguros S.A., which changed its name to Unibanco Seguros S.A., or Unibanco Seguros; and (ii) AIG acquired, for US$15.0 million, the shares held by Unibanco in AIG Brasil Companhia de Seguros S.A., or AIG Seguros.  Upon the completion of the exchange, Unibanco Seguros, Unibanco AIG Vida e Previdência S.A. and Unibanco AIG Saúde Seguradora S.A., which used to be Unibanco Seguros’ wholly owned subsidiaries, became our wholly owned subsidiaries.
In August 2009, Itaú Unibanco Holding and Porto Seguro S.A., Porto Seguro, entered into an operating agreement that provides for the offering and distribution, on an exclusive basis, of homeowner and automobile insurance products to customers of Itaú Unibanco Holding in Brazil and Uruguay (the “Porto Seguro Alliance”).  In connection with the Porto Seguro Alliance, Itaú Unibanco Holding transferred all the assets and liabilities related to its then current portfolio of homeowner and automobile insurance to Itaú Seguros de Auto e Residência S.A., ISAR, all of the shares of which were subsequently transferred to Porto Seguro. In exchange, Porto Seguro issued shares representing 30.0% of its capital stock to Itaú Unibanco Holding and/or its affiliates.  The controlling shareholders of Porto Seguro and Itaú Unibanco Holding established a new company named Porto Seguro Itaú Unibanco Participações S.A., or PSIUPAR, and transferred their shares of Porto Seguro to PSIUPAR.  The controlling shareholders of Porto Seguro remained controlling shareholders of PSIUPAR, which became the parent company of Porto Seguro.  Itaú Unibanco Holding is entitled to nominate two members of the board of directors of each of Porto Seguro and PSIUPAR.  ISAR, which is directly controlled by Porto Seguro and indirectly controlled by PSIUPAR, will be managed by Porto Seguro and will utilize the trademarks Porto Seguro, Itaú Unibanco and Azul. In August 2009, Itaú Unibanco (through Itaú Seguros S.A.) had 3.4 million automobiles and 1.2 million homes insured, which were subsequently transferred to ISAR.  In October 2009, SUSEP granted prior authorization for the corporate acts related to the Porto Seguro Alliance. The approval by the Brazilian antitrust authorities for the transaction is still pending.
In November 2009, Itaú Seguros S.A., or Itaú Seguros, and XL Swiss Holdings Ltd., or XL Swiss, a company controlled by XL Capital Ltd., or XL Capital, signed an agreement providing for the acquisition by Itaú Seguros of all of XL Swiss’s shares in Itaú XL Seguros Corporativos S.A., or Itaú XL. Itaú XL will be wholly owned by Itaú Unibanco Holding.  After completion of the sale, Itaú Seguros will provide, under a separate agreement, insurance coverage to XL Capital’s clients in Brazil and XL Capital’s Global Programs clients with operations in Brazil.  The transaction is pending approval by the Brazilian insurance regulator, SUSEP and has not yet closed.
In December 2009, Allianz South America Holding B.V. entered into an agreement with Itaú Unibanco Holding for the purchase of the 14.025% indirect interest that Itaú Unibanco Holding held in Allianz Seguros S.A. for R$109 million. The transaction was completed in January 2010, approved by the Brazilian antitrust authorities on March 3, 2010 and SUSEP was notified of the transaction. The transaction did not have a significant impact on our net income for 2009.

Private Retirement Plans
In 2008, balances under investment contracts and liabilities for future policy benefits totaled R$ 25.5 billion an increase of 22% compared to 2007. This amount includes VGBL, which for regulatory purposes is considered life insurance although its substance is that of a private retirement plan providing annuity benefits.
In 2008, our reserves in corporate plans grew 49.5% according to the National Federation of Private Retirement Plans and Life (Federação Nacional de Previdência Privada e Vida), or FENAPREVI.  Our assets in these plans totaled R$ 3 billion in December 2008.
 
As of December 31, 2008,2009, balances under private retirement plans (including VGBL) totaled R$43,435 million, an increase of 25.0% compared to December 31, 2008.  As of December 31, 2009, we were the second largest private retirement plan manager in Brazil based on total assets,liabilities according to FENAPREVI.SUSEP. As of December 31, 2008,2009, we had R$ 25.5 billion43,636 million in assets related to our private retirement liabilities (including VGBL), an increase of 22.7% compared to 2007..  We focusconcentrate our activities on managing open private retirement plans, which have been under public pension plan reform discussions and have experienced strong growth.growth in 2009.
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Capitalization Products
 
Capitalization products are savings account products that generally requiring thatrequire a customer to deposit a fixed sum with us towhich will be returned at the end of an agreed uponagreed-upon term date, with accrued interest.  In return, the customer entersautomatically entered into a periodic drawingdrawings that presentsgives him the opportunity to win a significant cashmoney prize.  As of December 31, 2008,2009, we had approximately 6.19.7 million capitalization planstitles outstanding with guaranteeing assets of R$ 1.2 billion.2,300 million. We distribute these products through our retail banking branches network, Itaú Personnalité and Itaú Uniclass branches, and electronic channels such as the Internet and ATMs. We sell theseThese products throughare sold by our subsidiary, Cia. Itaú de Capitalização.o S.A. During 2008, sales2009, R$1,786 million of capitalization plans totaled approximately R$ 1 billion. In this period,products were sold and we also developed other products in order to reach lower income customers. We distributed over R$ 22.341.1 million in money prizesprize to 1,235 customers in 2008.6,085 customers.

Itaú BBA
 
Itaú BBA is responsible for our corporate and investment banking activities.  Itaú BBA offers a complete portfolio of products and services to most of the largest two thousand economic groupscompanies and conglomerates in Brazil through a team of highly qualified professionals.
  Itaú BBA services approximately 2,400 companies and conglomerates.  Itaú BBA’s activities range from typical operations of a commercial bank to capital markets operations and advisory services infor mergers and acquisitions.  These activities are fully integrated, which enables itItaú BBA to achieve a performance targeted attailored to its clients’ needs.  As of December 31, 2009, our corporate loan portfolio reached R$90,830 million.  During 2009, this portfolio was affected mainly by the best interest of its clients, irrespectivelyappreciation of the products real and services it offers.weaker economic conditions when compared to 2008. In investment banking, the fixed income department was responsible for the issuance of debentures and promissory notes that totaled R$17,849 million and securitization transactions that amounted to R$1,378 million in Brazil in 2009.  According to ANBIMA, Itaú BBA was the leader in distribution of fixed income in 2009 with a 24.2% market share, thus maintaining the bank’s historic leadership in the domestic fixed income market.  In the international debt markets, Itaú BBA acted as joint bookrunner in the issuance of seven deals in the amount of US$4,950 million, of debt securities in 2009, earning the second place in Bloomberg’s rankings of underwrites of Brazilian-based corporate debt issuances based on number of transactions.
 
During 2008With respect to equity issuances, Itaú BBA maintained a steady growthcoordinated public offerings that totaled R$14,229 million in 2009, and occupied the third position in ANBIMA’s origination rankings in Brazil, with corporate, treasury, international and13.7% of the market share in Brazil in 2009. Itaú BBA’s investment banking clients.
Investment Bankingdivision also started to manage the wholesale brokerage business in 2009 and is implementing several initiatives to increase its presence in the markets it operates in.
 
In 2008,addition, Itaú BBA participatedadvised on merger and acquisition transactions with a total volume of 24 deals in the distributionamount of debentureR$19,964 million, in 2009, ranking second in Brazil based on the number of merger and promissory note transactions totaling R$ 15.1 billion, plus R$ 2 billion in FIDCs. Accordingacquisition deals according to the ANBID ranking, Itaú BBA was ranked first in fixed-income origination and FIDCs in 2008, with a market share of 46% and 42%, respectively.Thomson Reuters.
 
As a lead underwriter and distributor, in initial public offerings and follow-ons, Itaú BBA reached an amount of R$ 31.8 billion.  Itaú BBA was ranked in first place according to  the ANBID and Thompson’s ranking, with a market share of 25%.
In July 2008, Itaú BBA was named Best Investment Bank in Brazil by Global Finance magazine, an American publication which covers financial institutions worldwide.

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We expect that the main opportunities in the capital markets in 2009 will be in mergers and acquisitions. During the second half we believe more companies will be electing to go public, although this number will fall short of the 76 initial public offerings conducted in 2007, which was an atypical year.
Corporate Banking
The credit and co-obligations portfolio grew R$ 20 billion, representing an increase of 52% in 2008 compared to 2007.
Itaú BBA has a team of professionals in the derivatives market that specialize in selling structured notes and derivative-based instruments which can be linked to any type of financial asset. These products enable investors to have the benefits and risks of a particular asset, without having to buy it in the outside market. These products include interest rate swaps, which allow the exchange of one type of interest rate by another, such as swapping a fixed rate for a floating rate. A currency swap allows the indexing of one currency to another that may be more attractive, allowing forex hedge operations.The latter product, the foreign exchange swap, despite being an efficient tool to protect a company, generated losses for a group of our commercial clients that was confronted with the sudden and considerable strengthening of the U.S. dollar against the Real in the last quarter of 2008.Despite the losses, these companies adjusted to the situation with the help of bank professionals. This experience served to increase the transparency level of information regarding exotic derivatives. When buying this product clients must sign a document showing they are aware of its inherent risks, and informing us if they have this same product at any other bank.
International Area
Itaú BBA focuses on the following products and initiatives in the international area: (1) câmbio pronto (whereby a foreign exchange purchase in reais or sale in foreign currency is completed in two business days), which exceeded US$ 120 billion in volume in 2008, an increase of 40% compared to 2007; and (2) structuring of long-term, bilateral and/or syndicated financing with other institutions.  In addition, in 2008 Itaú BBA continued to offer a large number of lines of credit for foreign trade, having a total of approximately US$ 4.6 billion in lines of credit drawn from corresponding banks by year-end 2008.
Through Banco Itaú Argentina S.A., or Banco Itaú Argentina and Banco Itaú Chile S.A., or Banco Itaú Chile, Itaú BBA consolidated its expansion strengthening corporate activities in Argentina and Chile, respectively, and European market under the Banco Itaú Europa  structure.
The offer of a complete portfolio of products and services and customized solutions to clients placed Itaú BBA in an important position in the investment banking and corporate customer segment in 2008.  Furthermore, the volume of receivables and payments related to Itaú BBA’s cash management services grew 26% in 2008 compared to 2007.
Finally, Itaú BBA was active in BNDES on-lending to finance large-scale projects, aimingwhich is aimed at strengthening domestic infrastructure and increasing the productive capacity of various industrial sectors.  In consolidated terms, total loans granted under BNDES on-lending represented more than R$ 3.4 billion4,889 million for various projects and financings in 2008,2009, corresponding to an increase of 56%44.0% in 20082009 compared to 2007.
The2008.  As an integral part of its risk management and sustainability policies, the on-lending of funds to large-scale projects is in compliance with Itaú Unibanco’s social and environmental risk policy.  Itaú Unibanco is the guidelines establishedcurrent leader in the ranking of Latin American banks which adopt the best corporate governance practices drawn up by the consultancy Management & Excellence and Latin Finance magazine.  All lending categorized as project finance, as defined under Basel II, is also in compliance with the Equator Principles, a set of socio-environmental policies that Itaú Unibanco andwhich Itaú BBA adopted in 2004.  This set2004, being the first financial institution from an emerging market to adopt the Equator Principles.  The Equator Principles were announced launched in 2003 and became the benchmark within the financial sector for addressing environmental and social risks in project financing.  By February 2010, 68 financial institutions had adopted the Equator Principles, and therefore had voluntarily committed themselves to incorporating these principles in projects worth US$10 million or more.  The Equator Principles were revised in 2006 and were extended to advisory services in structuring projects.  Itaú Unibanco plays a leading role in the Equator Principles Steering Committee and Working Groups, having occupied the position of policies was launched atChair of the endSteering Committee from September 2008 until March 2010.
Itaú BBA focuses on the following products and initiatives in the international area:  (1)  câmbio pronto (whereby a foreign exchange purchase in reais or sale in foreign currency is completed in two business days), which exceeded US$88.677 million in volume in 2009; and (2) structuring long-term, bilateral and syndicated financing.  In addition, in 2009 Itaú BBA continued to offer a large number of 2007lines of credit for foreign trade, having a total of approximately US$6,797 million in lines of credit drawn from corresponding banks as of December 31, 2009.
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In 2009, Itaú BBA received the award of Investment Bank of the Year in Latin America, according to The Banker magazine and is used in credit granting processes to corporate customers when the transaction involves amounts equal to, or in excessBest Local Investment Bank accolade from Latin Finance.
In December 2008, Itaú Unibanco acquired the remaining 4.25% of R$ 5 million.Itaú BBA’s total shares from certain Itaú BBA managers and employees who were minority shareholders. Itaú Unibanco holds approximately 100% of the capital stock of Itaú BBA.

International Operations

Banco Itaú Argentina
 
AsArgentina is the third largest economy in Latin America, Brazil’s main trading partner and one of the countries with highest GDP per capita of the continent. The pace of increase in banking penetration shows that the Argentine financial system has ample growth potential.
Banco Itaú Argentina’s core business is retail banking, with approximately 250,000 customers in the Argentine middle and upper-income segment as of December 31, 2009.  Compared with 2008, Banco Itaú Argentina had 81 branches, two of which had been recently openedthis represents a 5.9% increase in the citiesnumber of Neuquén and Salta.  The other branches are located in the capital and provinces of Buenos Aires, Santa Fe, Mendoza, Cordoba and Tucumán.  In 2008, we also inaugurated the opening of 19 new platforms of our commercial business segment.  In that same year, Banco Itaú Argentina’s customer base increased 17%, reaching a total of 236 thousand individual customers and 5.8 thousand corporate customers.

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As of December 31, 2008,2009, Banco Itaú Argentina’s totalArgentina had assets amounted toof R$ 2.52.1 billion, an increaseloan and leasing operations of 30% compared to 2007.  The loans portfolio increased 25%,R$1.1 billion, deposits totaling R$ 1.51.6 billion in 2008. The totaland shareholders’ equity of deposits amounted to R$ 1.9 billion, an increase of 22% compared to 2007. Banco Itaú Argentina’s net income was R$ 21 million in 2008.

Itaú Chile
In 2008, Itaú Chile opened seven new branches, totaling 67 branches in Chile.  It also opened Itaú Chile Compañía de Seguros de Vida.
The year 2008 was marked by the bank’s growth and focus on customer service quality, mainly targeted at high income individuals’ segment, in which Itaú Chile had increased its market share by 16%. Itaú Chile’s individual customer base increased by 11%, reaching a total of 81 thousand individual customers in 2008.  The number of corporate customers decreased by 5%, reaching a total of 3.5 thousand corporate customers and ranking fourth place in current accounts between the private banks.172 million.
 
As of December 31, 2008,the same date, Banco Itaú Chile’s total assets amounted to R$ 11.9 billion, an increase of 45% compared to 2007.  This increase was a resultArgentina had one of the growthlargest branch networks in Argentina consisting of 81 branches, one of the foreign trade, leasinglargest ATM networks in Argentina consisting of 164 ATMs, and mortgage loans portfolios.  The loans portfolio increased 32%, totaling R$ 8.4 billion in 2008.  The total deposits amounted to R$ 7.7 billion, an increase of 48% compared to 2007.  In addition, in 2008 23 customer site branches.
 Itaú Chile Operations
Banco Itaú Chile successfully issued US$ 64 millionstarted its official activities on February 26, 2007, when Bank of America Corporation, or BAC, transferred the operations of BankBoston Chile and BankBoston Uruguay to us.  This acquisition increased our presence in subordinated bondsLatin America and increased its capital by US$ 47 million.expanded the scope of our operations.  In addition, Itaú Chile Inversiones Servicios y Administración S.A. provides services related to collection, securitization and insurance.
 
As of December 31, 2009, our consolidated Chilean operations had R$10.7 billion in assets, R$8.3 billion in loans and leases, R$7.0 billion in deposits and R$1.3 billion in shareholders’ equity. According to the Chilean banking and financial institutions regulator ( Superintendencia de Bancos e Instituciones Financieras ), or, SBIF, as of that same date, Banco Itaú Chile’s net income totaled R$ 140 millionChile ranked eighth in the Chilean loans and leases market with a 3.2% market share and ranked sixth in number of demand deposit accounts in the private sector, with approximately 89,094 accounts.
Banco Itaú Chile offers several products such as factoring, leasing, corporate finance, mutual funds, insurance brokerage and trading, which are offered through different entities and different lines of business.
The retail segment focuses on the upper-income segment that, as of December 31, 2008,2009, accounted for 59.6% of Banco Itaú Chile’s total revenues. As of December 31, 2009, Banco Itaú Chile had 48 ATMs and 70 branches, of which 65.7% were located in Santiago.
Banco Itaú Chile’s commercial banking segment offers a wide range of products to improve customer experience by building a competitive advantage based on service quality, products and processes for targeted customers (companies with annual revenues of between R$4 million and R$180 million).
Banco Itaú Chile’s global corporate banking segment offers local and international corporate finance capabilities such as syndications, private placements and securitizations.  It also provides trade financing and global treasury services complementing Banco Itaú Chile’s marketing strategy.  Treasury products such as foreign exchange and derivatives are a resultkey part of this strategy.
Itaú Uruguay Operations
Banco Itaú Uruguay is one of the increaseleading financial institutions in revenues fromUruguay.  Local operations also include the main credit portfoliocard issuer, OCA S.A., or OCA, and currency fluctuations which were partially offset by the increase in the provisions for credit losses and administrative expenses.

Itaú Uruguay
In 2008, Itaú Uruguay acquired the totality of the capital stock ofpension fund management company Unión Capital AFAP S.A., or Unión Capital.  Banco Itaú Uruguay’s strategy is to serve a Uruguayan private pension company, with a customer basebroad range of 175 thousand customers. 
customers through customized banking solutions.  As of December 31, 2008,2009, Itaú Uruguay’s totalUruguay had R$3.1 billion in assets, amountedranking second in terms of asset volume among private banks in Uruguay, according to the Uruguayan Central Bank ( Banco Central del Uruguay ), or BCU, R$ 3.31.3 billion an increasein loans and leases, R$2.3 billion in deposits and R$279 million in shareholders’ equity.
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The retail banking business is focused on individuals and small business customers, with approximately 130,000 customers as of 64% compared to 2007.  AsDecember 31, 2009. The core branch network is located in the metropolitan area of that same date, Itaú Uruguay’s credit portfolio amounted to R$ 1.6 billion, an increase of 47% compared to 2007.  The bank’s customer base is comprised of 107 thousand customers most of them from the high income individuals’ segment and 8 thousand corporate customers.Montevideo with 15 branches. In addition, Banco Itaú Uruguay has 17 branches including the branch inauguratedin Punta del Este, Tucuarembó and Salto. Banco Itaú Uruguay has a leading position in the citydebit card segment of Saltoprivate banks in 2008, and has a strong presence in the agricultural and agribusiness segments.
OCA S.A and OCA Casa Financiera S.A, or OCA, the credit card company, reached 335 thousand customers in 2008, an increaseUruguay with 17.4% market share out of 6% compared to 2007489,000 cards as of December 31, 2008. OCA’s assets amounted2009, according to R$ 434 million, an increase of 50% compared to 2007. OCA’s credit portfolio increased 36%, totaling R$ 267 million in 2008. OCA hasBANRED, and a great position in the Uruguayandistinguished role as a credit card issuer (mainly Visa), with a 23.1% market share as of December 31, 2009 in terms of purchases made in Uruguay (according to Visanet Compañía Uruguaya de Medios de Procesamiento S.A.). Retail products and services focus on the most usedmiddle and rememberedupper-income segments, and also include current and savings accounts, payroll payment, self-service areas and ATMs in all branches, and phone and Internet banking.
The wholesale banking division is focused on multinational companies, financial institutions, large- and medium-sized corporations and the public sector. It provides lending, cash management, treasury, trade and investment services. Additionally, the private banking unit provides a dedicated regional service (for both resident and non-resident customers), offering a full portfolio of local and international financial market products.
OCA is the main credit card issuer in Uruguay, with a 41.0% market share based on the countryaggregate amount of credit card domestic transactions as of December 31, 2009, and having more than 90%an approximately 50.0% market share in terms of costumer’s satisfaction, accordingnumber of transactions processed. OCA performs the three main credit card operations:  customer acquisition, issuance of cards and transaction processing. Credit cards and consumer loans are the main products offered by OCA to Gonzáles, Raga & Associados, researchits approximately 347,000 customers, through a network of 20 branches, as of December 31, 2009.
Unión Capital is a pension fund management company which has been operating in 2008.Uruguay since 1996, when the current Uruguayan pension system was created. As of December 31, 2008, OCA’s net income totaled R$ 392009, it had 194,739 customers, managed approximately US$858 million an increasein pension funds, with a market share of 219 % comparedapproximately 16.8%, according to 2007. the BCU.
 
Interbanco S.A. (Paraguay)
Interbanco S.A., or Interbanco, was set up in Paraguay in 1978 and has become one of the largest banks in the Paraguayan financial market. Interbanco was acquired by Unibanco in 1995.
Interbanco has experienced significant growth since 1999, expanding the variety and enhancing the excellence of its services across the whole country. As of December 31, 2008, Itaú Uruguay’s net2009, Interbanco had 19 branches, approximately 220,000 customers and 166 ATMs.
Its main sources of income totaledare consumer banking products, primarily credit cards. Interbanco has launched innovative products and services under the brand “ 24IN,” and provides its customers several products and services, such as International Debit Card Cirrus Maestro and the Internet Banking Service Interhome Banking and also offers banking customer information through mobile phones with the Click Banking service. As of December 31, 2009, Interbanco had R$ 821.9 billion in assets, R$975 million an increasein loans and leases, R$1.6 billion in deposits and R$247 million in shareholders’ equity. The structure of 70 % comparedInterbanco products and services operates under:  corporate banking (small- and medium-sized businesses, agribusiness, large companies, institutional clients) and consumer banking (individuals and wage payment).  Under corporate banking, Interbanco has a well-established presence in the agribusiness segment, which has presented attractive levels of profitability since 2002 and credit performance in Paraguay. Under consumer banking, the main marketing channel is payment services, allowing us to 2007.  This increase is a result of gains obtained from currency fluctuation, the increase in revenues from credit card transactions and by the acquisition of Unión Capital AFAP by Banco Itaú Uruguay.offer pre-approved products to all customers who receive their wages through Interbanco.

Banco Itaú Europa
 
Banco Itaú Europa headquartered in Lisbon and with branches in London and Madeira, and subsidiaries in Cayman Islands, Luxembourg, Miami and Nassau, recorded total consolidated assets of R$ 24 billion, in 2008, which represents an increase of 105.2% compared to 2007.
In the assets composition it’s worth highlighting the corporate loans, which reached R$ 7.9 billion, comprised mainlyis a Portuguese-chartered bank controlled by structured loans, most of which associated to the financing of Brazilian exports. In this context,Itaú Unibanco Holding. Banco Itaú Europa has been operating together with the dynamicfocuses mainly on two lines of Itaú Unibanco Holding group’s market segmentation structure, extending its corporate and middle market client base, offering structured products in capital markets, and supporting the investments of European companies in Latin America.business:

·Corporate banking:  providing international corporate banking, international capital markets operations, foreign trade financing and other financial services to support investments and other economic relations between Latin America and Europe through its operations in Lisbon, Madrid, Frankfurt, Paris and London; and
·Private banking:  delivering offshore and international private banking products and services to our Latin American customer base, through its subsidiaries (BIEL and BIEI in Miami).
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The consolidated net incomeAs of December 31, 2009, Banco Itaú Europa reached R$ 26had US$7,283 million in 2008. Net operating income illustrating the stable contributionassets, US$2,899 million in loans and leases, US$2,318 million in deposits and US$1,263 million in shareholders’ equity (including minority interests).
Banco Itaú Europa’s corporate banking business offers several products, such as credit, derivatives and advisory services for European companies with Latin American subsidiaries.
The private banking business provides financial and asset management services to Latin American customers with a minimum of US$250,000 in investments, putting at their disposal a diversified and specialized range of investment funds, dealing in and managing securities and other financial instruments, trusts and investment companies on behalf of customers.  The private banking business has clients in Argentina, Brazil, Chile, Mexico, Uruguay, Venezuela and others.  Assets under management of the financial margin and a high performance of the capital markets, treasury and international private banking areas.business amounted to US$9,974 million as of December 31, 2009.
 
 The investment grade statusAll of the Bank (Baa1our transactions with Banco Itaú Europa and its subsidiaries are on an arm’s-length basis. Banco Itaú Europa’s senior unsecured debt is rated Baa1 by Moody’s and BBB+ by Fitch Ratings) has been an important supporting factor to the diversification of the funding sources.
The international private banking activity developed by BIE Luxembourg, BIE International (Miami) and BIE Bank & Trust Bahamas, represented at the end of 2008 nearly US$ 6.1 billion of assets under management and around US$ 2.5 billion of customer deposits.
As of December 31, 2008, we held 19% of Banco BPI S.A.’s total capital. Banco BPI S.A. is the fourth largest private Portuguese financial group.
Fitch.

Other International Operations
 
TheseIn November 2008, Itaú Unibanco Holding entered into an agreement with Itaúsa for the acquisition of a 77.8% interest and a 80.0% voting interest in Itaúsa Export, and of a 12.13% voting interest of Itaúsa Europa, a subsidiary of Itaúsa Export, for approximately R$1,136.0 million.  As a result of the acquisition and subsequent corporate events, Itaú Unibanco Holding now holds indirectly 100% of the total and voting interest of Itaúsa Europa and Itaúsa Export. Itaúsa Export is a holding company domiciled in Brazil which holds a controlling interest in Itaúsa Europa. Itaúsa Europa is a holding company domiciled in Portugal.  Itaúsa Export’s and Itaúsa Europa’s business activities are carried out by their indirect subsidiaries and include corporate banking, international cash management services and private banking.  The acquisition by Itaú Unibanco Holding of all of the stock of Itaúsa Export and Itaúsa Europa was a condition precedent to the Association.

Our other international operations have the following objectives:
 
(1)           Support our customers in cross-border financial transactions and services:
 
The international areas of the groupItaú Unibanco Holding are active in providing our customers with a variety of financial products such as trade financing, loans from multilateral credit agencies, off-shore loans, international cash management services, foreign exchange, letters of credit, guarantees required in international bidding processes, derivatives for hedging or proprietary trading purposes, structured transactions, and international capital markets offerings.
 
The followingOur international units provide customer services:include: Itaú BBA, Nassau Branch (corporatebranch (focused on corporate banking business), Banco; Itaú Unibanco, New York Branch, Bancobranch, Itaú Unibanco, Nassau Branchbranch and Banco Itaú GrandUnibanco, Cayman BranchIslands branch (focused on middle-market customers); Interbanco S.A. (Paraguay), Banco Itaú Argentina, Banco Itaú Chile and Banco Itaú Uruguay (focused on retail customers, international corporate banking and middle-market); and Banco Itaú Unibanco, Tokyo Branch (Brazilianbranch (focused on Brazilian retail customers living in Japan).
 
The Financial Service Agency in Japan granted a banking license to Itaú Unibanco on September 7, 2004, and our Tokyo branch started its operations in October of the same year. On December 23, 2006, we acquired the portfolio of customers and respective deposits of Banespa’s branch in Japan. Currently, the main purpose of the Tokyo branch is to offer a portfolio of services and products that satisfy the basic banking needs of Brazilians living in Japan.
(2)           Deal withManage proprietary portfolios and raise capitalfunds through the issuance of securities in the international market:market.
 
CapitalFunds raising through the issuance of securities, certificates of deposit, commercial paper and trade notes can be executed out ofby Itaú’s Grand Unibanco’s branches located in the Cayman Islands, Nassau, Bahamas and New York, branches,Itaú Bank Ltd., or Itaú Bank, Ltd., a banking subsidiary incorporated in the Cayman Islands, or Itaú Holding’s Cayman Branch, orBanco Itaú BBA’s Nassau Branch.branch. Itaú’s Unibanco’s Cayman BranchIslands branch has issued subordinated debt which is treated as Tier 2 capital.Capital. For a description of Tier 1 and Tier 2 capital,Capital, see “Regulation“—Regulation and Supervision – Supervision—Regulation by the Central Bank – Bank—Capital Adequacy and Leverage/Regulatory Capital Requirements”.Requirements.”
 
The proprietary portfolios are mainly held inby Itaú Bank Ltd. (Cayman) and also Banco Itaú GrandUnibanco Cayman Branch.Islands branch. These unitsoffices also enhance our ability to manage our international liquidity. Itaú BBA’s proprietary positions abroad are booked in the Itaú BBA, Nassau Branch.branch.
 
Through theour international activities, the group establishesoperations, we establish and monitorsmonitor trade-related lines of credit from foreign banks and maintainsmaintain correspondent banking relationships (which are banks that maintain credit lines with us), with money centerscenter and regional banks throughout the world and overseesoversee our other foreign currency raisingcurrency-raising activities.

(3)           Participate in the international capital markets as dealers:

In line with our strategy to become a non-stop shop for institutional investors around the world interested in investing in Brazilian assets, we have continued ourThere are international expansion to major financial cities in the world. Our Equityfixed income and Fixed Incomeequity desks are located in Brazil (Itaú BBA), New York (Itaú USA Securities Inc.), London Dubai,(Itaú UK Securities Ltd.), Argentina (Banco Itaú Argentina), Hong Kong and Japan.Tokyo (Itaú Asia Securities Ltd.). Our international sales team is active in offering equity and fixed income Brazilian securitiesand equity teams offer to institutional investors around the world. The next step is to cover companies ininvestor Latin America with the purpose of becoming one of the leaders in the region by 2011.securities. 

(4)            In addition, we are also present in Shanghai,and servicing our clients in Asia, speciallyespecially in China, through Itaú BBA’s Representative Office.representative office in Shanghai.

Trade Financing
 
For the year endedAs of December 31, 2008, we financed approximately US$ 4.5 billion in trade transactions. Our trade financing activities focus on export, pre-export and import financing. Pre-export and post-export financing constitute the principal part of2009, our trade finance portfolio. The amountportfolio accounted for US$8,601 million, of export financing outstanding as of December 31, 2008which US$7,501 million was approximately US$ 4.2 billion.
export-related (both pre-export and post-export financing). Our export financing to larger corporate customers is generally unsecured, even thoughbut some transactions do require more complex guarantees, specially the ones originallyparticularly those structured to be syndicated.
We carry out Our import financing by extending credit and by issuing letters of credit. Asbusiness accounted for US$1,099 million as of December 31, 2008, Itaú Unibanco Holding had US$ 1.6 billion in principal amount of import financing.
We are licensed by the Central Bank to trade in the foreign exchange markets. Our foreign exchange transactions are carried out subject to Central Bank limits on our overall daily position. These limits are intended to control the level of reais in the market and to limit foreign exchange speculation.  In addition, we have internal credit limits on our foreign exchange contracts with other banks.2009. For the year ended December 31, 2008,2009, our total volume of foreign exchange transactions related to exports was approximately US$ 12.8 billion17,138 million and our total volume of foreign exchange transactions related to imports was approximately US$ 10.9 billion.14,556 million.

Itaucred
Itaucred’s activities consist of transactions offered mainly to non-account holding customers. We created this segment as part of our core strategy of dividing our operations based on the specific needs of our several categories of customers. The operations of Itaucred consist of Taií’s operations, the association with Companhia Brasileira de Distribuição, or CBD, and Lojas Americanas S.A., or LASA, the investments in Banco Fiat and Intercap, and payroll deduction loans.
The consumer credit segment includes:
•              Automobiles: financing marketed outside the branch network;
•              Credit cards: credit cards for non-account holding customers; and
•              Taií: focus on partnership with major retailers, financial products to low-income population and payroll deduction loans.

AutomobileVehicle Financing
 
OnAs of December 31, 2008,2009, our portfolio of automobilevehicle financing, vehicle leasing and consortium lending consisted of approximately 2,918,1883.7 million contracts, of which approximately 75%70.0% were non-depositor contracts.non-account holders customers. The personal loan portfolio of automobilerelating to vehicle financing and vehicle leasing grew 37%4.3% to R$ 41 billion51,285 million in 20082009 as compared to 2007,2008, representing a market share in Brazil of approximately 28.5%. This33.5% as of December 31, 2009. Our strong performance maintainsand the Association have impacted our leadership market leadership in the segment.share.
 
The automobilevehicle financing sector in Brazil is dominated by bankbanks and finance companies that are affiliated with automobilevehicle manufacturers. According to ABEL, the ABELBrazilian association of leasing companies, as of December 31, 20082009, we were the largest leasing company in Brazil in terms of present value of lease operations.

 
We lease and finance automobilesvehicles through 15,54013,270 dealers. The salesSales are made through computer terminals installed in the dealerships that are connected to our computer network. Each automobilevehicle financing application is reviewed based on credit scoring and dealer scoring systems. The dealer scoring system analyzes the credit quality and amount of business provided by each automobilevehicle dealer. CreditWe usually grant credit approvals are usually granted within 1011 minutes, and one hour, depending on the credit history of the customer. Around 58%Approximately 81% of our credit approvals arein 2009 were made instantaneously because we have developed scoring models that permit prior approvalspre-approvals for our customers, which provide us with a very efficient tool and high credit approval performance. Currently, 100%all of the proposalsapplications are captured and processed bythrough the Internet, conferring more security and agility into the process of concession of credit, process, for the dealers, customers financed and us.
 
The truckdivision for the financing division responded forof trucks corresponded to approximately 7%5.8% of automobilevehicle financing and vehicle leasing in 2008.2009.
 
We also have a division responsible for the financing of motorcycles. The financial volume of transactions relating to motorcycles until December increased 19.05%, compared to December 2008.

In January of 2008, weMarch 2009, Itaú Unibanco Holding entered into a partnership with Dafra, a national motorcycle manufacturer,MMC Automotores do Brasil Ltda. and SVB Automotores do Brasil Ltda. for exclusive financing of Dafra motorcycles.their brands. The financial volume of transactionrelated transactions in 2009 reached R$ 1 billion at370 million. The agreement includes that Itaú Unibanco Holding will provide loans to Mitsubishi and Suzuki dealers and that dealers will offer our products and services to their customers.
Redecard
Redecard S.A., or Redecard, is a multibrand credit card provider in Brazil, also responsible for the endcapturing, transmission, processing and settlement of 2008.credit, debit and benefit card transactions. We hold 50% plus one share of Redecard’s capital stock. On March 30, 2009, Itaú Unibanco purchased 24,082,760 common shares of Redecard for R$590.0 million, giving rise to a goodwill amounting to R$14.4 million. In view of this transaction, we have control over Redecard and its results are fully consolidated in our consolidated financial statements since its acquisition.

Credit Cards – Non-Account Holding CustomersCommercial Agreements, Associations and Partnerships
 
Itaucred’s activities consistItaú Unibanco Holding has commercial agreements, associations and partnership agreements with over 300 retailers in the Brazilian market, serving more than 17.3 million customers as of transactions offered mainly to non-account holding customers. In December 31, 2008,2009. The consumer credit portfolios with respect to customers of those retailers amounted to R$7,941 million as of December 31, 2009.
Itaú Unibanco has developed a strong presence in the portfolio reached 9.4 million cardholders (an increase of 27.5% compared to 2007)consumer finance sector through our strategic alliances with main retailers in Brazil such as Magazine Luiza S.A., or Magazine Luiza, Marisa S.A., Companhia Brasileira de Distribuição, or CBD, Vivo S.A. and Telemig Celular S.A., Lojas Americanas S.A. and Ipiranga (Ultrapar Participações S.A.). Since 2001, when we established the volume of transactions was R$ 23.4 billion (an increase of 18.2% compared to 2007).
first partnerships, these alliances have supported consumer finance through several products, such as co-branded credit cards, private label cards, personal loans and insurance.

TaiíIn November 2009, Itaú Unibanco Holding entered into an agreement to extend through December 31, 2029 its joint venture with Magazine Luiza, pursuant to which Luizacred S.A. Sociedade de Crédito, Financiamento e Investimento, or Luizacred, offers and sells consumer credit financial services and products to Magazine Luiza’s customers.  Itaú Unibanco Holding paid R$250.0 million to extend its exclusive rights to distribute credit products through Luizacred at all physical and virtual Magazine Luiza stores, in addition to its call centers, internet and direct mailing. Each of Magazine Luiza and Itaú Unibanco Holding holds 50.0% of Luizacred’s capital stock.

Taií,In August 2009, CBD, which operates under the brand “Pão de Açucar,” and Itaú’s consumer-credit segment, encompasses the transactions of Financeira Itaú (FIT), a company 100% Itaú; Unibanco concluded their negotiations concerning Financeira Itaú CBD (FIC)S.A., or FIC, leading to:  (i) the release of Itaú Unibanco’s exclusivity obligation to CBD in exchange for a R$550.0 million payment to CBD; and Financeira Americanas(ii) the extension of the exclusivity term granted by CBD to FIC through August 2029 in exchange for a R$50.0 million payment. The association provides for the sale of financial services and products in stores of all types that are directly or indirectly operated or owned by CBD, including supermarkets, convenience stores, electronic appliance stores, retail and wholesale stores, gas stations, drugstores, and e-commerce.
In March 2009, Banco Itaucard, a subsidiary of Itaú (FAI)Unibanco Holding, and Vivo S.A. and Telemig Celular S.A., a subsidiary of Vivo S.A. (together, “Vivo”), a leading Brazilian mobile telecommunication services provider, entered into a partnership agreement pursuant to which we were granted the right to distribute and sell co-branded credit cards and certain other financial and insurance products and services to Vivo’s clients in Brazil for ten years.
In December 2008, Itaú Unibanco, Marisa S.A. and Credi-21 Participações Ltda., or Credi-21, (Marisa S.A. and Credi-21, together “Marisa”) entered into a partnership agreement pursuant to which Itaú has equity interestUnibanco and its affiliates were granted a ten-year exclusive right to offer and sell financial products and services, namely co-branded credit cards, personal loans and other types of 50%consumer credit financial products through Marisa’s sales network (physical and online stores). Marisa is the largest Brazilian department store chain specializing in women’s clothing. Its business and operational strategies focus on medium- and low-income women with ages ranging from 20 to 35 years. Both parties have combined the strengths of their business operations, which comprise valuable brands, clientele, market share and great penetration in their respective segments. The deal was structured as a profit-sharing agreement, under which each party is entitled to 50.0% of the share capital.results of the partnership operation. The credit portfoliopartnership represented an investment of Taií, excludingapproximately R$120.0 million by Itaú Unibanco, R$65.0 million of which was paid in exchange for the payroll loans, reachedexclusivity right and for the access to Marisa’s customer base for the period of the agreement, and payment of up to R$2,35955.0 million, in December 2008. The client base reached 7.5 million, 21% higher than 2007.which is linked to certain sales targets over a five-year period.

Personal Loans
 
Financeira Itaú (FIT)

FIT implemented previously announced restructuring plan. As of December 31, 2008Unibanco fully closed its proprietary network comprised 136 stores.dedicated to selling personal loans to low-income consumers. Itaú Unibanco intends to increase its low-income costumer base by selling credit cards to non-account holders customers, mainly through the partnerships developed with major retailers, airlines and fuel distribution companies. For further information on these partnerships, see “—Commercial Agreements, Associations and Partnerships.”
 
 
Financeira Americanas Itaú (FAI)

As of December 31, 2008, FAI was comprised of 463 points of sale, an increase of 67% of its network compared to 2007.  FAI reached 2.8 million credit cards accounts in 2008, which represented a market share of 12% in retailer sales.

Marketing and Distribution Channels
 
We provide integrated financial services and products to our customers through a variety of marketing and distribution channels. Our distribution network consists mainlyprincipally of branches, ATMs and CSBs (customercustomer site branches),branches, or CSBs, which are banking service centers located at aon corporate customer’scustomers’ premises.
 
The following table provides information asrelating to our branch network, customer site branches and ATMs as of December 31, 20082009 in Brazil and abroad:

  
Branches
  
CSBs
  
ATMs
 
Itaú Unibanco Holding  3,550   915   29,522 
Itaú Personnalité  165   3   344 
Itaú BBA  9   -   - 
Total in Brazil  3,724   918   29,866 
Itaú Unibanco abroad (excluding Latin America)  4   -   - 
Argentina  81   23   164 
Chile  70   -   48 
Uruguay  38   1   32 
Paraguay  19   6   166 
Total  3,936   948   30,276 
  Branches  CSBs  ATMs 
Itaú Unibanco  2,534   733   22,535 
Itaú Personnalité  173   1   333 
Itaú BBA  8   -   - 
Total in Brazil  2,715   734   22,868 
Itaú abroad  4   -   - 
Argentina  81   27   170 
Chile and Uruguay  84   1   67 
Total  169   28   237 

The following table provides information asrelating to the geographic distribution of our distribution network throughout Brazil as of December 31, 2008:2009:
 
Region
 
Branches
  
CSBs
  
ATMs
  
Branches
  
CSBs
  
ATMs
 
South  509   117   3,255   633   125   4,179 
Southeast  1,755   514   16,694   2,499   653   21,694 
Centerwest  243   47   1,298 
Center-west  282   62   1,663 
Northeast  154   27   1,192   242   45   1,788 
North  54   29   429   68   33   542 
Total in Brazil  2,715   734   22,868   3,724   918   29,866 

Branches
 
As of December 31, 2008,2009, we had a network of 2,7153,724 full service branches throughout Brazil. We havehad branches in municipalities representing over 83%92.4% of Brazil’s gross domestic products, or GDP as of December 31, 2008.  Although our branch network has a national coverage,2009. As of  December 31, 2009, 81.3% of our branches are heavily concentrated on the southeast of Brazil.  By year-end 2008, we had a wide branch networkwere located in the States of São Paulo, Rio de Janeiro and Minas Gerais in the Southeast region, Paraná in the South, and Goiás representing, in the aggregate, approximately 82% of total branches,Center-west, which collectively accounted for more than 63%63.7% of Brazil’s GDP.GDP (according to information published by the Central Bank on the breakdown of national GDP by state for 2006). The branch network serves as a distribution network for all of the products and services we offer to our customers.  We also offercustomers, such as credit cards, insurance capitalizationplans and private retirement plans through our branches.plans.
 
CSBsCustomer Site Branches
 
We operated 734 CSBs throughout Brazil asAs of December 31, 2008.2009, we operated 918 CSBs throughout Brazil. The range of services provided at the CSBs may be the same as those ofprovided at a full service branch, or more limited in accordance withaccording to the size of a particular corporate customer and its needs. The CSBs represent a low costlow-cost alternative to opening full service branches. In addition, we believe the CSBs provide us with an excellent opportunity to target new retail customers while servicing corporate customers.customers and personnel.
 
ATMs
 
We operated 22,868 ATMs asAs of December 31, 2008.  The annual volume of the2009, we operated 29,866 ATMs isthroughout Brazil. Our ATM network handles approximately 1,292125 million transactions.transactions per month. Our customers may conduct almost all account, related operations through ATMs. ATMs are low cost alternatives to employee-based services and give us points of service at costs significantly lower than branches. We also have arrangements with other network operators such as Cirrusthe brands “Cirrus” and Maestro“Maestro” to allow our clients to use simplified services through their networks.
 
Other Distribution Channels
 
We also offer customers the ability to obtain information as to the status of their accounts, investment funds and credit lines of credit through differentvarious electronic channels, which allowsallow us to conduct our retail operations at a lower transaction cost. These channels include:
 
 ·Call
c all centers, with an annuala monthly volume of approximately 237,000,000 transactions,43.3 million transactions. This distribution channel corresponded to 3.0% of total products sold by the retail banking segment in 2009;
 
 ·Homehome and office computer banking systems,system, with an annuala monthly volume of approximately 1,123,000,000 transactions,167.7 million transactions. This distribution channel corresponded to 5.0% of total products sold by the retail bank in 2009;
 
 ·Point-of-Sale/Redeshop, a network to electronically capture transactions at merchant stores which allows customers to use a direct debit card to purchase goods at the merchant’s point-of-sale, with approximately  352,000,00045.6 million transactions per year,month; and

 
 ·Variousvarious other channels, such as e-mail, cellular phone and WAP (wirelesswireless application protocol)protocol links, drive-through facilities and courier services.

Divestitures
In 2007, we sold equity interests held in (i) Serasa S.A., or Serasa, (ii) Redecard, (iii) Bovespa Holding S.A., or Bovespa Holding, and (iv) BM&F, which are summarized below.
Sale of Equity Interest in Serasa
On June 28, 2007, Itaú Unibanco Holding, through certain of its subsidiaries, sold to Experian Brasil 832,176 shares of Serasa representing 22.33% of its total capital stock.  On that same date:
(i)Itaú Unibanco and two other banks that held shares in Serasa incorporated a holding company named BIU Participações S.A., or BIU, to which Itaú Unibanco and these other banks transferred all the remaining shares held by them in the capital stock of Serasa; and
(ii)BIU entered into a stockholders’ agreement with Experian Brasil, which set forth the right of BIU to elect three board members of Serasa (of which one shall be indicated by Itaú Unibanco).  Pursuant to this stockholders’ agreement, Experian Brasil was granted a call option and BIU was granted a put option, both of them related to the equity interest held by BIU in Serasa. The options may be exercised by either Experian Brasil or BIU during the period starting on the fifth anniversary of the stockholders’ agreement and ending on the tenth anniversary thereof.
On October 11, 2007, BIU sold additional 11,025 shares of Serasa to Experian Brasil.  Itaú Unibanco holds an indirect equity interest equivalent to 10.16% of the capital stock of Serasa.
Initial Public Offering of Redecard
Banco Itaucard S.A. sold part of its equity interest in Redecard (53,798,700 common shares) in its primary and secondary initial public offering on July 11, 2007 and July 31, 2007 (over-allotment option), at a price of R$27.00 per share. On February 20, 2009, Itaú Unibanco acquired 24,082,760 of the common shares held by Banco Citibank S.A., or Citibank, in Redecard, and became the sole controlling stockholder of Redecard, holding title of approximately 50% plus one share of Redecard capital stock. See “Item 4A. History and Development of the Company – Recent Developments.”
Initial Public Offering of Bovespa Holding
Itaú Unibanco and Itaú BBA sold part of their equity interest in Bovespa Holding in its secondary initial public offering in October 2007.  Itaú Unibanco and Itaú BBA sold 2,698,629 and 8,723,798 common shares of Bovespa Holding, respectively, at a price of R$ 23.00 per share.  Upon completion of the offering, we held 4.02% of the total capital stock of Bovespa Holding.
Initial Public Offering of BM&F

Itaú Unibanco, Itaú BBA, Itaú CV S.A. and Itaubank DTVM S.A. sold part of their equity interest in BM&F in its secondary initial public offering on November 29, 2007.  Itaú Unibanco, Itaú BBA, Itaú CV S.A. and Itaubank DTVM S.A. sold 2,988,966, 1,500,483, 4,430,292 and 1,472,405 common shares of BM&F, respectively, at a price of R$ 20.00 per share.

Before the secondary initial public offering of BM&F, Itaú Unibanco, Itaú CV S.A., Itaubank DTVM S.A. and Itaú BBA sold to GL Latin America Investments, LLC, on November 16, 2007, 996,322, 1,476,764, 490,802 and 500,161 common shares of BM&F, respectively, at the total price of R$ 11.00 per share.

Upon completion of these transactions, we, through Itaú Unibanco, Itaú BBA, Itaú CV S.A. and Itaubank DTVM S.A. held approximately 2.3% of the total capital stock of BM&F.

On May 8, 2008, a merger between Bovespa Holding and BM&F was approved by its stockholders, creating BM&F Bovespa S.A.- Bolsa de Valores, Mercadorias e Futuros, or BM&F Bovespa. As a result of the merger, we, through our subsidiaries Itaú Unibanco, Itaú CV S.A., Itaubank DTVM S.A., Itaú DTVM S.A., Kinea Investimentos, Itaucard (Uam DTVM), Investshop and Itaú BBA, became holders of 59,922,961 common shares of BM&F Bovespa, corresponding to approximately 2.3% of its total capital stock.

 
Risk Management
 
On August 29, 2007, the Central Bank passedCMN enacted Resolution No. 3,490, which set forthprovides for the criteria for determiningto determine the Required Equity (PRE),required equity, effective as of July 1, 2008.  From its effectiveSince the date of effectiveness, the calculation of the institution’sour regulatory capital for risk coverage will consider all definedhas considered the factors as described below by each parcel:below:
 
 ·PEPR isPEPR: the regulatory capital required to cover the risk-weighted exposures, or Credit Risk;credit risk
 
 ·PCAM is
PCAM: the regulatory capital required to cover the Market Riskmarket risk in Foreign Exchange;exposures to gold, f oreign exchange and foreign assets and liabilities subject to exchange variation
 
 ·PJUR isPJUR: the regulatory capital required to cover the Market Riskmarket risk in Fixed Interest Rate, Foreign Exchange Coupon, Pricefixed interest rate, foreign exchange coupon, price and Other Indices;other indices
 
 ·PCOM isPCOM: the regulatory capital required to cover the Market Riskmarket risk in Commodities;commodities;
 
 ·PACS isPACS: the regulatory capital required to cover the Market Riskmarket risk in Stock; andstock
 
 ·POPR isPOPR: the regulatory capital required to cover the Operational Risk.operational risk.
 
 This is an attempt to more closely adjust Brazilian standards to the principles and rules provided in Basel II, which include:
 
Extension of the minimum regulatory capital requirements for coverage of the various risks based on internal models of financial institutions,
·Extension of the minimum regulatory capital requirements for coverage of the various risks based on internal models of financial institutions
 
Improvement of banking surveillance, and
·Improvement of banking surveillance
 
Significant expansion of the existing disclosure requirements.
·Significant expansion of the existing disclosure requirements.
 
Basel II contains a new methodology to calculate the minimum regulatory capital requirements for financial institutions and takes into account the particular risk factors of each of them.
 
We have always been driven by the concern of identifying, measuring and monitoring risks. We calculate our regulatory capital in such a way as to exceed all potential losses based on advanced managerial models. Accordingly, a major part of the Basel II requirements has already been incorporated in our risk control tools or is in the process of being developed.included. Our efforts are concentrated on Basel II’s Pillar 1 rules related to credit, market and operational risks and we intend to use advanced approaches (Advanced Internal Rating-Based (AIRB) for credit risk, Advanced Measurement Approach (AMA) for operational risk and Internal Models Approach (IMA) for market risk).
 
As part of the risk control tools, we developed and improved proprietary risk management systems that are in compliance with the Central Bank’s regulations and with international practices and procedures.  These models are based on the following elements:
 
Economic, financial and statistical analyses, which enable the evaluation of the effects of adverse events on the institution’sour liquidity, credit and market positions;
 
Market risks using Valuevalue at Risk,risk, or VaR, to evaluate risk in the structural portfolio, and stress tests using independent scenarios, to evaluate our whole exposure in extreme situations;
 
Credit risks tools which typically involve credit and behavior scoring for retail portfolios, subject to mass processes and proprietary rating models for corporate customers, with uniform individual approaches. We also use portfolio management models to quantify and allocate economic capital;
 
Operational risks which are in the process of being identified and already have an important amount evaluated on a current basis through the use of internal data bases and statistical models that monitor the frequency and the severity of internal events of losses to quantify the risks and allocate economic capital;
 
Daily monitoring of positions in relation to pre-established market risk limits; and

 
Simulations of alternatives for protection due to liquidity losses and contingency plans for crisis situations in different scenarios.
 
In addition, we have established committees responsible for risk management, structured as follows:
 
Risk policies superior committee, responsible for establishing general risk policies, setting up aggregated risk limits based on the allocation of capital and other parameters as it deems suitable, discussing the most important aspects to maximize the risk-return ratio and ensuring a consistent risk management within Itaú Unibanco,
 
Credit superior committee, responsible for establishing overall credit risk policy and making major credit risk decisions,
 
Financial risk superior committee, responsible for establishing policies and limits for market and liquidity risks, and monitoring positions on a consolidated basis, and
 
Audit and operational risk management superior committee, responsible for monitoring operational risk controls and compliance systems.
 
In order to further comply with the new requirements of the more advanced risk models provided for in Basel II, we established internal specific committees composed of executives from all areas of Itaú Unibanco Holding. AnWe prepared an action plan was elaborated at the end of 2004 and, to this date, activitieswe have been carried out activities as planned. In 2005, we focused on the construction of a historical database for probabilities of default (PD), models and historical databases for loss given default (LGD) and operational losses. In 2006, the implementation project continued with models for exposure at default (EAD), inclusion of credit risk mitigations and analysis of database validation processes. We also worked on a framework of documentation. In 2007, we started to develop stress test models for some portfolios and to implement a system to consolidate information and compute the capital ratio, in addition to adjusting controls for compliance with the requirements set forth by Resolution No. 3,380 on operating risks.  In 2008 we created a department responsible for internal models validation, with an independent structure from the other models development departments.  In addition to this new department, we are also working on the implementation of a system responsible for consolidating information related to Basel II capital calculation.
 
In the first half of 2009, we promoted through the Basel II project the unification of concepts, procedures and efforts to ensure that we adopted risk management best practices after the Association.
 We also reassessed the separation of the business, management and controls areas to enhance their independence and promote more balanced decisions regarding risks involved, pursuant to the requirements of CMN Resolution No. 3,721.
We believe that the changes to be implemented will result in lower allocated capital and, as a result, will establish grounds for an increase in the volume of credit operations resulting from the same capital base.


39
Market and Liquidity Risk Management
 
Our financial risk superior committee is responsible for managing market and liquidity risk. The committee analyzes and proposes scenarios for the risk and return assessment of interest and exchange ratios.  It also determines criteria for internal fund transfers and establishes minimum reserve limits.
 
To manage liquidity risk, we monitor and analyze liquidity through models that consider statistical tools and financial projections, which enable us to analyze various factors that affect our cash flows and liquidity levels under different scenarios. We also revise the contingency funding plan on a monthly basis to ensure that responsibilities are clearly attributed and the measures to be taken are feasible and able to provide adequate liquidity even under a severely stressed scenario.
 
To manage and control market risk, we have implemented internal risk management and valuation models.  These models employ statistical and historical information with regard to interest and foreign exchange rates, volatilities and trends, and seek to avoid adverse market fluctuations. Our VaR model analyzes volatility and correlation of market rates on an overnight basis. The model provides statistical results at a 99% confidence level.  See “Item 11. Quantitative and Qualitative Disclosures About Market Risk – Market Risk.”
 
Our financial risk superior committee analyzes the statement of income and risk information on a weekly basis and establishes limits for our risk exposures, interest rate positions and foreign currency risk positions.  It takes into account correlations across different markets. Depending on prevailing macroeconomic and microeconomic conditions, the committee may also propose that particular scenarios be considered in risk models.  In addition, the committee analyzes and approves criteria and rules for internal pricing of resources.

Credit Risk Management
 
Our continuous improvement in the process for decision-making and for credit risk management and control, guided by the best market practices, have made it possible for us to use methodologies based on mathematical modeling for risk analysis.
 
We prepare theour credit policy on the basis of internal and external factors, relating to the economic environment in Brazil and abroad. Among internal factors, there are customer ratings, determined by advanced credit analysis and control instruments, levels of default, rates of return, quality of the portfolio, and economic capital allocated. We have focused on evaluating the risk/return ratio in our strategy to expand our assets. Our main concern is the quality of the credit portfolio and the creation of value for our stockholders.shareholders. The whole decision-making process and the definition of our credit policy are centralized to ensure synchronized actions and optimize business opportunities.
 
Our credit risk management is centralized and carried out by a specific structure under the corporate risk area, which combines operating and market risk. Our senior credit committee defines the credit policies and the credit approval authority levels for the different divisions. The approval authorities rely on the professional skills and personal experiences of each individual with credit authority, and also consider the economic conditions and risk profile of the different divisions.
 
The credit committees establish standards and limits, fix risk classifications and oversee the credit operation approval process, models and policies. Depending on the amount and terms of a proposed loan, as well as on the risk rating of the potential borrower, the credit committee must consult with the senior credit committee.
 
Within the retail and small business operations, most types of loans to individuals and small companies are subject to our automated credit process. When an account is established with us, we obtain information about the customer’s income, net worth and professional standing (in the case of individuals). In addition, external information is also gathered automatically and, credit record and relationship history is always updated.  Based on these data and advanced credit and behavior scoring models, we assign each customer an aggregate credit limit. The customer must update new credit information at least annually.
 
There is a different credit review process for credit amounts higher than those available through the automated credit process and for categories of customer or types of credit not subject to the automated credit process, including credit operations in the middle market and corporate divisions. In these cases, we examine each application individually, verify data and carry out traditional credit analysis methodologies.
 
In addition, our credit area carries out technical support research on business groups and economic and industrial sectors within Brazil. This enables us to evaluate credit risk for companies in the middle market (with annual revenues in excess of R$ 106 million) and corporate divisions. Within the middle market and corporate division, we currently have ratings for approximately 60,000 business groups comprising approximately 100,000 companies. Payroll deduction loans are reevaluated at least on a yearly basis or sooner if something relevant comes to the attention of the credit area.
 
We give to each credit manager (manager of the credit area responsible for a team of credit analysts) and commercial area manager (relationship manager) a credit approval authorization limit for each of several categories of loans. The amount of the limit depends upon the experience of the particular manager and economic conditions. Loans up to R$ 70100 million require approval from the credit committee, and may require approval from thea senior credit committee,authority, depending on the termsterm of the proposed loan, and the credit rating of the potential borrower.borrower and the allocated capital for the proposed loan.  In addition, any loanproposed capital allocation greater than R$ 7020 million is subject to the approval of the senior credit committee.committee of Itaú Unibanco Holding.
 
Itaú BBA targets the large corporate divisions and its credit decision process is also based on the rating and size of the loan. There is no individual authority. The highest credit authority within Itaú BBA is represented by the president (or 2 commercial vice-presidents) and the credit director who, together, can approve up to R$ 350545 million, depending on the risk rating. Any loan above R$ 350545 million has to be submitted to the approval of senior credit committee of Itaú Unibanco Holding.

 
Operational Risk Management
 
Operational risk is defined as the risk of loss resulting from inadequate or failed internal processes and systems, the improper behavior of people, or from outside events.
 
The sophistication of the banking businesses and the technology evolution have increased the complexity of the risk profiles of the organizations and affected their operational risk management.  While our management is experienced and operational risk management is not a new practice, it has been necessary to establish a specific structure for the operational risk distinctdifferent from the one traditionally applied to the market and credit risks.
 
In line with the principles established by the National Monetary Council (Conselho Monetário Nacional), or CMN, we defined our operational risk management policy, approved by the audit committee and ratified by the board of directors. The operational risk management policy is applicable to the Itaú Unibanco Holding conglomerate in Brazil and abroad.
 
The policy is comprised of a set of principles, procedures and guidelines that provide an adequate management of products, services, activities, processes and systems’ risks taking into consideration their nature and complexity.
 
The policy defines the procedures for identifying, assessing, monitoring, mitigating, controlling and disclosing operational risks as well as its participants’ roles and responsibilities.
 
In addition, we utilize a business capital evaluation management model that quantifies the operational risks incurred through statistical models that allow us to calculate expected losses and capital allocation for unexpected losses (VaR at a confidence level of 99.9%) using Monte Carlo simulation.
 
This mechanism enhances our product and service price definition process and will be submitted to the approval of the Brazilian regulatory agency within the advanced measurement approach methodology, in accordance with Basel’s Revised Framework for the International Convergence of Capital Measurement and Capital Standards criteria, following the guidelines established by the regulatory authorities.
 
We constantly seek to improve our management process and to comply with the regulatory agencies’ requirements, maintaining our image as a solid and trustworthy bank.

Insurance Underwriting and Portfolio Risk Management
 
Management of our insurance operations establishes our underwriting policies relating to retentions, protections, reinsurance programs and pricing, depending on the type of business. This approach is designed to maintain high quality underwriting, pricing discipline and reduce volatility in the results. The actuarial department analyzes the adherence of the probability tables used in the pricing discipline.models to the experience of our portfolio. In the retail market, the prices of our insurance products are established according to proprietary scoring and rating systems based on data we gathered and analyzed over many years, which underwriters use to assess and evaluate risks prior to quotation. This information provides specialized knowledge aboutrelating to industry segments and helps analyze risk based on account characteristics and pricing parameters. With respectIn the group life market, the prices of our insurance products are established according to auto insurance, we use information fromrating systems based on an international actuarial table of death and the applicant and take into account factors such as gender,historical experience of our policies, the age driving experience and use of the vehicle.group, the industry segments, the percentage of female and experience of each group and the financial health of the client. The informationproperty insurance underwriting is appliedcontrolled by the risk factors and an appropriate pricing according to rating programs used by independent selling brokersthe company exposition considering economy segment analysis, activity and other channels.level of severity risk, customer and similar companies experiences, financial health and optional management instruments. The reinsurance strategy is to work with limited reinsurance companies to have a high automatic limit with a safe retention limit. Besides that, the underwriters reanalyze all our accounts every year to control the risk of portfolio. In addition we apply the RAROC concept on the corporate segment to allocate enough capital to maintain business sustainability.


Funding

Main SourcesRetail Banking

Our principal source of fundingcore business is deposits. Deposits include non-interest bearing demand deposits, interest bearing savings account deposits, time deposits certificates sold to customers and interbank deposits from financial institutions.retail banking, which serves individuals with monthly income below R$7,000.  As of December 31, 2008, total deposits amounted to approximately R$ 150.8 billion representing 51.6%2009, we had over 13.7 million customers and 4,465 branches and customer site branches under the “Itaú” and “Unibanco” brands.  Our retail banking operations are present in all Brazilian states and in cities that altogether represented more than 80.0% of total funding. Our savings deposits represent one of our major source of funding which,Brazil’s individual domestic consumption as of December 31, 2008 accounted for 21.2%2009.  Our strategy is to offer higher quality banking products to our retail banking customers.
In the second half of total deposits.2009, we began the project of converting “Unibanco” brand branches to the “Itaú” brand.  We converted approximately 50 branches during 2009.  As of December 31, 2009, there were 950 remaining branches under the “Unibanco” brand.  During 2010, we will intensify the conversion process and intend to convert approximately 160 branches per month starting in June 2010.
 We classify our retail clients in accordance with their income and profile:
·Itaú retail customers, who earn less than R$4,000 per month;
·Itaú Uniclass customers, who earn more than R$4,000 and less than R$7,000 per month; and
·Specialized account managers provide services to Itaú Uniclass customers who have access to certain customized products.  We created this segment after the Association and we expect Itaú Uniclass to be present in some of our retail branches across Brazil and increase the number of our customers.
For the year ended December 31, 2009, credit products represented 67.0% of our consolidated revenue from retail banking, while investments represented 24.0% and services and other fee-based products represented 9.0%.

25
Very Small Business Banking
At the end of 2005, we set up 150 offices in the city of São Paulo to provide specialized services to companies with annual revenues below R$500,000.  In 2006, we expanded our services to over 80 locations throughout the interior of the State of São Paulo, followed by 94 additional offices in the State of Rio de Janeiro.  In 2007, we expanded our services into the States of Minas Gerais and Paraná.  In 2008 and 2009, we continued this expansion and set up additional offices focused on very small business banking.
Our very small business banking office managers are trained to offer customized solutions and provide detailed advice on all products and services to very small companies.  Our strategy is to capture the market opportunity of this customer base by meeting the needs of these companies and their owners, particularly with respect to the management of cash flow and credit facilities.
Since the Association, we have been consolidating offices and customer service in the very small business banking segment.  As of December 31, 2009, we had over 430 very small business banking offices located throughout Brazil and approximately 1,700 managers working for over 537,000 small business customers.  In 2010, we expect to continue to consolidate our very small business banking operations and to increase the number of managers.
The following table sets forth a breakdown of our sources of fundingcredit facilities we provide to very small businesses increased by approximately 92.8% in 2009.  Loans to very small businesses totaled R$5,444 million as of December 31, 2008 and 2007:2009.

Public Sector
  2008  2007 
  
millions of
R$
  
% of total
funding
  
millions of
R$
  
% of total
funding
 
Deposits  150,802   51.6   81,625   44.3 
Demand deposits  23,041   7.9   26,729   14.5 
Other deposits  1,065   0.4   1,405   0.8 
Savings deposits  31,896   10.9   27,990   15.1 
Time deposits  92,758   31.7   23,885   13.0 
Deposits from banks  2,042   0.7   1,616   0.9 
Securities sold under repurchase agreements  49,492   16.9   23,399   12.7 
Short-term borrowings  54,277   18.6   48,178   26.2 
Trade finance borrowings  9,166   3.1   5,805   3.2 
Local on-lendings  122   0.1   70   0.0 
Euronotes  576   0.2   186   0.1 
Commercial Paper  60   0.0   3   0.0 
Fixed rate notes  133   0.1   -   - 
Mortgage notes  3,035   1.0   282   0.2 
Securities issued and sold to customers under repurchase agreements  40,977   14.0   41,174   22.3 
Other short-term borrowings  208   0.1   658   0.4 
Long-term debt  37,672   12.9   31,027   16.8 
Local on-lendings  7,271   2.5   5,403   2.9 
Euronotes  2,209   0.8   1,758   1.0 
Fixed rate notes  278   0.1   193   0.1 
Commercial Paper  -   -   15   0.0 
Mortgage notes  669   0.2   907   0.5 
Trade financing borrowings  7,361   2.5   5,184   2.8 
Debentures  2,093   0.7   3,488   1.9 
Subordinated debt  15,030   5.1   11,934   6.5 
Diversified payments right  1,424   0.5   1,110   0.6 
Other long-term debt  1,337   0.5   1,035   0.5 
Total  292,243   100.0   184,229   100.0 
Our public sector business operates in all areas of the public sector, including federal, state and municipal levels of government (in the executive, legislative and judicial branches). As of December 31, 2009, we have 2,500 public sector customers. To service these customers, we use platforms that are separate from the retail banking branches, with teams of specially trained managers who offer customized solutions in tax collection, foreign exchange services, administration of public agency assets, payments to suppliers, payroll for civil and military servants and retirement. Based on these platforms, we have a significant amount of business with public sector clients, particularly in those Brazilian states where we acquired previously state-owned financial institutions.

Itaú Personnalité
Through Itaú Personnalité, we were one of the first banks in Brazil to provide personalized services to high-income individuals.
Itaú Personnalité’s value proposition consists of offering (i) an advisory service by its managers, who understand the specific needs of these customers; and (ii) a large portfolio of exclusive products and services, which are available through a dedicated and network of located in the main Brazilian cities. Composed of distinctive and specifically designed branches. Through this dedicated network of 167 branches, Itaú Personnalité’s customer base reached approximately 534,000 individuals as of December 31, 2009. Itaú Personnalité customers also have access to Itaú Unibanco network branches and ATMs throughout the country.
Since its establishment in 1996, Itaú Personnalité has been expanding its market share in the high-income individuals market.  In 2006, as a result of the acquisition of BankBoston Brazil by Itaú, Itaú Personnalité consolidated its leadership in the high-income individuals market.
As a repositioning strategy, in September 2009, Itaú Personnalité raised its client target to high-income individuals who earn more than R$7,000 per month or have investments in excess of R$80,000.

Private Bank
Itaú Private Bank is a leading Brazilian bank in the global private banking industry, providing financial advisory services to approximately 22,200 Latin American customers as of December 31, 2009. Our 620 employees are focused on offering financial consulting services to customers with at least US$200,000 in investment assets. In addition, we provide our customers with a full range of traditional banking products and services.
Financial advisory services are provided by teams of experienced relationship managers located in Brazil, Miami, Argentina, Uruguay, Chile and Paraguay, and supported by investment specialists, who recommend the most appropriate solutions for each individual risk profile. Our private banking client base is composed of clients from Brazil, Argentina, Venezuela, Chile, Uruguay, Ecuador, Paraguay, Mexico, and other Latin American countries.
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We serve our customers’ needs for offshore wealth management solutions in three major jurisdictions through independent institutions: in the United States through Banco Itaú Europa International, or BIEI, and Itaú Europa Securities, or IES; in Luxembourg through Banco Itaú Europa Luxembourg (“BIEL”); and in the Caribbean, through BIE Bank & Trust in the Bahamas, or BIE Bahamas, and Unicorp Bank & Trust in Cayman, or UBT Cayman.
 
We manage individual portfolios on a non-discretionary basis, subject to guidelines agreed upon with each customer. Portfolios managed by Itaú Private Bank may also invest in mutual funds managed by other financial institutions which have more flexibility in making investment decisions. Fees earned from our private banking customers are, in most cases, a function of the assets under management.
As of December 31, 2009, our private banking activity for Latin American clients had assets under management equivalent to R$ 97,548.0 million, including R$13,945.2 million in BIEL, R$6,809.6 million in BIEI and IES and R$2,128.6 million in BIE Bahamas and UBT Cayman.
Private Banker International recognized Itaú Private Bank as “The Outstanding Private Bank - The Americas,” for 2008 during the global financial crisis and in 2009 Itaú Private Bank was named the “The Outstanding Private Bank - Latin America”, which shows consistent recognition of our strong performance in our target market. According to the 2010 Annual Private Banking and Wealth Management Survey, coordinated by Euromoney magazine, Itaú Private Bank was recognized as offering “The Best Private Banking Overall Services” in Brazil for the second consecutive year. In the latest ranking published in the February 2010 edition of Euromoney magazine, Itaú Private Bank was also named “Best Private Banking Services Overall” in Chile and Top 5 “Best Private Banking Services Overall” in Latin America. Itaú Private Bank also remains the only private bank in Brazil to be among the finalist organizations in the Brazilian National Quality Award ( Prêmio Nacional de Qualidade 2007 ).

Small Business Banking
We have structured our relationships with small business customers through the use of specialized offices since 2001.  As of December 31, 2009, we had 277 offices located nationwide in Brazil and nearly 1,600 managers who worked for over 260,000 companies with annual revenues from R$500,000 to R$6 million. In 2010, we expect to continue to consolidate our small business banking operations and to expand our offices geographically.
All our managers are certified by ANBIMA, and throughout the year they receive training to offer the best solutions for each customer profile. Our customers rely on our ability to provide products, terms and rates customized to their needs.
Loans to small businesses totaled R$18,330 million as of December 31, 2009.

Middle - - Market Banking
We believe the Association has strengthened our middle-market banking position. We selected the best products and services of each bank to offer to our customers and dedicated managers to serve our customers to meet their needs.
As of December 31, 2009, we have approximately 104,000 middle-market corporate customers that represented a broad range of Brazilian companies located in over 75 cities in Brazil. Our middle-market customers are generally companies with annual revenues from R$6 million to R$150 million.
We offer a full range of financial products and services to middle-market customers, including deposit accounts, investment options, insurance, private retirement plans and credit products. Credit products include investment capital loans, working capital loans, inventory financing, trade financing, foreign currency services, equipment leasing services, letters of credit and guarantees.  We also carry out financial transactions on behalf of middle-market customers, including interbank transactions, open market transactions and futures, swaps, hedging and arbitrage transactions. We also offer our middle-market customers collection services and electronic payment services.  We are able to provide these services for virtually any kind of payment, including Internet office banking.  We charge collection fees and fees for making payments, such as payroll, on behalf of our customers.
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As of December 31, 2009, we had over 1,300 managers specializing in middle-market customers and we intend to increase this number in 2010.  At December 31, 2009, these managers worked from one of the 213 specialized offices located at key branches and we intend to further increase the number of these specified offices in 2010.
Consistent with customary lending practices in Brazil, our loan portfolio to our middle-market customers is composed predominantly of short-term products, defined as having a maturity of less than 12 months. Loans to middle-market businesses totaled R$37,219 million as of December 31, 2009.

Credit Cards
We are the leading company in the Brazilian credit card market, based on transaction volume as of December 31, 2009. Our credit card brands “Itaucard” and “Hipercard,” offer a wide range of products to 23.4 million customers as of December 31, 2009, including both account holders customers and non-account holders customers. In the year ended December 31, 2009, the transaction volume of credit cards was R$84,938 million, a 17.8% increase from the prior year. The results of customer transactions by non-account holders customers are reported in the consumer credit division.
Our main challenges in the credit card business are to continually increase our cardholder base and improve our portfolio profitability. To this end, our credit card division focuses on the development of new products, the enhancement of partnerships, cross-selling of banking and insurance products and sales through a variety of channels.
To enhance market opportunities in the credit card segment, we entered into partnerships with Marisa S.A. and Vivo S.A. and C&C Casa e Construção Ltda. For further information on these partnerships, see “—Commercial Agreements, Associations and Partnerships.”

Real Estate Financing
As of December 31, 2009, we had approximately R$8,510 million in outstanding real estate loans. Given our expectation of growth over the next several years in the mortgage market in Brazil, we are investing in the operational platform in order to reduce costs and improve quality for our customers. We are also developing our distribution channels for mortgage loans by focusing on our branch network and developing our relationships with real estate brokers. According to Brazilian regulations, financial institutions are required to allocate at least 65% of their savings accounts balances to fund mortgage financing, of which 80% must be used to finance properties with value lower than R$500,000 and must have annual interest rates lower than 12%.
We use different distribution channels to reach our customers, including our Itaú Personnalité branches and real estate brokers. Itaú Unibanco Holding has partnerships with two of the largest real estate brokers in Brazil: Lopes and Coelho da Fonseca. These long-term partnerships provide us with exclusive real estate financing origination at a large number of locations throughout Brazil.

Asset Management
According to ANBIMA, as of December 31, 2009, we were the largest mutual fund manager among private banks in Brazil based on our assets under management. As of that date, we had total net assets under management of R$297,987 million on behalf of approximately 1.5 million customers.  We also provide portfolio management services for pension funds, corporations, private bank customers and foreign investors. According to ANBIMA, as of December 31, 2009, we were the largest manager of private bank clients’ assets and the largest private manager of pension fund assets in Brazil, based on our assets under management.  As of December 31, 2009, we had R$176,363 million of assets under management for pension funds, corporations and private bank customers.
Our fees are based on the average net asset value of the funds under management, which we calculate on a daily basis. Fees generally average approximately 2.74% per year for funds from individuals and 0.2% to 0.5% per year for funds from companies.  Fees for portfolio management services are privately negotiated and vary depending on the size and investment parameters of the funds under management.
As of December 31, 2009, we offered and managed about 1,478 mutual funds, which are mostly fixed-income and money market funds. For individual customers, we offered 157 funds to our retail customers and approximately 300 funds to our Itaú Personnalité customers. Private banking customers may invest in over 600 funds, including those offered by other institutions. Itaú BBA’s capital markets group also provides tailor-made mutual funds to institutional, corporate and private banking customers.
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In November 2009, Fitch Ratings, one of the largest international rating agencies in Brazil, maintained its M1 (bra) rating (the highest rating granted to an asset manager) of our asset management area.  We have been in the top rating category since July 2003.

Corporate Social Responsibility
 
The Itaú Social Excellence Fund ( Fundo Itaú Excelência Social or FIES, launched in 2004, is a socially responsible investment fund, investing in the shares of companies with superior corporate social responsibility practices with the goal of obtaining higher long-term returns than those offered by the main Brazilian financial market indices. In addition to analyzing the risks and returns of companies, fund managers take into account three fundamental criteria in relation to companies: corporate social activities; environmental protection practices and good corporate governance practices. Every year the fund manager donates part of its accumulated asset management fees to social projects in the following tables set forthcategories: environmental education, employment education and childhood education.
As of December 31, 2009, FIES had net assets of R$365 million, and the fund donated more than R$3.3 million in 2009, which corresponded to 50% of the management fee from July 1, 2008 to June 30, 2009.  The 19 projects chosen to receive this donation were divided into two investment categories, with 16 non-governmental organizations receiving R$100,000 each and three non-governmental organizations receiving R$150,000 each, and almost R$1.3 million spent on consulting.  The projects are selected by the fund advisory council, which is composed by market leaders and specialists in corporate social responsibility.
Securities Services for Third Parties
We provide securities services for third parties in the Brazilian capital markets, where we act as custodian, transfer agent and registered holder. In December 2009, we were ranked the top provider of securities services in Brazil to third parties by ANBIMA.
As of December 31, 2009, Itaú Unibanco held assets of R$685,360 million in connection with securities services for third parties, representing 28.5% of the Brazilian market based on assets held. Our broad range of products relates to both domestic and international custody. Our services include acting as transfer agent, providing services relating to debentures and promissory notes, custody and control services for mutual funds, pension funds and portfolios, providing trustee services and non-resident investor services, and acting as custodian for depositary receipt programs.
In 2009, we acted as custodian and transfer agent for 438 companies and as the registered holder with respect to 145 transactions.  As of December 31, 2009, our specialized staff reached 659 employees managing portfolios for mutual funds, institutional investors and private portfolios.
Brokerage
Itaú Corretora has been providing brokerage services since 1965, with operations on BM&FBOVESPA.  We also provide brokerage services to international customers through our broker-dealer operations in New York, through our London branch, and through our broker-dealers in Hong Kong and Dubai.
For the year ended December 31, 2009, Itaú Corretora was ranked third on the BM&FBOVESPA in equity trading volume and third among brokers controlled by large commercial banks in Brazil in commodities and futures trading volume.

Insurance, Private Retirement and Capitalization Products
Insurance
As of December 31, 2009, according to SUSEP, we were one of the largest insurance groups in Brazil based on direct premiums, excluding health insurance and VGBL, a breakdownprivate retirement plan providing annuity benefits. For regulatory purposes VGBL is considered life insurance. For the year ended December 31, 2009, our direct premiums totaled approximately R$6,715 million.
Our main lines of depositsinsurance are life insurance (excluding VGBL; see “Private Retirement Plans”), property and casualty insurance and vehicle insurance, which accounted for 31.4%, 27.5% and 27.3% of direct premiums, respectively, for the year ended December 31, 2009. Our policies are sold through our banking operations, independent local brokers, multinational brokers and other channels.  We reinsure a portion of the risks we underwrite, particularly large marine property and casualty risks that exceed the retention limits we have established within regulatory limits. Risks that exceed the retention limit must be ceded to licensed Brazilian reinsurers in accordance with complementary Law No. 126 published on January 15, 2007 and the SUSEP regulations published on December 17, 2007.
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Our strategy to increase our level of penetration in the Brazilian insurance market depends on the markets in which we operate. In the high risk market, we intend to enhance our market share through independent local brokers and multinational brokerage firms. For individuals and small and medium company markets, we focus on operations within our banking client base banc assurance operations, to increase customer penetration. We are working on improving banc assurance operations in property and casualty insurance for small and medium companies.  Our customer relationship management has implemented several advances and the development of specific products for different segments allows more efficient use of each marketing channel (our branches, telemarketing, Internet, ATMs and bank teller terminals).
In November 2008, Unibanco entered into an agreement with American International Group, Inc., or AIG, regarding the exchange of shares that Unibanco and AIG respectively held in certain Brazilian insurance companies, as follows:  (i) Unibanco acquired, for US$820.0 million, the shares held by maturity,AIG in Unibanco AIG Seguros S.A., which changed its name to Unibanco Seguros S.A., or Unibanco Seguros; and (ii) AIG acquired, for US$15.0 million, the shares held by Unibanco in AIG Brasil Companhia de Seguros S.A., or AIG Seguros.  Upon the completion of the exchange, Unibanco Seguros, Unibanco AIG Vida e Previdência S.A. and Unibanco AIG Saúde Seguradora S.A., which used to be Unibanco Seguros’ wholly owned subsidiaries, became our wholly owned subsidiaries.
In August 2009, Itaú Unibanco Holding and Porto Seguro S.A., Porto Seguro, entered into an operating agreement that provides for the offering and distribution, on an exclusive basis, of homeowner and automobile insurance products to customers of Itaú Unibanco Holding in Brazil and Uruguay (the “Porto Seguro Alliance”).  In connection with the Porto Seguro Alliance, Itaú Unibanco Holding transferred all the assets and liabilities related to its then current portfolio of homeowner and automobile insurance to Itaú Seguros de Auto e Residência S.A., ISAR, all of the shares of which were subsequently transferred to Porto Seguro. In exchange, Porto Seguro issued shares representing 30.0% of its capital stock to Itaú Unibanco Holding and/or its affiliates.  The controlling shareholders of Porto Seguro and Itaú Unibanco Holding established a new company named Porto Seguro Itaú Unibanco Participações S.A., or PSIUPAR, and transferred their shares of Porto Seguro to PSIUPAR.  The controlling shareholders of Porto Seguro remained controlling shareholders of PSIUPAR, which became the parent company of Porto Seguro.  Itaú Unibanco Holding is entitled to nominate two members of the board of directors of each of Porto Seguro and PSIUPAR.  ISAR, which is directly controlled by Porto Seguro and indirectly controlled by PSIUPAR, will be managed by Porto Seguro and will utilize the trademarks Porto Seguro, Itaú Unibanco and Azul. In August 2009, Itaú Unibanco (through Itaú Seguros S.A.) had 3.4 million automobiles and 1.2 million homes insured, which were subsequently transferred to ISAR.  In October 2009, SUSEP granted prior authorization for the corporate acts related to the Porto Seguro Alliance. The approval by the Brazilian antitrust authorities for the transaction is still pending.
In November 2009, Itaú Seguros S.A., or Itaú Seguros, and XL Swiss Holdings Ltd., or XL Swiss, a company controlled by XL Capital Ltd., or XL Capital, signed an agreement providing for the acquisition by Itaú Seguros of all of XL Swiss’s shares in Itaú XL Seguros Corporativos S.A., or Itaú XL. Itaú XL will be wholly owned by Itaú Unibanco Holding.  After completion of the sale, Itaú Seguros will provide, under a separate agreement, insurance coverage to XL Capital’s clients in Brazil and XL Capital’s Global Programs clients with operations in Brazil.  The transaction is pending approval by the Brazilian insurance regulator, SUSEP and has not yet closed.
In December 2009, Allianz South America Holding B.V. entered into an agreement with Itaú Unibanco Holding for the purchase of the 14.025% indirect interest that Itaú Unibanco Holding held in Allianz Seguros S.A. for R$109 million. The transaction was completed in January 2010, approved by the Brazilian antitrust authorities on March 3, 2010 and SUSEP was notified of the transaction. The transaction did not have a significant impact on our net income for 2009.

Private Retirement Plans
As of December 31, 2009, balances under private retirement plans (including VGBL) totaled R$43,435 million, an increase of 25.0% compared to December 31, 2008.  As of December 31, 2009, we were the second largest private retirement plan manager in Brazil based on total liabilities according to SUSEP. As of December 31, 2009, we had R$43,636 million in assets related to our private retirement liabilities (including VGBL).  We concentrate our activities on managing open private retirement plans, which experienced strong growth in 2009.
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Capitalization Products
Capitalization products are savings account products that generally require a customer to deposit a fixed sum with us which will be returned at the end of an agreed-upon term date, with accrued interest.  In return, the customer automatically entered into periodic drawings that gives him the opportunity to win a significant money prize.  As of December 31, 2009, we had 9.7 million capitalization titles outstanding with guaranteeing assets of R$2,300 million. We distribute these products through our retail network, Itaú Personnalité and Itaú Uniclass branches, electronic channels and ATMs. These products are sold by our subsidiary, Cia. Itaú de Capitalização S.A. During 2009, R$1,786 million of capitalization products were sold and we distributed over R$41.1 million in money prize to 6,085 customers.

Itaú BBA
Itaú BBA is responsible for our corporate and investment banking activities.  Itaú BBA offers a complete portfolio of products and services to most of the largest companies and conglomerates in Brazil through a team of highly qualified professionals.  Itaú BBA services approximately 2,400 companies and conglomerates.  Itaú BBA’s activities range from typical operations of a commercial bank to capital markets operations and advisory services for mergers and acquisitions.  These activities are fully integrated, which enables Itaú BBA to achieve a performance tailored to its clients’ needs.  As of December 31, 2009, our corporate loan portfolio reached R$90,830 million.  During 2009, this portfolio was affected mainly by the appreciation of the real and weaker economic conditions when compared to 2008. In investment banking, the fixed income department was responsible for the issuance of debentures and promissory notes that totaled R$17,849 million and securitization transactions that amounted to R$1,378 million in Brazil in 2009.  According to ANBIMA, Itaú BBA was the leader in distribution of fixed income in 2009 with a 24.2% market share, thus maintaining the bank’s historic leadership in the domestic fixed income market.  In the international debt markets, Itaú BBA acted as joint bookrunner in the issuance of seven deals in the amount of US$4,950 million, of debt securities in 2009, earning the second place in Bloomberg’s rankings of underwrites of Brazilian-based corporate debt issuances based on number of transactions.
With respect to equity issuances, Itaú BBA coordinated public offerings that totaled R$14,229 million in 2009, and occupied the third position in ANBIMA’s origination rankings in Brazil, with 13.7% of the market share in Brazil in 2009. Itaú BBA’s investment banking division also started to manage the wholesale brokerage business in 2009 and is implementing several initiatives to increase its presence in the markets it operates in.
In addition, Itaú BBA advised on merger and acquisition transactions with a total volume of 24 deals in the amount of R$19,964 million, in 2009, ranking second in Brazil based on the number of merger and acquisition deals according to Thomson Reuters.
Itaú BBA is active in BNDES on-lending to finance large-scale projects, which is aimed at strengthening domestic infrastructure and increasing the productive capacity of various industrial sectors.  In consolidated terms, total loans granted under BNDES on-lending represented more than R$4,889 million for various projects and financings in 2009, corresponding to an increase of 44.0% in 2009 compared to 2008.  As an integral part of its risk management and sustainability policies, the on-lending of funds to large-scale projects is in compliance with Itaú Unibanco’s social and environmental risk policy.  Itaú Unibanco is the current leader in the ranking of Latin American banks which adopt the best corporate governance practices drawn up by the consultancy Management & Excellence and Latin Finance magazine.  All lending categorized as project finance, as defined under Basel II, is also in compliance with the Equator Principles, which Itaú BBA adopted in 2004, being the first financial institution from an emerging market to adopt the Equator Principles.  The Equator Principles were announced launched in 2003 and became the benchmark within the financial sector for addressing environmental and social risks in project financing.  By February 2010, 68 financial institutions had adopted the Equator Principles, and therefore had voluntarily committed themselves to incorporating these principles in projects worth US$10 million or more.  The Equator Principles were revised in 2006 and were extended to advisory services in structuring projects.  Itaú Unibanco plays a leading role in the Equator Principles Steering Committee and Working Groups, having occupied the position of Chair of the Steering Committee from September 2008 until March 2010.
Itaú BBA focuses on the following products and initiatives in the international area:  (1)  câmbio pronto (whereby a foreign exchange purchase in reais or sale in foreign currency is completed in two business days), which exceeded US$88.677 million in volume in 2009; and (2) structuring long-term, bilateral and syndicated financing.  In addition, in 2009 Itaú BBA continued to offer a large number of lines of credit for foreign trade, having a total of approximately US$6,797 million in lines of credit drawn from corresponding banks as of December 31, 2008 and 2007:2009.
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  (in millions of R$) 
  2008 
  0-30 days  31-180 days  181-365 days  Over 365 days  Total 
Non-interest bearing deposits  24,106   -   -   -   24,106 
Demand deposits  23,041               23,041 
Other deposits  1,065               1,065 
Interest bearing deposits  48,167   15,525   9,062   53,942   126,696 
Savings deposits  31,896   -       -   31,896 
Time deposits  15,822   14,656   8,615   53,665   92,758 
Deposits from banks  449   869   447   277   2,042 
Total  72,273   15,525   9,062   53,942   150,802 
In 2009, Itaú BBA received the award of Investment Bank of the Year in Latin America, according to The Banker magazine and the Best Local Investment Bank accolade from Latin Finance.
In December 2008, Itaú Unibanco acquired the remaining 4.25% of Itaú BBA’s total shares from certain Itaú BBA managers and employees who were minority shareholders. Itaú Unibanco holds approximately 100% of the capital stock of Itaú BBA.

  2007 
  0-30 days  31-180 days  181-365 days  Over 365 days  Total 
Non-interest bearing deposits  28,134   -   -   -   28,134 
Demand deposits  26,729   -   -   -   26,729 
Other deposits  1,405   -   -   -   1,405 
Interest bearing deposits  35,939   6,781   4,107   6,664   53,491 
Savings deposits  27,990   -   -   -   27,990 
Time deposits  6,898   6,439   3,989   6,559   23,885 
Deposits from banks  1,051   342   118   105   1,616 
Total  64,073   6,781   4,107   6,664   81,625 
International Operations

The following table sets forthBanco Itaú Argentina
Argentina is the mixthird largest economy in Latin America, Brazil’s main trading partner and one of the individualcountries with highest GDP per capita of the continent. The pace of increase in banking penetration shows that the Argentine financial system has ample growth potential.
Banco Itaú Argentina’s core business is retail banking, with approximately 250,000 customers in the Argentine middle and corporate time deposits divided among our retail, Personnalité, middle market and corporate sectors (each expressed as a percentage of total time deposits)upper-income segment as of December 31, 2009.  Compared with 2008, and 2007:

  2008  2007 
Retail  22.9%  25.2%
Personnalité  27.2%  3.7%
Middle market  40.5%  38.7%
Corporate  9.4%  32.4%
Total  100.0%  100.0%

Other Sourcesthis represents a 5.9% increase in the number of customers.
 
We also act as a financial agent through borrowing funds from the BNDES, and from the National Industrial Finance Authority (Fundo de Financiamento para Aquisição de Máquinas e Equipamentos Industriais), or FINAME, and passing the funds at a spread determined by the government to the targeted sectors of the economy. We refer to these borrowings as on-lending borrowings and they are primarily in the form of credit lines that are directed by the government agencies through private banks to specific targeted sectors for economic development. As of December 31, 2008, we participated as a financial agent in on-lending borrowings financed by BNDES2009, Banco Itaú Argentina had assets of R$2.1 billion, loan and FINAME, in the total amountleasing operations of approximately R$ 7.4 billion.  See “Itaú BBA – Investment Banking”1.1 billion, deposits totaling R$1.6 billion and “Itaú BBA - Corporate Banking.”shareholders’ equity of R$172 million.
 
We obtain U.S. dollar-denominated linesAs of credit fromthe same date, Banco Itaú Argentina had one of the largest branch networks in Argentina consisting of 81 branches, one of the largest ATM networks in Argentina consisting of 164 ATMs, and 23 customer site branches.
 Itaú Chile Operations
Banco Itaú Chile started its official activities on February 26, 2007, when Bank of America Corporation, or BAC, transferred the operations of BankBoston Chile and BankBoston Uruguay to us.  This acquisition increased our correspondent bankspresence in Latin America and expanded the scope of our operations.  In addition, Itaú Chile Inversiones Servicios y Administración S.A. provides services related to provide a source of trade finance funding for Brazilian companies. collection, securitization and insurance.
As of December 31, 2008,2009, our consolidated Chilean operations had R$10.7 billion in assets, R$8.3 billion in loans and leases, R$7.0 billion in deposits and R$1.3 billion in shareholders’ equity. According to the Chilean banking and financial institutions regulator ( Superintendencia de Bancos e Instituciones Financieras ), or, SBIF, as of that same date, Banco Itaú Chile ranked eighth in the Chilean loans and leases market with a 3.2% market share and ranked sixth in number of demand deposit accounts in the private sector, with approximately 89,094 accounts.
Banco Itaú Chile offers several products such as factoring, leasing, corporate finance, mutual funds, insurance brokerage and trading, which are offered through different entities and different lines of business.
The retail segment focuses on the upper-income segment that, as of December 31, 2009, accounted for 59.6% of Banco Itaú Chile’s total importrevenues. As of December 31, 2009, Banco Itaú Chile had 48 ATMs and export funding was approximately70 branches, of which 65.7% were located in Santiago.
Banco Itaú Chile’s commercial banking segment offers a wide range of products to improve customer experience by building a competitive advantage based on service quality, products and processes for targeted customers (companies with annual revenues of between R$ 16.5 billion.4 million and R$180 million).
Banco Itaú Chile’s global corporate banking segment offers local and international corporate finance capabilities such as syndications, private placements and securitizations.  It also provides trade financing and global treasury services complementing Banco Itaú Chile’s marketing strategy.  Treasury products such as foreign exchange and derivatives are a key part of this strategy.
Itaú Uruguay Operations
 
Banco Itaú Uruguay is one of the leading financial institutions in Uruguay.  Local operations also include the main credit card issuer, OCA S.A., or OCA, and the pension fund management company Unión Capital AFAP S.A., or Unión Capital.  Banco Itaú Uruguay’s strategy is to serve a broad range of customers through customized banking solutions.  As of December 31, 2009, Itaú Uruguay had R$3.1 billion in assets, ranking second in terms of asset volume among private banks in Uruguay, according to the Uruguayan Central Bank ( Banco Central del Uruguay ), or BCU, R$1.3 billion in loans and leases, R$2.3 billion in deposits and R$279 million in shareholders’ equity.
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The retail banking business is focused on individuals and small business customers, with approximately 130,000 customers as of December 31, 2009. The core branch network is located in the metropolitan area of Montevideo with 15 branches. In addition, we obtainBanco Itaú Uruguay has branches in Punta del Este, Tucuarembó and Salto. Banco Itaú Uruguay has a leading position in the debit card segment of private banks in Uruguay with 17.4% market share out of 489,000 cards as of December 31, 2009, according to BANRED, and a distinguished role as a credit card issuer (mainly Visa), with a 23.1% market share as of December 31, 2009 in terms of purchases made in Uruguay (according to Visanet Compañía Uruguaya de Medios de Procesamiento S.A.). Retail products and services focus on the middle and upper-income segments, and also include current and savings accounts, payroll payment, self-service areas and ATMs in all branches, and phone and Internet banking.
The wholesale banking division is focused on multinational companies, financial institutions, large- and medium-sized corporations and the public sector. It provides lending, cash management, treasury, trade and investment services. Additionally, the private banking unit provides a dedicated regional service (for both resident and non-resident customers), offering a full portfolio of local and international financial market products.
OCA is the main credit card issuer in Uruguay, with a 41.0% market share based on the aggregate amount of credit card domestic transactions as of December 31, 2009, and an approximately 50.0% market share in terms of number of transactions processed. OCA performs the three main credit card operations:  customer acquisition, issuance of cards and transaction processing. Credit cards and consumer loans are the main products offered by OCA to its approximately 347,000 customers, through a network of 20 branches, as of December 31, 2009.
Unión Capital is a pension fund management company which has been operating in Uruguay since 1996, when the current Uruguayan pension system was created. As of December 31, 2009, it had 194,739 customers, managed approximately US$858 million in pension funds, with a market share of approximately 16.8%, according to the BCU.
Interbanco S.A. (Paraguay)
Interbanco S.A., or Interbanco, was set up in Paraguay in 1978 and has become one of the largest banks in the Paraguayan financial market. Interbanco was acquired by Unibanco in 1995.
Interbanco has experienced significant growth since 1999, expanding the variety and enhancing the excellence of its services across the whole country. As of December 31, 2009, Interbanco had 19 branches, approximately 220,000 customers and 166 ATMs.
Its main sources of income are consumer banking products, primarily credit cards. Interbanco has launched innovative products and services under the brand “ 24IN,” and provides its customers several products and services, such as International Debit Card Cirrus Maestro and the Internet Banking Service Interhome Banking and also offers banking customer information through mobile phones with the Click Banking service. As of December 31, 2009, Interbanco had R$1.9 billion in assets, R$975 million in loans and leases, R$1.6 billion in deposits and R$247 million in shareholders’ equity. The structure of Interbanco products and services operates under:  corporate banking (small- and medium-sized businesses, agribusiness, large companies, institutional clients) and consumer banking (individuals and wage payment).  Under corporate banking, Interbanco has a well-established presence in the agribusiness segment, which has presented attractive levels of profitability since 2002 and credit performance in Paraguay. Under consumer banking, the main marketing channel is payment services, allowing us to offer pre-approved products to all customers who receive their wages through Interbanco.

Banco Itaú Europa
Banco Itaú Europa is a Portuguese-chartered bank controlled by Itaú Unibanco Holding. Banco Itaú Europa focuses mainly on two lines of business:
·Corporate banking:  providing international corporate banking, international capital markets operations, foreign trade financing and other financial services to support investments and other economic relations between Latin America and Europe through its operations in Lisbon, Madrid, Frankfurt, Paris and London; and
·Private banking:  delivering offshore and international private banking products and services to our Latin American customer base, through its subsidiaries (BIEL and BIEI in Miami).
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As of December 31, 2009, Banco Itaú Europa had US$7,283 million in assets, US$2,899 million in loans and leases, US$2,318 million in deposits and US$1,263 million in shareholders’ equity (including minority interests).
Banco Itaú Europa’s corporate banking business offers several products, such as credit, derivatives and advisory services for European companies with Latin American subsidiaries.
The private banking business provides financial and asset management services to Latin American customers with a minimum of US$250,000 in investments, putting at their disposal a diversified and specialized range of investment funds, dealing in and managing securities and other financial instruments, trusts and investment companies on behalf of customers.  The private banking business has clients in Argentina, Brazil, Chile, Mexico, Uruguay, Venezuela and others.  Assets under management of the private banking business amounted to US$9,974 million as of December 31, 2009.
All of our transactions with Banco Itaú Europa and its subsidiaries are on an arm’s-length basis. Banco Itaú Europa’s senior unsecured debt is rated Baa1 by Moody’s and BBB+ by Fitch.

Other International Operations
In November 2008, Itaú Unibanco Holding entered into an agreement with Itaúsa for the acquisition of a 77.8% interest and a 80.0% voting interest in Itaúsa Export, and of a 12.13% voting interest of Itaúsa Europa, a subsidiary of Itaúsa Export, for approximately R$1,136.0 million.  As a result of the acquisition and subsequent corporate events, Itaú Unibanco Holding now holds indirectly 100% of the total and voting interest of Itaúsa Europa and Itaúsa Export. Itaúsa Export is a holding company domiciled in Brazil which holds a controlling interest in Itaúsa Europa. Itaúsa Europa is a holding company domiciled in Portugal.  Itaúsa Export’s and Itaúsa Europa’s business activities are carried out by their indirect subsidiaries and include corporate banking, international cash management services and private banking.  The acquisition by Itaú Unibanco Holding of all of the stock of Itaúsa Export and Itaúsa Europa was a condition precedent to the Association.

Our other international operations have the following objectives:
(1)           Support our customers in cross-border financial transactions and services:
The international areas of Itaú Unibanco Holding are active in providing our customers with a variety of financial products such as trade financing, loans from multilateral credit agencies, off-shore loans, international cash management services, foreign currencyexchange, letters of credit, guarantees required in international bidding processes, derivatives for hedging or proprietary trading purposes, structured transactions, and international capital markets offerings.
Our international units include: Itaú BBA, Nassau branch (focused on corporate banking business); Itaú Unibanco, New York branch, Itaú Unibanco, Nassau branch and Itaú Unibanco, Cayman Islands branch (focused on middle-market customers); Interbanco S.A. (Paraguay), Banco Itaú Argentina, Banco Itaú Chile and Banco Itaú Uruguay (focused on retail customers, international corporate banking and middle-market); and Itaú Unibanco, Tokyo branch (focused on Brazilian retail customers living in Japan).
(2)           Manage proprietary portfolios and raise funds fromthrough the issuance of securities in the international market.
Funds raising through the issuance of securities, certificates of deposit, commercial paper and trade notes can be executed by Itaú Unibanco’s branches located in the Cayman Islands, Nassau, Bahamas and New York, Itaú Bank Ltd., or Itaú Bank, a banking subsidiary incorporated in the Cayman Islands, or Banco Itaú BBA’s Nassau branch. Itaú Unibanco’s Cayman Islands branch has issued subordinated debt which is treated as Tier 2 Capital. For a description of Tier 1 and Tier 2 Capital, see “—Regulation and Supervision—Regulation by the Central Bank—Capital Adequacy and Leverage/Regulatory Capital Requirements.”
The proprietary portfolios are mainly held by Itaú Bank and Itaú Unibanco Cayman Islands branch. These offices also enhance our ability to manage our international liquidity. Itaú BBA’s proprietary positions abroad are booked in the Itaú BBA, Nassau branch.
Through our international operations, we establish and monitor trade-related lines of credit from foreign banks and maintain correspondent banking relationships with money center and regional banks throughout the world and oversee our other foreign currency-raising activities.

(3)           Participate in the international capital markets either through private borrowings or through issuance of debt securities generally to on-lend these fundsas dealers:
There are international fixed income and equity desks in Brazil (Itaú BBA), New York (Itaú USA Securities Inc.), London (Itaú UK Securities Ltd.), Argentina (Banco Itaú Argentina), Hong Kong and Tokyo (Itaú Asia Securities Ltd.). Our international fixed income and equity teams offer to Brazilian corporationsinstitutional investor Latin America securities. 

(4)            In addition, we are also present and financial institutions. These on-lendings take the form of loans denominatedservicing our clients in reais and indexed to the U.S. dollar. Asia, especially in China, through Itaú BBA’s representative office in Shanghai.

Trade Financing
As of December 31, 2008, we had2009, our trade finance portfolio accounted for US$8,601 million, of which US$7,501 million was export-related (both pre-export and post-export financing). Our export financing to larger corporate customers is generally unsecured, but some transactions require complex guarantees, particularly those structured to be syndicated. Our import financing business accounted for US$1,099 million as of December 31, 2009. For the year ended December 31, 2009, our total volume of foreign exchange transactions related to exports was approximately R$ 3.3 billion outstanding of structured and financial transactions. Our international operations in PortugalUS$17,138 million and our operations through Grand Cayman, New York and Itaú BBA Nassau branches, represent another funding vehicle for us, as they are responsible for issuing securities and establishing programs for the issuancetotal volume of several financial instruments. See “International Operations – Other International Operations”.foreign exchange transactions related to imports was approximately US$14,556 million.

Vehicle Financing
As of December 31, 2009, our portfolio of vehicle financing, leasing and consortium lending consisted of approximately 3.7 million contracts, of which approximately 70.0% were non-account holders customers. The personal loan portfolio relating to vehicle financing and leasing grew 4.3% to R$51,285 million in 2009 as compared to 2008, representing a market share in Brazil of approximately 33.5% as of December 31, 2009. Our strong performance and the Association have impacted our leadership market share.
The vehicle financing sector in Brazil is dominated by banks and finance companies that are affiliated with vehicle manufacturers. According to ABEL, the Brazilian association of leasing companies, as of December 31, 2009, we were the largest leasing company in Brazil in terms of present value of lease operations.
We lease and finance vehicles through 13,270 dealers. Sales are made through computer terminals installed in the dealerships that are connected to our computer network. Each vehicle financing application is reviewed based on credit scoring and dealer scoring systems. The dealer scoring system analyzes the credit quality and amount of business provided by each vehicle dealer. We usually grant credit approvals within 11 minutes, depending on the credit history of the customer. Approximately 81% of our credit approvals in 2009 were made instantaneously because we have developed scoring models that permit pre-approvals for our customers, which provide us with a very efficient tool and high credit approval performance. Currently, all of the applications are processed through the Internet, conferring more security and agility to the process of concession of credit, for the dealers, customers and us.
The division for the financing of trucks corresponded to approximately 5.8% of vehicle financing and leasing in 2009.
We also have a division responsible for the financing of motorcycles. The financial volume of transactions relating to motorcycles until December increased 19.05%, compared to December 2008.

In March 2009, Itaú Unibanco Holding entered into a partnership with MMC Automotores do Brasil Ltda. and SVB Automotores do Brasil Ltda. for exclusive financing of their brands. The financial volume of related transactions in 2009 reached R$370 million. The agreement includes that Itaú Unibanco Holding will provide loans to Mitsubishi and Suzuki dealers and that dealers will offer our products and services to their customers.
Redecard
Redecard S.A., or Redecard, is a multibrand credit card provider in Brazil, also responsible for the capturing, transmission, processing and settlement of credit, debit and benefit card transactions. We hold 50% plus one share of Redecard’s capital stock. On March 30, 2009, Itaú Unibanco purchased 24,082,760 common shares of Redecard for R$590.0 million, giving rise to a goodwill amounting to R$14.4 million. In view of this transaction, we have control over Redecard and its results are fully consolidated in our consolidated financial statements since its acquisition.

Commercial Agreements, Associations and Partnerships
Itaú Unibanco Holding has commercial agreements, associations and partnership agreements with over 300 retailers in the Brazilian market, serving more than 17.3 million customers as of December 31, 2009. The consumer credit portfolios with respect to customers of those retailers amounted to R$7,941 million as of December 31, 2009.
Itaú Unibanco has developed a strong presence in the consumer finance sector through our strategic alliances with main retailers in Brazil such as Magazine Luiza S.A., or Magazine Luiza, Marisa S.A., Companhia Brasileira de Distribuição, or CBD, Vivo S.A. and Telemig Celular S.A., Lojas Americanas S.A. and Ipiranga (Ultrapar Participações S.A.). Since 2001, when we established the first partnerships, these alliances have supported consumer finance through several products, such as co-branded credit cards, private label cards, personal loans and insurance.

In November 2009, Itaú Unibanco Holding entered into an agreement to extend through December 31, 2029 its joint venture with Magazine Luiza, pursuant to which Luizacred S.A. Sociedade de Crédito, Financiamento e Investimento, or Luizacred, offers and sells consumer credit financial services and products to Magazine Luiza’s customers.  Itaú Unibanco Holding paid R$250.0 million to extend its exclusive rights to distribute credit products through Luizacred at all physical and virtual Magazine Luiza stores, in addition to its call centers, internet and direct mailing. Each of Magazine Luiza and Itaú Unibanco Holding holds 50.0% of Luizacred’s capital stock.
In August 2009, CBD, which operates under the brand “Pão de Açucar,” and Itaú Unibanco concluded their negotiations concerning Financeira Itaú CBD S.A., or FIC, leading to:  (i) the release of Itaú Unibanco’s exclusivity obligation to CBD in exchange for a R$550.0 million payment to CBD; and (ii) the extension of the exclusivity term granted by CBD to FIC through August 2029 in exchange for a R$50.0 million payment. The association provides for the sale of financial services and products in stores of all types that are directly or indirectly operated or owned by CBD, including supermarkets, convenience stores, electronic appliance stores, retail and wholesale stores, gas stations, drugstores, and e-commerce.
In March 2009, Banco Itaucard, a subsidiary of Itaú Unibanco Holding, and Vivo S.A. and Telemig Celular S.A., a subsidiary of Vivo S.A. (together, “Vivo”), a leading Brazilian mobile telecommunication services provider, entered into a partnership agreement pursuant to which we were granted the right to distribute and sell co-branded credit cards and certain other financial and insurance products and services to Vivo’s clients in Brazil for ten years.
In December 2008, Itaú Unibanco, Marisa S.A. and Credi-21 Participações Ltda., or Credi-21, (Marisa S.A. and Credi-21, together “Marisa”) entered into a partnership agreement pursuant to which Itaú Unibanco and its affiliates were granted a ten-year exclusive right to offer and sell financial products and services, namely co-branded credit cards, personal loans and other types of consumer credit financial products through Marisa’s sales network (physical and online stores). Marisa is the largest Brazilian department store chain specializing in women’s clothing. Its business and operational strategies focus on medium- and low-income women with ages ranging from 20 to 35 years. Both parties have combined the strengths of their business operations, which comprise valuable brands, clientele, market share and great penetration in their respective segments. The deal was structured as a profit-sharing agreement, under which each party is entitled to 50.0% of the results of the partnership operation. The partnership represented an investment of approximately R$120.0 million by Itaú Unibanco, R$65.0 million of which was paid in exchange for the exclusivity right and for the access to Marisa’s customer base for the period of the agreement, and payment of up to R$55.0 million, which is linked to certain sales targets over a five-year period.

Personal Loans
Itaú Unibanco fully closed its proprietary network dedicated to selling personal loans to low-income consumers. Itaú Unibanco intends to increase its low-income costumer base by selling credit cards to non-account holders customers, mainly through the partnerships developed with major retailers, airlines and fuel distribution companies. For further information on these partnerships, see “—Commercial Agreements, Associations and Partnerships.”
Marketing and Distribution Channels
We provide integrated financial services and products to our customers through a variety of marketing and distribution channels. Our distribution network consists principally of branches, ATMs and customer site branches, or CSBs, which are banking service centers located on corporate customers’ premises.
The following table provides information relating to our branch network, customer site branches and ATMs as of December 31, 2009 in Brazil and abroad:
  
Branches
  
CSBs
  
ATMs
 
Itaú Unibanco Holding  3,550   915   29,522 
Itaú Personnalité  165   3   344 
Itaú BBA  9   -   - 
Total in Brazil  3,724   918   29,866 
Itaú Unibanco abroad (excluding Latin America)  4   -   - 
Argentina  81   23   164 
Chile  70   -   48 
Uruguay  38   1   32 
Paraguay  19   6   166 
Total  3,936   948   30,276 
The following table provides information relating to the geographic distribution of our distribution network throughout Brazil as of December 31, 2009:
Region 
Branches
  
CSBs
  
ATMs
 
South  633   125   4,179 
Southeast  2,499   653   21,694 
Center-west  282   62   1,663 
Northeast  242   45   1,788 
North  68   33   542 
Total in Brazil  3,724   918   29,866 
Branches
As of December 31, 2009, we had a network of 3,724 full service branches throughout Brazil. We had branches in municipalities representing 92.4% of Brazil’s gross domestic products, or GDP as of December 31, 2009. As of  December 31, 2009, 81.3% of our branches were located in the States of São Paulo, Rio de Janeiro and Minas Gerais in the Southeast region, Paraná in the South, and Goiás in the Center-west, which collectively accounted for 63.7% of Brazil’s GDP (according to information published by the Central Bank on the breakdown of national GDP by state for 2006). The branch network serves as a distribution network for all of the products and services we offer to our customers, such as credit cards, insurance plans and private retirement plans.
Customer Site Branches
As of December 31, 2009, we operated 918 CSBs throughout Brazil. The range of services provided at the CSBs may be the same as those provided at a full service branch, or more limited according to the size of a particular corporate customer and its needs. CSBs represent a low-cost alternative to opening full service branches. In addition, we believe CSBs provide us with an opportunity to target new retail customers while servicing corporate customers and personnel.
ATMs
As of December 31, 2009, we operated 29,866 ATMs throughout Brazil. Our ATM network handles approximately 125 million transactions per month. Our customers may conduct almost all account, related operations through ATMs. ATMs are low cost alternatives to employee-based services and give us points of service at costs significantly lower than branches. We also have arrangements with other network operators such as the brands “Cirrus” and “Maestro” to allow our clients to use simplified services through their networks.
Other Distribution Channels
We also offer customers the ability to obtain information as to the status of their accounts, investment funds and credit lines through various electronic channels, which allow us to conduct our retail operations at a lower transaction cost. These channels include:
·
c all centers, with a monthly volume of approximately 43.3 million transactions. This distribution channel corresponded to 3.0% of total products sold by the retail banking segment in 2009;
·home and office computer banking system, with a monthly volume of approximately 167.7 million transactions. This distribution channel corresponded to 5.0% of total products sold by the retail bank in 2009;
·Point-of-Sale/Redeshop, a network which allows customers to use a direct debit card to purchase goods at the merchant’s point-of-sale, with approximately  45.6 million transactions per month; and
·various other channels, such as e-mail, cellular phone and wireless application protocol links, drive-through facilities and courier services.
Risk Management
On August 29, 2007, the CMN enacted Resolution No. 3,490, which provides for the criteria to determine the required equity, effective as of July 1, 2008.  Since the date of effectiveness, the calculation of our regulatory capital for risk coverage has considered the factors described below:
·PEPR: the regulatory capital required to cover the risk-weighted exposures, or credit risk
·
PCAM: the regulatory capital required to cover the market risk in exposures to gold, f oreign exchange and foreign assets and liabilities subject to exchange variation
·PJUR: the regulatory capital required to cover the market risk in fixed interest rate, foreign exchange coupon, price and other indices
·PCOM: the regulatory capital required to cover the market risk in commodities;
·PACS: the regulatory capital required to cover the market risk in stock
·POPR: the regulatory capital required to cover the operational risk.
 This is an attempt to more closely adjust Brazilian standards to the principles and rules provided in Basel II, which include:
·Extension of the minimum regulatory capital requirements for coverage of the various risks based on internal models of financial institutions
·Improvement of banking surveillance
·Significant expansion of the existing disclosure requirements.
Basel II contains a new methodology to calculate the minimum regulatory capital requirements for financial institutions and takes into account the particular risk factors of each of them.
We have always been driven by the concern of identifying, measuring and monitoring risks. We calculate our regulatory capital in such a way as to exceed all potential losses based on advanced managerial models. Accordingly, a major part of the Basel II requirements has already been incorporated in our risk control tools or is in the process of being included. Our efforts are concentrated on Basel II’s Pillar 1 rules related to credit, market and operational risks and we intend to use advanced approaches (Advanced Internal Rating-Based (AIRB) for credit risk, Advanced Measurement Approach (AMA) for operational risk and Internal Models Approach (IMA) for market risk).
As part of the risk control tools, we developed and improved proprietary risk management systems that are in compliance with the Central Bank’s regulations and with international practices and procedures.  These models are based on the following elements:
Economic, financial and statistical analyses, which enable the evaluation of the effects of adverse events on our liquidity, credit and market positions;
Market risks using value at risk, or VaR, to evaluate risk in the structural portfolio, and stress tests using independent scenarios, to evaluate our whole exposure in extreme situations;
Credit risks tools which typically involve credit and behavior scoring for retail portfolios, subject to mass processes and proprietary rating models for corporate customers, with uniform individual approaches. We also use portfolio management models to quantify and allocate economic capital;
Operational risks which are in the process of being identified and already have an important amount evaluated on a current basis through the use of internal data bases and statistical models that monitor the frequency and the severity of internal events of losses to quantify the risks and allocate economic capital;
Daily monitoring of positions in relation to pre-established market risk limits; and
Simulations of alternatives for protection due to liquidity losses and contingency plans for crisis situations in different scenarios.
In addition, we have established committees responsible for risk management, structured as follows:
Risk policies superior committee, responsible for establishing general risk policies, setting up aggregated risk limits based on the allocation of capital and other parameters as it deems suitable, discussing the most important aspects to maximize the risk-return ratio and ensuring a consistent risk management within Itaú Unibanco,
Credit superior committee, responsible for establishing overall credit risk policy and making major credit risk decisions,
Financial risk superior committee, responsible for establishing policies and limits for market and liquidity risks, and monitoring positions on a consolidated basis, and
Audit and operational risk management superior committee, responsible for monitoring operational risk controls and compliance systems.
In order to further comply with the new requirements of the more advanced risk models provided for in Basel II, we established internal specific committees composed of executives from all areas of Itaú Unibanco Holding. We prepared an action plan at the end of 2004 and, to this date, we have carried out activities as planned. In 2005, we focused on the construction of a historical database for probabilities of default (PD), models and historical databases for loss given default (LGD) and operational losses. In 2006, the implementation project continued with models for exposure at default (EAD), inclusion of credit risk mitigations and analysis of database validation processes. We also worked on a framework of documentation. In 2007, we started to develop stress test models for some portfolios and to implement a system to consolidate information and compute the capital ratio, in addition to adjusting controls for compliance with the requirements set forth by Resolution No. 3,380 on operating risks.  In 2008 we created a department responsible for internal models validation, with an independent structure from the other models development departments.  In addition to this new department, we are also working on the implementation of a system responsible for consolidating information related to Basel II capital calculation.
In the first half of 2009, we promoted through the Basel II project the unification of concepts, procedures and efforts to ensure that we adopted risk management best practices after the Association.
 We also reassessed the separation of the business, management and controls areas to enhance their independence and promote more balanced decisions regarding risks involved, pursuant to the requirements of CMN Resolution No. 3,721.
We believe that the changes to be implemented will result in lower allocated capital and, as a result, will establish grounds for an increase in the volume of credit operations resulting from the same capital base.

 
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Market and Liquidity Risk Management
Our financial risk superior committee is responsible for managing market and liquidity risk. The committee analyzes and proposes scenarios for the risk and return assessment of interest and exchange ratios.  It also determines criteria for internal fund transfers and establishes minimum reserve limits.
To manage liquidity risk, we monitor and analyze liquidity through models that consider statistical tools and financial projections, which enable us to analyze various factors that affect our cash flows and liquidity levels under different scenarios. We also revise the contingency funding plan on a monthly basis to ensure that responsibilities are clearly attributed and the measures to be taken are feasible and able to provide adequate liquidity even under a severely stressed scenario.
To manage and control market risk, we have implemented internal risk management and valuation models.  These models employ statistical and historical information with regard to interest and foreign exchange rates, volatilities and trends, and seek to avoid adverse market fluctuations. Our VaR model analyzes volatility and correlation of market rates on an overnight basis. The model provides statistical results at a 99% confidence level.  See “Item 11. Quantitative and Qualitative Disclosures About Market Risk – Market Risk.”
Our financial risk superior committee analyzes the statement of income and risk information on a weekly basis and establishes limits for our risk exposures, interest rate positions and foreign currency risk positions.  It takes into account correlations across different markets. Depending on prevailing macroeconomic and microeconomic conditions, the committee may also propose that particular scenarios be considered in risk models.  In addition, the committee analyzes and approves criteria and rules for internal pricing of resources.

We also generate additional fundsCredit Risk Management
Our continuous improvement in the process for our operations throughdecision-making and for credit risk management and control, guided by the resalebest market practices, have made it possible for us to our customers of securities issued by us and previously held in our treasury account. Our customers have the right to sell the securities back to us at their option until the maturity date. We pay interest on these securities funds at variable ratesuse methodologies based on the Interbank Deposit Certificate.  Total funding under this financial product as of December 31, 2008 amounted to R$ 41 billion.mathematical modeling for risk analysis.
 
We also obtain funds from securitization transactionsprepare our credit policy on the basis of internal and external factors, relating to the economic environment in Brazil and abroad. Among internal factors, there are customer ratings, determined by advanced credit analysis and control instruments, levels of default, rates of return, quality of the portfolio, and economic capital allocated. We have focused on evaluating the risk/return ratio in our non-Brazilian diversified payment orders. These transactionsstrategy to expand our assets. Our main concern is the quality of the credit portfolio and the creation of value for our shareholders. The whole decision-making process and the definition of our credit policy are effectively securedcentralized to ensure synchronized actions and optimize business opportunities.
Our credit risk management is centralized and carried out by a specific structure under the corporate risk area, which combines operating and market risk. Our senior credit committee defines the credit policies and the credit approval authority levels for the different divisions. The approval authorities rely on the professional skills and personal experiences of each individual with credit authority, and also consider the economic conditions and risk profile of the different divisions.
The credit committees establish standards and limits, fix risk classifications and oversee the credit operation approval process, models and policies. Depending on the amount and terms of a proposed loan, as well as on the risk rating of the potential borrower, the credit committee must consult with the senior credit committee.
Within the retail and small business operations, most types of loans collateralized byto individuals and small companies are subject to our currentautomated credit process. When an account is established with us, we obtain information about the customer’s income, net worth and future payment orders. As a result,professional standing (in the effective interest rates chargedcase of individuals). In addition, external information is also gathered automatically and, credit record and relationship history is always updated.  Based on these funds are lowerdata and advanced credit and behavior scoring models, we assign each customer an aggregate credit limit. The customer must update new credit information at least annually.
There is a different credit review process for credit amounts higher than those that could otherwise be obtainedavailable through other available financing alternatives. Asthe automated credit process and for categories of December 31, 2008, our outstanding balance was R$ 1.4 billion.customer or types of credit not subject to the automated credit process, including credit operations in the middle market and corporate divisions. In these cases, we examine each application individually, verify data and carry out traditional credit analysis methodologies.
 
In addition, our leasing subsidiary periodically issues debentures, which represent another sourcecredit area carries out technical support research on business groups and economic and industrial sectors within Brazil. This enables us to evaluate credit risk for companies in the middle market (with annual revenues in excess of funding.R$ 6 million) and corporate divisions. Within the middle market and corporate division, we currently have ratings for approximately 60,000 business groups comprising approximately 100,000 companies. Payroll deduction loans are reevaluated at least on a yearly basis or sooner if something relevant comes to the attention of the credit area.

Technology
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We give to each credit manager (manager of the credit area responsible for a team of credit analysts) and commercial area manager (relationship manager) a credit approval authorization limit for each of several categories of loans. The amount of the limit depends upon the experience of the particular manager and economic conditions. Loans up to R$ 100 million require approval from the credit committee, and may require approval from a senior credit authority, depending on the term of the proposed loan, the credit rating of the potential borrower and the allocated capital for the proposed loan.  In addition, any proposed capital allocation greater than R$ 20 million is subject to the approval of the senior credit committee of Itaú Unibanco Holding.
Itaú BBA targets the large corporate divisions and its credit decision process is also based on the rating and size of the loan. There is no individual authority. The highest credit authority within Itaú BBA is represented by the president and the credit director who, together, can approve up to R$ 545 million, depending on the risk rating. Any loan above R$ 545 million has to be submitted to the approval of senior credit committee of Itaú Unibanco Holding.
Operational Risk Management
Operational risk is defined as the risk of loss resulting from inadequate or failed internal processes and systems, the improper behavior of people, or from outside events.
The sophistication of the banking businesses and the technology evolution have increased the complexity of the risk profiles of the organizations and affected their operational risk management.  While our management is experienced and operational risk management is not a new practice, it has been necessary to establish a specific structure for the operational risk different from the one traditionally applied to the market and credit risks.
 
In line with the last five years endedprinciples established by the CMN, we defined our operational risk management policy, approved by the audit committee and ratified by the board of directors. The operational risk management policy is applicable to the Itaú Unibanco Holding conglomerate in 2008,Brazil and abroad.
The policy is comprised of a set of principles, procedures and guidelines that provide an adequate management of products, services, activities, processes and systems’ risks taking into consideration their nature and complexity.
The policy defines the procedures for identifying, assessing, monitoring, mitigating, controlling and disclosing operational risks as well as its participants’ roles and responsibilities.
In addition, we made technology investments inutilize a business capital evaluation management model that quantifies the amount of R$ 1.8 billion. We continue to invest substantial amounts in the development of technology, which enablesoperational risks incurred through statistical models that allow us to respond competitivelycalculate expected losses and capital allocation for unexpected losses (VaR at a confidence level of 99.9%) using Monte Carlo simulation.
This mechanism enhances our product and service price definition process and will be submitted to market requirements, reduce coststhe approval of the Brazilian regulatory agency within the advanced measurement approach methodology, in accordance with Basel’s Revised Framework for the International Convergence of Capital Measurement and increase productivity.Capital Standards criteria, following the guidelines established by the regulatory authorities.
 
We have successfully run eight full-scale tests recently, validatingconstantly seek to improve our contingency plan. The disaster recoverymanagement process allowsand to comply with the continuityregulatory agencies’ requirements, maintaining our image as a solid and trustworthy bank.

 Insurance Underwriting and Portfolio Risk Management
Management of commercialour insurance operations establishes our underwriting policies relating to retentions, protections, reinsurance programs and protectspricing, depending on the stockholderstype of business. This approach is designed to maintain high quality underwriting, pricing discipline and customers’ assets against ordinary and operational risks. This indicates the high-level of risk management performed and places us in a distinguished positionreduce volatility in the Brazilian market. To make this process feasible, we made investmentsresults. The actuarial department analyzes the adherence of the probability tables used in the amount of R$ 121.2 million inpricing models to the last five years ended in 2008 corresponding to 7%experience of our IT investments.portfolio. In the retail market, the prices of our insurance products are established according to proprietary scoring and rating systems based on data we gathered and analyzed over many years, which underwriters use to assess and evaluate risks prior to quotation. This information provides specialized knowledge relating to industry segments and helps analyze risk based on account characteristics and pricing parameters. In the group life market, the prices of our insurance products are established according to rating systems based on an international actuarial table of death and the historical experience of our policies, the age of the group, the industry segments, the percentage of female and experience of each group and the financial health of the client. The property insurance underwriting is controlled by the risk factors and an appropriate pricing according to the company exposition considering economy segment analysis, activity and level of severity risk, customer and similar companies experiences, financial health and optional management instruments. The reinsurance strategy is to work with limited reinsurance companies to have a high automatic limit with a safe retention limit. Besides that, the underwriters reanalyze all our accounts every year to control the risk of portfolio. In addition we apply the RAROC concept on the corporate segment to allocate enough capital to maintain business sustainability.

Competition
General
The last several years have been characterized by increased competition and consolidation in the financial services industry in Brazil.Funding

Retail Banking
 
The markets for financial andOur core business is retail banking, services in Brazil are highly competitive.which serves individuals with monthly income below R$7,000.  As of December 31, 2008,2009, we had over 13.7 million customers and 4,465 branches and customer site branches under the “Itaú” and “Unibanco” brands.  Our retail banking operations are present in all Brazilian states and in cities that altogether represented more than 80.0% of Brazil’s individual domestic consumption as of December 31, 2009.  Our strategy is to offer higher quality banking products to our retail banking customers.
In the second half of 2009, we began the project of converting “Unibanco” brand branches to the “Itaú” brand.  We converted approximately 50 branches during 2009.  As of December 31, 2009, there were 140950 remaining branches under the “Unibanco” brand.  During 2010, we will intensify the conversion process and intend to convert approximately 160 branches per month starting in June 2010.
 We classify our retail clients in accordance with their income and profile:
·Itaú retail customers, who earn less than R$4,000 per month;
·Itaú Uniclass customers, who earn more than R$4,000 and less than R$7,000 per month; and
·Specialized account managers provide services to Itaú Uniclass customers who have access to certain customized products.  We created this segment after the Association and we expect Itaú Uniclass to be present in some of our retail branches across Brazil and increase the number of our customers.
For the year ended December 31, 2009, credit products represented 67.0% of our consolidated revenue from retail banking, while investments represented 24.0% and services and other fee-based products represented 9.0%.

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Very Small Business Banking
At the end of 2005, we set up 150 offices in the city of São Paulo to provide specialized services to companies with annual revenues below R$500,000.  In 2006, we expanded our services to over 80 locations throughout the interior of the State of São Paulo, followed by 94 additional offices in the State of Rio de Janeiro.  In 2007, we expanded our services into the States of Minas Gerais and Paraná.  In 2008 and 2009, we continued this expansion and set up additional offices focused on very small business banking.
Our very small business banking office managers are trained to offer customized solutions and provide detailed advice on all products and services to very small companies.  Our strategy is to capture the market opportunity of this customer base by meeting the needs of these companies and their owners, particularly with respect to the management of cash flow and credit facilities.
Since the Association, we have been consolidating offices and customer service in the very small business banking segment.  As of December 31, 2009, we had over 430 very small business banking offices located throughout Brazil and approximately 1,700 managers working for over 537,000 small business customers.  In 2010, we expect to continue to consolidate our very small business banking operations and to increase the number of managers.
The credit facilities we provide to very small businesses increased by approximately 92.8% in 2009.  Loans to very small businesses totaled R$5,444 million as of December 31, 2009.

Public Sector
Our public sector business operates in all areas of the public sector, including federal, state and municipal levels of government (in the executive, legislative and judicial branches). As of December 31, 2009, we have 2,500 public sector customers. To service these customers, we use platforms that are separate from the retail banking branches, with teams of specially trained managers who offer customized solutions in tax collection, foreign exchange services, administration of public agency assets, payments to suppliers, payroll for civil and military servants and retirement. Based on these platforms, we have a significant amount of business with public sector clients, particularly in those Brazilian states where we acquired previously state-owned financial institutions.

Itaú Personnalité
Through Itaú Personnalité, we were one of the first banks in Brazil to provide personalized services to high-income individuals.
Itaú Personnalité’s value proposition consists of offering (i) an advisory service by its managers, who understand the specific needs of these customers; and (ii) a large portfolio of exclusive products and services, which are available through a dedicated and network of located in the main Brazilian cities. Composed of distinctive and specifically designed branches. Through this dedicated network of 167 branches, Itaú Personnalité’s customer base reached approximately 534,000 individuals as of December 31, 2009. Itaú Personnalité customers also have access to Itaú Unibanco network branches and ATMs throughout the country.
Since its establishment in 1996, Itaú Personnalité has been expanding its market share in the high-income individuals market.  In 2006, as a result of the acquisition of BankBoston Brazil by Itaú, Itaú Personnalité consolidated its leadership in the high-income individuals market.
As a repositioning strategy, in September 2009, Itaú Personnalité raised its client target to high-income individuals who earn more than R$7,000 per month or have investments in excess of R$80,000.

Private Bank
Itaú Private Bank is a leading Brazilian bank in the global private banking industry, providing financial advisory services to approximately 22,200 Latin American customers as of December 31, 2009. Our 620 employees are focused on offering financial consulting services to customers with at least US$200,000 in investment assets. In addition, we provide our customers with a full range of traditional banking products and services.
Financial advisory services are provided by teams of experienced relationship managers located in Brazil, Miami, Argentina, Uruguay, Chile and Paraguay, and supported by investment specialists, who recommend the most appropriate solutions for each individual risk profile. Our private banking client base is composed of clients from Brazil, Argentina, Venezuela, Chile, Uruguay, Ecuador, Paraguay, Mexico, and other Latin American countries.
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We serve our customers’ needs for offshore wealth management solutions in three major jurisdictions through independent institutions: in the United States through Banco Itaú Europa International, or BIEI, and Itaú Europa Securities, or IES; in Luxembourg through Banco Itaú Europa Luxembourg (“BIEL”); and in the Caribbean, through BIE Bank & Trust in the Bahamas, or BIE Bahamas, and Unicorp Bank & Trust in Cayman, or UBT Cayman.
We manage individual portfolios on a non-discretionary basis, subject to guidelines agreed upon with each customer. Portfolios managed by Itaú Private Bank may also invest in mutual funds managed by other financial institutions which have more flexibility in making investment decisions. Fees earned from our private banking customers are, in most cases, a function of the assets under management.
As of December 31, 2009, our private banking activity for Latin American clients had assets under management equivalent to R$ 97,548.0 million, including R$13,945.2 million in BIEL, R$6,809.6 million in BIEI and IES and R$2,128.6 million in BIE Bahamas and UBT Cayman.
Private Banker International recognized Itaú Private Bank as “The Outstanding Private Bank - The Americas,” for 2008 during the global financial crisis and in 2009 Itaú Private Bank was named the “The Outstanding Private Bank - Latin America”, which shows consistent recognition of our strong performance in our target market. According to the 2010 Annual Private Banking and Wealth Management Survey, coordinated by Euromoney magazine, Itaú Private Bank was recognized as offering “The Best Private Banking Overall Services” in Brazil for the second consecutive year. In the latest ranking published in the February 2010 edition of Euromoney magazine, Itaú Private Bank was also named “Best Private Banking Services Overall” in Chile and Top 5 “Best Private Banking Services Overall” in Latin America. Itaú Private Bank also remains the only private bank in Brazil to be among the finalist organizations in the Brazilian National Quality Award ( Prêmio Nacional de Qualidade 2007 ).

Small Business Banking
We have structured our relationships with small business customers through the use of specialized offices since 2001.  As of December 31, 2009, we had 277 offices located nationwide in Brazil and nearly 1,600 managers who worked for over 260,000 companies with annual revenues from R$500,000 to R$6 million. In 2010, we expect to continue to consolidate our small business banking operations and to expand our offices geographically.
All our managers are certified by ANBIMA, and throughout the year they receive training to offer the best solutions for each customer profile. Our customers rely on our ability to provide products, terms and rates customized to their needs.
Loans to small businesses totaled R$18,330 million as of December 31, 2009.

Middle - - Market Banking
We believe the Association has strengthened our middle-market banking position. We selected the best products and services of each bank to offer to our customers and dedicated managers to serve our customers to meet their needs.
As of December 31, 2009, we have approximately 104,000 middle-market corporate customers that represented a broad range of Brazilian companies located in over 75 cities in Brazil. Our middle-market customers are generally companies with annual revenues from R$6 million to R$150 million.
We offer a full range of financial products and services to middle-market customers, including deposit accounts, investment options, insurance, private retirement plans and credit products. Credit products include investment capital loans, working capital loans, inventory financing, trade financing, foreign currency services, equipment leasing services, letters of credit and guarantees.  We also carry out financial transactions on behalf of middle-market customers, including interbank transactions, open market transactions and futures, swaps, hedging and arbitrage transactions. We also offer our middle-market customers collection services and electronic payment services.  We are able to provide these services for virtually any kind of payment, including Internet office banking.  We charge collection fees and fees for making payments, such as payroll, on behalf of our customers.
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As of December 31, 2009, we had over 1,300 managers specializing in middle-market customers and we intend to increase this number in 2010.  At December 31, 2009, these managers worked from one of the 213 specialized offices located at key branches and we intend to further increase the number of these specified offices in 2010.
Consistent with customary lending practices in Brazil, our loan portfolio to our middle-market customers is composed predominantly of short-term products, defined as having a maturity of less than 12 months. Loans to middle-market businesses totaled R$37,219 million as of December 31, 2009.

Credit Cards
We are the leading company in the Brazilian credit card market, based on transaction volume as of December 31, 2009. Our credit card brands “Itaucard” and “Hipercard,” offer a wide range of products to 23.4 million customers as of December 31, 2009, including both account holders customers and non-account holders customers. In the year ended December 31, 2009, the transaction volume of credit cards was R$84,938 million, a 17.8% increase from the prior year. The results of customer transactions by non-account holders customers are reported in the consumer credit division.
Our main challenges in the credit card business are to continually increase our cardholder base and improve our portfolio profitability. To this end, our credit card division focuses on the development of new products, the enhancement of partnerships, cross-selling of banking and insurance products and sales through a variety of channels.
To enhance market opportunities in the credit card segment, we entered into partnerships with Marisa S.A. and Vivo S.A. and C&C Casa e Construção Ltda. For further information on these partnerships, see “—Commercial Agreements, Associations and Partnerships.”

Real Estate Financing
As of December 31, 2009, we had approximately R$8,510 million in outstanding real estate loans. Given our expectation of growth over the next several years in the mortgage market in Brazil, we are investing in the operational platform in order to reduce costs and improve quality for our customers. We are also developing our distribution channels for mortgage loans by focusing on our branch network and developing our relationships with real estate brokers. According to Brazilian regulations, financial institutions are required to allocate at least 65% of their savings accounts balances to fund mortgage financing, of which 80% must be used to finance properties with value lower than R$500,000 and must have annual interest rates lower than 12%.
We use different distribution channels to reach our customers, including our Itaú Personnalité branches and real estate brokers. Itaú Unibanco Holding has partnerships with two of the largest real estate brokers in Brazil: Lopes and Coelho da Fonseca. These long-term partnerships provide us with exclusive real estate financing origination at a large number of locations throughout Brazil.

Asset Management
According to ANBIMA, as of December 31, 2009, we were the largest mutual fund manager among private banks in Brazil based on our assets under management. As of that date, we had total net assets under management of R$297,987 million on behalf of approximately 1.5 million customers.  We also provide portfolio management services for pension funds, corporations, private bank customers and foreign investors. According to ANBIMA, as of December 31, 2009, we were the largest manager of private bank clients’ assets and the largest private manager of pension fund assets in Brazil, based on our assets under management.  As of December 31, 2009, we had R$176,363 million of assets under management for pension funds, corporations and private bank customers.
Our fees are based on the average net asset value of the funds under management, which we calculate on a daily basis. Fees generally average approximately 2.74% per year for funds from individuals and 0.2% to 0.5% per year for funds from companies.  Fees for portfolio management services are privately negotiated and vary depending on the size and investment parameters of the funds under management.
As of December 31, 2009, we offered and managed about 1,478 mutual funds, which are mostly fixed-income and money market funds. For individual customers, we offered 157 funds to our retail customers and approximately 300 funds to our Itaú Personnalité customers. Private banking customers may invest in over 600 funds, including those offered by other institutions. Itaú BBA’s capital markets group also provides tailor-made mutual funds to institutional, corporate and private banking customers.
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In November 2009, Fitch Ratings, one of the largest international rating agencies in Brazil, maintained its M1 (bra) rating (the highest rating granted to an asset manager) of our asset management area.  We have been in the top rating category since July 2003.

Corporate Social Responsibility
The Itaú Social Excellence Fund ( Fundo Itaú Excelência Social or FIES, launched in 2004, is a socially responsible investment fund, investing in the shares of companies with superior corporate social responsibility practices with the goal of obtaining higher long-term returns than those offered by the main Brazilian financial market indices. In addition to analyzing the risks and returns of companies, fund managers take into account three fundamental criteria in relation to companies: corporate social activities; environmental protection practices and good corporate governance practices. Every year the fund manager donates part of its accumulated asset management fees to social projects in the following categories: environmental education, employment education and childhood education.
As of December 31, 2009, FIES had net assets of R$365 million, and the fund donated more than R$3.3 million in 2009, which corresponded to 50% of the management fee from July 1, 2008 to June 30, 2009.  The 19 projects chosen to receive this donation were divided into two investment categories, with 16 non-governmental organizations receiving R$100,000 each and three non-governmental organizations receiving R$150,000 each, and almost R$1.3 million spent on consulting.  The projects are selected by the fund advisory council, which is composed by market leaders and specialists in corporate social responsibility.
Securities Services for Third Parties
We provide securities services for third parties in the Brazilian capital markets, where we act as custodian, transfer agent and registered holder. In December 2009, we were ranked the top provider of securities services in Brazil to third parties by ANBIMA.
As of December 31, 2009, Itaú Unibanco held assets of R$685,360 million in connection with securities services for third parties, representing 28.5% of the Brazilian market based on assets held. Our broad range of products relates to both domestic and international custody. Our services include acting as transfer agent, providing services relating to debentures and promissory notes, custody and control services for mutual funds, pension funds and portfolios, providing trustee services and non-resident investor services, and acting as custodian for depositary receipt programs.
In 2009, we acted as custodian and transfer agent for 438 companies and as the registered holder with respect to 145 transactions.  As of December 31, 2009, our specialized staff reached 659 employees managing portfolios for mutual funds, institutional investors and private portfolios.
Brokerage
Itaú Corretora has been providing brokerage services since 1965, with operations on BM&FBOVESPA.  We also provide brokerage services to international customers through our broker-dealer operations in New York, through our London branch, and through our broker-dealers in Hong Kong and Dubai.
For the year ended December 31, 2009, Itaú Corretora was ranked third on the BM&FBOVESPA in equity trading volume and third among brokers controlled by large commercial banks in Brazil in commodities and futures trading volume.

Insurance, Private Retirement and Capitalization Products
Insurance
As of December 31, 2009, according to SUSEP, we were one of the largest insurance groups in Brazil based on direct premiums, excluding health insurance and VGBL, a private retirement plan providing annuity benefits. For regulatory purposes VGBL is considered life insurance. For the year ended December 31, 2009, our direct premiums totaled approximately R$6,715 million.
Our main lines of insurance are life insurance (excluding VGBL; see “Private Retirement Plans”), property and casualty insurance and vehicle insurance, which accounted for 31.4%, 27.5% and 27.3% of direct premiums, respectively, for the year ended December 31, 2009. Our policies are sold through our banking operations, independent local brokers, multinational brokers and other channels.  We reinsure a portion of the risks we underwrite, particularly large marine property and casualty risks that exceed the retention limits we have established within regulatory limits. Risks that exceed the retention limit must be ceded to licensed Brazilian reinsurers in accordance with complementary Law No. 126 published on January 15, 2007 and the SUSEP regulations published on December 17, 2007.
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Our strategy to increase our level of penetration in the Brazilian insurance market depends on the markets in which we operate. In the high risk market, we intend to enhance our market share through independent local brokers and multinational brokerage firms. For individuals and small and medium company markets, we focus on operations within our banking client base banc assurance operations, to increase customer penetration. We are working on improving banc assurance operations in property and casualty insurance for small and medium companies.  Our customer relationship management has implemented several advances and the development of specific products for different segments allows more efficient use of each marketing channel (our branches, telemarketing, Internet, ATMs and bank teller terminals).
In November 2008, Unibanco entered into an agreement with American International Group, Inc., or AIG, regarding the exchange of shares that Unibanco and AIG respectively held in certain Brazilian insurance companies, as follows:  (i) Unibanco acquired, for US$820.0 million, the shares held by AIG in Unibanco AIG Seguros S.A., which changed its name to Unibanco Seguros S.A., or Unibanco Seguros; and (ii) AIG acquired, for US$15.0 million, the shares held by Unibanco in AIG Brasil Companhia de Seguros S.A., or AIG Seguros.  Upon the completion of the exchange, Unibanco Seguros, Unibanco AIG Vida e Previdência S.A. and Unibanco AIG Saúde Seguradora S.A., which used to be Unibanco Seguros’ wholly owned subsidiaries, became our wholly owned subsidiaries.
In August 2009, Itaú Unibanco Holding and Porto Seguro S.A., Porto Seguro, entered into an operating agreement that provides for the offering and distribution, on an exclusive basis, of homeowner and automobile insurance products to customers of Itaú Unibanco Holding in Brazil and Uruguay (the “Porto Seguro Alliance”).  In connection with the Porto Seguro Alliance, Itaú Unibanco Holding transferred all the assets and liabilities related to its then current portfolio of homeowner and automobile insurance to Itaú Seguros de Auto e Residência S.A., ISAR, all of the shares of which were subsequently transferred to Porto Seguro. In exchange, Porto Seguro issued shares representing 30.0% of its capital stock to Itaú Unibanco Holding and/or its affiliates.  The controlling shareholders of Porto Seguro and Itaú Unibanco Holding established a new company named Porto Seguro Itaú Unibanco Participações S.A., or PSIUPAR, and transferred their shares of Porto Seguro to PSIUPAR.  The controlling shareholders of Porto Seguro remained controlling shareholders of PSIUPAR, which became the parent company of Porto Seguro.  Itaú Unibanco Holding is entitled to nominate two members of the board of directors of each of Porto Seguro and PSIUPAR.  ISAR, which is directly controlled by Porto Seguro and indirectly controlled by PSIUPAR, will be managed by Porto Seguro and will utilize the trademarks Porto Seguro, Itaú Unibanco and Azul. In August 2009, Itaú Unibanco (through Itaú Seguros S.A.) had 3.4 million automobiles and 1.2 million homes insured, which were subsequently transferred to ISAR.  In October 2009, SUSEP granted prior authorization for the corporate acts related to the Porto Seguro Alliance. The approval by the Brazilian antitrust authorities for the transaction is still pending.
In November 2009, Itaú Seguros S.A., or Itaú Seguros, and XL Swiss Holdings Ltd., or XL Swiss, a company controlled by XL Capital Ltd., or XL Capital, signed an agreement providing for the acquisition by Itaú Seguros of all of XL Swiss’s shares in Itaú XL Seguros Corporativos S.A., or Itaú XL. Itaú XL will be wholly owned by Itaú Unibanco Holding.  After completion of the sale, Itaú Seguros will provide, under a separate agreement, insurance coverage to XL Capital’s clients in Brazil and XL Capital’s Global Programs clients with operations in Brazil.  The transaction is pending approval by the Brazilian insurance regulator, SUSEP and has not yet closed.
In December 2009, Allianz South America Holding B.V. entered into an agreement with Itaú Unibanco Holding for the purchase of the 14.025% indirect interest that Itaú Unibanco Holding held in Allianz Seguros S.A. for R$109 million. The transaction was completed in January 2010, approved by the Brazilian antitrust authorities on March 3, 2010 and SUSEP was notified of the transaction. The transaction did not have a significant impact on our net income for 2009.

Private Retirement Plans
As of December 31, 2009, balances under private retirement plans (including VGBL) totaled R$43,435 million, an increase of 25.0% compared to December 31, 2008.  As of December 31, 2009, we were the second largest private retirement plan manager in Brazil based on total liabilities according to SUSEP. As of December 31, 2009, we had R$43,636 million in assets related to our private retirement liabilities (including VGBL).  We concentrate our activities on managing open private retirement plans, which experienced strong growth in 2009.
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Capitalization Products
Capitalization products are savings account products that generally require a customer to deposit a fixed sum with us which will be returned at the end of an agreed-upon term date, with accrued interest.  In return, the customer automatically entered into periodic drawings that gives him the opportunity to win a significant money prize.  As of December 31, 2009, we had 9.7 million capitalization titles outstanding with guaranteeing assets of R$2,300 million. We distribute these products through our retail network, Itaú Personnalité and Itaú Uniclass branches, electronic channels and ATMs. These products are sold by our subsidiary, Cia. Itaú de Capitalização S.A. During 2009, R$1,786 million of capitalization products were sold and we distributed over R$41.1 million in money prize to 6,085 customers.

Itaú BBA
Itaú BBA is responsible for our corporate and investment banking activities.  Itaú BBA offers a complete portfolio of products and services to most of the largest companies and conglomerates in Brazil through a team of highly qualified professionals.  Itaú BBA services approximately 2,400 companies and conglomerates.  Itaú BBA’s activities range from typical operations of a commercial bank to capital markets operations and advisory services for mergers and acquisitions.  These activities are fully integrated, which enables Itaú BBA to achieve a performance tailored to its clients’ needs.  As of December 31, 2009, our corporate loan portfolio reached R$90,830 million.  During 2009, this portfolio was affected mainly by the appreciation of the real and weaker economic conditions when compared to 2008. In investment banking, the fixed income department was responsible for the issuance of debentures and promissory notes that totaled R$17,849 million and securitization transactions that amounted to R$1,378 million in Brazil in 2009.  According to ANBIMA, Itaú BBA was the leader in distribution of fixed income in 2009 with a 24.2% market share, thus maintaining the bank’s historic leadership in the domestic fixed income market.  In the international debt markets, Itaú BBA acted as joint bookrunner in the issuance of seven deals in the amount of US$4,950 million, of debt securities in 2009, earning the second place in Bloomberg’s rankings of underwrites of Brazilian-based corporate debt issuances based on number of transactions.
With respect to equity issuances, Itaú BBA coordinated public offerings that totaled R$14,229 million in 2009, and occupied the third position in ANBIMA’s origination rankings in Brazil, with 13.7% of the market share in Brazil in 2009. Itaú BBA’s investment banking division also started to manage the wholesale brokerage business in 2009 and is implementing several initiatives to increase its presence in the markets it operates in.
In addition, Itaú BBA advised on merger and acquisition transactions with a total volume of 24 deals in the amount of R$19,964 million, in 2009, ranking second in Brazil based on the number of merger and acquisition deals according to Thomson Reuters.
Itaú BBA is active in BNDES on-lending to finance large-scale projects, which is aimed at strengthening domestic infrastructure and increasing the productive capacity of various industrial sectors.  In consolidated terms, total loans granted under BNDES on-lending represented more than R$4,889 million for various projects and financings in 2009, corresponding to an increase of 44.0% in 2009 compared to 2008.  As an integral part of its risk management and sustainability policies, the on-lending of funds to large-scale projects is in compliance with Itaú Unibanco’s social and environmental risk policy.  Itaú Unibanco is the current leader in the ranking of Latin American banks which adopt the best corporate governance practices drawn up by the consultancy Management & Excellence and Latin Finance magazine.  All lending categorized as project finance, as defined under Basel II, is also in compliance with the Equator Principles, which Itaú BBA adopted in 2004, being the first financial institution from an emerging market to adopt the Equator Principles.  The Equator Principles were announced launched in 2003 and became the benchmark within the financial sector for addressing environmental and social risks in project financing.  By February 2010, 68 financial institutions had adopted the Equator Principles, and therefore had voluntarily committed themselves to incorporating these principles in projects worth US$10 million or more.  The Equator Principles were revised in 2006 and were extended to advisory services in structuring projects.  Itaú Unibanco plays a leading role in the Equator Principles Steering Committee and Working Groups, having occupied the position of Chair of the Steering Committee from September 2008 until March 2010.
Itaú BBA focuses on the following products and initiatives in the international area:  (1)  câmbio pronto (whereby a foreign exchange purchase in reais or sale in foreign currency is completed in two business days), which exceeded US$88.677 million in volume in 2009; and (2) structuring long-term, bilateral and syndicated financing.  In addition, in 2009 Itaú BBA continued to offer a large number of lines of credit for foreign trade, having a total of approximately US$6,797 million in lines of credit drawn from corresponding banks as of December 31, 2009.
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In 2009, Itaú BBA received the award of Investment Bank of the Year in Latin America, according to The Banker magazine and the Best Local Investment Bank accolade from Latin Finance.
In December 2008, Itaú Unibanco acquired the remaining 4.25% of Itaú BBA’s total shares from certain Itaú BBA managers and employees who were minority shareholders. Itaú Unibanco holds approximately 100% of the capital stock of Itaú BBA.

International Operations

Banco Itaú Argentina
Argentina is the third largest economy in Latin America, Brazil’s main trading partner and one of the countries with highest GDP per capita of the continent. The pace of increase in banking penetration shows that the Argentine financial system has ample growth potential.
Banco Itaú Argentina’s core business is retail banking, with approximately 250,000 customers in the Argentine middle and upper-income segment as of December 31, 2009.  Compared with 2008, this represents a 5.9% increase in the number of customers.
As of December 31, 2009, Banco Itaú Argentina had assets of R$2.1 billion, loan and leasing operations of R$1.1 billion, deposits totaling R$1.6 billion and shareholders’ equity of R$172 million.
As of the same date, Banco Itaú Argentina had one of the largest branch networks in Argentina consisting of 81 branches, one of the largest ATM networks in Argentina consisting of 164 ATMs, and 23 customer site branches.
 Itaú Chile Operations
Banco Itaú Chile started its official activities on February 26, 2007, when Bank of America Corporation, or BAC, transferred the operations of BankBoston Chile and BankBoston Uruguay to us.  This acquisition increased our presence in Latin America and expanded the scope of our operations.  In addition, Itaú Chile Inversiones Servicios y Administración S.A. provides services related to collection, securitization and insurance.
As of December 31, 2009, our consolidated Chilean operations had R$10.7 billion in assets, R$8.3 billion in loans and leases, R$7.0 billion in deposits and R$1.3 billion in shareholders’ equity. According to the Chilean banking and financial institutions regulator ( Superintendencia de Bancos e Instituciones Financieras ), or, SBIF, as of that same date, Banco Itaú Chile ranked eighth in the Chilean loans and leases market with a 3.2% market share and ranked sixth in number of demand deposit accounts in the private sector, with approximately 89,094 accounts.
Banco Itaú Chile offers several products such as factoring, leasing, corporate finance, mutual funds, insurance brokerage and trading, which are offered through different entities and different lines of business.
The retail segment focuses on the upper-income segment that, as of December 31, 2009, accounted for 59.6% of Banco Itaú Chile’s total revenues. As of December 31, 2009, Banco Itaú Chile had 48 ATMs and 70 branches, of which 65.7% were located in Santiago.
Banco Itaú Chile’s commercial banking segment offers a wide range of products to improve customer experience by building a competitive advantage based on service quality, products and processes for targeted customers (companies with annual revenues of between R$4 million and R$180 million).
Banco Itaú Chile’s global corporate banking segment offers local and international corporate finance capabilities such as syndications, private placements and securitizations.  It also provides trade financing and global treasury services complementing Banco Itaú Chile’s marketing strategy.  Treasury products such as foreign exchange and derivatives are a key part of this strategy.
Itaú Uruguay Operations
Banco Itaú Uruguay is one of the leading financial institutions in Uruguay.  Local operations also include the main credit card issuer, OCA S.A., or OCA, and the pension fund management company Unión Capital AFAP S.A., or Unión Capital.  Banco Itaú Uruguay’s strategy is to serve a broad range of customers through customized banking solutions.  As of December 31, 2009, Itaú Uruguay had R$3.1 billion in assets, ranking second in terms of asset volume among private banks in Uruguay, according to the Uruguayan Central Bank ( Banco Central del Uruguay ), or BCU, R$1.3 billion in loans and leases, R$2.3 billion in deposits and R$279 million in shareholders’ equity.
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The retail banking business is focused on individuals and small business customers, with approximately 130,000 customers as of December 31, 2009. The core branch network is located in the metropolitan area of Montevideo with 15 branches. In addition, Banco Itaú Uruguay has branches in Punta del Este, Tucuarembó and Salto. Banco Itaú Uruguay has a leading position in the debit card segment of private banks in Uruguay with 17.4% market share out of 489,000 cards as of December 31, 2009, according to BANRED, and a distinguished role as a credit card issuer (mainly Visa), with a 23.1% market share as of December 31, 2009 in terms of purchases made in Uruguay (according to Visanet Compañía Uruguaya de Medios de Procesamiento S.A.). Retail products and services focus on the middle and upper-income segments, and also include current and savings accounts, payroll payment, self-service areas and ATMs in all branches, and phone and Internet banking.
The wholesale banking division is focused on multinational companies, financial institutions, large- and medium-sized corporations and the public sector. It provides lending, cash management, treasury, trade and investment services. Additionally, the private banking unit provides a dedicated regional service (for both resident and non-resident customers), offering a full portfolio of local and international financial market products.
OCA is the main credit card issuer in Uruguay, with a 41.0% market share based on the aggregate amount of credit card domestic transactions as of December 31, 2009, and an approximately 50.0% market share in terms of number of transactions processed. OCA performs the three main credit card operations:  customer acquisition, issuance of cards and transaction processing. Credit cards and consumer loans are the main products offered by OCA to its approximately 347,000 customers, through a network of 20 branches, as of December 31, 2009.
Unión Capital is a pension fund management company which has been operating in Uruguay since 1996, when the current Uruguayan pension system was created. As of December 31, 2009, it had 194,739 customers, managed approximately US$858 million in pension funds, with a market share of approximately 16.8%, according to the BCU.
Interbanco S.A. (Paraguay)
Interbanco S.A., or Interbanco, was set up in Paraguay in 1978 and has become one of the largest banks in the Paraguayan financial market. Interbanco was acquired by Unibanco in 1995.
Interbanco has experienced significant growth since 1999, expanding the variety and enhancing the excellence of its services across the whole country. As of December 31, 2009, Interbanco had 19 branches, approximately 220,000 customers and 166 ATMs.
Its main sources of income are consumer banking products, primarily credit cards. Interbanco has launched innovative products and services under the brand “ 24IN,” and provides its customers several products and services, such as International Debit Card Cirrus Maestro and the Internet Banking Service Interhome Banking and also offers banking customer information through mobile phones with the Click Banking service. As of December 31, 2009, Interbanco had R$1.9 billion in assets, R$975 million in loans and leases, R$1.6 billion in deposits and R$247 million in shareholders’ equity. The structure of Interbanco products and services operates under:  corporate banking (small- and medium-sized businesses, agribusiness, large companies, institutional clients) and consumer banking (individuals and wage payment).  Under corporate banking, Interbanco has a well-established presence in the agribusiness segment, which has presented attractive levels of profitability since 2002 and credit performance in Paraguay. Under consumer banking, the main marketing channel is payment services, allowing us to offer pre-approved products to all customers who receive their wages through Interbanco.

Banco Itaú Europa
Banco Itaú Europa is a Portuguese-chartered bank controlled by Itaú Unibanco Holding. Banco Itaú Europa focuses mainly on two lines of business:
·Corporate banking:  providing international corporate banking, international capital markets operations, foreign trade financing and other financial services to support investments and other economic relations between Latin America and Europe through its operations in Lisbon, Madrid, Frankfurt, Paris and London; and
·Private banking:  delivering offshore and international private banking products and services to our Latin American customer base, through its subsidiaries (BIEL and BIEI in Miami).
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As of December 31, 2009, Banco Itaú Europa had US$7,283 million in assets, US$2,899 million in loans and leases, US$2,318 million in deposits and US$1,263 million in shareholders’ equity (including minority interests).
Banco Itaú Europa’s corporate banking business offers several products, such as credit, derivatives and advisory services for European companies with Latin American subsidiaries.
The private banking business provides financial and asset management services to Latin American customers with a minimum of US$250,000 in investments, putting at their disposal a diversified and specialized range of investment funds, dealing in and managing securities and other financial instruments, trusts and investment companies on behalf of customers.  The private banking business has clients in Argentina, Brazil, Chile, Mexico, Uruguay, Venezuela and others.  Assets under management of the private banking business amounted to US$9,974 million as of December 31, 2009.
All of our transactions with Banco Itaú Europa and its subsidiaries are on an arm’s-length basis. Banco Itaú Europa’s senior unsecured debt is rated Baa1 by Moody’s and BBB+ by Fitch.

Other International Operations
In November 2008, Itaú Unibanco Holding entered into an agreement with Itaúsa for the acquisition of a 77.8% interest and a 80.0% voting interest in Itaúsa Export, and of a 12.13% voting interest of Itaúsa Europa, a subsidiary of Itaúsa Export, for approximately R$1,136.0 million.  As a result of the acquisition and subsequent corporate events, Itaú Unibanco Holding now holds indirectly 100% of the total and voting interest of Itaúsa Europa and Itaúsa Export. Itaúsa Export is a holding company domiciled in Brazil which holds a controlling interest in Itaúsa Europa. Itaúsa Europa is a holding company domiciled in Portugal.  Itaúsa Export’s and Itaúsa Europa’s business activities are carried out by their indirect subsidiaries and include corporate banking, international cash management services and private banking.  The acquisition by Itaú Unibanco Holding of all of the stock of Itaúsa Export and Itaúsa Europa was a condition precedent to the Association.

Our other international operations have the following objectives:
(1)           Support our customers in cross-border financial transactions and services:
The international areas of Itaú Unibanco Holding are active in providing our customers with a variety of financial products such as trade financing, loans from multilateral credit agencies, off-shore loans, international cash management services, foreign exchange, letters of credit, guarantees required in international bidding processes, derivatives for hedging or proprietary trading purposes, structured transactions, and international capital markets offerings.
Our international units include: Itaú BBA, Nassau branch (focused on corporate banking business); Itaú Unibanco, New York branch, Itaú Unibanco, Nassau branch and Itaú Unibanco, Cayman Islands branch (focused on middle-market customers); Interbanco S.A. (Paraguay), Banco Itaú Argentina, Banco Itaú Chile and Banco Itaú Uruguay (focused on retail customers, international corporate banking and middle-market); and Itaú Unibanco, Tokyo branch (focused on Brazilian retail customers living in Japan).
(2)           Manage proprietary portfolios and raise funds through the issuance of securities in the international market.
Funds raising through the issuance of securities, certificates of deposit, commercial paper and trade notes can be executed by Itaú Unibanco’s branches located in the Cayman Islands, Nassau, Bahamas and New York, Itaú Bank Ltd., or Itaú Bank, a banking subsidiary incorporated in the Cayman Islands, or Banco Itaú BBA’s Nassau branch. Itaú Unibanco’s Cayman Islands branch has issued subordinated debt which is treated as Tier 2 Capital. For a description of Tier 1 and Tier 2 Capital, see “—Regulation and Supervision—Regulation by the Central Bank—Capital Adequacy and Leverage/Regulatory Capital Requirements.”
The proprietary portfolios are mainly held by Itaú Bank and Itaú Unibanco Cayman Islands branch. These offices also enhance our ability to manage our international liquidity. Itaú BBA’s proprietary positions abroad are booked in the Itaú BBA, Nassau branch.
Through our international operations, we establish and monitor trade-related lines of credit from foreign banks and maintain correspondent banking relationships with money center and regional banks throughout the world and oversee our other foreign currency-raising activities.

(3)           Participate in the international capital markets as dealers:
There are international fixed income and equity desks in Brazil (Itaú BBA), New York (Itaú USA Securities Inc.), London (Itaú UK Securities Ltd.), Argentina (Banco Itaú Argentina), Hong Kong and Tokyo (Itaú Asia Securities Ltd.). Our international fixed income and equity teams offer to institutional investor Latin America securities. 

(4)            In addition, we are also present and servicing our clients in Asia, especially in China, through Itaú BBA’s representative office in Shanghai.

Trade Financing
As of December 31, 2009, our trade finance portfolio accounted for US$8,601 million, of which US$7,501 million was export-related (both pre-export and post-export financing). Our export financing to larger corporate customers is generally unsecured, but some transactions require complex guarantees, particularly those structured to be syndicated. Our import financing business accounted for US$1,099 million as of December 31, 2009. For the year ended December 31, 2009, our total volume of foreign exchange transactions related to exports was approximately US$17,138 million and our total volume of foreign exchange transactions related to imports was approximately US$14,556 million.

Vehicle Financing
As of December 31, 2009, our portfolio of vehicle financing, leasing and consortium lending consisted of approximately 3.7 million contracts, of which approximately 70.0% were non-account holders customers. The personal loan portfolio relating to vehicle financing and leasing grew 4.3% to R$51,285 million in 2009 as compared to 2008, representing a market share in Brazil of approximately 33.5% as of December 31, 2009. Our strong performance and the Association have impacted our leadership market share.
The vehicle financing sector in Brazil is dominated by banks and finance companies that are affiliated with vehicle manufacturers. According to ABEL, the Brazilian association of leasing companies, as of December 31, 2009, we were the largest leasing company in Brazil in terms of present value of lease operations.
We lease and finance vehicles through 13,270 dealers. Sales are made through computer terminals installed in the dealerships that are connected to our computer network. Each vehicle financing application is reviewed based on credit scoring and dealer scoring systems. The dealer scoring system analyzes the credit quality and amount of business provided by each vehicle dealer. We usually grant credit approvals within 11 minutes, depending on the credit history of the customer. Approximately 81% of our credit approvals in 2009 were made instantaneously because we have developed scoring models that permit pre-approvals for our customers, which provide us with a very efficient tool and high credit approval performance. Currently, all of the applications are processed through the Internet, conferring more security and agility to the process of concession of credit, for the dealers, customers and us.
The division for the financing of trucks corresponded to approximately 5.8% of vehicle financing and leasing in 2009.
We also have a division responsible for the financing of motorcycles. The financial volume of transactions relating to motorcycles until December increased 19.05%, compared to December 2008.

In March 2009, Itaú Unibanco Holding entered into a partnership with MMC Automotores do Brasil Ltda. and SVB Automotores do Brasil Ltda. for exclusive financing of their brands. The financial volume of related transactions in 2009 reached R$370 million. The agreement includes that Itaú Unibanco Holding will provide loans to Mitsubishi and Suzuki dealers and that dealers will offer our products and services to their customers.
Redecard
Redecard S.A., or Redecard, is a multibrand credit card provider in Brazil, also responsible for the capturing, transmission, processing and settlement of credit, debit and benefit card transactions. We hold 50% plus one share of Redecard’s capital stock. On March 30, 2009, Itaú Unibanco purchased 24,082,760 common shares of Redecard for R$590.0 million, giving rise to a goodwill amounting to R$14.4 million. In view of this transaction, we have control over Redecard and its results are fully consolidated in our consolidated financial statements since its acquisition.

Commercial Agreements, Associations and Partnerships
Itaú Unibanco Holding has commercial agreements, associations and partnership agreements with over 300 retailers in the Brazilian market, serving more than 17.3 million customers as of December 31, 2009. The consumer credit portfolios with respect to customers of those retailers amounted to R$7,941 million as of December 31, 2009.
Itaú Unibanco has developed a strong presence in the consumer finance sector through our strategic alliances with main retailers in Brazil such as Magazine Luiza S.A., or Magazine Luiza, Marisa S.A., Companhia Brasileira de Distribuição, or CBD, Vivo S.A. and Telemig Celular S.A., Lojas Americanas S.A. and Ipiranga (Ultrapar Participações S.A.). Since 2001, when we established the first partnerships, these alliances have supported consumer finance through several products, such as co-branded credit cards, private label cards, personal loans and insurance.

In November 2009, Itaú Unibanco Holding entered into an agreement to extend through December 31, 2029 its joint venture with Magazine Luiza, pursuant to which Luizacred S.A. Sociedade de Crédito, Financiamento e Investimento, or Luizacred, offers and sells consumer credit financial services and products to Magazine Luiza’s customers.  Itaú Unibanco Holding paid R$250.0 million to extend its exclusive rights to distribute credit products through Luizacred at all physical and virtual Magazine Luiza stores, in addition to its call centers, internet and direct mailing. Each of Magazine Luiza and Itaú Unibanco Holding holds 50.0% of Luizacred’s capital stock.
In August 2009, CBD, which operates under the brand “Pão de Açucar,” and Itaú Unibanco concluded their negotiations concerning Financeira Itaú CBD S.A., or FIC, leading to:  (i) the release of Itaú Unibanco’s exclusivity obligation to CBD in exchange for a R$550.0 million payment to CBD; and (ii) the extension of the exclusivity term granted by CBD to FIC through August 2029 in exchange for a R$50.0 million payment. The association provides for the sale of financial services and products in stores of all types that are directly or indirectly operated or owned by CBD, including supermarkets, convenience stores, electronic appliance stores, retail and wholesale stores, gas stations, drugstores, and e-commerce.
In March 2009, Banco Itaucard, a subsidiary of Itaú Unibanco Holding, and Vivo S.A. and Telemig Celular S.A., a subsidiary of Vivo S.A. (together, “Vivo”), a leading Brazilian mobile telecommunication services provider, entered into a partnership agreement pursuant to which we were granted the right to distribute and sell co-branded credit cards and certain other financial and insurance products and services to Vivo’s clients in Brazil for ten years.
In December 2008, Itaú Unibanco, Marisa S.A. and Credi-21 Participações Ltda., or Credi-21, (Marisa S.A. and Credi-21, together “Marisa”) entered into a partnership agreement pursuant to which Itaú Unibanco and its affiliates were granted a ten-year exclusive right to offer and sell financial products and services, namely co-branded credit cards, personal loans and other types of consumer credit financial products through Marisa’s sales network (physical and online stores). Marisa is the largest Brazilian department store chain specializing in women’s clothing. Its business and operational strategies focus on medium- and low-income women with ages ranging from 20 to 35 years. Both parties have combined the strengths of their business operations, which comprise valuable brands, clientele, market share and great penetration in their respective segments. The deal was structured as a profit-sharing agreement, under which each party is entitled to 50.0% of the results of the partnership operation. The partnership represented an investment of approximately R$120.0 million by Itaú Unibanco, R$65.0 million of which was paid in exchange for the exclusivity right and for the access to Marisa’s customer base for the period of the agreement, and payment of up to R$55.0 million, which is linked to certain sales targets over a five-year period.

Personal Loans
Itaú Unibanco fully closed its proprietary network dedicated to selling personal loans to low-income consumers. Itaú Unibanco intends to increase its low-income costumer base by selling credit cards to non-account holders customers, mainly through the partnerships developed with major retailers, airlines and fuel distribution companies. For further information on these partnerships, see “—Commercial Agreements, Associations and Partnerships.”
Marketing and Distribution Channels
We provide integrated financial services and products to our customers through a variety of marketing and distribution channels. Our distribution network consists principally of branches, ATMs and customer site branches, or CSBs, which are banking service centers located on corporate customers’ premises.
The following table provides information relating to our branch network, customer site branches and ATMs as of December 31, 2009 in Brazil and abroad:
  
Branches
  
CSBs
  
ATMs
 
Itaú Unibanco Holding  3,550   915   29,522 
Itaú Personnalité  165   3   344 
Itaú BBA  9   -   - 
Total in Brazil  3,724   918   29,866 
Itaú Unibanco abroad (excluding Latin America)  4   -   - 
Argentina  81   23   164 
Chile  70   -   48 
Uruguay  38   1   32 
Paraguay  19   6   166 
Total  3,936   948   30,276 
The following table provides information relating to the geographic distribution of our distribution network throughout Brazil as of December 31, 2009:
Region 
Branches
  
CSBs
  
ATMs
 
South  633   125   4,179 
Southeast  2,499   653   21,694 
Center-west  282   62   1,663 
Northeast  242   45   1,788 
North  68   33   542 
Total in Brazil  3,724   918   29,866 
Branches
As of December 31, 2009, we had a network of 3,724 full service branches throughout Brazil. We had branches in municipalities representing 92.4% of Brazil’s gross domestic products, or GDP as of December 31, 2009. As of  December 31, 2009, 81.3% of our branches were located in the States of São Paulo, Rio de Janeiro and Minas Gerais in the Southeast region, Paraná in the South, and Goiás in the Center-west, which collectively accounted for 63.7% of Brazil’s GDP (according to information published by the Central Bank on the breakdown of national GDP by state for 2006). The branch network serves as a distribution network for all of the products and services we offer to our customers, such as credit cards, insurance plans and private retirement plans.
Customer Site Branches
As of December 31, 2009, we operated 918 CSBs throughout Brazil. The range of services provided at the CSBs may be the same as those provided at a full service branch, or more limited according to the size of a particular corporate customer and its needs. CSBs represent a low-cost alternative to opening full service branches. In addition, we believe CSBs provide us with an opportunity to target new retail customers while servicing corporate customers and personnel.
ATMs
As of December 31, 2009, we operated 29,866 ATMs throughout Brazil. Our ATM network handles approximately 125 million transactions per month. Our customers may conduct almost all account, related operations through ATMs. ATMs are low cost alternatives to employee-based services and give us points of service at costs significantly lower than branches. We also have arrangements with other network operators such as the brands “Cirrus” and “Maestro” to allow our clients to use simplified services through their networks.
Other Distribution Channels
We also offer customers the ability to obtain information as to the status of their accounts, investment funds and credit lines through various electronic channels, which allow us to conduct our retail operations at a lower transaction cost. These channels include:
·
c all centers, with a monthly volume of approximately 43.3 million transactions. This distribution channel corresponded to 3.0% of total products sold by the retail banking segment in 2009;
·home and office computer banking system, with a monthly volume of approximately 167.7 million transactions. This distribution channel corresponded to 5.0% of total products sold by the retail bank in 2009;
·Point-of-Sale/Redeshop, a network which allows customers to use a direct debit card to purchase goods at the merchant’s point-of-sale, with approximately  45.6 million transactions per month; and
·various other channels, such as e-mail, cellular phone and wireless application protocol links, drive-through facilities and courier services.
Risk Management
On August 29, 2007, the CMN enacted Resolution No. 3,490, which provides for the criteria to determine the required equity, effective as of July 1, 2008.  Since the date of effectiveness, the calculation of our regulatory capital for risk coverage has considered the factors described below:
·PEPR: the regulatory capital required to cover the risk-weighted exposures, or credit risk
·
PCAM: the regulatory capital required to cover the market risk in exposures to gold, f oreign exchange and foreign assets and liabilities subject to exchange variation
·PJUR: the regulatory capital required to cover the market risk in fixed interest rate, foreign exchange coupon, price and other indices
·PCOM: the regulatory capital required to cover the market risk in commodities;
·PACS: the regulatory capital required to cover the market risk in stock
·POPR: the regulatory capital required to cover the operational risk.
 This is an attempt to more closely adjust Brazilian standards to the principles and rules provided in Basel II, which include:
·Extension of the minimum regulatory capital requirements for coverage of the various risks based on internal models of financial institutions
·Improvement of banking surveillance
·Significant expansion of the existing disclosure requirements.
Basel II contains a new methodology to calculate the minimum regulatory capital requirements for financial institutions and takes into account the particular risk factors of each of them.
We have always been driven by the concern of identifying, measuring and monitoring risks. We calculate our regulatory capital in such a way as to exceed all potential losses based on advanced managerial models. Accordingly, a major part of the Basel II requirements has already been incorporated in our risk control tools or is in the process of being included. Our efforts are concentrated on Basel II’s Pillar 1 rules related to credit, market and operational risks and we intend to use advanced approaches (Advanced Internal Rating-Based (AIRB) for credit risk, Advanced Measurement Approach (AMA) for operational risk and Internal Models Approach (IMA) for market risk).
As part of the risk control tools, we developed and improved proprietary risk management systems that are in compliance with the Central Bank’s regulations and with international practices and procedures.  These models are based on the following elements:
Economic, financial and statistical analyses, which enable the evaluation of the effects of adverse events on our liquidity, credit and market positions;
Market risks using value at risk, or VaR, to evaluate risk in the structural portfolio, and stress tests using independent scenarios, to evaluate our whole exposure in extreme situations;
Credit risks tools which typically involve credit and behavior scoring for retail portfolios, subject to mass processes and proprietary rating models for corporate customers, with uniform individual approaches. We also use portfolio management models to quantify and allocate economic capital;
Operational risks which are in the process of being identified and already have an important amount evaluated on a current basis through the use of internal data bases and statistical models that monitor the frequency and the severity of internal events of losses to quantify the risks and allocate economic capital;
Daily monitoring of positions in relation to pre-established market risk limits; and
Simulations of alternatives for protection due to liquidity losses and contingency plans for crisis situations in different scenarios.
In addition, we have established committees responsible for risk management, structured as follows:
Risk policies superior committee, responsible for establishing general risk policies, setting up aggregated risk limits based on the allocation of capital and other parameters as it deems suitable, discussing the most important aspects to maximize the risk-return ratio and ensuring a consistent risk management within Itaú Unibanco,
Credit superior committee, responsible for establishing overall credit risk policy and making major credit risk decisions,
Financial risk superior committee, responsible for establishing policies and limits for market and liquidity risks, and monitoring positions on a consolidated basis, and
Audit and operational risk management superior committee, responsible for monitoring operational risk controls and compliance systems.
In order to further comply with the new requirements of the more advanced risk models provided for in Basel II, we established internal specific committees composed of executives from all areas of Itaú Unibanco Holding. We prepared an action plan at the end of 2004 and, to this date, we have carried out activities as planned. In 2005, we focused on the construction of a historical database for probabilities of default (PD), models and historical databases for loss given default (LGD) and operational losses. In 2006, the implementation project continued with models for exposure at default (EAD), inclusion of credit risk mitigations and analysis of database validation processes. We also worked on a framework of documentation. In 2007, we started to develop stress test models for some portfolios and to implement a system to consolidate information and compute the capital ratio, in addition to adjusting controls for compliance with the requirements set forth by Resolution No. 3,380 on operating risks.  In 2008 we created a department responsible for internal models validation, with an independent structure from the other models development departments.  In addition to this new department, we are also working on the implementation of a system responsible for consolidating information related to Basel II capital calculation.
In the first half of 2009, we promoted through the Basel II project the unification of concepts, procedures and efforts to ensure that we adopted risk management best practices after the Association.
 We also reassessed the separation of the business, management and controls areas to enhance their independence and promote more balanced decisions regarding risks involved, pursuant to the requirements of CMN Resolution No. 3,721.
We believe that the changes to be implemented will result in lower allocated capital and, as a result, will establish grounds for an increase in the volume of credit operations resulting from the same capital base.

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Market and Liquidity Risk Management
Our financial risk superior committee is responsible for managing market and liquidity risk. The committee analyzes and proposes scenarios for the risk and return assessment of interest and exchange ratios.  It also determines criteria for internal fund transfers and establishes minimum reserve limits.
To manage liquidity risk, we monitor and analyze liquidity through models that consider statistical tools and financial projections, which enable us to analyze various factors that affect our cash flows and liquidity levels under different scenarios. We also revise the contingency funding plan on a monthly basis to ensure that responsibilities are clearly attributed and the measures to be taken are feasible and able to provide adequate liquidity even under a severely stressed scenario.
To manage and control market risk, we have implemented internal risk management and valuation models.  These models employ statistical and historical information with regard to interest and foreign exchange rates, volatilities and trends, and seek to avoid adverse market fluctuations. Our VaR model analyzes volatility and correlation of market rates on an overnight basis. The model provides statistical results at a 99% confidence level.  See “Item 11. Quantitative and Qualitative Disclosures About Market Risk – Market Risk.”
Our financial risk superior committee analyzes the statement of income and risk information on a weekly basis and establishes limits for our risk exposures, interest rate positions and foreign currency risk positions.  It takes into account correlations across different markets. Depending on prevailing macroeconomic and microeconomic conditions, the committee may also propose that particular scenarios be considered in risk models.  In addition, the committee analyzes and approves criteria and rules for internal pricing of resources.

Credit Risk Management
Our continuous improvement in the process for decision-making and for credit risk management and control, guided by the best market practices, have made it possible for us to use methodologies based on mathematical modeling for risk analysis.
We prepare our credit policy on the basis of internal and external factors, relating to the economic environment in Brazil and abroad. Among internal factors, there are customer ratings, determined by advanced credit analysis and control instruments, levels of default, rates of return, quality of the portfolio, and economic capital allocated. We have focused on evaluating the risk/return ratio in our strategy to expand our assets. Our main concern is the quality of the credit portfolio and the creation of value for our shareholders. The whole decision-making process and the definition of our credit policy are centralized to ensure synchronized actions and optimize business opportunities.
Our credit risk management is centralized and carried out by a specific structure under the corporate risk area, which combines operating and market risk. Our senior credit committee defines the credit policies and the credit approval authority levels for the different divisions. The approval authorities rely on the professional skills and personal experiences of each individual with credit authority, and also consider the economic conditions and risk profile of the different divisions.
The credit committees establish standards and limits, fix risk classifications and oversee the credit operation approval process, models and policies. Depending on the amount and terms of a proposed loan, as well as on the risk rating of the potential borrower, the credit committee must consult with the senior credit committee.
Within the retail and small business operations, most types of loans to individuals and small companies are subject to our automated credit process. When an account is established with us, we obtain information about the customer’s income, net worth and professional standing (in the case of individuals). In addition, external information is also gathered automatically and, credit record and relationship history is always updated.  Based on these data and advanced credit and behavior scoring models, we assign each customer an aggregate credit limit. The customer must update new credit information at least annually.
There is a different credit review process for credit amounts higher than those available through the automated credit process and for categories of customer or types of credit not subject to the automated credit process, including credit operations in the middle market and corporate divisions. In these cases, we examine each application individually, verify data and carry out traditional credit analysis methodologies.
In addition, our credit area carries out technical support research on business groups and economic and industrial sectors within Brazil. This enables us to evaluate credit risk for companies in the middle market (with annual revenues in excess of R$ 6 million) and corporate divisions. Within the middle market and corporate division, we currently have ratings for approximately 60,000 business groups comprising approximately 100,000 companies. Payroll deduction loans are reevaluated at least on a yearly basis or sooner if something relevant comes to the attention of the credit area.
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We give to each credit manager (manager of the credit area responsible for a team of credit analysts) and commercial area manager (relationship manager) a credit approval authorization limit for each of several categories of loans. The amount of the limit depends upon the experience of the particular manager and economic conditions. Loans up to R$ 100 million require approval from the credit committee, and may require approval from a senior credit authority, depending on the term of the proposed loan, the credit rating of the potential borrower and the allocated capital for the proposed loan.  In addition, any proposed capital allocation greater than R$ 20 million is subject to the approval of the senior credit committee of Itaú Unibanco Holding.
Itaú BBA targets the large corporate divisions and its credit decision process is also based on the rating and size of the loan. There is no individual authority. The highest credit authority within Itaú BBA is represented by the president and the credit director who, together, can approve up to R$ 545 million, depending on the risk rating. Any loan above R$ 545 million has to be submitted to the approval of senior credit committee of Itaú Unibanco Holding.
Operational Risk Management
Operational risk is defined as the risk of loss resulting from inadequate or failed internal processes and systems, the improper behavior of people, or from outside events.
The sophistication of the banking businesses and the technology evolution have increased the complexity of the risk profiles of the organizations and affected their operational risk management.  While our management is experienced and operational risk management is not a new practice, it has been necessary to establish a specific structure for the operational risk different from the one traditionally applied to the market and credit risks.
In line with the principles established by the CMN, we defined our operational risk management policy, approved by the audit committee and ratified by the board of directors. The operational risk management policy is applicable to the Itaú Unibanco Holding conglomerate in Brazil and abroad.
The policy is comprised of a set of principles, procedures and guidelines that provide an adequate management of products, services, activities, processes and systems’ risks taking into consideration their nature and complexity.
The policy defines the procedures for identifying, assessing, monitoring, mitigating, controlling and disclosing operational risks as well as its participants’ roles and responsibilities.
In addition, we utilize a business capital evaluation management model that quantifies the operational risks incurred through statistical models that allow us to calculate expected losses and capital allocation for unexpected losses (VaR at a confidence level of 99.9%) using Monte Carlo simulation.
This mechanism enhances our product and service price definition process and will be submitted to the approval of the Brazilian regulatory agency within the advanced measurement approach methodology, in accordance with Basel’s Revised Framework for the International Convergence of Capital Measurement and Capital Standards criteria, following the guidelines established by the regulatory authorities.
We constantly seek to improve our management process and to comply with the regulatory agencies’ requirements, maintaining our image as a solid and trustworthy bank.

 Insurance Underwriting and Portfolio Risk Management
Management of our insurance operations establishes our underwriting policies relating to retentions, protections, reinsurance programs and pricing, depending on the type of business. This approach is designed to maintain high quality underwriting, pricing discipline and reduce volatility in the results. The actuarial department analyzes the adherence of the probability tables used in the pricing models to the experience of our portfolio. In the retail market, the prices of our insurance products are established according to proprietary scoring and rating systems based on data we gathered and analyzed over many years, which underwriters use to assess and evaluate risks prior to quotation. This information provides specialized knowledge relating to industry segments and helps analyze risk based on account characteristics and pricing parameters. In the group life market, the prices of our insurance products are established according to rating systems based on an international actuarial table of death and the historical experience of our policies, the age of the group, the industry segments, the percentage of female and experience of each group and the financial health of the client. The property insurance underwriting is controlled by the risk factors and an appropriate pricing according to the company exposition considering economy segment analysis, activity and level of severity risk, customer and similar companies experiences, financial health and optional management instruments. The reinsurance strategy is to work with limited reinsurance companies to have a high automatic limit with a safe retention limit. Besides that, the underwriters reanalyze all our accounts every year to control the risk of portfolio. In addition we apply the RAROC concept on the corporate segment to allocate enough capital to maintain business sustainability.
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Funding

Main Sources

Our principal source of funding is deposits. Deposits include non-interest bearing demand deposits, interest bearing savings account deposits, time deposits certificates sold to customers and interbank deposits from financial institutions. As of December 31, 2009, total deposits amounted to approximately R$ 190.9 billion representing 48.2% of total funding. Our savings deposits represent one of our major source of funding which, as of December 31, 2009 accounted for 25.3% of total deposits.

The following table sets forth a breakdown of our sources of funding as of December 31, 2009 and 2008:

  2009  2008 
  
millions of
R$
  
% of total
funding
  
millions of
R$
  
% of total
funding
 
Deposits  190,908   48.2   150,802   51.6 
Demand deposits  24,887   6.3   23,041   7.9 
Other deposits  997   0.3   1,065   0.4 
Savings deposits  48,222   12.2   31,896   10.9 
Time deposits  114,810   28.9   92,758   31.7 
Deposits from banks  1,992   0.5   2,042   0.7 
Securities sold under repurchase agreements  66,174   16.7   49,492   16.9 
Short-term borrowings  80,725   20.4   54,277   18.6 
Trade finance borrowings  6,093   1.5   9,166   3.1 
Local onlendings  215   0.1   122   0.1 
Euronotes  414   0.1   576   0.2 
Commercial Paper  -   -   60   - 
Fixed rate notes  408   0.1   133   0.1 
Mortgage notes  7,854   2.0   3,035   1.0 
Securities issued and sold to customers under repurchase agreements  65,520   16.5   40,977   14.0 
Other short-term borrowings  221   0.1   208   0.1 
Long-term debt  58,976   14.7   37,672   12.9 
Local onlendings  21,867   5.5   7,271   2.5 
Euronotes  1,534   0.4   2,209   0.8 
Fixed rate notes  148   -   278   0.1 
Mortgage notes  971   0.2   669   0.2 
Trade financing borrowings  5,907   1.5   7,361   2.5 
Debentures  2,764   0.7   2,093   0.7 
Subordinated debt  22,725   5.7   15,030   5.1 
Debt under securitization of diversified payments right  -   -   1,424   0.5 
Other long-term debt  3,060   0.7   1,337   0.5 
Total  396,783   100.0   292,243   100.0 
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The following tables set forth a breakdown of deposits by maturity, as of December 31, 2009 and 2008:

(in millions of R$) 
  2009 
  0-30 days  31-180 days  181-365 days  Over 365 days  Total 
Non-interest bearing deposits  25,884   -   -   -   25,884 
Demand deposits  24,887               24,887 
Other deposits  997               997 
Interest bearing deposits  65,238   16,167   14,785   68,834   165,024 
Savings deposits  48,222   -       -   48,222 
Time deposits  16,446   15,437   14,242   68,685   114,810 
Deposits from banks  570   730   543   149   1,992 
Total  91,122   16,167   14,785   68,834   190,908 

  2008 
  0-30 days  31-180 days  181-365 days  Over 365 days  Total 
Non-interest bearing deposits  24,106   -   -   -   24,106 
Demand deposits  23,041               23,041 
Other deposits  1,065               1,065 
Interest bearing deposits  48,167   15,525   9,062   53,942   126,696 
Savings deposits  31,896   -       -   31,896 
Time deposits  15,822   14,656   8,615   53,665   92,758 
Deposits from banks  449   869   447   277   2,042 
Total  72,273   15,525   9,062   53,942   150,802 

The following table sets forth the mix of the individual and corporate time deposits divided among our retail, Personnalité, middle market and corporate sectors (each expressed as a percentage of total time deposits) as of December 31, 2009 and  2008:

  2009  2008 
Retail  34.7%  22.9%
Personnalité  16.1%  27.2%
Middle market  34.7%  40.5%
Corporate  14.5%  9.4%
Total  100.0%  100.0%

Other Sources
We also act as a financial agent through borrowing funds from the BNDES, and from the National Industrial Finance Authority ( Fundo de Financiamento para Aquisição de Máquinas e Equipamentos Industriais ), or FINAME, and passing the funds at a spread determined by the government to targeted sectors of the economy. We refer to these borrowings as on-lending borrowings and they are primarily in the form of credit lines that are directed by the government agencies through private banks to specific targeted sectors for economic development. As of December 31, 2009, we participated as a financial agent in on-lending borrowings financed by BNDES and FINAME, in the total amount of approximately R$22 billion.  See “Itaú BBA – Investment Banking” and “– Corporate Banking.”
We obtain U.S. dollar-denominated lines of credit from our correspondent banks to provide a source of trade finance funding for Brazilian companies. As of December 31, 2009, our total import and export funding was approximately R$ 12 billion.
In addition, we obtain foreign currency funds from the issuance of securities in the international capital markets, either through private borrowings or through issuance of debt securities generally to on-lend these funds in Brazil to Brazilian corporations and financial institutions. These on-lendings take the form of loans denominated in reais and indexed to the U.S. dollar. As of December 31, 2009, we had approximately R$ 2.5 billion outstanding of structured and financial transactions. Our international operations in Portugal and our operations through Grand Cayman, New York and Itaú BBA Nassau branches, represent another funding vehicle for us, as they are responsible for issuing securities and establishing programs for the issuance of several financial instruments. See “– International Operations – Other International Operations”.
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We also generate additional funds for our operations through the resale to our customers of securities issued by us and previously held in our treasury account. Our customers have the right to sell the securities back to us at their option until the maturity date. We pay interest on these securities funds at variable rates based on the Interbank Deposit Certificate.  Total funding under this financial product as of December 31, 2009 amounted to R$ 65.5 billion.
In addition, our leasing subsidiary periodically issues debentures, which represent another source of funding.

Technology
We see IT as key to our business. In 2009, our budget consisted of approximately R$2,900 million in expenses (including software development) and R$800.0 million in investments. We believe our brands are strongly associated with innovation and we reinforce that internally with specific IT projects to guarantee our technological leadership in comparison to our competitors.
Itaú Unibanco Holding’s IT officers are involved in a development program pursuant to which we are developing several initiatives to build an IT group to support our growth and to enable us to be competitive in the following years.  The main initiatives of this program are:
·  Maintaining our brands associated with innovation;
·  Reducing time-to-market for new products;
·  Increasing systems availability for customers;
·  Designing systems architecture;
·  Consolidating “one-client-view” for all of our businesses;
·  Ensuring IT – business alignment; and
·  Improving IT operational efficiency.
Itaú Unibanco Holding is currently building its software development operational model and outsourcing certain IT services, such as coding.  In the shorter term, our main focus is to finalize the integration of IT operations and risk functionalities.  In 2010, we intend to finalize systems integration and begin to benefit from IT synergies.  We have workplace contingency and disaster recovery processes for our main businesses.  We have a back-up site located in Campinas, state of São Paulo.
Competition
General
The last several years have been characterized by increased competition and consolidation in the financial services industry in Brazil.

Retail Banking
As of December 31, 2009, there were 137 multiple-service banks, 18 commercial banks, and numerous savings and loan, brokerage, leasing and other financial institutions in Brazil.
 
We, (taking into account the Associationtogether with the Unibanco Financial Group), Banco Bradesco andS.A., or Bradesco, Banco Santander (Brasil) S.A. (who acquired, or Banco ABN Amro RealSantander, and HSBC Bank Brasil S.A. at, or HSBC, are the end of 2007), dominateleaders in the private multiple servicesnon-state-owned multiple-services banking sector.  As of December 31, 2008,2009, these banks accounted for more than 47%45.5% of the Brazilian multiple-service private banking sector’s total assets.  We also face competition from public-sectorstate-owned banks.  As of December 31, 2009, Banco do Brasil S.A., or Banco do Brasil, BNDES and Caixa Econômica Federal, theor CEF, ranked first, fourth and the secondfifth in the publicbanking sector, rank, accountedrespectively, accounting for 28%41.1% of the banking system’s total assets.
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The table below sets forth the total assets of the top 14 banks in Brazil, ranked according to their share of the Brazilian banking sector’s total assets.
  
December 31, 2009(*)
 
  
R$billion
  
%
 
Banco do Brasil(**)  692.0   20.0 
Itaú Unibanco Holding  585.6   17.0 
Bradesco  444.4   12.9 
BNDES  386.6   11.2 
CEF  341.8   9.9 
Santander  334.1   9.7 
HSBC  100.1   3.9 
Banco Votorantim  86.9   2.5 
Safra  71.1   2.1 
Citibank  40.8   1.2 
Banrisul  29.3   0.8 
BTG Pactual  21.9   0.6 
Credit Suisse  21.3   0.6 
Deutsche  20.7   0.6 
Others  275.4   8.0 
Total  3,452.0   100.0 
(*)Based on banking services, excluding insurance and pension funds.
(**)Includes the consolidation of 50% of Banco Votorantim based on Banco do Brasil ownership of a 50% interest in Banco Votorantim.
Source: Central Bank, 50 Largest Banks and the Consolidated Financial System (December 2009).
With the Association and the establishment of Itaú Unibanco Holding, new business opportunities arose in the domestic market, in which the economies of scale have become crucial for competition. Itaú Unibanco Holding has a leading position in many areas in the domestic financial market. We achieved a market share of 16.5% based on total loans as of November 2009, which positioned us at the second place in the Brazilian market. Without considering the public banks, we had a leading position based on total loans with 27.2% of the Brazilian market share. We are ranked in the second position in the market based on total funding, achieving 17.0% of market share as of December 31, 2008.2009.
 
The Brazilian banking industry hasWe also faced increasing competition from foreign banks. Earlier, certain large United States banks, such as Citibank, established significanthave a highly qualified team of employees. We intensified our presence in Brazilthe Southern Cone (Argentina, Chile, Paraguay and large foreign financial groups, such as HSBC, ABN AmroUruguay) to strengthen our operations in Latin America in order to become a leader in the international market. Our long-term strategy is to move gradually to a global position, but our strategy gives priority to the consolidation of our presence in the domestic and Santander Central Hispano, S.A., have gained entry into the Brazilian market through the acquisition of various Brazilian financial institutions.regional markets.

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Credit Cards
 
The Brazilian credit card market is highly competitive. In 2008competitive, growing at a rate of over 21.3% per year over the Brazilian credit card market grew 23.7%,last three years, according to the ABECS.Brazilian Association of Credit Card Companies and Services ( Associação Brasileira das Empresas de Cartões de Crédito e Serviços , or ABECS). Itaú Unibanco Holding’s mainUnibanco’s major competitors in this segment are Bradesco, Banco Bradescodo Brasil and Banco do Brasil.Santander. Credit card companies in Brazil are increasingly adopting alliances and co-branding strategies.strategies and adapting relationship pricing policies (interest rates, cardholder fees and merchant fees) in order to strengthen their position in the market.

Asset Management
 
The asset management industry in Brazil is still at an early stage of development compared to foreign markets, with the activity dominated by commercial banks offering fixed-income funds to retail bank customers. The primary factors affecting competition in institutional funds are expertise and price. Our competition in the sector includes large and well-established banks such as Banco do Brasil and Banco Bradesco as well as several other participants such as Caixa Econômica Federal, Citibank,CEF, HSBC Banco Santander (Brasil) S.A. and Banco Safra.Santander.

Insurance
 
The Brazilian insurance market is highly competitive. As of December 31, 2008, this industry consisted of approximately 114 insurance companies of different sizes. Our primary competitors in this sector, excluding health insurance, are the economic groups: Bradesco Porto Seguro,Seguros S.A., Mapfre Vera Cruz Seguradora S.A., BB Seguros e Participações S.A. and Sul América.other related companies. As of December 31, 2008,2009, this industry consisted of approximately 113 insurance companies of varying sizes. We believe our alliance with Porto Seguro will result in gains in scale and efficiency. Giving effect to our 30.0% ownership interest in Porto Seguro, we represented approximately 9%had a leading position based on insurance premiums in December 2009, with 14.1% of the total written premiums, excluding health insurance and VGBL, generated in the Brazilian insurance market. We also face competition from local or regional companies with well-established presence in their respective region.market share.


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Private Retirement Plans and Capitalization Products
 
Our primary competitors in this sectorprivate retirement plans and capitalization products are controlled by large commercial banks, such as Banco Bradesco, Banco do Brasil, Caixa Econômica FederalBanco Santander (for private retirement plans only) and Banco Santander,CEF, which, like us, take advantage of their extensive branch network to gain access to the retail market.

Corporate and Investment Banking
 
In theOur corporate and investment banking area has achieved a leading position in many of the markets in which it operates. Itaú BBA faces competition from some ofis a contender for the largest Brazilian banks, such astop spot in the wholesale credit market along with Banco do Brasil (including Banco Votorantim), and to a lesser extent Bradesco and Banco Santander. In cash management, Itaú BBA has been recognized for its leadership role, having received the Best Domestic Cash Manager in Brazil award from Euromoney in 2009, based on its high service standards. Its main competitors are Banco do Brasil, as well as some of the international financial groups, including Citigroup, Banco Santander and Bradesco. Itaú BBA also has a prominent position in derivatives operations, particularly in structured derivatives. In this market, its main competitors are international banks, including Citibank, Banco Credit Suisse Goldman Sachs,Brasil S.A., or Credit Suisse, HSBC, Banco JP Morgan and UBS.

Consumer Finance
The consumer finance sector has significantly changed, starting with Unibanco’s acquisition of Fininvest in 1996, followed by HSBC’s acquisition of LosangoS.A., Banco Morgan Stanley S.A. and Banco Bradesco’s acquisition of Zogbi. Besides these companies, other large competitors in this industry include Panamericano and Banco IBI.Santander.
Key competitive factors in this industry are distribution, a strong brand, consumer relationship management and strategic alliance with key retailers. Itaú Unibanco Holding has made alliances with Companhia Brasileira de Distribuição, Lojas Americanas, Magazine Luiza and Ponto Frio, leaders in their sectors. Banco Bradesco has alliances with Casas Bahia.

 
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REGULATION AND SUPERVISION
 
The basic institutional framework of the Brazilian financial system was established in 1964 through Law No. 4,595 of December 31, 1964, or the banking reform law.“Banking Law. This legislation created the CMN, as the regulatory agency responsible for establishing currency and credit policies promoting economic and social development, as well as for the operation of the financial system.
Principal Regulatory Agencies
The CMN
The CMN, the highest authority responsible for monetary and financial policies in Brazil, is responsible for the overall supervision of Brazilian monetary, credit, budgetary, fiscal and public debt policies. The CMN is chaired by the Ministerminister of Financefinance and includes the Ministerminister of Planningplanning and Budgetbudget and the Presidentpresident of the Central Bank. The CMN is authorized to regulate the credit operations which Brazilian financial institutions are engaged in, to regulate the Brazilian currency, to supervise Brazil’s reserves of gold and foreign exchange, to determine Brazilian saving and investment policies and to regulate the Brazilian capital markets. In this regard, the CMN also oversees the activities of the Central Bank and the CVM.
 
The Banking Reform LawCentral Bank
 
Overview
The banking reform law regulatesCentral Bank is responsible for implementing the National Financial System (Sistema Financeiro Nacional), which is composedpolicies of the CMN as they relate to monetary policy and exchange control matters, regulating public and private sector Brazilian financial institutions, monitoring and registration of foreign investment in Brazil and overseeing the Brazilian financial markets. The president of the Central Bank Banco do Brasil, BNDES and numerous public- and private-sector financial institutions. This law grantsis appointed by the president of Brazil for an indefinite term subject to ratification by the CMNBrazilian senate. Since January 2003, the power to control lending and capital limits, approve monetary budgets, establish foreign exchange and interest rate policies, oversee activities related to the stock exchange markets, regulate the constitution and functioningpresident of public- and private-sector financial institutions, grant authority to the Central Bank to issue paper moneyhas been Mr. Henrique de Campos Meirelles.
The CVM
The CVM is the body responsible for regulating the Brazilian securities and establish reserve requirement levels, and sets forthderivative markets in accordance with the general directives pertaining toregulatory framework determined by the banking and financial markets.CMN. The CVM also regulates companies whose securities are traded on the Brazilian securities markets, as well as investment funds.
 
Principal Limitations and Restrictions on Financial Institutions
 
Under the banking reform law,Banking Law, financial institutions may not:
 
·  operate in Brazil without the prior approval of the Central Bank and carry out transactions that fail to comply with principles of selectivity of transactions, adequate guarantees, liquidity and risk diversification;
·  invest in the equity of another company unless the investment receives the prior approval of the Central Bank, based upon certain standards established by the CMN. Those investments may, however, be made through the investment banking unit of a multiple-service bank or through an investment bank;
·  own real estate unless the institution occupies that property. When real estate is transferred to a financial institution in satisfaction of a debt, the property must be sold within one year, except if otherwise authorized by the Central Bank; and
·  lend more than 25.0% of their capital calculated in accordance with CMN Resolution No. 3,444 as the basis for our regulatory capital to any single person or group.
Principal Financial Institutions
Public Sector
The federal and state governments of Brazil control several commercial banks and financial institutions devoted to fostering economic development, primarily with respect to the agricultural and industrial sectors. State development banks act as independent regional development agencies in addition to performing commercial banking activities. In the last decade, several public sector multiple-service banks have been privatized and acquired by Brazilian and foreign financial groups. Government-controlled banks include:
47
·  Banco do Brasil, which is a federal government-controlled bank. Banco do Brasil provides a full range of banking products to the public and private sectors. It is the primary financial agent of the federal government and, as of December 31, 2009, it was the largest multiple — service bank in Brazil based on assets;
·  BNDES, which is the federal government-controlled development bank primarily engaged in the provision of medium- and long-term finance to the Brazilian private sector, including to industrial companies, either directly or indirectly through other public and private sector financial institutions;
·  CEF, which is a federal government-controlled multiple-service bank and the principal agent of the national housing finance system. CEF is involved principally in deposit-taking, savings accounts and the provision of financing for housing and urban infrastructure; and
·  other federal public sector development and multiple-service banks, including those controlled by the various state governments.
Private Sector
The private financial sector includes commercial banks, investment, finance and credit companies, investment banks, multiple-service banks, securities dealers, stock brokerage firms, credit co-operatives, leasing companies, insurance companies and others. In Brazil, the largest participants in the financial markets are financial conglomerates involved in commercial banking, investment banking, financing, leasing, securities dealing, brokerage and insurance. As of February 1, 2010, there were 553 financial institutions operating in the private sector, including:
·  commercial banks — approximately 18 private sector commercial banks engaged in wholesale and retail banking and were particularly active in demand deposits and lending for working capital purposes;
·  investment banks — approximately 16 private investment banks engaged primarily in time deposits, specialized lending, and securities underwriting and trading; and
·  multiple-service banks (bancos múltiplos) — 136 private sector multiple-service banks provided, through different departments, a full range of commercial banking, investment banking (including securities underwriting and trading), consumer financing and other services including fund management and real estate financing.
In addition to the above, the Central Bank also supervises the operations of consumer credit companies (financeiras), securities dealerships (distribuidoras de títulos e valores mobiliários), stock brokerage companies (corretoras de valores), leasing companies (sociedades de arrendamento mercantil), savings and credit associations (associações de poupança e empréstimo) and real estate credit companies (sociedades de crédito imobiliário).

Foreign Banks

The establishment in Brazil of new branches by foreign financial institutions (financial institutions which operate and have a head office offshore) is prohibited, except when duly authorized by the Brazilian government, in accordance with international treaties, the policy of reciprocity and the interest of the Brazilian government. Once authorized to operate in Brazil, withouta foreign financial institution is subject to the prior approvalsame rules, regulations and requirements that are applicable to any other Brazilian financial institution.
Foreign Investments in Brazilian Financial Institutions

Foreign investment in Brazilian financial institutions by individuals or companies is permitted only if specific authorization is granted by the Brazilian government, in accordance with international treaties, the policy of reciprocity and the interest of the Central Bank;Brazilian government. Once authorization is granted, Brazilian law sets forth the following rules concerning foreign investment in Brazil and the remittance of capital outside of Brazil:
foreign and Brazilian investors must be treated equally, unless legislation states otherwise,
 
invest in
any foreign entity that directly owns shares of Brazilian companies must be registered with the equity of another company unless the investment receives the prior approval ofcorporate taxpayer registry ( Cadastro Nacional de Pessoa Jurídica) or “CNPJ”;
48
foreign direct investments, repatriations and profit remittances must be registered electronically with the Central Bank based upon certain standards established by the CMN. Those investments may, however, be made through the investment banking unitModule RDE-IED of a multiple-service bank or through an investment bank;SISBACEN;
 
own real estate unless the institution occupies that property. When real estate is transferred to a financial institution in satisfaction of debt, the property must be sold within one year, except if otherwise authorized by the Central Bank;
lend more than 25% of their adjusted regulatory capital toBank may require that Brazilian companies provide information regarding the foreign equity interests in those Brazilian companies, and any single person or group;
grant loans to or guarantee transactions of any company which holds more than 10% of their capital, except under certain limited circumstances and subject toother information in connection with the prior approval of the Central Bank;relevant foreign investment in Brazil; and
 
grant loans to or guarantee transactions of any companyBrazilian companies must provide in which they hold more than 10% of the capital, except for loans to leasing subsidiaries.their financial statements relevant foreign investments, obligations and credits.
 
Special Provisions Relating to Capital Structure
Financial institutions may be organized as branchesOn December 9, 1996, a presidential decree authorizing the acquisition by non-Brazilians of foreign corporations or corporations that may have their capital divided into voting and non-voting shares but no more than 50%issued by Brazilian financial institutions as well as the offering abroad of their capital may be represented bydepositary receipts representing those shares. Also in December 1996, the CMN approved a resolution specifically authorizing the global offering of depositary receipts representing non-voting shares.shares of Brazilian financial institutions. Therefore, in these specific cases, authorization from the Brazilian government is not necessary.
 
Regulation by the Central Bank
 
Overview
 
The Central Bank implements the currency and credit policies established by the CMN, and controls and supervises all public- and private-sector financial institutions. Any amendment to a financial institution’s bylaws, any increase in its capital or any establishment or transfer of its principal place of business or any branch (whether in Brazil or abroad) must be approved by the Central Bank. Central Bank approval is necessary to enable a financial institution to merge with or acquire another financial institution or in any transaction resulting in a change of control of a financial institution. See also “— Antitrust Regulation.” The Central Bank also determines minimum capital requirements, permanent asset limits, lending limits and compulsorymandatory reserve requirements.

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No financial institution may operate in Brazil without the prior approval of the Central Bank.
 
The Central Bank monitors compliance with accounting and statistical requirements. Financial institutions must submit annual and semiannualsemi-annual audited financial statements, quarterly financial statements, subject to a limited review, as well as monthly unaudited financial statements, prepared in accordance with the Central Bank rules, all of which shouldmust be filed with the Central Bank. Publicly held financial institutions must also submit quarterly financial statements to the CVM, which are subject to a limited review. In addition, financial institutions are required to disclose to the Central Bank all credit transactions, foreign exchange transactions, export and import transactions and any other related economic activity. This disclosure is usually made on a daily basis by computer and through periodic reports and statements. A financial institution and the corporate entities or individuals which control such financial institution have a duty to make available for inspection by the Central Bank its corporate records and any other document which the Central Bank may require in order to carry out its activities.
 
Capital Adequacy and Leverage/Regulatory Capital Requirements
 
Since January 1995, Brazilian financial institutions have been required to comply with the Basel AccordI on risk-based capital adequacy, modified as described below.
 
In general, the Basel Accord requiresI and Basel II require banks to maintain a ratio of capital to assets and certain off-balance sheet items, determined on a risk-weighted basis, of at least 8%8.0%. At least half of the required capital must consist of Tier 1 capital,Capital, and the balance must consist of Tier 2 capital.Capital. Tier 1 Capital, or core capital, includes equity capital (i.e., common shares and non-cumulative permanent preferred shares), share premium, retained earnings and certain disclosed reserves less goodwill. Tier 2 Capital, or supplementary capital, includes “hidden” reserves, asset revaluation reserves, general loan loss reserves, subordinated debt and other quasi-equity capital instruments (such as cumulative preferred shares, long-term preferred shares and mandatory convertible debt instruments). There are also limitations on the maximum amount of certain Tier 2 capitalCapital items. To assess the capital adequacy of banks under the risk-based capital adequacy guidelines, a bank’s capital is evaluated on the basis of the aggregate amount of its assets and off-balance sheet exposures, such as financial guarantees, letters of credit and foreign currency and interest rate contracts, which are weighted according to their categories of risk.
 
Brazilian legislation closely tracks the provisions of the Basel Accord.II standardized or basic approaches for credit, market and operational risks. Among the key differences between Brazilian legislation and the Basel AccordII are:
49
 
•           the minimum ratio of capital to assets determined on a risk-weighted basis is 11%11.0%;
 
•           the risk-weighting assigned to certain assets and off-balance sheet exposures differdiffers slightly from those set forth in the Basel Accord; and
II, including a risk weighting of 300.0% on deferred tax assets other than temporary differences;
 
•           the ratio of capital to assets of 11%11.0% mentioned above must be calculated based on the consolidation of all financial subsidiaries (partial consolidation basis), as well as from July 2000 on a fully consolidated basis since July 2000, i.e., including all financial and non-financial subsidiaries. In making these consolidations, Brazilian financial institutions are required to take into account all investments made in Brazil or abroad in which the financial institution holds, directly and indirectly, individually or together with another partner, including through voting agreements,agreements: (i) partner rights that ensure a majority onin adopting corporate resolutions of the invested entity,entity; (ii) power to elect or dismiss the majority of the management of the invested entity,entity; (iii) operational control of the invested company characterized by common management,management; and (iv) effective corporate control of the invested entity characterized by the total equity interest held by its management, controlling individuals or entities, related entities and the equity interest held, directly or indirectly, through investment funds. Upon preparation of the consolidated financial statements, the financial institutions that are related by actual operational control or by operation in the market under the same trade name or trademark must also be considered for consolidation purposes.purposes; and
•           the requirement for banks to set aside a portion of their equity to cover operational risks as from July 1, 2008, which varies from 12.0% to 18.0% of average gross income from financial intermediation.
 
For limited purposes, the Central Bank establishes the criteria for the determination of Reference Capitalregulatory capital for Brazilian financial institutions. In accordance with those criteria established by CMN Resolution No. 3,444, the capital of the banks is divided into Tier 1 Capital and Tier 2 capital.Capital.
 
•           Tier 1 capitalCapital is represented by stockholders’shareholders’ equity plus balance of credit income account and blocked deposits account in order to mitigate the capital deficiency, excluding the balance of debt income account, revaluation reserves, contingency reserves, special profit reserves related to mandatory dividends not yet distributed, preferred cumulative stock, preferred redeemable stock, non-realized earnings related to available-per-sale securities market value adjustments and certain tax credits in accordance with Resolution No. 3,059/02,3,059, as amended, established by CMN. As from December, 2008, the Central Bank permits considering as Tier I Capital, the amount allowance for loan and lease losses that exceeds the mandatory allowance computed based on minimum percentages established by CMN.

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•           Tier 2 capitalCapital is represented by revaluation reserves, contingency reserves, special profit reserves related to mandatory dividends not yet distributed, preferred cumulative stock, preferred redeemable stock, subordinated debt and hybrid instruments and non realized earnings related to available-for-sale securities’securities market value adjustments. As mentioned above, Tier 2 capitalCapital must not exceed Tier 1 capital.
Capital. In addition, preferred redeemable stock with original maturity of less than 10 years plus the amount of subordinated debt is limited to 50.0% of the amount of Tier 1 Capital.
 
The Reference Capitalregulatory capital is represented by the sum of Tier 1 and Tier 2 capitalCapital and, together with the deductions described in Note 31 to our consolidated financial statements as of and for the year ended December 31, 2009, will be taken into consideration for the purposes of defining the operational limits of financial institutions.

Foreign Currency Exposure
 
The total exposure in gold, foreign currency and other assets and liabilities indexed or linked to the foreign exchange rate variation undertaken by financial institutions, and their direct and indirect subsidiaries, on a consolidated basis, may not exceed 30%30.0% of their regulatory capital, in accordance with Resolution No. 3,488/07, established by the CMN.

Reserve Requirements
The Central Bank currently imposes several reserve requirements on Brazilian financial institutions and such reserve amounts must be deposited with the Central Bank, as a mechanism to control the liquidity of the Brazilian financial system. These reserve requirements are applied to a wide range of banking activities and transactions, such as demand deposits, savings deposits and time deposits. The deduction of certain costs related to foreign currency acquisitions from compulsory deposit requirements related to interbank deposits from leasing companies mentioned below (which compulsory deposits are a part of the reserve requirements related to time deposits) is in effect until June 10, 2010. For compulsory deposits related to time deposits, the deduction of amounts related to debt purchase or investments on interbank deposits issued by financial institutions with a consolidated Tier 1 regulatory capital no greater than R$7 billion is limited to 45.0% of required reserves since March 29, 2010.
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In light of the global financial crisis, the CMN and the Central Bank enacted measures to modify Brazilian banking laws in order to provide the financial market with greater liquidity, including:
•           reducing the rate applicable on additional time deposit and demand deposit reserve requirements to 4.0%, and to 5.0%, respectively, effective until March 22, 2010. As of March 22, 2010 the rate applicable to both additional time and demand deposits reserve requirements is 8.0%, corresponding to the rate in place before the crisis.
•           providing that financial institutions may deduct costs related to foreign currency acquisitions from the compulsory deposit requirements related to interbank deposits from commercial leasing companies;
•           reducing the rate of compulsory demand deposits from 45.0% to 42.0%;
•           reducing the rate of required compulsory reserves as time deposits to 13.5%, effective until March 29, 2010. As of March 29, 2010, the rate of required compulsory reserves as time deposits is 15.0%, corresponding to the rate in place before the crisis; and
•           permitting financial institutions to deduct the amount of voluntary installments of the ordinary contribution to the Credit Assurance Fund ( Fundo Garantidor de Crédito ), or FGC, from compulsory demand deposits.
Liquidity and Fixed Assets Investment Regime
 
The Central Bank prohibits Brazilian multiple-service banks, including our bank,us, from holding, on a consolidated basis, permanent assets in excess of 50%50.0% of their adjusted regulatory capital. Permanent assets include investments in unconsolidated subsidiaries as well as real estate, equipment and intangible assets.
 
Lending Limits
 
AIn accordance with the CMN Resolution No. 2,844, a financial institution, on a consolidated basis, may not extend loans or advances, grant guarantees, enter into credit derivative transactions, underwrite or hold in its investment portfolio securities of any customer or group of affiliated customers that, in the aggregate, exceed 25%25.0% of the financial institution’s adjusted regulatory capital.
Reserve Requirements
The Central Bank currently imposes several reserve requirements on Brazilian financial institutions. These reserve requirements are applied to a wide range of banking activities and transactions, such as demand deposits, savings deposits, debt purchase and assumption transactions. Reserves for demand deposits are not subject to any compensation. The Central Bank established, since January 31, 2008, the compulsory deposit over Interbank Deposit Certificates (Certificado de Depósito Interbancário), or CDI rate, of leasing companies issued by other financial institutions, which started, as from October 2008, to compose the time deposits reserve requirement, being allowed, for such reserve purposes, the deduction of costs related to foreign currency acquisitions.

Treatment of Overdue Debts
 
In accordance with CMN Resolution No 2,682, Brazilian financial institutions are required to classify in accordance with Resolution No 2,682/99, established by the CMN, their credit transactions (including leasing transactions and other transactions characterized as credit advances) at different levels and make provisions according to the level attributed to each such transaction. The classification is based on the financial condition of the customer, the terms and conditions of the transaction and the period of time during which the transaction has been in arrears, if any. Transactions are classified as level AA, A, B, C, D, E, F, G or H, with AA being the highest classification.
Credit classifications must be reviewed on a monthly basis and, without prejudiceapart from to additional provisions to those required by the Central Bank which are deemed necessary by management of those financial institutions, provisions shouldrequired to be made which vary from 0.5% of the value of the transaction, in the case of level A transactions, to 100%100.0% in the case of level H transactions.

Provision for Loan Losses for Income Tax Deduction Purposes
 
Brazilian financial institutions are allowed to deduct loan losses as expenses for purposes of determining their taxable income. The period during which these deductions may be made depends on the amounts, maturities and types involved in the transaction.transaction, in accordance with article 9 of Law Nº 9,430 of December 27, 1996.

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Foreign Currency Loans
 
Financial institutions in Brazil are permitted to borrow foreign-currency denominated funds in the international markets (either through direct loans or through the issuance of debt securities) for any purpose including on-lending those funds in Brazil to Brazilian corporations and financial institutions without the prior written consent of the Central Bank.Bank, in accordance with Resolution No 3,844 issued by the CMN. The Central Bank may establish limits on the term, interest rate and general conditions of such international loan transactions (including the issuance of bonds and notes by financial institutions). Currently, there are no limits imposed on such transactions, but international funds that remain in Brazil for a period shorter than 90 days are subject to a tax on financial transactions ( Imposto sobre Operações Financeiras ), or IOF, at a rate of 5.38% levied on the nationalnotional amount in local currency of the foreign currency exchange contract entered into for the inflow of resources.into. However, if the funds remain in Brazil for a period over 90 days, the tax rate on financial transactionsIOF is reduced to zero. The Central Bank frequently changes these regulations in accordance with the economic scenario and the monetary policy of the Brazilian government.
 
Cross-border loans between individual or legal entities (including banks) resident or domiciled in Brazil and individual or legal entities resident or domiciled abroad are no longer subject to the prior approval of the Central Bank, but are subject to the prior electronic declaratory registration through SISBACEN, a database of information provided by financial institutions towith the Central Bank.
 
Foreign Currency Position
 
Transactions involving the sale and purchase of foreign currency in Brazil may only be conducted by institutions authorized to do so by the Central Bank. The Central Bank imposes limits on the foreign exchange sale and purchase positions of institutions authorized to operate in the foreign exchange markets. These limits vary according to the type of financial institution performingconducting foreign exchange transactions, the foreign exchange sale positions held by those institutions, as well as the stockholders’shareholders’ equity of the relevant institution.
There is no current limit to long or short positions in foreign currency of banks (commercial, multiple, investment, development banks and savings banks) authorized to carry out transactions on the foreign exchange market.
Other In accordance with the Central Bank Circular nº 3,401, other institutions (finances houses, brokerage firms and exchange houses) within the National Financial Systemnational financial system are not allowed to have long positions in Brazil are subject to the following limits:
Long positions are limited to US$ 500,000; if institutions exceed this limit, they first receive a formal warning to regularize the excess and, if the amount is exceeded again within 90 days as of the first one, the authorization to carry out transactions on the foreign exchange market will be revoked.
•              Therecurrency, although there are no limits on thein respect to foreign exchange short positions.
 
Rules Governing the Collection of Bank Fees
The collection of bank fees and commissions is extensively regulated by the CMN and by the Central Bank. Recent rules seeking standardization of the collection of bank fees and the cost of credit transactions for individuals were approved by the CMN in December 2007. According to these rules, bank services to individuals are divided into the following four groups: (i) essential services; (ii) priority services; (iii) specific or differentiated services; and (iv) special services.
Banks are not able to collect fees in exchange for supplying essential services to individuals with regard to checking accounts, such as (i) supplying a debit card; (ii) supplying ten checks per month to accountholders who meet the requirements to use checks, as per the applicable rules; (iii) supplying of a second debit card (except in cases of loss, theft, damage and other reasons not caused by the bank); (iv) up to four withdrawals per month, which can be made at the branch of the bank, using checks or additional checks or in ATM terminals; (v) supplying up to two statements describing the transactions during the month, to be obtained through ATM terminals; (vi) inquiries over the internet; (vii) up to two transfers of funds between accounts held by the same bank, per month, at the branch, through ATM terminals or over the internet; (viii) clearance of checks; and (ix) supplying a consolidated statement describing, on a month-by-month basis, the fees charged over the preceding year with regard to checking accounts and savings accounts. Certain services rendered to individuals with regard to savings accounts also fall under the category of essential services and, therefore, are exempt from the payment of fees.
Priority services are the ones rendered to individuals with regard to checking accounts, transfers of funds, credit transactions and records and are subject to the collection of fees by the financial institutions only if the service and its nomenclature are listed in Memorandum 3,371, which defines standardized nomenclature for services and their delivery channels, acronym identification and description of triggering events for such services. In addition, Resolution No. 3,518 also states that commercial banks must offer to their individual clients a “standardized package” of priority services, whose content is defined by Memorandum 3,371. Banking clients must have the option to acquire individual services, instead of adhering to the package.
The regulation authorizes financial institutions to collect fees for the performance of specific services, provided that the account holder or user shall be informed of the conditions for use and payment or the fee and charging method are defined in the contract. Some of the specific services are (i) approval of signatures; (ii) management of investment funds; (iii) rental of safe deposit boxes; (iv) courier services; and (v) custody and brokerage services, among others.
The collection of fees in exchange for the supply of special services (including, among others, services relating to rural credit, currency exchange market and on-lending of funds from the real estate financial system, for example) are still governed by the specific provisions found in the laws and regulations relating to such services.
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In addition, CMN regulations establishes that all debits related to the collection of fees must be charged to a bank   account only if there are sufficient funds to cover such debits in such account thus forbidding overdrafts caused by the collection of banking fees. Furthermore, a minimum of 30 days notice must precede any increase or creation of fees, while fees related to priority services and the “standardized package” can be increased only after 180 days from the date of the last increase (whereas reductions can take place at any time).
Regulation of Internet and Electronic Commerce
Although Brazil does not have a comprehensive legislation regulating electronic commerce, the president adopted Provisional Measure No. 2,200 on June 28, 2001 to govern the legal validity of electronic documents in Brazil and to establish a government controlled digital certification system, which will guarantee the authenticity, integrity and legal validity of electronic documents and ensure the security of electronic transactions.
Nevertheless, the widespread use of digital certification and the improvement of electronic commerce in Brazil still depends on extensive regulation. Thus, there are currently several bills dealing with internet and electronic commerce regulation in the Brazilian Congress. The proposed legislation, if enacted, will reinforce the legal effect, validity and enforceability of information in the form of electronic messages, allowing parties to enter into an agreement, make an offer and accept one through electronic messages.
Considering the increasing use of electronic channels in the Brazilian banking sector, the CMN enacted Resolution No. 2,817 on February 22, 2001, as amended by Resolution No. 2,953 of April 25, 2002, allowing the opening of deposit accounts with banks and other financial institutions by electronic means, which includes the Internet, ATM machines, telephone and other distance communication channels. This regulation sets forth some specific rules on opening and moving accounts via electronic means: (i) all requirements contained in Resolution No. 2,025 for verification of the identity of the customer must be fulfilled; (ii) transfers of amounts are allowed only between similar accounts that have the same exact accountholders or in the event of liquidation of investment products and funds held by the same accountholders.
On March 26, 2009, the CVM approved Resolution No. 3,694 requiring that all financial institutions which offer products and services to their clients through electronic means must guarantee security, secrecy and reliability in all electronic transactions and disclose, in clear and precise terms, the risks and responsibilities involving the product or service acquired through such channel.
Transactions with Affiliates
Law No. 7,492 of June 16, 1986, which sets forth crimes against the Brazilian financial system, establishes the extension of credit by a financial institution to any of its controlling shareholders, directors or officers and certain family members of such individuals and any entity controlled directly or indirectly by such financial institution or which is subject to common control with such financial institution as a crime. Violations of Law No. 7,492 are punishable by two to six years’ imprisonment and a fine. On June 30, 1993, the CMN issued Resolution No. 1,996, which requires any such transaction to be reported to the public ministry’s office.
The Banking Law also imposed prohibitions on the extension of credit or guarantee to any company which holds more than 10.0% of the financial institution’s capital and to any company in which they hold more than 10.0% of the capital. This limitation is also applicable in respect to directors and officers of the financial institution and certain of their relatives, as well to those companies in which such persons hold more than 10.0% of the capital.

Establishment of Offices and Investments Abroad

For a Brazilian financial institution to establish foreign offices or directly or indirectly maintain equity interests in financial institutions outside Brazil, it must obtain the prior approval of the Central Bank, which will be contingent on the applicant Brazilian bank being able to meet the following four criteria:certain criteria, including:
 
•           the Brazilian financial institution must have been in operation for at least six years;
 
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•           the Brazilian financial institution’s paid-in capital and stockholders’shareholders’ equity must meet the minimum levels established by Central Bank regulations for the relevant financial institution plus an amount equal to 300% of the minimum paid-in capital and stockholders’shareholders’ equity required by Central Bank regulations for commercial banks;
 
•           the Central Bank must be assured of access to information, data and documents regarding the transactions and accounting records of the branch for its global and consolidated supervision; and
 
•           the Brazilian financial institution must present to the Central Bank a study on the economic and financial viability of the subsidiary, branch or investment and the expected return on investment.
investment; and
 
Within•           within 180 days of Central Bank approval, the Brazilian financial institution must submit a request to open the branch with the competent foreign authorities and begin operations within one year. Failure to observe these conditions willmay result in automatic cancellation of the authorization and repatriation of the amounts remitted abroad, along with any accrued profits earned on the investment.authorization.

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Regulation of Independent Auditors

On May 29, 2003, the Central Bank adopted Resolution No. 3,081, revoked by Resolution No. 3,198 of CMN, dated as of May 27, 2004, (which wasas amended, establishes consolidated regulations with respect to external audit services for financial institutions. In accordance with Resolution No. 3,198, all financial institutions must be audited by independent accountants. Independent accountants can only be hired if they are registered with the CVM, certified in specialized banking analysis by the IBRACON, Institute of Brazilian Independent Auditors ( Instituto dos Auditores Independentes do Brasil ) and if they meet several requirements that assure their independence. Moreover, financial institutions must replace the responsible partner and senior team members within their independent accounting firm at least every five consecutive years.
Former teams of accountants can be rehired only after three complete years have passed since their prior service. Financial institutions must designate a technically qualified senior manager to be responsible for compliance with all regulations regarding financial statements and auditing.
In addition to preparing an audit report, the independent accountants must prepare:
• a report on the financial institution’s internal controls showing all deficiencies found, and
• a description of the financial institution’s non-compliance with applicable regulation material to the financial institution’s financial statements or activities.
Resolution No. 3,198, as amended by Resolutions No. 3,271 dated March 24, 2005, Resolution No. 3,332 dated December 22, 2005, Resolution No. 3,503 dated October 26, 2007, and Resolution No. 3,606 dated September 11, 2008), which consolidates and regulatesseveral other resolutions, implemented the rules relatingfollowing changes to the regulation of independent audit services provided to financial institutions. The main changes are the following:auditors:
 
• mandatory limited review of quarterly financial information provided to the Central Bank;
 
• the financial institution will haveis required to appoint one executive officer, who is technically qualified to supervise the applicability of the rules and who will be responsible for delivering any information and responsible for reporting any eventual fraud or negligence, notwithstanding any other applicable regulation;
regulation, to the Central Bank;
 
• definition of certain services that the independent auditor will not be able to offer dueprovide so as not to the risk of losing its independence, following the standards already required by the CVM;
in addition to CVM requirements;
 
• Resolution No. 3,503 suspended until December 31, 2008, the provision contained in article 9 of the regulation annex to Resolution Nº 3,198, which determined the mandatory rotation of the independent auditor firm every five years;years and Resolution No. 3,606, dated September 11, 2008, replaced the rotation of the auditing firm by the rotation of the partner responsible and management team;
• financial institutions that present regulatory capital equal to or above R$1 billion will have to establish an audit committee comprised of at least three members who should rotate every five years and at least one of the members must have accounting and financial knowledge. The members of the audit committee will only be allowed to be part of the committee again after three years following the maximum five-year office term. The audit committee will be responsible for the evaluation of internal controls, the effectiveness of the independent auditor, and recommend the improvement or change of policies and procedures, among other responsibilities. Each audit committee must publish a summary of the audit committee report, together with the six-month financial statements;
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·Resolution No. 3,606 dated September 11, 2008, replaced the rotation of the auditing firm by the rotation of the technical responsible• the hiring of the independent auditor is subject to the certification of team members with management responsibility issued by CFC, together with the IBRACON; and management team;
 
·On December 26, 2008, the CMN announced, through Circular Letter No. 3,367/08 that the first day of work of the technical responsible and management team will be considered the first day for purposes of calculating the auditors rotation term;

·financial institutions that present Reference Capital equal to or above R$ 1 billion will have to establish an audit committee comprised of at least three members who should rotate every five years and at least one of the members must have accounting and financial knowledge. The members of the audit committee will only be allowed to be part of the committee again after three years from the five-year office term. The audit committee will be responsible for the evaluation of internal controls, the effectiveness of the independent auditor, and recommend the improvement or change of policies and procedures, among other responsibilities. From December 31, 2004, each audit committee must publish a summary of the audit committee report, together with the six-month financial statements;

·the hiring of the independent auditor is subject to the certification issued by CFC, together with the IBRACON, of team members with management responsibility; and
• the independent auditor is responsible for the issuance of the audit report on the financial statements, a report on the evaluation of internal controls and systems and a report presenting transgressions to the rules and regulations which may have a significant impact on the financial statements or operations of the entity. These reports must be available for inspection by the Central Bank.
 
·the independent auditor is responsible for the issuance of the audit report on the financial statements, a report on the evaluation of internal controls and systems and a report presenting transgressions to the rules and regulations which may have a significant impact on the financial statements or operations of the entity. These reports must be available for inspection by the Central Bank.
Furthermore, under Brazilian law our financial statements must be prepared in accordance with Brazilian GAAP and other applicable regulations. Financial institutions are required to have financial statements audited every six months. Quarterly financial information filed with the CVM is subject to review by its independent accountants. In January 2003, the CVM approved regulations requiring audited entities to disclose information relating to an independent accounting firm’s non-auditing services whenever such services represent more than 5.0% of the fees the entity paid to the external accounting firm.
In addition, under CMN Resolution No. 3786, dated September 24, 2009, as of December 31, 2010 our annual statutory consolidated financial statements must be prepared in accordance with IFRS, and accompanied by an independent audit report confirming that the financial statements have been so prepared.

Taxation on Financial Transactions
 
The main taxes imposed on financial transactions are the following:
 
Tax on Financial Transactions
 
The tax on financial transactions (Imposto sobre Operações Financeiras), or IOF tax is a tax imposed on financial transactions (such as credit, foreign exchange and insurance transactions or those transactions related to securities). The rate of the IOF tax varies according to the policypolicies adopted by the Brazilian government to restrict or stimulate the inflow of foreign capital and to limit credit to individuals.

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The IOF tax is imposed on several foreign exchange transactions and itstransactions. Its applicable rates, which may be increased up to 25%, are set by the Executiveexecutive branch of the Brazilian government. The IOF tax rates imposed on foreign exchange transactions recently have been recently modified and are currently imposed at a rate of 0.38%, with the following main exceptions:
 
(i)(i)      the rate of IOF tax rate imposed on the inflow of amounts in Brazil deriving from or for loans which average minimum payment terms are no longer than 90 days, will be 5.38%;
(ii)the rate of IOF tax imposed on foreign exchange transactions made in compliance with the obligations of credit card management companies or commercial or multiple banks, as credit card issuers, deriving from the purchase of goods and services made abroad by their credit card users, will be 2.38%;
(iii)the rate of IOF tax imposed on foreign exchange transactions made in compliance with the obligations of credit card management companies or commercial or multiple banks, as credit card issuers, deriving from the purchase of goods and services made abroad by credit card users of the Federal, State, Municipal and the Federal District governments, their foundations and agencies, will be zero;
(iv)the rate of IOF tax imposed on foreign exchange transactions related to inflow of revenues from export of goods and services in Brazil will be zero;
(v)the rate of IOF tax imposed on foreign exchange transactions carried out by a foreign investor for the purpose of investing in the financial and capital markets, will be 0.38% or zero. Depending upon the type and time of inflow of foreign funds to the country, the IOF may be levied on the outflow and inflow of funds (it may also be levied when the type of investment is changed; in many cases, the outflow and inflow of funds will require simultaneous foreign exchange transactions).
If the inflow of capital to Brazil deriving from, or for, loans whose average minimum payment terms are no longer than 90 days, is 5.38%, if the average minimum terms of the loan are longer than 90 days, the IOF rate is 0%;
(ii)     the IOF tax rate imposed on foreign fundsexchange transactions made in compliance with the obligations of credit card management companies or commercial or multiple banks, as credit card issuers, and deriving from the purchase of goods and services made abroad by their credit card users, is 2.38%;
(iii)    there is no IOF tax rate imposed on foreign exchange transactions made accordingin compliance with the obligations of credit card management companies or commercial or multiple banks, as credit card issuers, and deriving from the purchase of goods and services made abroad by credit card users of the federal, state, municipal and the federal district governments, their foundations and agencies;
(iv)    there is no IOF tax rate imposed on foreign exchange transactions related to CMN Resolution No. 2,689/02 or Resolution No. 1,927 (which regulatesinflow of revenues from the ADSs program)export of goods and services from Brazil;
(v)     the IOF tax rate imposed on foreign exchange transactions carried out by a foreign investor for the investmentpurpose of investing in the Brazilian stock exchanges or acquisition of shares in connection with the public offering or subscription of shares (provided that in both cases the issuing companyfinancial and capital markets, is registered with the CVM), the rate of IOF tax will zero.  In2%.In relation to these investments, the rate of IOF tax imposed on the outflow of funds, from the country, will be zero, as well as on the remittance of interest on stockholders’shareholders’ equity and dividends.
Depending upon the type of inflow of foreign funds to the country, the IOF may be levied on the outflow and inflow of funds. It may also be levied when the type of investment is changed. In many cases, the outflow and inflow of funds will require simultaneous foreign exchange transactions.
 
The IOF tax is also imposed on credit transactions, including financing, discounts and factoring. The maximum rate of IOF tax that can be imposed on credit transactions is 1.5% per day. Currently, however, both individuals and companies pay IOF tax at a rate of 0.0041% per day. An additional IOF tax rate of 0.38% canis also be  imposed on   the concession ofany credit when the principal amount borrowed is set at that occasion, or is based on the monthly sum of the daily IOF tax rates levied on the outstanding balances of credit transactions in which the principal amount is not set when the credit is granted.transactions.
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The IOF tax is also imposed on insurance transactions upon the receipt of a premium. In insurance transactions, the IOF tax will be imposed at thea highest rate of 25%. Currently, the rates imposed vary from zero to 7.38% according to the type of insurance purchased.
 
Finally, the IOF tax is also imposed on the acquisition, assignment, redemption, renegotiation or payment for settlement of securities, even though these transactions are carried out on stock, commodities and futures exchanges. The IOF tax will be imposed at thea highest rate of 1.5% per day on the value of securities transactions.  Currently, the IOF rate on preferred share and ADS transactions is zero, but the Executive Branch may increase it up to 1.5% per day. If the rate is increased, the new rate shall be imposed only on transactions made after such increase. The IOF rate can be higher than zero in some cases, such as when the investor sells or redeems its investment fund unit during the grace period in order to use the earned income. The IOF tax is usually charged on fixed income operations as described below, at the rate of 1.5% per day on the value of securities transaction, up to the yield of the operation. IOF’sThe IOF tax rate decreases according to the timeterm  of the operation. UntilFrom the 30ththirtieth day, the fixed income operation will be exempted from the IOF.IOF tax. In some cases, the fixed income operations are exempt from the IOF, regardless of the time of application.
 
Temporary Contribution onIncome Tax – Financial Transactions
 
The Temporary Contribution on Financial Transaction (Contribuição Provisória sobre a Movimentação ou Transmissão de Valores e de Créditos e Direitos de Natureza Financeira), or CPMF tax, was imposed at a rate of 0.38% on financial transactions.  The CPMF tax ceased to be charged as of January 1, 2008.  As a general rule, the CPMF tax was levied on debits from bank accounts.

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Currently, the CPMF tax is no longer charged, but many discussions have been held about whether it will be charged again or not; it is impossible to say if this tax will be charged again thus far.
Income Tax
In general, the income tax (Imposto(Imposto de Renda)Renda) is a tax imposed as follows:
 
(i)
on income from financial transactions at fixed or variable rates, including hedging transactions, varying from 15% to 22.5%. The income tax is withheld at source (Imposto de Renda Retido na Fonte).  The rates vary according to the transaction type and terms,
(i)        on income from financial transactions (fixed income), including hedging transactions, at rates varying from 15% to 22.5%. The income tax is withheld at source. The rates vary according to the transaction type and terms;
 
(ii)on income from equity funds at 15% withheld at source,
(ii)       on income from financial transactions (variable income), including hedging transactions, at a rate of 15%;
 
(iii)
on income from equity funds (Fundos de Investimento em Participações), investment funds in equity fund quotas (Fundos de Investimento em Cotas de Fundos de Investimento em Participações) (iii)     on income from equity funds (Fundos de Investimento em Participações), investment funds in equity fund quotas (Fundos de Investimento em Cotas de Fundos de Investimento em Participações) and investment funds in emerging companies (Fundos de Investimento em Empresas Emergentes), at a rate of 15% upon redemption, provided that the funds meet certain conditions set forth by Brazilian legislation. In case of gain on disposal of fund units, the rate will also 15%, but the income tax is not withheld at source, but is directly paid by the investor; and investment funds in emerging companies (Fundos de Investimento em Empresas Emergentes), at 15% upon redemption, provided that such funds meet certain conditions set forth by Brazilian legislation.  In case of gain on disposal of fund units, the rate will also be levied at 15%, but the income tax is not withheld at source (is directly paid by the investor), and
 
(iv)income from other long and short-term investment funds, other than those mentioned in items (ii) and (iii), which rates vary(iv)      income from other long and short-term investment funds, other than those mentioned in items (ii) and (iii), at rates varying from 15% to 22.5%, according to the investment period. The income tax is withheld at source.
 
Foreign investors whose funds are from a jurisdiction that is considered a “tax haven” (jurisdiction(i.e. a jurisdiction where no tax on income is imposed, or where the highest rate imposed is 20% or where the laws provide for secrecy or impose restrictions on the disclosure of the equity interests or ownership of companies) shall pay income tax withheld at source as described above.
 
For foreign investors whose inflow of funds followed CMN Resolution No. 2,689/00 and are not from a jurisdiction considered a “tax haven,” the income tax is imposed as follows:
 
(i)on capital gains on the sale of stock on Brazilian stock exchanges are income tax exempt, except if related to combined transactions with a net fixed income result,
(i)        capital gains from the sale of stock on Brazilian stock exchanges are income tax exempt, except if related to combined transactions with a net fixed income result;
 
(ii)(ii)       on income from equity funds, swap and other transactions on futures market not carried out through a Brazilian stock exchange, income tax will be imposed at a rate of 10%; and other transactions on futures market not carried out through a Brazilian stock exchange, income tax will be imposed at a rate of 10%, and
 
(iii)(iii)      on income from all other fixed income investments made through a Brazilian stock exchange or over-the-counter market, and on gains earned, except as provided for in item (i) above, the income tax withheld at source will be imposed at a rate of 15%.
Law No. 11,312/06 eliminated the income tax withheld at source will be imposed at a rate of 15%.
Law No. 11,312/06 also reduced to zero the income tax withheld at source rate imposed on income from government bonds paid, credited or otherwise remitted to beneficiaries who do not reside in Brazil, provided that: (i) they do not reside in “tax haven” jurisdictions,jurisdictions; (ii) the inflow of funds was not made in accordance to CMN Resolution No. 2,689/0000; and (iii) such securities havewere not been purchased upon the buyer’swith a commitment to resell them. This exemption is applicable to income earned from February 16, 2006.
 
Income Tax and Social Contribution Tax
 
Currently, companies are subject to corporate income tax (Imposto de Renda de Pessoa Jurídica), or IRPJ, and the social contribution tax on net incomeprofits (Contribuição Social sobreSobre o Lucro Líquido), or CSLL.
 
According to the tax regime adopted by each company, the IRPJ and CSLL may be imposed on an adjusted tax basis (taxable income regime), an assumed tax basis, which estimates the percentage of revenue on which the tax will be imposed on (assumed profit regime or “ Simples Nacional” regime (a special tax regime for micro and small companies)) or on an arbitrary tax basis. Financial institutions and public companies are required to calculate IRPJ and CSLL according to the taxable income regime.
56
 
The IRPJ is imposed at a rate of 15% and a surtax of 10% is applicable when the total amount of profit exceeds R$20,000 per month (imposing a total rate of 25% on the amount of profit exceeding that value)R$20,000 per month).

51
 
The CSLL is generally imposed at a rate of 9%.  Provisional Measure 413 of January 3, 2008 and Law No. 11,727, dated June 23, 2008, established that as of May 1, 2008, the CSLL rate imposed on private insurance and capitalization companies, banks of any type, securities underwriters, foreign exchange and securities brokerages, credit, financing and investment companies, real estate loan companies, credit card management companies, leasing companies, credit cooperatives and savings and loan associations will increase to 15%. This increase in the CSLL rate is applicable to us and many of our subsidiaries and affiliates.
 
We can offset tax losses against results in future years at any time, provided that these tax losses dothe offsetting    does not exceed 30% of theour annual taxable income.
 
PIS and COFINS
 
In addition to IRPJ and CSLL, companies are also subject to the following taxes on revenues: Contribution for the Program of Social Integration ( (Contribuição para o Programa de Integração Social)Social , or PIS,“PIS”), and Social Security Financing Contribution ( (Contribuição para o Financiamento da Seguridade Social)Soc ial , or COFINS.“COFINS”). PIS and COFINS are charged to companies´ gross revenue. We are currently claiming that the revenue subject to such taxes, of certain subsidiaries and affiliates, is that arising from the sale of goods and services, therefore excluding financial income and other types of revenues. Our provision is made based on the instruction of tax authorities to tax the financial margin.  Brazilian law sets forth the types of revenues that cannot be used as a calculation basis for PIS and COFINS, as well as some expenses that can be deducted from the calculation basis offor these contributions (for example, funding expenses in the case of financial institutions).
 
PIS and COFINS contributions can be calculated according to the differentiated regime provided for by the Supplementary Law No. 123 of 2006, (Simples Nacional,), which established that contribution rates vary based on the activity and the annual gross revenue of the company.
 
These contributions can also be calculated according to the cumulative regime, in which the PIS rate is set at 0.65% and the COFINS rate at 3%, and the calculation basis is the gross revenue earned by the company. The companies that calculate IRPJ and CSLL based on presumed profit are required to calculate PIS and COFINS contributions according to the cumulative regime.
 
The companies that calculate IRPJ and CSLL based on taxable income are required to calculate PIS and COFINS contributions according to the non-cumulative regime. In such a regime, PIS is imposed at a rate of 1.65% whereas COFINS is imposed at a rate of 7.6%. The calculation basis of these contributions is the gross revenue earned by the company. In this regime,Brazilian legislation allows the company can creditutilization of PIS and COFINS contributions related to somecredits originated on the purchase of inputs that it purchases from other companies that are used in its activities.the production process of the company. At present, the financial income from companies that calculate these contributions under the non-cumulative regime (even those which only a portion of revenue is submitted to the non-cumulative regime) pay PIS and COFINS at a rate of zero, rate, except for income from interest on stockholders’shareholders’ equity.
 
The financialFinancial institutions are excluded from the non-cumulative regime and shall pay contribution to PIS at a rate of 0.65% and COFINS at a rate of 4% and are entitled to specific deductions forin determining the calculation basis.

Foreign Investment
 
Foreign BanksBank Insolvency
 
Insolvency Regime
Financial institution insolvency is largely a matter handled by the Central Bank. The establishmentCentral Bank will commence and oversee all administrative proceedings, whether for, or in avoidance of, liquidation.
Law No. 11,101, as amended, or the Brazilian Insolvency Law, was sanctioned by the president on February 9, 2005, became effective in June 2005 and was amended in November 2005; it has significantly reshaped and modernized bankruptcy law in Brazil, until then governed by rules originating in 1945. Among the more important innovations introduced by the new law are the following: (i) the availability of new branchesreorganization arrangements that, subject to flexible statutory terms and conditions, may be structured under varying forms so as to enable a debtor deemed by foreignits creditors to have business potential to effectively attempt to financially restructure; and (ii) in the event of bankruptcy, the ranking of secured debts ahead of tax liabilities.
57
While the insolvency of financial institutions i.e.remains governed by specific regimes (intervention, extrajudicial liquidation and temporary special administration, each of which is discussed in further detail below), financial institutions which operate and have a head office offshore, is prohibited, except when duly authorized by the Brazilian government, in which case they should take into account international treaties, the policy of reciprocity and the interest of the Brazilian government. Once authorized to operate in Brazil, a foreign financial institution isare subject to the sameBrazilian Insolvency Law, to the extent applicable, on an ancillary basis, until such time as a specific set of rules regulations and requirements that are applicable to any other Brazilian financial institution.
Foreign Investments in Brazilian Financial Institutions
Foreign investment in Brazilian financial institutions, by individuals or companies, is permitted only if specific authorization is granted by the Brazilian government, which authorization may be granted in light of international treaties, the policy of reciprocity or the interest of the Brazilian government.
Once authorization is granted, Brazilian law sets forth the following rules concerning foreign investment in Brazil and the remittance of capital outside of Brazil:

52
• foreign and Brazilian investors must be treated equally, unless legislation says otherwise,
any foreign entity that directly owns shares of Brazilian companies must be registered with the corporate taxpayer registry (Cadastro Nacional de Pessoa Jurídica), or CNPJ,
foreign direct investments, repatriations and profit remittances must be registered electronically with the Central Bank through the Module RDE-IED of SISBACEN,
the Central Bank may require that Brazilian companies provide information regarding the foreign equity interests in those Brazilian companies, and any other information in connection with the relevant foreign investment in Brazil, and
Brazilian companies must provide in their financial statements relevant foreign investments, obligations and credits.
In December 1996, President Fernando Henrique Cardoso issued a decree authorizing the acquisition by non-Brazilians of non-voting shares issued by Brazilian financial institutions as well as the offering abroad of depositary receipts representing those shares. Also in December 1996, the CMN approved a resolution specifically authorizing the global offering of depositary receipts representing non-voting shares of Brazilian financial institutions. Therefore, in these specific cases, the authorization from the Brazilian government is not necessary.

Bank Failureenacted.
 
Intervention, Administrative Liquidation and Bankruptcy
 
The Central Bank may intervene in the operations of a bank if there is a material risk for creditors. The Central Bank may intervene if liquidation can be avoided or it may perform administrative liquidation or, in some circumstances, require the bankruptcy of any financial institution except those controlled by the Brazilian government.
 
Extrajudicial Liquidation
 
An extrajudicial liquidation of any financial institution (with the exception of public financial institutions controlled by the Brazilian Government)government) may be carried out by the Central Bank if it can be established that:
 
·debts of the financial institution are not being paid when due; or
 
·the financial institution is deemed insolvent; or
 
·the financial institution has incurred losses that could abnormally increase the exposure of the unsecured creditors; or
 
·management of the relevant financial institution has materially violated Brazilian banking laws or regulations; or
 
·upon cancellation of its operating authorization, a financial institution’s ordinary liquidation proceedings are not carried out within 90 days or are carried out with delay representing a risk to its creditors, at the Central Bank’s discretion. Liquidation proceedings may otherwise be requested, on reasonable grounds, by the financial institution’s officers or by the intervener appointed by the Central Bank in the intervention proceeding.
 
Extrajudicial liquidation proceedings may cease:
 
·at the discretion of the Central Bank if the parties concerned take over the administration of the financial institution after having provided the necessary guarantees; or
 
·when the liquidator’s final accounts are rendered and approved, and subsequently filed with the competent Public Registry;public registry; or
 
·when converted to an ordinary liquidation; or

53
 
·when the financial institution is declared bankrupt.
 
Temporary Special Administration Regime
 
In addition to the aforesaid procedures, the Central Bank may also establish the Temporary Special Administration Regime (Regime de Administração Especial Temporária),   or RAET, which is a less severe form of Central Bank intervention in private and non-federal public financial institutions and which allows institutions to continue to operate normally.
The RAET may be imposed by the Central Bank in the following circumstances:
 
·the financial institution continually participates in transactions contrary to the economic and financial policies established by federal law;law,
 
·the financial institution fails to comply with the compulsory reserves rules;rules,
 
·the financial institution has operations or circumstances which call for an intervention;intervention,
 
·illegal or management misconduct;misconduct exists, and
 
·the institution faces a shortage of assets.
 
The main purpose of the RAET is to assist with the recovery of the financial conditions of the institution under special administration. Therefore, the RAET does not affect the day-to-day business operations, liabilities or rights of the financial institution, which continues to operate in its ordinary course.
 
Repayment of Creditors in Liquidation
 
In the event of the extra-judicial liquidation of a financial institution or a liquidation of a financial institution under the terms of a bankruptcy proceeding, employees’ wages up to a certain amount, secured credits and indemnities and tax claims enjoy the highest priority of any claims against the bankruptbankruptcy estate. The Credit Insurance Fund iscredit insurance fund, a deposit insurance system, which guarantees a maximum amount of R$60,000 of deposits and credit instruments held by an individual againstwith a financial institution (or against financial institutions of the same financial group). The Credit Insurance Fundcredit insurance fund is funded principally by mandatory contributions from all Brazilian financial institutions that handle customer deposits, currently at 0.0125% per year, in accordance with theCMN Resolution No 3,400/06 established by the CMN, from all Brazilian financial institutions that handle customer deposits.No. 3,400, as amended. The payment of unsecured credit, andincluding regular retail customer deposits not payable under the Credit Insurance Fundcredit insurance fund, is subject to the prior payment of all secured credits and other credits to which specific laws may grant special privileges. Additionally, deposits and credit instruments raised outside of Brazil are not payable under the credit insurance fund, in accordance with Resolution No. 3,400.
 
58
Brazilian Payment and Settlement System
 
The rules for the settlement of payments in Brazil are based on the guidelines adopted by the Bank of International Settlements, or BIS.Settlements. The Brazilian Paymentpayment and Settlement Systemsettlement system began operating in April 2002. The Central Bank and the CVM have the power to regulate and supervise this system. Pursuant to these rules, all clearing houses are required to adopt procedures designed to reduce the possibility of systemic crises and to reduce the risks previously borne by the Central Bank. The most important principles of the Brazilian Paymentpayment and Settlement Systemsettlement system are:
 
·the existence of two main payment and settlement systems: real time gross settlements, using the reserves deposited with the Central Bank; and deferred net settlements, through the clearing houses;
 
·the clearing houses, with some exceptions, will beare liable for the payment orders they accept; and
 
·bankruptcy laws do not affect the payment orders made through the credits of clearing houses, nor the collateral granted to secure those orders. However, clearing houses have ordinary credits against any participant under bankruptcy laws.
 
Privatization of State-Controlled BanksAntitrust Regulation
 
InGenerally, under Brazilian law transactions resulting in economic concentration are subject to review if they result in control of 20% or more of a relevant market or if any of the parties had an annual gross revenue of R$400 million or more. Transactions exceeding these thresholds must be submitted to the Brazilian Antitrust System ( Sistema Brasileiro de Defesa da Concorrência ), or SBDC, for approval. CADE, the decision-making body of the SBDC, may approve a transaction without restrictions, approve it with restrictions or not approve it.
Currently, financial conglomerates submit merger and acquisitions transactions in various industries, including the insurance and pension plan industries, to SBDC for approval. Merger and acquisition transactions in the banking industry, however, must be submitted to the Central Bank, as financial institutions depend on the approval of the Central Bank in order to reducemerge with or acquire another financial institution.
There is one case currently before the participationSuperior Court of Brazilian statesJustice, pending decision, as to whether a specific economic concentration in the banking industry should also be subject to the approval of the SBDC.  Although the outcome of this case would not automatically become a binding precedent for banks in general, a decision ruling that the SBDC has the power to decide on the specific transaction under judgment could nevertheless make it advisable for financial institutions to submit any merger or acquisition transactions in the banking industry to the SBDC, in addition to the submission of such transactions to the Central Bank.
Asset Management Regulation
Asset management is regulated by the CMN and the CVM. CMN and CVM regulations stipulate that institutions must segregate their asset management activities from their other activities.
The asset management industry is also self-regulated by ANBIMA, which enacts additional rules and policies, especially with respect to the Brazilian government has established certain procedures for the privatization, liquidation or transformation into non-financial institutionsoffering, marketing and advertising of financial institutions currently controlledproducts and services.
Investment funds are subject to the regulation and supervision of the CVM and are managed by Brazilian states.companies authorized by the CVM to manage investment fund portfolios. Investment funds may invest in instruments available in the financial and capital markets, including fixed income instruments, stocks, debentures and derivative products, provided that, in addition to the denomination of the fund, a reference to the relevant type of fund is included.
According to Instruction CVM No. 409, of August 18, 2004, as amended, investment funds may be classified as (i) short term funds; (ii) referenced funds; (iii) fixed income funds; (iv) stocks funds; (v) exchange funds; (vi) external debt funds; and (vii) multi-market funds.
Investment funds may not:
•           Have more than 5.0% of the equity when the issuer is a natural person or private company that is not a publicly-held company or financial institution authorized by the Central Bank,

 
5459
 
 
•           Have more than 10.0% of the equity of the fund when the issuer is a publicly-held company,
 
The Brazilian government, subject to certain conditions relating to•           Have more than 10.0% of the guarantees to be provided byequity of the Brazilian states, may, at its discretion:fund when the issuer is an investment fund, and
 
acquire control•           Have more than 20.0% of the equity of the fund when the issuer is a financial institution forauthorized by the purpose of its privatization or liquidation,
Central Bank.
 
financeIn addition, the liquidation or transformation of a financial institution into a non-financial institution when such action is instituted by its controlling stockholder,
finance any prior adjustments necessaryCVM regulations establish criteria for the privatizationregistration and accounting evaluation of atitles, securities, financial institution,
instruments and derivatives. Pursuant to such regulations, fund managers shall mark their securities to market; hence, the fund’s portfolio assets must be accounted for at their fair market value, instead of their expected yield to maturity.
 
purchase contractual credits held by a financial institution against its controlling stockholder and entities controlled by that stockholder and refinance those credits, and
under exceptional circumstances, upon the prior approval of the CMN and subject to the fulfillment of certain conditions by the relevant Brazilian state, finance a capitalization program aimed at improving the management of the financial institution and limited to 50% of the amount of necessary funds.

Leasing Regulations
 
The basic legal framework governing leasing transactions is established by Law No. 6,099 of September 12, 1974, as amended, and the regulations issued there under by the CMN from time to time, in particular CMN Resolution No. 2,309 of August 28, 1996.
Law No. 6,099, as amended, sets forth the general guidelines for the legal treatment of leasing transactions and delegates to the CMN, the regulator and supervisor of the financial system, the competency to scrutinize leasing companies and their transactions in greater detail. Through Resolution No. 2,309, the CMN and the Central Bank of Brazil supervise and control the transactions entered into by leasing companies. Furthermore, the laws and regulations issued by the Central Bank with respectapplicable to financial institutions, includingsuch as those related to reporting requirements, capital adequacy and leverage, assetassets composition limits and treatment of doubtful loans, are generally also applicable to leasing companies.

Insurance Regulation
 
The Brazilian insurance system is governed by three regulatory agencies: the Brazilian Private Insurance Council (Conselho Nacional de Seguros Privados)Privados ), or CNSP, the SUSEP and the Supplementary Health Insurance Agency (Agência Nacional de Saúde Suplementar)Suplementar ), or ANS. With governmental approval, an insurance company may offer all types of insurance with the exception of workers’ compensation insurance, which is provided exclusively by the National Institute of Medical Assistance and Social Welfare (Instituto Nacional de Seguridade Social)Social ), or INSS. Insurance companies are required to sell policies through qualified brokers. In accordance with Brazilian insurance legislation, health insurance must be sold separately from other types of insurance by a specialized insurance company that is subject to the rules of the ANS, the agency responsible for private health insurance.
 
Insurance companies must set aside reserves to be invested in specific types of securities. As a result, insurance companies are among the main investors in the Brazilian financial market and are subject to the rules of the CMN regarding the investment of technical reserves.
 
Insurance companies are exempt from ordinary bankruptcy procedures and instead are subject to a special procedure administered by the SUSEP or by the ANS, the insurance sector regulators, except when the assets of the insurance company are not sufficient to guarantee at least half of the unsecured credits or procedures relating to acts that may be considered bankruptcy-related crimes. Dissolutions may be either voluntary or compulsory. The Minister of Finance is responsible for the institution of compulsory dissolutions of insurance companies under the SUSEP’s regulation and ANS is responsible for the dissolution of health insurance companies.
 
There is currently no restriction on foreign investments in insurance companies.
 
According to Brazilian law, insurance companies must buy reinsurance to the extent their liabilities exceed their technical limits under the SUSEP rules. For several years, reinsurance activities in Brazil were carried out on a monopoly basis by IRBthe Brazilian Reinsurance Institute, (IRB – Brasil Resseguros S.A,S.A), or IRB. On January 16, 2007, Complementary Law No. 126/07126 came into force, providing for the opening of the Brazilian reinsurance market to other reinsurance companies. This complementary law specifically establishesestablished new policies related to reinsurance, retrocession and its intermediation, coinsurance operations, hiring ofcontracting insurance products abroad and insurance sector foreign currency operations.
 
The main changes introduced by Complementary Law No. 126/07126 are summarized below.
55
Three types of reinsurers are established by such law:

 
a)
local reinsurer. Reinsurer with head office in Brazil, incorporated as a corporation (sociedade por ações)
60

- Local reinsurer: a reinsurer with its head office in Brazil, incorporated as a corporation (sociedade por ações) and having as its exclusive purpose the performance of reinsurance and retrocession transactions;
 
b)
admitted reinsurer. Non-resident- Admitted reinsurer: a non-resident reinsurer, registered with the SUSEP to carry out reinsurance and retrocession transactions, with a representative office in Brazil, which complies with the requirements of Complementary Law No. 126 and the applicable rules regarding reinsurance and reassignment of reinsurance activities; and retrocession transactions, with a representative office in Brazil, which complies with the requirements of Complementary Law No. 126/07 and the applicable rules regarding reinsurance and reassignment of reinsurance activities;
 
c)
eventual reinsurer. Non-resident reinsurer, registered with the SUSEP to carry out reinsurance and retrocession transactions, without a representative office in Brazil, which complies with the requirements of Complementary Law No. 126/07- Eventual reinsurer: a non-resident reinsurer, registered with SUSEP to carry out reinsurance and retrocession transactions, without a representative office in Brazil, which complies with the requirements of Complementary Law No. 126 and the applicable rules regarding reinsurance and retrocession activities.
 
EventualAn eventual reinsurer must notcannot be a resident in a country considered as a tax-haven jurisdiction, which does not tax income or tax it at a rate 20% below or which does not disclose information about shareholding structure.as defined in Complementary Law No. 126.
 
Admitted or eventual reinsurers must comply with the following minimum requirements:
 
a)- to be duly incorporated, according to the laws of their countries of origin, in order to underwrite local and international reinsurance in the fields that they intend to operate in Brazil and present evidence that they have carried out their operations in their respective countries of origin for at least five years;
 
b)to have economic and financial capacity not inferior- to have economic and financial capacity equal to or higher than the minimum to be established by CNSP;
 
c)to have a rating issue- to have a rating issued by rating agencies recognized by the SUSEP equal to or higher than the minimum to be established by CNSP;
 
d)- to have in Brazil a duly appointed resident attorney-in-fact in Brazil with full administrative and judicial powers;
 
e)- to comply with additional requirements to be established by CNSP and the SUSEP.
 
In addition to the requirements mentioned above, an admitted reinsurer must keep a foreign currency account with the SUSEP and periodically submit to such regulatory agency their financial statements to SUSEP, pursuant to the rules to be enacted by CNSP.
 
Lloyd’s can be registered as an admitted reinsurer upon submitting an application to the SUSEP. For purposes of registration as an admitted reinsurer, the members of Lloyd´s will be considered as a single entity.
The contracting ofEntering into reinsurance and retrocession contracts in Brazil or abroad shallmust occur either through direct negotiation between the involved parties or an authorized broker. Foreign reinsurance brokers may be authorized to operate in Brazil, according to the law and additional requirements to be established by the SUSEP and CNSP.
 
Reinsurance operations relating to survival life insurance and private pension plans are exclusive ofmay only be offered by local reinsurers.
With due observance of the rules to be enacted by CNSP, insurance companies when transferring their risks in reinsurance will have to offer to local reinsurers the following percentage of said risks (right of first refusal):
 
a)60%- 60.0% until January 16, 2010;
 
b)40%- 40.0% in the subsequent years.
 
The technical reserves funds of local reinsurers and the funds deposited in Brazil for purposes of guaranteeing admitted reinsurersreinsurers’ local activities will be managed according to the rules of the CMN.
IRB continues to be authorized to carry out reinsurance and retrocession activities in Brazil as a local reinsurer.

 
5661
 

SELECTED STATISTICAL INFORMATION
 
The following information is included for analytical purposes and should be read in connection with our U.S. GAAP financial statements in Item 18 as well as with “Item 5. Operating and Financial Review and Prospects.”  Information is presented as of and for the years ended December 31, 2009, 2008 2007 and 2006,2007, and in the case of certain information related to our loans and leases and its related allowances, also as of and for the years ended December 31, 20052006 and 2004.2005.
 
On November 12, 2008, Itaú Unibanco entered into an agreement with Itaúsa, our controlling stockholdershareholder at that time, pursuant to which Itaú Unibanco acquired part of Itaúsa’s ownership interest in Itaúsa Export and Itaúsa Europa. The transaction is accounted for as a transaction between entities under common control that resulted in a change in reporting entity under U.S. GAAP. As a result, retroactively restatement of prior year financial statement is required to present the combined financial statement of Itaú Unibanco with Itaúsa Export and Itaúsa Europa as if the transaction had taken place on the beginning of the first period presented. Accordingly, the U.S. GAAP financial statements as of and for the years ended December 31, 2007 and 2006, included in this annual report were retroactively adjusted to reflect the impact of this transaction. However, financial information under Selected Financial Information and other sections of this annual report as of December 31, 2005 and 2004 and for the years then ended has not been restated to reflect the combination of Itaúsa Export and Itaúsa Europa as if it had occurred on those periods considering the burden to compile such information for prior periods and the reduced impact of those entities in the consolidated financial information. See note 3 to the consolidated financial statements for additional information.
 
The numbers included in the tables and other data in this section are presented on a U.S. GAAP basis.

Average Balance Sheet and Interest Rate Data
 
The following table presents the average balances of our interest-earning assets and interest-bearing liabilities, other assets and liabilities accounts, the related interest income and expense amounts and the average real yield/rate for each period.  We calculated the average balances using daily book balances for the years ended December 31, 2009, 2008 2007 and 2006.2007.

 
5762
 

 
(in millions of R$, except percentages)
 
(in millions of R$, except percentages)
(in millions of R$, except percentages)
 2008  2007  
2006
  2009  2008  2007 
Assets
 
Average
balance
  
Interest
  
Average
yield/rate (%)
  
Average
balance
  
Interest
  
Average
yield/rate (%)
  
Average
balance
  
Interest
  
Average
yield/rate (%)
  
Average
balance
  Interest  
Average
yield/rate (%)
  
Average
balance
  Interest  
Average
yield/rate (%)
  
Average
balance
  Interest  
Average
yield/rate (%)
 
Interest-earning assets  287,667   47,649   16.6%  200,127   34,603   17.3%  145,387   28,147   19.4%  453,883   72,567   16.0%  287,667   47,649   16.6%  200,127   34,603   17.3%
Interest-bearing deposits in other banks  30,555   3,028   9.9%  26,866   2,852   10.6%  28,358   2,725   9.6%  54,046   3,533   6.5%  30,555   3,028   9.9%  26,866   2,852   10.6%
Securities purchased under resale agreements  39,182   5,369   13.7%  19,268   2,375   12.3%  8,062   1,251   15.5%  59,916   8,673   14.5%  39,182   5,369   13.7%  19,268   2,375   12.3%
Central Bank compulsory deposits  11,747   1,051   8.9%  10,203   909   8.9%  8,191   881   10.8%  7,816   519   6.6%  11,747   1,051   8.9%  10,203   909   8.9%
Trading assets and securities:  73,135   6,874   9.4%  57,474   5,569   9.7%  34,502   3,943   11.4%  121,215   11,260   9.3%  73,135   6,874   9.4%  57,474   5,569   9.7%
Trading assets, at fair value  49,917   4,141   8.3%  38,133   3,418   9.0%  21,877   2,539   11.6%  78,933   7,087   9.0%  49,917   4,141   8.3%  38,133   3,418   9.0%
Available for sale securities, at fair value  22,367   2,536   11.3%  17,951   1,992   11.1%  11,211   1,236   11.0%  40,605   3,996   9.8%  22,367   2,536   11.3%  17,951   1,992   11.1%
Held-to-maturity securities, at amortized cost  852   198   23.2%  1,390   159   11.4%  1,414   169   11.9%  1,677   177   10.5%  852   198   23.2%  1,390   159   11.4%
Loans and leases  133,047   31,326   23.5%  86,316   22,898   26.5%  66,274   19,346   29.2%  210,890   48,582   23.0%  133,047   31,326   23.5%  86,316   22,898   26.5%
Non-interest-earning assets  46,662           41,587           28,688           60,812           46,662           41,587         
Cash and due from banks  4,092           4,041           3,039           6,235           4,092           4,041         
Central Bank compulsory deposits  4,543           5,074           4,200           5,087           4,543           5,074         
Non-accrual loans  6,270           5,022           3,349           10,919           6,270           5,022         
Allowance for loan and lease losses  (8,486)          (7,224)          (5,645)          (21,186)          (8,486)          (7,224)        
Premises and equipment, net  2,383           2,094           2,586         
Premises and equipments, net  3,393           2,383           2,094         
Investments in unconsolidated companies  3,209           1,640           1,362           3,890           3,209           1,640         
Goodwill and intangibles assets, net  7,172           7,303           4,857         
Goodwill and intangible assets, net  21,583           7,172           7,303         
Other assets  27,479           23,638           14,941           30,891           27,479           23,638         
Total assets  334,329           241,714           174,074           514,695           334,329           241,714         

 
5863
 
 
 
 (in millions of R$, except percentages)
 
(in millions of R$, except percentages)
(in millions of R$, except percentages)
 2008  2007  
2006
  2009  2008  2007 
Liabilities
 
Average
balance
  
Interest
  
Average
yield/rate (%)
  
Average
balance
  
Interest
  
Average
yield/rate (%)
  
Average
balance
  
Interest
  
Average
yield/rate (%)
  
Average
balance
  Interest  
Average
yield/rate (%)
  
Average
balance
  Interest  
Average
yield/rate (%)
  
Average
balance
  Interest  
Average
yield/rate (%)
 
Interest-bearing liabilities  230,083   26,508   11.5%  151,391   13,271   8.8%  104,073   11,104   10.7%  382,880   31,876   8.3%  230,083   26,508   11.5%  151,391   13,271   8.8%
Interest-bearing deposits:  74,390   6,233   8.4%  45,287   3,510   7.8%  42,173   3,950   9.4%  159,296   11,773   7.4%  74,390   6,233   8.4%  45,287   3,510   7.8%
Saving deposits  29,509   1,960   6.6%  25,256   1,582   6.3%  21,797   1,432   6.6%  40,998   2,429   5.9%  29,509   1,960   6.6%  25,256   1,582   6.3%
Deposits from banks  1,461   236   16.1%  3,588   270   7.5%  3,118   112   3.6%  2,605   336   12.9%  1,461   236   16.1%  3,588   270   7.5%
Time deposits  43,421   4,037   9.3%  16,443   1,657   10.1%  17,258   2,406   13.9%  115,693   9,008   7.8%  43,421   4,037   9.3%  16,443   1,657   10.1%
Securities sold under repurchase agreements  45,234   6,489   14.3%  22,880   3,453   15.1%  8,694   2,007   23.1%  65,939   7,177   10.9%  45,234   6,489   14.3%  22,880   3,453   15.1%
Borrowings:  89,589   12,458   13.9%  67,005   4,762   7.1%  41,391   3,783   9.1%  124,953   9,901   7.9%  89,589   12,458   13.9%  67,005   4,762   7.1%
Short-term borrowings  58,252   7,737   13.3%  41,199   3,329   8.1%  23,349   2,328   10.0%  70,861   5,314   7.5%  58,252   7,737   13.3%  41,199   3,329   8.1%
Long-term debt  31,337   4,721   15.1%  25,805   1,433   5.6%  18,042   1,455   8.1%  54,093   4,586   8.5%  31,337   4,721   15.1%  25,805   1,433   5.6%
Investment contracts  20,870   1,328   6.4%  16,220   1,546   9.5%  11,816   1,364   11.5%  32,691   3,025   9.3%  20,870   1,328   6.4%  16,220   1,546   9.5%
Non-interest-bearing liabilities  68,394           57,431           46,934           70,272           68,394           57,431         
Non-interest-bearing deposits  21,198           18,364           13,016           23,799           21,198           18,364         
Other non-interest-bearing liabilities  47,196           39,067           33,918           46,474           47,196           39,067         
Stockholders’ equity  35,852           32,892           23,068         
Total liabilities and stockholders’ equity  334,329           241,714           174,074         
Shareholders’ equity  61,544           35,852           32,892         
Total liabilities and shareholders’ equity  514,695           334,329           241,714         

 
5964
 
 
Changes in Interest Income and Expenses – Volume and Rate Analysis
 
The following table sets forth the allocation of the changes in our interest income and expense between average volume and changes in the average yields/rates for the year ended December 31, 20082009 compared to 20072008 and for the year ended December 31, 20072008 compared to 2006.2007. Volume and rate variations have been calculated based on fluctuations of average balances over the period and changes in average interest yield/rates on interest-earning assets and interest-bearing liabilities from one period to the other. Volume change has been computed as the change in the average interest-earning assets or interest-bearing liabilities from one period to the other multiplied by the average yield/rate in the later period. Yield/rate change has been computed as the change in the yield/rate in the period multiplied by the average interest-earning assets or interest-bearing liabilities in the earlier period. We allocated the net change from the combined effects of volume and yield/rate proportionately to volume change and yield/rate change, in absolute terms, without considering positive and negative effects.

 
(in millions of R$)
 
(in millions of R$) (in millions of R$)
 Increase/(decrease) due to changes in:  Increase/(decrease) due to changes in: 
  
2008/2007
   
2007/2006
  2009/2008    2008/2007  
 
Volume
  
Yield/rate
  Net change  
Volume
  
Yield/rate
  
Net change
  Volume  Yield/rate  Net change  Volume  Yield/rate  Net change 
Interest-earning assets:  15,934   (2,888)  13,045   9,214   (2,757)  6,457   26,878   (1,960)  24,918   15,934   (2,888)  13,045 
Interest-bearing deposits in other banks  374   (198)  176   (148)  275   127   1,779   (1,274)  505   374   (198)  176 
Securities purchased under resale agreements  2,702   292   2,994   1,427   (303)  1,124   2,986   318   3,304   2,702   292   2,994 
Central Bank compulsory deposits  138   4   142   195   (167)  28   (300)  (232)  (532)  138   4   142 
Trading assets and securities:  1,477   (171)  1,305   2,300   (675)  1,626   4,467   (82)  4,385   1,477   (171)  1,305 
Trading assets  993   (270)  723   1,558   (679)  879   2,581   366   2,946   993   (270)  723 
Available for sale securities  500   44   544   748   8   756   1,833   (373)  1,460   500   44   544 
Held-to-maturity securities  (79)  118   39   (3)  (7)  (10)  125   (146)  (21)  (79)  118   39 
Loans and leases  11,243   (2,815)  8,428   5,440   (1,888)  3,552   17,946   (691)  17,256   11,243   (2,815)  8,428 
Interest-bearing liabilities:  8,013   5,225   13,237   4,939   (2,773)  2,166   13,702   (8,334)  5,368   8,013   5,225   13,237 
Interest-bearing deposits:  2,418   305   2,723   129   (570)  (441)  6,354   (813)  5,541   2,418   305   2,723 
Saving deposits  278   99   377   219   (69)  150   699   (229)  470   278   99   377 
Deposits from banks  (223)  188   (34)  19   139   158   155   (55)  100   (223)  188   (34)
Time deposits  2,518   (138)  2,380   (109)  (639)  (749)  5,725   (753)  4,971   2,518   (138)  2,380 
Securities sold under repurchase agreements  3,215   (179)  3,036   2,340   (893)  1,446   2,501   (1,813)  688   3,215   (179)  3,036 
Borrowings:  2,005   5,691   7,696   2,022   (1,044)  979   3,905   (6,463)  (2,557)  2,005   5,691   7,696 
Short-term borrowings  1,725   2,683   4,408   1,510   (508)  1,001   1,433   (3,855)  (2,423)  1,725   2,683   4,408 
Long-term debt  366   2,923   3,289   513   (535)  (22)  2,493   (2,627)  (135)  366   2,923   3,289 
Investment contracts  375   (593)  (218)  448   (266)  182   942   755   1,696   375   (593)  (218)

Net Interest Margin and Spread

The following table sets forth our average interest-earning assets, average interest-bearing liabilities, net interest income and the comparative net interest margin and net interest spread for the years ended December 31, 2009, 2008 2007 and 2006.2007.

 
(in millions of R$, except percentages)
 
(in millions of R$, except percentages)(in millions of R$, except percentages)
 2008  
2007
  
2006
  2009  2008  2007 
Total average interest-earning assets  287,667   200,127   145,387 �� 453,883   287,667   200,127 
Total average interest-bearing liabilities  230,083   151,391   104,073   382,880   230,083   151,391 
Net interest income(1)  21,141   21,332   17,043   40,691   21,141   21,332 
Average yield on average interest-earning assets(2)  16.6%  17.3%  19.4%  16.0%  16.6%  17.3%
Average rate on average interest-bearing liabilities(3)  11.5%  8.8%  10.7%  8.3%  11.5%  8.8%
Net interest spread(4)  5.0%  8.5%  8.7%  7.7%  5.0%  8.5%
Net interest margin(5)  7.3%  10.7%  11.7%  9.0%  7.3%  10.7%
(1) Total interest income less total interest expense.
(2) Total interest income divided by average interest-earning assets.
(3) Total interest expense divided by average interest-bearing liabilities.
(4) Difference between the average yield on interest-earning assets and the average rate on interest-bearing liabilities.
(5) Net interest income divided by average interest-earning assets.

 
6065
 

Return on Equity and Assets

The following table sets forth selected financial data for the periods indicated:

  
(in millions of R$, except percentages)
 
  2008  
2007
  
2006
 
Net income  4,849   7,662   6,037 
Average total assets  334,329   241,714   174,074 
Average stockholders' equity  35,852   32,892   23,068 
Net income as a percentage of average total assets  1.5%  3.2%  3.5%
Net income as a percentage of average stockholders' equity  13.5%  23.3%  26.2%
Average stockholders' equity as a percentage of average total assets  10.7%  13.6%  13.3%
Dividend payout ratio per share (1)  78.5%  29.3%  36.4%
(in millions of R$, except percentages)
  2009  2008  2007 
Net income attributable to Ita ú Unibanco
  14,085   4,849   7,662 
Average total assets  514,695   334,329   241,714 
Average shareholders' equity  61,544   35,852   32,892 
Net income attributable to Itaú Unibanco as a percentage of average total assets  2.7%  1.5%  3.2%
Net income attributable to Itaú Unibanco as a percentage of average equity  22.9%  13.5%  23.3%
Average equity as a percentage of average total assets  12.0%  10.7%  13.6%
Dividend payout ratio per share (1)  29.1%  78.5%  29.3%
(1) Dividend and interest on stockholders’shareholders’ equity per share divided by basic earnings per share. Please see “Item 3A. Selected Financial Data – U.S. GAAP Selected Financial Data – Earnings and Dividend Per Share” for additional information on the computation of both dividend and interest on stockholders’shareholders’ equity and basic earnings per share.

 
6166
 

Securities Portfolio

General

The following table sets forth our portfolio of trading assets, securities available for sale and held-to-maturity securities, as of December 31, 2009, 2008 2007 and 2006.2007. The amounts exclude our investments in securities of unconsolidated companies. For more information on our investments in unconsolidated companies see note 11 to our U.S. GAAP financial statements. Trading assets and securities available for sale are stated at fair value and held-to-maturity securities are stated at amortized cost. See notes 2.f, 2.g, 6, 7 and 8 to our U.S. GAAP financial statements for a description of the accounting policies applied to account for our securities portfolio and for additional information on the portfolio maintained as of such dates.

 
(in millions of R$, except percentages)
 
(in millions of R$, except percentages)(in millions of R$, except percentages)
 
2008
  % of total  
2007
  % of total  2006  
% of total
  2009  % of total  2008  % of total  2007  % of total 
Trading assets, at fair value  66,483   100.0%  40,524   100.0%  28,093   100.0%  73,529   100.0%  66,483   100.0%  40,524   100.0%
Investment funds  24,458   36.8%  20,321   50.1%  16,051   58.9%  39,347   53.5%  24,458   36.8%  20,321   50.1%
Brazilian federal government securities  27,145   40.8%  10,222   25.2%  4,355   14.0%  23,985   32.6%  27,145   40.8%  10,222   25.2%
Brazilian external debt bonds  383   0.6%  240   0.6%  490   1.8%  222   0.3%  383   0.6%  240   0.6%
Government securities - abroad  1,988   2.8%  3,365   8.3%  1,887   6.7%  1,058   1.5%  1,988   2.8%  3,365   8.3%
Argentina  64   0.1%  37   0.1%  -   0.0%  179   0.2%  64   0.1%  37   0.1%
United States  1,038   1.6%  286   0.7%  1,389   5.0%  748   1.2%  1,038   1.6%  286   0.7%
Mexico  6   0.0%  69   0.2%  -   0.0%  10   0.0%  6   0.0%  69   0.2%
Austria  -   0.0%  -   0.0%  231   0.8%
Russia  -   0.0%  275   0.7%  147   0.5%  -   0.0%  -   0.0%  275   0.7%
Denmark  -   0.0%  196   0.5%  -   0.0%  -   0.0%  -   0.0%  196   0.5%
Spain  418   0.6%  847   2.1%  -   0.0%  -   0.0%  418   0.6%  847   2.1%
Korea  291   0.4%  1,582   3.9%  -   0.0%  -   0.0%  291   0.4%  1,582   3.9%
Chile  164   0.2%  71   0.2%  -   0.0%  77   0.1%  164   0.2%  71   0.2%
Uruguay  6   0.0%  -   0.0%  -   0.0%  30   0.0%  6   0.0%  -   0.0%
Others  1   0.0%  2   0.0%  120   0.4%  14   0.0%  1   0.0%  2   0.0%
Corporate debt securities  2,030   3.1%  2,110   5.3%  1,500   5.2%  2,226   3.0%  2,030   3.1%  2,110   5.3%
Marketable equity securities  456   0.7%  393   1.0%  636   2.3%  1,142   1.6%  456   0.7%  393   1.0%
Derivative financial instruments  10,023   15.1%  3,873   9.5%  3,174   11.1%  5,549   7.5%  10,023   15.1%  3,873   9.5%
                        
Trading assets as a percentage of total assets  16.47%      14.99%      14.5%      18.21%      16.47%      14.99%    
                        
Securities available for sale, at fair value  28,445   100.0%  18,825   100.0%  13,560   100.0%  41,263   100.0%  28,445   100.0%  18,825   100.0%
Investment funds  992   3.4%  973   5.0%  1,005   7.4%  1,259   2.9%  992   3.4%  973   5.0%
Brazilian federal government securities  5,579   19.6%  2,145   11.4%  2,637   19.4%  14,443   35.0%  5,579   19.6%  2,145   11.4%
Brazilian external debt bonds  1,009   3.5%  278   1.5%  381   2.8%  1,980   4.8%  965   3.5%  278   1.5%
Government securities - abroad  8,733   30.7%  7,697   40.9%  1,227   9.1%  7,243   17.7%  8,733   30.7%  7,697   40.9%
Portugual  301   1.1%  240   1.3%  -   0.0%
Portugal  26   0.1%  301   1.1%  240   1.3%
Argentina  1   0.0%  53   0.3%  -   0.0%  -   0.0%  1   0.0%  53   0.3%
United States  25   0.1%  -   0.0%  -   0.0%  17   0.1%  25   0.1%  -   0.0%
Norway  345   1.2%  189   1.0%  -   0.0%  -   0.0%  345   1.2%  189   1.0%
Italy  -   0.0%  70   0.4%  -   0.0%  -   0.0%  -   0.0%  70   0.4%
Austria  1,460   5.1%  2,108   11.2%  444   3.3%  213   0.5%  1,460   5.1%  2,108   11.2%
Denmark  2,193   7.7%  174   0.9%  -   0.0%  1,971   4.8%  2,193   7.7%  174   0.9%
Spain  2,829   9.9%  2,284   12.1%  -   0.0%  1,093   2.6%  2,830   9.9%  2,284   12.1%
Korea  1,021   3.6%  2,159   11.5%  -   0.0%  1,757   4.3%  1,021   3.6%  2,159   11.5%
Chile  483   1.7%  355   1.9%  -   0.0%  1,274   3.1%  483   1.7%  355   1.9%
Paraguay  417   1.0%  -   0.0%  -   0.0%
Uruguay  74   0.3%  65   0.3%  -   0.0%  475   1.2%  74   0.3%  65   0.3%
Others  -   0.0%  -   0.0%  783   5.8%
Corporate debt securities  11,446   40.6%  5,294   28.3%  7,349   54.2%  14,966   29.8%  11,490   40.6%  5,294   28.3%
Marketable equity securities  686   2.2%  2,438   12.9%  961   7.1%  1,372   9.8%  686   2.2%  2,438   12.9%
                                                
Securities available for sale as a percentage of total assets  7.05%      6.15%      6.07%      10.22%      7.05%      6.2%    
                        
Held-to-maturity securities, at amortized cost  1,325   100.0%  1,428   100.0%  1,589   100.0%  1,762   100.0%  1,325   100.0%  1,428   100.0%
Brazilian federal government securities  637   48.1%  822   57.6%  812   51.1%  1,273   72.2%  637   48.1%  822   57.6%
Brazilian external debt bonds  321   24.2%  307   21.5%  419   26.4%  238   13.5%  321   24.2%  307   21.5%
Government securities - abroad  22   1.7%  19   1.3%  19   1.2%  17   1.0%  22   1.7%  19   1.3%
Corporate debt securities  345   26.0%  280   19.6%  339   21.3%  234   13.3%  345   26.0%  280   19.6%
                        
Held-to-maturity securities, as a percentage of total assets  0.33%      0.53%      0.83%      0.44%      0.33%      0.53%    

 
6267
 

The following table sets forth our portfolio of trading assets, securities available-for-sale and held-to-maturity securities at its amortized cost and its fair value as of December 31, 2008.2009.

 
(in millions of R$)
 
(in millions of R$)(in millions of R$) 
 
Amortized
cost
  
Fair
value
  
Amortized
cost
  
Fair
value
 
Trading assets  65,068   66,483   72,968   73,529 
Investment funds  24,467   24,458   39,316   39,347 
Brazilian federal government securities  26,867   27,145   23,945   23,985 
Brazilian external debt bonds  363   383   221   222 
Government securities - abroad  1,915   1,988   1,045   1,058 
Argentina  64   64   179   179 
United States  957   1,038   735   748 
Mexico  5   6   10   10 
Spain  422   418 
Korea  294   291 
Chile  164   164   77   77 
Uruguay  8   6   30   30 
Others  1   1   14   14 
Corporate debt securities  2,021   2,030   2,219   2,226 
Marketable equity securities  483   456   908   1,142 
Derivative financial instruments  8,952   10,023   5,314   5,549 
Securities available for sale  28,165   28,445   40,637   41,263 
Investment funds  971   992   1,247   1,259 
Brazilian federal government securities  5,545   5,579   14,324   14,443 
Brazilian external debt bonds  748   1,009   2,060   1,980 
Government securities - abroad  8,684   8,733   7,261   7,243 
Portugual  297   301 
Argentina  1   1 
Portugal  26   26 
United States  18   25   17   17 
Norway  347   345 
Austria  1,470   1,460   212   213 
Denmark  2,092   2,193   1,995   1,971 
Spain  2,866   2,830   1,090   1,093 
Korea  1,020   1,021   1,750   1,757 
Chile  492   483   1,278   1,274 
Paraguay  417   417 
Uruguay  81   74   476   475 
Corporate debt securities  11,365   11,446   14,852   14,966 
Marketable equity securities  852   686   893   1,372 
Held-to-maturity securities  1,325   1,516   1,762   2,124 
Brazilian federal government securities  637   761   1,273   1,572 
Brazilian government external debt securities  321   375   238   280 
Other governments external debt securities  22   22   17   17 
Corporate debt securities  345   358   234   255 

 
6368
 

Maturity Distribution

The following table sets forth the maturity distribution and average yields as of December 31, 20082009 for our trading assets, securities available for sale and held-to-maturity securities.

(in millions of R$, except percentages)  
 
(in millions of R$, except percentages)
 
 
Maturity
  Maturity 
 
No stated
maturity
  
Due in 1 year or
less
  
Due after 1 year to
5 years
  
Due after 5 years
to 10 years
  
Due after 10
years
  
Total
 
No stated
maturity
  
Due in 1 year or
less
  
Due after 1 year to
5 years
  
Due after 5 years
to 10 years
  
Due after 10
years
  Total 
 
Average yield
  Average  yield 
 
R$
  
Average
yield %
  
R$
  
Average
yield %
  
R$
  
Average
yield
%
  
R$
  
Average
yield %
  
R$
  
Average
yield %
  
R$
  
Average
yield %
  R$  
Average
yield %
  R$  
Average
yield %
  R$  
Average
yield %
  R$  
Average
yield %
  R$  
Average
yield %
  R$  Average  yield % 
Trading assets  24,914      19,198      15,429      5,452      1,490      66,483      40,490      14,342      16,003      1,692      1,002      73,529    
Investment funds (1)  24,458   0.0%  -   0.0%  -   0.0%  -   0.0%  -   0.0%  24,458   0.0%  39,347   0.00%  -   0.00%  -   0.00%  -   0.00%  -   0.00%  39,347   0.00%
Brazilian federal government securities  -   0.0%  9,701   4.7%  11,479   1.5%  4,728   0.0%  1,237   0.0%  27,145   6.2%  -   0.00%  9,960   3.64%  12,285   2.70%  811   2.03%  929   9.14%  23,985   17.51%
Brazilian external debt bonds  -   0.0%  52   12.3%  244   10.3%  74   7.6%  13   11.1%  383   41.3%  -   0.00%  156   9.96%  54   10.10%  11   9.25%  1   0.00%  222   29.31%
Government securities - abroad  -       1,080       490       414       4       1,988       1       196       374       480       7       1,058     
Argentina  -   0.0%  5   2.5%  58   4.6%  1   0.0%  -   0.0%  64   7.1%  -   0.00%  66   11.00%  79   4.18%  31   7.00%  3   0.00%  179   22.18%
United States  -   0.0%  217   2.9%  413   2.5%  408   4.6%  -   0.0%  1,038   10.1%  -   0.00%  21   2.71%  284   2.15%  443   4.00%  -   0.00%  748   8.86%
Mexico  -   0.0%  1   9.7%  -   0.0%  2   6.4%  3   7.2%  6   23.3%  -   0.00%  6   0.00%  1   0.00%  2   0.00%  1   0.00%  10   0.00%
Spain  -   0.0%  418   9.2%  -   0.0%  -   0.0%  -   0.0%  418   9.2%
Korea  -   0.0%  291   9.3%  -   0.0%  -   0.0%  -   0.0%  291   9.3%
Chile  -   0.0%  147   4.0%  17   4.5%  -   0.0%  -   0.0%  164   8.5%  -   0.00%  77   4.66%  -   0.00%  -   0.00%  -   0.00%  77   4.66%
Uruguay  -   0.0%  1   12.6%  1   18.3%  3   4.7%  1   5.9%  6   41.4%  -   0.00%  24   9.18%  3   0.00%  2   0.00%  1   0.00%  30   9.18%
Others  -   0.0%  -   0.0%  1   9.8%  -   0.0%  -   0.0%  1   9.8%  1   0.00%  2   0.00%  7   0.00%  2   0.00%  2   0.00%  14   0.00%
Corporate debt securities  -   0.0%  910   5.4%  944   1.9%  171   2.0%  5   8.2%  2,030   17.5%  -   0.00%  574   9.14%  1,387   1.81%  217   8.21%  48   7.92%  2,226   27.08%
Marketable equity securities (1)  456   0.9%  -   0.0%  -   0.0%  -   0.0%  -   0.0%  456   0.9%  1,142   0.00%  -   0.00%  -   0.00%  -   0.00%  -   0.00%  1,142   0.00%
Derivative financial instruments (1)  -   0.0%  7,455   6.8%  2,272   2.5%  65   0.0%  231   0.0%  10,023   9.3%  -   0.00%  3,456   8.35%  1,903   12.95%  173   8.81%  17   0.00%  5,549   30.11%
Securities available for sale  1,678       12,753       10,061       2,418       1,535       28,445       5,310       15,013       13,638       2,706       4,596       41,263     
Investment funds (1)  992   0.0%  -   0.0%  -   0.0%  -   0.0%  -   0.0%  992   0.0%  1,256   0.00%  -   0.00%  -   0.00%  3   0.00%  -   0.00%  1,259   0.00%
Brazilian federal government securities  -   0.0%  677   0.0%  4,485   0.0%  243   0.0%  175   0.6%  5,579   0.6%  -   0.00%  3,226   7.19%  9,263   7.39%  241   6.73%  1,713   5.19%  14,443   26.50%
Brazilian external debt bonds  -   0.0%  28   14.5%  585   10.3%  396   9.2%  -   0.0%  1,009   34.0%  -   0.00%  122   11.31%  741   9.09%  43   8.00%  1,074   10.21%  1,980   38.61%
Government securities - abroad  -       5,271       3,461       -       1       8,733       -       6,659       581       3       -       7,243     
Portugual  -   0.0%  266   4.0%  35   5.9%  -   0.0%  -   0.0%  301   9.8%
Argentina  -   0.0%  -   0.0%  1   0.0%  -   0.0%  -   0.0%  1   0.0%
Portugal  -   0.00%  26   5.85%  -   0.00%  -   0.00%  -   0.00%  26   5.85%
United States  -   0.0%  -   0.0%  25   5.0%  -   0.0%  -   0.0%  25   5.0%  -   0.00%  -   0.00%  17   5.00%  -   0.00%  -   0.00%  17   5.00%
Norway  -   0.0%  345   9.6%  -   0.0%  -   0.0%  -   0.0%  345   9.6%
Austria  -   0.0%  1,181   12.4%  279   14.1%  -   0.0%  -   0.0%  1,460   26.4%  -   0.00%  213   14.00%  -   0.00%  -   0.00%  -   0.00%  213   14.00%
Denmark  -   0.0%  778   43.2%  1,416   25.6%  -   0.0%  -   0.0%  2,193   68.9%  -   0.00%  1,545   34.95%  426   8.20%  -   0.00%  -   0.00%  1,971   43.15%
Spain  -   0.0%  1,847   9.4%  982   11.6%  -   0.0%  -   0.0%  2,830   21.0%  -   0.00%  1,093   10.63%  -   0.00%  -   0.00%  -   0.00%  1,093   10.63%
Korea  -   0.0%  323   12.4%  698   15.1%  -   0.0%  -   0.0%  1,021   27.5%  -   0.00%  1,757   12.23%  -   0.00%  -   0.00%  -   0.00%  1,757   12.23%
Chile  -   0.0%  478   5.1%  5   2.6%  -   0.0%  -   0.0%  483   7.7%  -   0.00%  1,214   6.29%  58   0.00%  2   0.00%  -   0.00%  1,274   6.29%
Paraguay  -   0.00%  350   18.78%  67   12.19%  -   0.00%  -   0.00%  417   30.97%
Uruguay  -   0.0%  53   7.3%  20   3.9%  -   0.0%  1   7.6%  74   18.8%  -   0.00%  461   8.03%  13   0.00%  1   0.00%  -   0.00%  475   8.03%
Corporate debt securities  -   0.0%  6,777   3.2%  1,530   4.5%  1,779   4.9%  1,360   1.4%  11,446   14.0%  2,682   0.00%  5,006   5.53%  3,053   8.23%  2,416   10.00%  1,809   11.28%  14,966   35.04%
Marketable equity securities (1)  686   0.5%  -   0.0%  -   0.0%  -   0.0%  (1)  0.0%  686   0.5%  1,372   0.00%  -   0.00%  -   0.00%  -   0.00%  -   0.00%  1,372   0.00%
Held-to-maturity securities, at amortizad cost  -       67       757       115       386       1,325       -       41       614       63       1,044       1,762     
Brazilian federal government securities  -   0.0%  27   1.7%  190   0.6%  43   0.0%  377   0.0%  637   2.3%  -   0.00%  19   6.00%  164   6.00%  52   0.00%  1,038   0.00%  1,273   12.00%
Brazilian external debt bonds  -   0.0%  9   1.4%  312   4.3%  -   0.0%  -   0.0%  321   5.7%  -   0.00%  -   0.00%  238   5.01%  -   0.00%  -   0.00%  238   5.01%
Government securities - abroad  -   0.0%  -   0.0%  -   0.0%  13   0.9%  9   0.2%  22   1.0%  -   0.00%  -   0.00%  -   0.00%  11   0.00%  6   0.00%  17   0.00%
Corporate debt securities  -   0.0%  31   1.4%  255   2.6%  59   4.8%  -   0.0%  345   8.8%  -   0.00%  22   5.01%  212   5.78%  -   0.00%  -   0.00%  234   10.79%

(1) Average yields are not shown for these securities, as such yields are not meaningful as future yields are not quantifiable.  These securities have been excluded from the calculation of the total yield.

 
6469
 

The following table sets forth our securities portfolio by currency as of December 31, 2009, 2008 2007 and 2006.2007.

(in millions of R$)(in millions of R$)
 
(in millions of R$)
  
Fair
value
  Amortized cost  Total 
 
Fair
value
  
Amortized cost
    
Trading
assets
  
Securities
available for sale
  
Held-to-maturity
securities
 
 
Trading
assets
  
Securities 
available for sale
  
Held-to-maturity
securities
  
Total
 
At 2009            
Denominated in Brazilian currency  70,601   31,891   1,555   104,047 
Denominated in Brazilian currency and indexed by foreign currency (1)  2,219   8,200   24   10,443 
Denominated in foreign currency (1)  709   1,172   183   2,064 
At 2008               
Denominated in Brazilian currency  60,983   21,562   620   83,165   60,983   21,562   620   83,165 
Denominated in Brazilian currency and indexed by foreign currency (1)  58   1,347   108   1,513   58   1,347   108   1,513 
Denominated in foreign currency (1)  5,441   5,536   618   11,595   5,441   5,536   618   11,595 
At 2007                                
Denominated in Brazilian currency  37,587   14,076   780   52,443   37,587   14,076   780   52,443 
Denominated in Brazilian currency and indexed by foreign currency (1)  81   429   111   621   81   429   111   621 
Denominated in foreign currency (1)  2,655   3,008   537   6,200   2,655   3,008   537   6,200 
At 2006                
Denominated in Brazilian currency  24,399   7,347   722   32,468 
Denominated in Brazilian currency and indexed by foreign currency (1)  65   190   164   419 
Denominated in foreign currency (1)  3,492   4,200   703   8,395 
(1) Predominantly U.S. dollar.

Central Bank Compulsory Deposits

We are required to either maintain certain deposits with the Central Bank or to purchase and hold federal government securities as compulsory deposits. The following table shows the amounts of these deposits as of December 31, 2009, 2008 2007 and 2006.2007.

  
(in millions of R$, except percentages)
 
  
2008
  
2007
  
2006
 
  
R$
  
% of total
Compulsory
deposits
  
R$
  
% of total
Compulsory
deposits
  
R$
  
% of total
Compulsory
deposits
 
Non-interest earning (1)  4,571   59.6%  6,294   36.6%  6,145   40.6%
Interest-earning (2)  6,743   40.4%  10,920   63.4%  8,991   59.4%
Total
  11,314   100.0%  17,214   100.0%  15,136   100.0%
(in millions of R$, except percentages)
  2009  2008  2007 
 R$  
% of total
compulsory
deposits
  R$  
% of total
compulsory
deposits
  R$  
% of total
compulsory
deposits
 
Non-interest bearing (1)  4,042   29.1%  4,571   40.4%  6,294   36.6%
Interest-bearing (2)  9,827   70.9%  6,743   59.6%  10,920   63.4%
Total  13,869   100.0%  11,314   100.0%  17,214   100.0%
(1) Mainly related to demand deposits.
(2) Mainly related to time and savings deposits.

 
6570
 

Loans and Leases

The following table presents our loan and lease portfolio by category of transaction. SubstantiallyThe vast majority all of our loans are to borrowers domiciled in Brazil and are denominated in reais. Additionally, the majority of our loan portfolio is indexed to Brazilian base interest rates or to the U.S. dollar.

 
(in millions of R$)
 
(in millions of R$)(in millions of R$) 
 
2008
  2007  2006  2005  2004  2009  2008  2007  2006  2005 
Type of loans and leases (1)                              
Commercial:                              
Industrial and others  64,952   40,991   29,516   19,981   16,152   104,505   64,952   40,991   29,516   19,981 
Import financing  3,643   1,287   661   407   1,032   1,895   3,643   1,287   661   407 
Export financing  9,746   3,257   3,343   2,182   3,289   6,823   9,746   3,257   3,343   2,182 
Real estate loans, primarily residential housing loans  6,469   4,732   2,499   1,985   1,896   10,939   6,469   4,732   2,499   1,985 
Lease financing  41,663   29,531   16,226   8,292   3,929   47,230   41,663   29,531   16,226   8,292 
Government  759   827   815   1,293   973   1,611   759   827   815   1,293 
Individuals:                                        
Overdraft  3,544   2,768   2,515   1,975   1,681   4,119   3,544   2,768   2,515   1,975 
Financing and others  20,272   18,023   15,556   12,526   8,383   32,701   20,272   18,023   15,556   12,526 
Credit card  14,288   11,391   9,157   4,079   2,709   30,781   14,288   11,391   9,157   4,079 
Agricultural  4,364   3,652   3,471   2,662   2,638   5,132   4,364   3,652   3,471   2,662 
Allowance for loan losses  (12,202)  (7,473)  (6,426)  (3,933)  (2,811)  (19,968)  (12,202)  (7,473)  (6,426)  (3,933)
Loans, net of allowance for loan losses  157,498   108,986   77,333   51,449   39,871   225,768   157,498   108,986   77,333   51,449 
(1) We consider non-accrual loans all loans that are 60 days or more overdue as non-accrual loans and we discontinue accruing financial charges related to them. Non-accrual loans amounted to R$7.6 billion,15,499 million, R$4.8 billion,7,579 million, R$3.9 billion,4,777 million, R$2.0 billion3,937 million and R$1.2 billion1,981 million as of December 31, 2009, 2008, 2007, 2006 2005 and 2004,2005, respectively.  Non-accrual loans are presented in the table above in the appropriate category of loan and lease.

- Commercial portfolios of loans and leases:  This category includes short-term loans as well as medium-term loans and financing for large, medium, and small companies. We also act as a financial agent for the Brazilian government through BNDES and its affiliates for the on-lending of money to target groups of private sector borrowers. Our trade financing activities focus on export, pre-export and import financing.
- Real estate loans:  This category consists mainly of loans for the construction, refurbishment, extension and acquisition of homes. We fund real estate loans primarily from Central Bank mandated portions of our savings account deposits. We extended real estate loans principally to retail bank customers to finance home acquisitions.  Maturity is generally of up to 15 years.
- Lease financing:  We are a major participant in the Brazilian leasing market through our subsidiary, Itauleasing.  Our leasing portfolio mainly consists of automobiles leased to individuals and machinery and equipment leased to corporate and middle market borrowers.
- Government:  Loans to federal government, state and municipal entities.
- Individuals:  We provide individual customers with three main credit products: overdraft accounts, consumer credit loans and personal credit loans.  In addition, we are one of the largest issuers of credit cards in Brazil under the Itaucard brand.
- Agricultural loans:  We obtain funding for our agricultural loans from Central Bank mandated portions of our deposit base.  We extend agricultural loans are principally made to agro-industrial borrowers.

Loan Approval Process
 
For a discussion of our loan approval process, see “Item 4B. Risk Management – Credit Risk Management.”
 
Indexing
 
Most of our portfolio is denominated in reais. However, a significant portion of our portfolio is indexed to foreign currencies, primarily the U.S. dollar. The foreign currency portion of our portfolio consists of loans and financing for foreign trade and on-lending operations. Our loans indexed to foreign currencies or denominated in U.S. dollars represented 13.7%, 22%,18.6% and 13.1%18.6% of our loan portfolio as of December 31, 2009, 2008 2007 and 2006,2007, respectively.

 
6671
 

Loans and Leases – Maturity and Interest Rates

The following tables present an analysis of the distribution of the credit portfolio as of December 31, 20082009 by maturity according to the type of loans and leases, as well as the classification of the portfolio between variable and fixed rates for each range of maturity:

Current

(in millions of R$) 
Type of loan and lease 
Due in 30
days or  less
  
Due in 31-90 
days
  
Due in 91-180 
days
  
Due in  181-
360  days
  
Due in one
year to  three
years
  
Due after
three  years
  
No stated
maturity
 
Commercial:                     
Industrial and others  15,389   17,944   11,216   14,681   24,780   12,432   3,800 
Import financing  155   438   405   390   276   179   - 
Export financing  586   1,013   1,141   1,263   1,533   1,031   - 
Real estate loans  252   1,432   505   1,017   2,205   5,456   - 
Lease financing  2,155   3,824   5,411   10,327   22,752   913   4 
Government  8   14   414   192   582   394   6 
Individuals:                            
Overdraft  -   -   -   -   -   -   3,162 
Financing and others  1,774   2,921   3,695   6,073   13,101   3,665   8 
Credit card  -   -   -   -   -   -   26,350 
Agricultural  343   719   1,374   1,581   486   553   - 
Total (1)  20,662   28,305   24,161   35,524   65,715   24,623   33,330 

Overdue

Current 
  
(in millions of R$)
 
Type of loan and lease
 
Due in 30
days or less
  
Due in 31-90
days
  
Due in 91-180
days
  
Due in 181-
360 days
  
Due in one
year to three
years
  
Due after
three years
  
No stated
maturity
 
Commercial:                     
Industrial and others  16,152   11,468   7,614   7,103   10,796   6,984   2,875 
Import financing  360   1,018   1,307   414   214   320   - 
Export financing  916   1,447   1,961   2,887   1,610   824   - 
Real estate loans  82   1,142   150   356   1,143   3,477   - 
Lease financing  1,990   3,261   4,662   8,931   20,445   1,070   - 
Government  10   35   42   153   274   244   - 
Individuals:                            
Overdraft  -   -   -   -   -   -   2,871 
Financing and others  1,163   1,768   2,262   3,892   8,126   1,971   - 
Credit card  -   -   -   -   -   -   12,457 
Agricultural
  285   629   1,246   1,326   420   427   - 
Total (1)
  20,958   20,768   19,244   25,062   43,028   15,317   18,203 

Overdue
 
 
(in millions of R$)
 
(in millions of R$)(in millions of R$) 
Type of loan and lease
 
30 days or
less
  
31-90 days
  
91-180 days
  
181-360
days
  
One year or
more
  
Total gross
loans
  
Allowance
for loan
losses
  
Total net
  
30 days  or 
less
  
31-90  days
  
91-180  days
  
181-360  days
  
One year  or
more
  
Total gross
loans
  
Allowance
for loan
losses
  Total net 
Commercial:                                                
Industrial and other  899   428   329   298   6   64,952   (2,399)  62,553   849   746   1,025   1,617   26   104,505   (3,334)  101,171 
Import financing  9   -   -   1   -   3,643   (10)  3,633   21   17   8   6   -   1,895   (11)  1,884 
Export financing  71   14   3   12   1   9,746   (135)  9,611   32   48   128   48   -   6,823   (127)  6,696 
Real estate loans  13   64   19   11   12   6,469   (171)  6,298   15   21   18   13   5   10,939   (209)  10,730 
Lease financing  337   308   257   327   75   41,663   (1,454)  40,209   426   398   393   495   132   47,230   (2,521)  44,709 
Government  -   1   -   -   -   759   (2)  757   -   -   -   1   -   1,611   -   1,611 
Individuals:                                                                
Overdraft  65   166   233   208   1   3,544   (2,290)  1,254   102   144   274   436   1   4,119   (1,319)  2,800 
Financing and other  373   268   256   182   11   20,272   (4,042)  16,230   398   333   346   381   6   32,701   (6,382)  26,319 
Credit card  486   344   459   527   15   14,288   (1,564)  12,724   963   743   975   1,719   31   30,781   (5,309)  25,472 
Agricultural  11   7   11   1   1   4,364   (135)  4,229   33   5   5   32   1   5,132   (756)  4,376 
Total (1)
  2,264   1,600   1,567   1,567   122   169,700   (12,202)  157,498   2,839   2,455   3,172   4,748   202   245,736   (19,968)  225,768 
(1) Non-accrual loans of R$ 7.6 billion15,499 million are presented in the table above in the appropriate category of loan and lease. Non-accrual loans include in the case of loans payable in installments both current and overdue installments.

 
6772
 

Current

Current 
 
(in millions of R$)
 
(in millions of R$)(in millions of R$) 
 
Due in 30 days
or less
  
Due in 31-90
days
  
Due in 91-180
days
  
Due in 181-360
days
  
Due in one
year to three
years
  
Due after three
years
  
No stated
maturity
  
Due in 30  days 
or less
  
Due in 31-90
days
  
Due in 91-180
days
  
Due in 181-360
days
  
Due in one
year to three
years
  
Due after three
years
  
No stated
maturity
 
Interest rate of loans to customers by maturity:Interest rate of loans to customers by maturity: Interest rate of loans to customers by maturity: 
Variable rates  8,650   10,343   8,964   8,586   12,176   12,456   1,786   6,619   9,906   7,495   10,264   20,629   18,851   13,533 
Fixed rates  12,308   10,425   10,280   16,476   30,852   2,861   16,417   14,043   18,399   16,666   25,260   45,086   5,772   19,797 
Total (1)
  20,958   20,768   19,244   25,062   43,028   15,317   18,203   20,662   28,305   24,161   35,524   65,715   24,623   33,330 

Overdue

Overdue 
 
(in millions of R$)
 
(in millions of R$)(in millions of R$) 
 
30 days or
less
  
31-90 days
  
91-180 days
  
181-360 days
  
One year or
more
  
Total gross
loans
  
30 days or
less
  31-90 days  91-180 days  181-360 days  
One year or
more
  
Total gross
loans
 
Interest rate of loans to customers by maturity:Interest rate of loans to customers by maturity: Interest rate of loans to customers by maturity: 
Variable rates  611   193   77   74   28   63,944   358   262   282   326   12   88,537 
Fixed rates  1,653   1,407   1,490   1,493   94   105,756   2,481   2,193   2,890   4,422   190   157,199 
Total (1)
  2,264   1,600   1,567   1,567   122   169,700   2,839   2,455   3,172   4,748   202   245,736 
(1) Non-accrual loans of R$ 7.6 billion15,499 million are presented in the table above in the appropriate category of loan and lease.  Non-accrual loans include in the case of loans payable in installments both current and overdue installments.

Overseas Loans and Leases
 
Loans outstanding to foreign borrowers exceeded 1% of total assets in the case of Argentine, Chilean, Paraguayan, Portugal and Uruguayan borrowers. Total amount outstanding to borrowers in Argentina, Chile, Paraguay, Portugal and Uruguay, consisting of loans and leases, deposits in banks and securities, as of December 31, 20082009 was R$ 40,14727,889 million. The amounts have been translated into reaisfrom their original amounts (Argentine pesos, Chilean pesos, Paraguayan guaranis, U.S. dollars, euros, and Uruguayan pesos, as appropriate) using the exchange rate at each date.

Total outstanding loans to borrowers in Argentina, Chile, Paraguay, Portugal and Uruguay, as of December 31, 20082009 consist of:

  (in millions of R$) 
Due from banks  356345 
Interest-bearing deposits in other banks  15,3185,722 
Securities purchased under resale agreements  8137 
Central Bank compulsory deposits  6761,308 
Trading assets  2,3971,782 
Available-for-sale securities  2,7622,782 
Loans and leases  18,63015,813 
Total outstanding  40,14727,889 

 
6873
 

Loans and Leases by Economic Activity

The following table presents the composition of our credit portfolio, including non-accrual loans, by economic activity of the borrower at each of the dates indicated.

 
(in millions of R$, except percentages)
 
(in millions of R$, except percentages)(in millions of R$, except percentages) 
 
2008
  2007  2006  2009  2008  2007 
Economic Activities
 
Loan
portfolio
  
% of Loan
portfolio
  
Loan
portfolio
  
% of Loan
portfolio
  
Loan
portfolio
  
% of Loan
portfolio
  
Loan
portfolio
  
% of Loan
portfolio
  
Loan
portfolio
  
% of Loan
portfolio
  
Loan
portfolio
  
% of Loan
portfolio
 
PUBLIC SECTOR  758   0.4%  826   0.7%  812   1.0%  1,611   0.7%  758   0.4%  826   0.7%
Generation, transmission and distribution of eletric energy  344   0.2%  505   0.4%  527   0.6%  716   0.3%  344   0.2%  505   0.4%
Chemical and petrochemical  131   0.1%  170   0.1%  186   0.2%  287   0.1%  131   0.1%  170   0.1%
Other  283   0.2%  151   0.1%  98   0.1%  608   0.2%  283   0.2%  151   0.1%
PRIVATE SECTOR  168,942   99.6%  115,633   99.3%  82,947   99.0%  244,125   99.3%  168,941   99.6%  115,633   99.3%
COMPANIES  90,337   53.4%  54,010   46.4%  40,220   48.4%  130,455   53.1%  90,337   53.4%  54,010   46.7%
INDUSTRY AND COMMERCE  52,277   31.0%  29,490   25.4%  23,474   28.2%  67,530   27.4%  52,277   31.0%  29,490   25.6%
Food and beverages  8,469   5.0%  4,643   4.0%  3,679   4.5%  10,573   4.3%  8,469   5.0%  4,643   4.1%
Autoparts and accessories  1,979   1.2%  1,068   0.9%  1,028   1.2%  2,663   1.1%  1,979   1.2%  1,068   0.9%
Agribusiness capital assets  491   0.3%  317   0.3%  189   0.2%  684   0.3%  491   0.3%  317   0.3%
Industrial capital assets  2,349   1.4%  1,216   1.0%  1,109   1.3%  4,030   1.6%  2,349   1.4%  1,216   1.0%
Pulp and paper  1,214   0.7%  778   0.7%  811   1.0%  1,624   0.7%  1,214   0.7%  778   0.7%
Distribution of fuels  949   0.6%  552   0.5%  693   0.8%  1,592   0.6%  949   0.6%  552   0.5%
Electrical and electronic  3,996   2.4%  2,429   2.1%  1,837   2.3%  5,769   2.3%  3,996   2.4%  2,429   2.2%
Pharmaceuticals  1,291   0.8%  948   0.8%  903   1.1%  1,624   0.7%  1,291   0.8%  948   0.8%
Fertilizers, insecticides and crop protection  2,020   1.2%  1,281   1.1%  913   1.1%  1,398   0.6%  2,020   1.2%  1,281   1.1%
Tobacco  328   0.2%  328   0.3%  286   0.3%  506   0.2%  328   0.2%  328   0.3%
Import and export  1,856   1.1%  918   0.8%  742   0.9%  1,551   0.6%  1,856   1.1%  918   0.8%
Hospital care materials and equipment  465   0.3%  237   0.2%  212   0.3%  718   0.3%  465   0.3%  237   0.2%
Construction material  1,546   0.9%  808   0.7%  748   0.9%  3,496   1.4%  1,546   0.9%  808   0.7%
Steel and metallurgy  5,939   3.5%  2,826   2.4%  2,214   2.6%  5,584   2.3%  5,939   3.5%  2,826   2.4%
Wood and furniture  1,983   1.2%  1,047   0.9%  808   1.0%  2,238   0.9%  1,983   1.2%  1,047   0.9%
Chemical and petrochemical  4,705   2.8%  2,687   2.3%  2,656   3.2%  5,216   2.1%  4,705   2.8%  2,687   2.3%
Supermarkets  421   0.2%  193   0.2%  123   0.1%  988   0.4%  421   0.2%  193   0.2%
Light and heavy vehicles  3,731   2.2%  1,997   1.7%  1,439   1.7%  5,365   2.2%  3,731   2.2%  1,997   1.7%
Clothing  3,456   2.0%  2,060   1.8%  1,671   2.0%  5,496   2.2%  3,456   2.0%  2,060   1.8%
Other - commerce  2,197   1.3%  1,599   1.4%  527   0.6%  3,696   1.5%  2,197   1.3%  1,599   1.4%
Other - industry  2,890   1.7%  1,558   1.3%  886   1.1%  2,719   1.1%  2,890   1.7%  1,558   1.3%
SERVICES  27,718   16.2%  17,634   15.1%  11,495   13.8%  48,389   19.8%  27,718   16.2%  17,634   15.1%
Heavy construction (constructors)  1,817   1.1%  952   0.8%  509   0.6%  2,863   1.2%  1,817   1.1%  952   0.8%
Financial  3,614   2.1%  2,047   1.8%  1,223   1.5%  4,788   1.9%  3,614   2.1%  2,047   1.8%
Generation, transmission and distribution of eletric energy  2,698   1.6%  2,072   1.8%  1,617   1.9%  5,802   2.4%  2,698   1.6%  2,072   1.8%
Holding companies  2,090   1.2%  1,210   1.0%  637   0.8%  2,901   1.2%  2,090   1.2%  1,210   1.0%
Real estate agents  3,787   2.2%  2,603   2.2%  1,055   1.3%  7,049   2.9%  3,787   2.2%  2,603   2.2%
Media  1,582   0.9%  1,268   1.1%  1,159   1.4%  2,220   0.9%  1,582   0.9%  1,268   1.1%
Service companies  1,727   1.0%  1,141   1.0%  738   0.9%  3,166   1.3%  1,727   1.0%  1,141   1.0%
Health care  556   0.3%  377   0.3%  283   0.3%  1,329   0.5%  556   0.3%  377   0.3%
Telecommunications  969   0.6%  625   0.5%  979   1.2%  1,188   0.5%  969   0.6%  625   0.5%
Transportation  4,140   2.4%  2,457   2.1%  1,511   1.8%  9,765   4.0%  4,140   2.4%  2,457   2.1%
Other services  4,737   2.8%  2,882   2.5%  1,783   2.1%  7,318   3.0%  4,737   2.8%  2,882   2.5%
PRIMARY SECTOR  8,560   5.1%  5,511   4.7%  4,455   5.4%  13,276   5.4%  8,560   5.1%  5,511   4.8%
Agribusiness  6,910   4.1%  4,528   3.9%  3,423   4.2%  11,338   4.6%  6,910   4.1%  4,528   4.0%
Mining  1,649   1.0%  983   0.8%  1,033   1.2%  1,938   0.8%  1,649   1.0%  983   0.8%
OTHER COMPANIES  1,783   1.1%  1,376   1.2%  796   1.0%  1,260   0.5%  1,783   1.1%  1,376   1.2%
INDIVIDUALS  78,605   46.3%  61,622   53.0%  42,727   51.0%  113,670   46.2%  78,604   46.3%  61,622   53.1%
Credit cards  14,288   8.4%  11,391   9.8%  9,157   10.9%  30,781   12.4%  14,288   8.4%  11,391   9.8%
Consumer Loans/overdraft  17,488   10.3%  15,330   13.2%  13,106   15.7%  23,260   9.5%  17,488   10.3%  15,330   13.3%
Real estate financing  5,489   3.2%  4,260   3.7%  2,103   2.5%  7,386   3.0%  5,489   3.2%  4,260   3.7%
Vehicles  41,339   24.4%  30,642   26.3%  18,360   21.9%  52,243   21.3%  41,339   24.4%  30,642   26.3%
                                                
TOTAL
  169,700   100.0%  116,459   100.0%  83,759   100.0%  245,736   100.0%  169,700   100.0%  116,459   100.0%

 
6974
 

Rating of the Loan and Lease Portfolio

We present below the classification of our loan and lease portfolio based on the risk categories established by the Central Bank. The Central Bank categories apply to specific transactions and not to borrowers. In order to apply the Central Bank categories to transactions, we consider the classification of the borrower as a starting point. In addition, we also take into consideration any overdue time with respect to the transaction and the specific terms and purposes of the transactions (e.g., guarantees). The table below presents as of December 31, 20082009 and 20072008 our classification of the loan and lease portfolio, according to the Central Bank categories, and as of December 31, 20082009 non-accrual loans and leases and the allowance corresponding to the loans and leases classified within each Central Bank category.

 
(in millions of R$, except percentages)
 
(in millions of R$, except percentages)(in millions of R$, except percentages) 
 
2008
  2007  2009  2008 
Central Bank
categories
 
Loans and
leases
  
% of total
  
Non-accrual
loans and  leases
  
Allowance for
loan and lease
losses
  
Loans and
leases
  
% of total
  
Loans and
leases
  % of total  
Non-accrual
loans and leases
  
Allowance for
loan and lease
losses
  
Loans and
leases
  % of total 
AA  31,926   18.8%  -   -   19,124   16.4%  35,609   14.5%  -   -   31,926   18.8%
A  78,519   46.2%  -   (825)  58,360   50.1%  118,301   48.1%  -   (785)  78,519   46.3%
B  33,375   19.7%  -   (702)  23,195   19.8%  46,892   19.1%  -   (622)  33,375   19.6%
C  10,656   6.3%  -   (672)  5,324   4.6%  15,995   6.5%  -   (636)  10,656   6.3%
D  6,142   3.6%  1,844   (1,291)  3,462   3.0%  8,615   3.5%  2,260   (1,143)  6,142   3.6%
E  2,339   1.4%  898   (1,475)  2,170   1.9%  4,176   1.7%  1,602   (1,661)  2,339   1.4%
F  1,444   0.9%  760   (1,518)  1,517   1.3%  2,689   1.1%  1,445   (1,783)  1,444   0.9%
G  886   0.5%  715   (1,306)  649   0.6%  1,687   0.7%  1,241   (1,566)  886   0.5%
H  4,413   2.6%  3,362   (4,413)  2,658   2.3%  11,772   4.8%  8,951   (11,772)  4,413   2.6%
Total
  169,700   100.0%  7,579   (12,202)  116,459   100.0%  245,736   100.0%  15,499   (19,968)  169,700   100.0%

Non-accrual Loans
 
We consider all loans that are 60 days or more overdue as non-accrual loans and we discontinue accruing financial charges related to them. In 2008,2009, we did not have any individually material non-accrual loan.
 
Charge-offs
 
Loans and leases are charged off against the allowance when the loan is not collected or is considered permanently impaired. We normally charge off loans when they become 360 days overdue.overdue except for loans with original maturity in excess of 36 months that we charged off when they are overdue 540 days. However, charge-offs may be recognized earlier than 360 days if we conclude that the loan is not recoverable.

Loans and Leases Quality Information

The table below presents our non-accrual loans together with certain asset quality ratio for the years ended December 31, 2009, 2008, 2007, 2006 2005 and 2004.2005.

 
(in millions of R$, except percentages)
 
(in millions of R$, except percentages)(in millions of R$, except percentages) 
 
2008
  
2007
  
2006
  
2005
  
2004
  2009  2008  2007  2006  2005 
Non-accrual loans and foreclosed assets  7,760   5,012   4,231   2,223   1,378   15,717   7,760   5,012   4,231   2,223 
Non-accrual loans  7,579   4,777   3,938   1,981   1,196   15,499   7,579   4,777   3,938   1,981 
Foreclosed assets, net of reserves  181   235   293   242   182   218   181   235   293   242 
Allowance for loan losses  12,202   7,473   6,426   3,933   2,811   19,968   12,202   7,473   6,426   3,933 
Total loans and leases  169,700   116,459   83,759   55,382   42,682   245,736   169,700   116,459   83,759   55,382 
Non-accrual loans as a percentage of total loans  4.5%  4.1%  4.7%  3.6%  2.8%  6.3%  4.5%  4.1%  4.7%  3.6%
Non-accrual loans and foreclosed assets as a percentage of total loans  4.6%  4.3%  5.1%  4.0%  3.2%  6.4%  4.6%  4.3%  5.1%  4.0%
Allowance for loan losses as a percentage of total loans  7.2%  6.4%  7.7%  7.1%  6.6%  8.1%  7.2%  6.4%  7.7%  7.1%
Allowance for loan losses as a percentage of non-accrual loans  161.0%  156.4%  163.2%  198.5%  235.0%  128.8%  161.0%  156.4%  163.2%  198.5%
Allowance for loan losses as a percentage of non-accrual loans and foreclosed assets  157.2%  149.1%  151.9%  176.9%  204.0%  127.0%  157.2%  149.1%  151.9%  176.9%

 
7075
 

Allowance for Loan and Lease Losses

The table below sets forth allowance for loan and lease losses for the years ended December 31, 2009, 2008, 2007, 2006 2005 and 2004.2005.

 
(in millions of R$, except percentages)
 
(in millions of R$, except percentages)(in millions of R$, except percentages) 
 
2008
  
2007
  2006  
2005
  
2004
  2009  2008  2007  2006  2005 
Balance at the beginning of period  7,473   6,426   3,933   2,811   2,848   12,202   7,473   6,426   3,933   2,811 
                    
Charge-offs  (5,904)  (5,566)  (3,617)  (2,339)  (1,521)  (9,490)  (5,904)  (5,566)  (3,617)  (2,339)
Commercial                                        
Industrial and others  (2,069)  (1,921)  (1,770)  (1,037)  (469)  (3,883)  (2,069)  (1,921)  (1,770)  (1,037)
Import financing  (7)  (7)  -   -   (2)  (53)  (7)  (7)  -   - 
Real estate loans  (78)  (170)  (123)  (99)  (114)  (72)  (78)  (170)  (123)  (99)
Lease financing  (453)  (280)  (183)  (66)  (41)
Lease financing including vehicle  (1,465)  (453)  (280)  (183)  (66)
Government  -   -   (3)  -   -   -   -   -   (3)  - 
Individuals                                        
Overdraft  (587)  (679)  (365)  (381)  (196)  (903)  (587)  (679)  (365)  (381)
Financing  (1,218)  (1,239)  (564)  (463)  (499)  (1,606)  (1,218)  (1,239)  (564)  (463)
Credit card  (1,482)  (1,263)  (609)  (293)  (200)  (1,508)  (1,482)  (1,263)  (609)  (293)
Agricultural  (10)  (7)  -   -   -   (1)  (10)  (7)  -   - 
                    
Recoveries  1,272   1,071   963   824   617   1,884   1,272   1,071   963   824 
Commercial                                        
Industrial and others  254   103   132   210   45   255   254   103   132   210 
Real estate  166   169   161   116   89   207   166   169   161   116 
Direct lease financing  174   78   41   22   31 
Lease financing including vehicle  119   174   78   41   22 
Individuals                                        
Overdraft  232   194   161   152   159   398   232   194   161   152 
Financing  401   468   376   250   190   769   401   468   376   250 
Credit card  45   59   92   74   103   136   45   59   92   74 
                    
Net charge-offs  (4,632)  (4,495)  (2,654)  (1,515)  (904)  (7,606)  (4,632)  (4,495)  (2,654)  (1,515)
Allowance for loan losses  9,361   5,542   5,147   2,637   867 
                    
Provision for loan losses  15,372   9,361   5,542   5,147   2,637 
Balance at the end of period  12,202   7,473   6,426   3,933   2,811   19,968   12,202   7,473   6,426   3,933 
Ratio of charge-offs during the period to average loans outstanding during the period  4.2%  6.3%  5.6%  4.9%  4.2%  4.3%  4.2%  6.3%  5.6%  4.9%
Ratio of net charge-offs during the period to average loans outstanding during the period  3.3%  5.1%  4.1%  3.1%  2.5%  3.4%  3.3%  5.1%  4.1%  3.1%
Ratio of allowance for loan losses to total loans and leases  7.2%  6.4%  7.7%  7.1%  6.6%  8.1%  7.2%  6.4%  7.7%  7.1%

The table below sets forth our provision for loan and lease losses, charge-offs and recoveries included in our result of operations for the years ended December 31, 2009, 2008 2007 and 2006.2007.


  (in millions of R$, except percentages) 
  2008  2007  2006   2008/2007   2007/2006 
Provision for loan and lease losses  (9,361)  (5,542)  (5,147)  68.9%  7.7%
Loan charge-offs  (5,904)  (5,566)  (3,617)  6.1%  53.9%
Loan recoveries  1,272   1,071   963   18.8%  11.2%
Net charge-offs  (4,632)  (4,495)  (2,654)  3.0%  69.4%
(in millions of R$, except percentages) 
  2009  2008  2007   2009/2008   2008/2007 
Provision for loan and lease losses  (15,372)  (9,361)  (5,542)  64.2%  68.9%
Loan charge-offs  (9,490)  (5,904)  (5,566)  60.7%  6.1%
Loan recoveries  1,884   1,272   1,071   48.1%  18.8%
Net charge-offs  (7,606)  (4,632)  (4,495)  64.2%  3.0%

Our allowance for loan and lease losses is intended to cover probable credit losses inherent to our entire current portfolio.
 
In order to identify the risks and to assess the collection probability of the loan and lease portfolio, we segregate it into two main categories, wholesale and retail, considering the credit risk evaluation process. For each category there is a specific methodology to estimate the inherent losses. In the first category we include large corporate non-homogeneous loans representing significant credit exposures, that are reviewed on an individual basis. In the second category, that includes the homogeneous part of the credit portfolio comprised of small commercial and consumer loans, credits are reviewed on a portfolio basis.

 
7176
 

To determine the amount of allowance corresponding to the credits reviewed on an individual basis and considered to be impaired, we use methodologies that take into account both quality of the borrower, the nature of the transaction, including its collateral, to estimate expected cash flows of repayment from these loans. This evaluation presents the specific loss component of the allowance for loan and lease losses.
 
For credits reviewed on an individual basis and not considered to be impaired, we classify loans into a certain rating category based on several qualitative and quantitative factors applied through internally developed models. We estimate inherent losses for each rating category considering mainly market-wide experience, since we have not experienced corporate loan losses in frequencies that could serve as a statistical pool to estimate such losses.
 
To determine the amount of the allowance corresponding to credits reviewed on a portfolio basis, we segregate small homogeneous loans into different clustersportfolios based on the underlying risks and characteristics of each group. The allowance for loan losses is determined for each group through a process that takes into account historical delinquency and credit loss experience over the most recent years, captured by transition matrices and applied to the current group of the portfolio. As a result of this analysis, we determine estimated inherent losses for each group, which corresponds to our allowance for loan losses at each reporting date.
 
Although we revise our models on a continuing basis, the relatively short credit history under the new economic environment results in a degree of uncertainty. Therefore the results of the models are taken as the main reference. In determining the amount of the allowance for loan losses we consider judgementaljudgmental factors that reflect the impacts of current macro economy on credit and political conditions and performance trends of the cycle affecting each of the groups identified as well as our total portfolio.  This approach may lead to fluctuations in the relationship between our allowance and the portfolio, especially for creditors reviewed on a portfolio basis.
 
Based on information available regarding our borrowers, we believe that our aggregate allowance is sufficientappropriate to cover probable loan and lease losses.

During the year ended December 31, 2004 we charged-off creditslosses inherent in the total amount of R$ 1,521 million and as of December 31, 2004 our ratio of allowance for loan and lease losses to total loans and leases was 6.6%. This reduction in the ratio of allowance for loan and lease losses to total loans and leases resulted from the improvement in credit quality during 2004, highlighting the consistent reduction in delinquency during that year, mainly because of the favorable economic period the country was experiencing at the time. Also, this was a result of continuous efforts to enhance the quality of our credit portfolio, in order to obtain the best risk-return ratio in our operations.portfolio.

During the year ended December 31, 2005 we charged-offcharged off credits in the total amount of R$2,339 million and as of December 31, 2005 our ratio of allowance for loan and lease losses to total loans and leases was 7.1%. The increase in the ratio of allowance for loan and lease losses to total loans and leases was a result of the increase in the volume of credit operations, mainly as a result of our strategy to increaseof increasing our presence in the consumer credit segment, and a significant increase in the demand for credit from the retail segment. We have maintained our policy of continuously enhancing the quality of our credit portfolio, in order to obtain the best risk-return ratio from operations. Our recoveries presented a favorable performance,also improved mainly as a result of our continuous efforts to improve our recovery process, while preserving the relationship with our customers.
 
During the year ended December 31, 2006 we charged-offcharged off credits in thea total amount of R$ 3,617million3,617 million and as of December 31, 2006 our ratio of allowance for loan and lease losses to total loans and leases was 7.7%, compared to 7.1% the previous year.. The increase in the number of business units focused on serving customers from the several segments in which we operate hasoperated contributed to increases in loans and financing, with a significant growth in vehicle financing, personal loanloans and credit card operations. The change in the mix of our credit portfolio contributed to the increase in allowance for loan and leaseslease losses because allocating funds to transactions capable of generating greater financial margins simultaneously means being exposed to greater risks. We maintained our policy of enhancing credit quality, in order to obtain the best risk-return ratio from operations. The recovery of charged-off credits against the allowance for loan and lease losses showed a favorable performance. Our efforts to enhance recovery processes while preserving the relationship with customers showed positive results.

72
 
During the year ended December 31, 2007 we charged-offcharged off credits in the total amount of R$5,566 million and as of December 31, 2007 our ratio of allowance for loan and lease losses to total loans and leases was 6.4%, compared to 7.7% as of December 31, 2006.. The increase in the volume of credits written off in 2007 was a result of the growth of credit portfolio and the change in the mix of our credit portfolio, which occurred in the lastprior four years. However, the credit portfolio also presented a continuous improvement in quality indicators during the year as a result of the adoption of adequateimproved credit policies. Our continuously developing risk models have permitted us to reach our goals of credit portfolio increase with improvements in quality indicators. Therefore, the growth in expenses with provision for loan and lease losses in 2007 was low when compared to the growth in our credit portfolio. Also, it is important to highlight the improvement of our collection efforts that caused an increase in the recovery of credits previously written off as losses.
 
During the year ended December 31, 2008 we charged-offcharged off credits in the total amount of R$5,904 million and as comparedof December 31, 2008 our ratio of allowance for loan and lease losses to R$ 5,566 million in 2007.total loans and leases was 7.2%. The relatively small increase in our charge-off credits in 2008, in a environment where our portfolio has been growing significantly, was due to the improved performance of our portfolio and collection activities during that year, mainly in the first nine months of the year. During the fourth quarter, with the worsening of the global economic crisis we increased the balance of allowance for loans and lease losses to adapt to the new economic scenario of increased credit risk in our loan and lease portfolio. As a consequence, our ratio of allowance for loan and lease losses to total loans and leases was 7.2% as of December 31, 2008, compared to 6.4% as of December 31, 2007.
 
77

During the year ended December 31, 2009 we charged off credits in the total amount of R$9,490 million and as of December 31, 2009 our ratio of allowance for loan and lease losses to total loans and leases was 8.1%. The increase in losses reflects the adverse economic environment observed during the first part of 2009 and occurred in accordance with our estimates of the economic conditions existing in December 2008. Recent data indicate that leading indicators for default rates, such as first payment default rates, improved and we believe that this is a result of increased selectivity in our origination policies we applyed since late 2008, our ongoing development of risk analysis procedures and an overall improvement in macroeconomic conditions in Brazil.
Allocation of the Allowance for Loan and Lease Losses
 
The following table sets forth our allocation of the allowance for loan and lease losses as of December 31, 2009, 2008, 2007, 2006 2005 and 2004.2005. The allocated amount of the allowance is expressed as a percentage of the related loan and lease amount with the corresponding percentage of the loan and lease category to total loans and leases.

 
7378
 
 
 
(in millions of R$, except percentages)
 
(in millions of R$, except percentages)
(in millions of R$, except percentages)
 
 
2008
  
2007
  
2006
  
2005
  
2004
  2009  2008  2007  2006  2005 
 
Allocated
allowance
  
Allocated
allowance as a
% of total loans
and leases
  
Loans category
as a % of total
loans (1)
  
Allocated
allowance
  
Allocated
allowance as a
% of total loans
and leases
  
Loans category
as a % of total
loans (1)
  
Allocated
allowance
  
Allocated
allowance as a
% of total loans
and leases
  
Loans category
as a % of total
loans (1)
  
Allocated
allowance
  
Allocated
allowance as a
% of total loans
and leases
  
Loans category
as a % of total
loans (1)
  
Allocated
allowance
  
Allocated
allowance as a
% of total loans
and leases
  
Loans category
as a % of total
loans (1)
  
Allocated
allowance
  
Allocated
allowance  as a 
% of  total loans
and leases
  
Loans  category 
as  a % of total
loans (1)
  
Allocated
allowance
  
Allocated
allowance  as a 
% of  total loans
and leases
  
Loans  category 
as  a % of total
loans (1)
  
Allocated
allowance
  
Allocated
allowance  as a
% of  total loans
and leases
  
Loans  category
as  a % of total
loans (1)
  
Allocated
allowance
  
Allocated
allowance  as a 
% of  total loans
and leases
  
Loans  category
 as  a % of total
loans (1)
  
Allocated
allowance
  
Allocated
allowance  as a
% of  total loans
and leases
  
Loans  category
as  a % of total
loans (1)
 
Type of loan                                                                                          
Commercial                                                                                          
Industrial and other  2,399   1.4%  38.4%  1,250   1.1%  35.2%  1,284   1.5%  35.3%  855   1.5%  36.1%  691   1.6%  37.9%  3,334   1.4%  42.4%  2,399   1.4%  38.4%  1,250   1.1%  35.2%  1,284   1.5%  35.3%  855   1.5%  36.1%
Import financing  10   0.0%  2.1%  6   0.0%  1.1%  8   0.0%  0.8%  3   0.0%  0.7%  7   0.0%  2.4%  11   0.0%  0.8%  10   0.0%  2.1%  6   0.0%  1.1%  8   0.0%  0.8%  3   0.0%  0.7%
Export financing  135   0.1%  5.7%  75   0.1%  2.8%  7   0.0%  4.0%  6   0.0%  3.9%  7   0.0%  7.7%  127   0.1%  2.8%  135   0.1%  5.7%  75   0.1%  2.8%  7   0.0%  4.0%  6   0.0%  3.9%
Real estate loans, primarily residential housing loans  171   0.1%  3.8%  199   0.2%  4.1%  267   0.3%  3.0%  156   0.3%  3.6%  166   0.4%  4.4%  209   0.1%  4.5%  171   0.1%  3.8%  199   0.2%  4.1%  267   0.3%  3.0%  156   0.3%  3.6%
Lease financing  1,454   0.9%  24.6%  862   0.7%  25.4%  401   0.5%  19.4%  234   0.4%  15.0%  202   0.5%  9.2%  2,521   1.0%  19.2%  1,454   0.9%  24.6%  862   0.7%  25.4%  401   0.5%  19.4%  234   0.4%  15.0%
Government  2   0.0%  0.4%  1   0.0%  0.7%  1   0.0%  1.0%  3   0.0%  2.3%  12   0.0%  2.3%  -   0.0%  0.7%  2   0.0%  0.4%  1   0.0%  0.7%  1   0.0%  1.0%  3   0.0%  2.3%
Individuals:                                                                                                                        
Overdraft  2,290   1.3%  2.1%  993   0.9%  2.4%  993   1.2%  3.0%  553   1.0%  3.6%  265   0.6%  3.9%  1,319   0.5%  1.7%  2,290   1.3%  2.1%  993   0.9%  2.4%  993   1.2%  3.0%  553   1.0%  3.6%
Financing  4,042   2.4%  11.9%  2,975   2.6%  15.5%  2,511   3.0%  18.6%  1,718   3.1%  22.6%  1,165   2.7%  19.7%  6,382   2.6%  13.3%  4,042   2.4%  11.9%  2,975   2.6%  15.5%  2,511   3.0%  18.6%  1,718   3.1%  22.6%
Credit Card  1,564   0.9%  8.4%  1,045   0.9%  9.8%  894   1.1%  10.9%  324   0.6%  7.4%  213   0.5%  6.3%  5,309   2.2%  12.5%  1,564   0.9%  8.4%  1,045   0.9%  9.8%  894   1.1%  10.9%  324   0.6%  7.4%
Agricultural  135   0.1%  2.6%  67   0.1%  3.0%  60   0.1%  4.1%  81   0.2%  4.8%  83   0.2%  6.2%  756   0.3%  2.1%  135   0.1%  2.6%  67   0.1%  3.0%  60   0.1%  4.1%  81   0.2%  4.8%
Total
  12,202   7.2%  100.0%  7,473   6.4%  100.0%  6,426   7.7%  100.0%  3,933   7.1%  100.0%  2,811   6.6%  100.0%  19,968   8.1%  100.0%  12,202   7.2%  100.0%  7,473   6.4%  100.0%  6,426   7.7%  100.0%  3,933   7.1%  100.0%
(1) Excludes non-accrual loans.

 
7479
 

Average Deposit Balances and Interest Rates

The table below sets forth the average balances of deposits together with the average interest rates paid for each period presented.

 
(in millions of R$, except percentages)
 
(in millions of R$, except percentages)(in millions of R$, except percentages) 
 2008  2007  2006  2009  2008  2007 
 
Average
balance
  
Average rate
  
Average
balance
  
Average rate
  
Average
balance
  Average rate  
Average
balance
  Average rate  
Average
balance
  Average rate  
Average
balance
  Average rate 
Non-interest-bearing deposits 21,198     18,364     13,016      23,799      21,198      18,364    
Demand deposits 20,121     17,165     12,309      22,821      20,121      17,165    
Other deposits 1,077     1,199     707      978      1,077      1,199    
Interest-bearing deposits 74,390  8.38% 45,287  7.75% 42,173  9.37%  159,296   7.4%  74,390   8.4%  45,287   7.8%
Deposits from banks 1,461  16.15% 3,588  7.53% 3,118  3.59%  2,605   12.9%  1,461   16.1%  3,588   7.5%
Savings deposits 29,509  6.64% 25,256  6.26% 21,797  6.57%  40,998   5.9%  29,509   6.6%  25,256   6.3%
Time deposits 43,421  9.30% 16,443  10.08% 17,258  13.94%  115,693   7.8%  43,421   9.3%  16,443   10.1%
Total 95,588  8.38% 63,650  7.75% 55,189  9.37%  183,095       95,588       63,650     

Maturity of Deposits

The table below sets forth the maturity distribution of our deposits as of December 31, 2008.2009.

 (in millions of R$) 
(in millions of R$)(in millions of R$) 
 
Due in three
months or less
  
Due after three
months to six
months
  
Due after six
months to one
year
  
After one
Year
  Total  
Due in three
months or less
  
Due after three
months to six
months
  
Due after six
months to one
year
  
After one
year
  Total 
Non-interest-bearing deposits 24,106  -  -  -  24,106   25,884   -   -   -   25,884 
Demand deposits 23,041              23,041   24,887               24,887 
Other deposits 1,065              1,065   997               997 
Interest-bearing deposits: 48,167  15,526  9,062  53,941  126,696   74,095   7,310   14,785   68,834   165,024 
Savings deposits 31,896  -          31,896   48,222   -           48,222 
Time deposits 15,822  14,656  8,615  53,664  92,757   25,001   6,881   14,243   68,685   114,810 
Deposits from banks 449  870  447  277  2,043   872   429   542   149   1,992 
Total 72,273  15,526  9,062  53,941  150,802   99,979   7,310   14,785   68,834   190,908 

The table below sets forth the maturity of outstanding time deposits with balances in excess of US$100,000 (or its equivalent) issued by us as of December 31, 2008.2009.

(in millions of R$) 
Maturity within three months  16,85514,878 
Maturity after three months to six months  4,6683,901 
Maturity after six months to twelve months  7,2929,517 
Maturity after twelve months  43,91858,519 
Total time deposits in excess of US$100,000  72,73386,815 

7580

Capital
 
Specific regulatory capital requirements are discussed in “Item 4B. Business Overview – Regulation and Supervision – Regulatory Capital Requirements.” Additional information on capital requirements is discussed in note 31 to our consolidated financial statements.
 
Minimum Capital Requirements
 
The following table below presentssets forth our capital positions of total risk-weighted assets, as well as our minimum capital requirements under Central Bank rules, in each case as of December 31, 2009, 2008 and 2007, and 2006, the minimum regulatory capital required in accordance with Central Bank rules, the regulatory capital for purposes of computing the capital to risk-weighted assets, the capital to risk-weighted assets ratio, and the excess of our regulatory capital as compared to the minimum required. The information is presentedeach case on a fully consolidated basis, as required by the Central Bank.including our financial and non-financial subsidiaries.
 
Taking into account the agreement to combine the operations of Itaú and Unibanco Financial Groups entered into in November 2008, referred to in “Item 4A. History and Development of the Company – Recent Developments – Association between Itaú and Unibanco Financial Groups” and “Item 10C. Material Contracts – Association between Itaú and Unibanco Financial Groups” since November 2008we have presented information on minimum capital requirements is being presented to the Central Bank only on a combined basis of Itaú and Unibanco. The presentation of this information on a combined basis was authorized by the Central Bank as fromUnibanco since November 2008 in spite of approval for the transaction not having yet been granted by the Central Bank and as information useful in the analyses by the Central Bank of the request of approval. Since November 2008 we have discontinued to present to the Central Bank information on minimum regulatory requirements only for Itaú and the information below is presented on a combined basis for Itaú and Unibanco.2008. The comparative information for 2007 corresponds only to Itaú Unibanco Holding and, as a result, it may not be directly comparable with the information in 2008.2008 .

  (in millions of R$, except percentages) 
  Full consolidation 
  
2008
  2007  2006 
Regulatory capital (1)  67,995   37,095   30,478 
Minimum regulatory capital required (2)  45,819   22,850   19,446 
Capital to risk-weighted assets ratio  16.3%  17.9%  17.2%
Excess of regulatory capital over minimum regulatory capital required  22,176   14,245   11,032 
(in millions of R$, except percentages)
 
  Full consolidation 
 2009  2008  2007 
Tier 1 Capital  57,706   52,156   29,611 
Tier 2 Capital  12,837   15,926   7,721 
Tier 1 plus Tier 2 Capital  70,543   68,082   37,332 
Adjustments  (28)  (87)  (237)
Our regulatory capital (1)  70,515   67,995   37,095 
Minimum regulatory capital required (2)  46,513   45,819   22,850 
Excess over minimum regulatory capital required  24,002   22,176   14,245 
Total risk-weighted assets  422,840   416,540   207,726 
Our regulatory capital to risk-weighted assets ratio  16.7%  16.3%  17.9%
(1) Based on Central Bank requirements (see note 31 to our consolidated financial statement).
(2) The minimum requirement in Brazil was 11% as of December 31, 2009, 2008 2007 and 2006.2007.

 
7681
 
 
Short-term Borrowings and Securities Sold Under Repurchase Agreements

Our federal funds purchased and securities sold under repurchase agreements and short-term borrowings, excluding other liabilities, totaled R$ 103,769146,899 million, R$ 71,576103,769 million and R$ 41,87171,577 million as of December 31, 2009, 2008 2007 and 2006,2007, respectively. The principal categories of short-term borrowings are securities sold under repurchase agreements and trade finance borrowings and, to a lesser extent, commercial paper, mortgage notes and local on-lendings.

The table below presents a summary of the primary short-term borrowings for the periods indicated.

(in millions of R$, except percentages) 
  2009  2008  2007 
Securities sold under repurchase agreements         
Amount outstanding  66,174   49,492   23,399 
Maximum amount outstanding during the period  84,259   52,727   36,182 
Weighted average interest rate at period-end  3.77%  9.95%  11.18%
Average amount outstanding during period  70,032   43,324   23,011 
Weighted average interest rate  10.9%  14.3%  15.1%
Trade finance borrowings            
Amount outstanding  6,093   9,166   5,805 
Maximum amount outstanding during the period  10,746   10,028   7,633 
Weighted average interest rate at period-end  2.27%  5.04%  4.74%
Average amount outstanding during period  6,260   6,571   5,461 
Weighted average interest rate  3.29%  4.55%  4.62%
Local on-lendings            
Amount outstanding  215   122   70 
Maximum amount outstanding during the period  223   135   85 
Weighted average interest rate at period-end  5.69%  8.72%  5.94%
Average amount outstanding during period  205   70   49 
Weighted average interest rate  5.56%  6.91%  6.25%
Mortgage notes            
Amount outstanding  7,854   3,035   282 
Maximum amount outstanding during the period  9,663   3,178   523 
Weighted average interest rate at period-end  7.30%  10.10%  9.18%
Average amount outstanding during period  7,511   2,139   328 
Weighted average interest rate  8.12%  10.06%  11.10%
Commercial paper            
Amount outstanding  -   60   3.00 
Maximum amount outstanding during the period  -   111   3.00 
Weighted average interest rate at period-end  -   3.73%  5.67%
Average amount outstanding during period  -   64   3.00 
Weighted average interest rate  -   3.73%  5.67%
Euronotes            
Amount outstanding  414   576   186 
Maximum amount outstanding during the period  1,800   873   205 
Weighted average interest rate at period-end  1.43%  3.52%  6.48%
Average amount outstanding during period  949   285   174 
Weighted average interest rate  2.39%  2.32%  6.01%
Securities issued and sold to customers under repurchase agreements            
Amount outstanding  65,520   40,977   41,174 
Maximum amount outstanding during the period  66,317   60,307   41,174 
Weighted average interest rate at period-end  8.69%  13.47%  11.06%
Average amount outstanding during period  57,651   50,605   37,040 
Weighted average interest rate  8.99%  12.45%  11.53%
Fixed rate notes            
Amount outstanding  408   133   - 
Maximum amount outstanding during the period  671   133   - 
Weighted average interest rate at period-end  5.59%  6.18%  - 
Average amount outstanding during period  526   92   - 
Weighted average interest rate  4.94%  8.30%  - 
Other short-term borrowings            
Amount outstanding  221   208   658 
Maximum amount outstanding during the period  226   208   705 
Weighted average interest rate at period-end  7.54%  0.44%  21.94%
Average amount outstanding during period  205   208   646 
Weighted average interest rate  8.47%  0.44%  22.07%
Total amount outstanding  146,899   103,769   71,577 
  (in millions of R$, except percentages) 
  
2008
  2007  2006 
Securities sold under repurchase agreements         
Amount outstanding  49,492   23,399   10,888 
Maximum amount outstanding during the period  52,727   36,182   15,483 
Weighted average interest rate at period-end  9.95%  11.18%  13.17%
Average amount outstanding during period  43,324   23,011   9,983 
Weighted average interest rate  9.95%  11.18%  13.17%
Trade finance borrowings            
Amount outstanding  9,166   5,805   1,980 
Maximum amount outstanding during the period  10,028   7,633   2,394 
Weighted average interest rate at period-end  5.04%  4.74%  5.78%
Average amount outstanding during period  6,571   5,461   1,633 
Weighted average interest rate  4.55%  4.62%  5.19%
Local on-lendings            
Amount outstanding  122   70   78 
Maximum amount outstanding during the period  135   85   142 
Weighted average interest rate at period-end  8.72%  5.94%  5.74%
Average amount outstanding during period  70   49   47 
Weighted average interest rate  6.91%  6.25%  7.28%
Mortgage notes            
Amount outstanding  3,035   282   520 
Maximum amount outstanding during the period  3,178   523   520 
Weighted average interest rate at period-end  10.10%  9.18%  12.37%
Average amount outstanding during period  2,139   328   346 
Weighted average interest rate  10.06%  11.10%  12.35%
Commercial paper            
Amount outstanding  60   3   - 
Maximum amount outstanding during the period  111   3   - 
Weighted average interest rate at period-end  3.73%  5.67%  - 
Average amount outstanding during period  64   3   - 
Weighted average interest rate  3.73%  5.67%  - 
Euronotes            
Amount outstanding  576   186   43 
Maximum amount outstanding during the period  873   205   237 
Weighted average interest rate at period-end  3.52%  6.48%  5.30%
Average amount outstanding during period  285   174   88 
Weighted average interest rate  2.32%  6.01%  5.03%
Securities issued and sold to customers under repurchase agreements            
Amount outstanding  40,977   41,174   28,158 
Maximum amount outstanding during the period  60,307   41,174   29,210 
Weighted average interest rate at period-end  13.47%  11.06%  13.05%
Average amount outstanding during period  50,605   37,040   19,154 
Weighted average interest rate  12.45%  11.53%  13.05%
Fixed rate notes            
Amount outstanding  133   -   119 
Maximum amount outstanding during the period  133   -   344 
Weighted average interest rate at period-end  6.18%  -   13.40%
Average amount outstanding during period  92   -   156 
Weighted average interest rate  8.30%  -   13.40%
Other short-term borrowings            
Amount outstanding  208   658   85 
Maximum amount outstanding during the period  208   705   336 
Weighted average interest rate at period-end  0.44%  21.94%  3.85%
Average amount outstanding during period  208   646   177 
Weighted average interest rate  0.44%  22.07%  9.30%
Total amount outstanding  103,769   71,577   41,871 

 
7782
 

4C.Organizational Structure
 
We are a financial holding company controlled by IUPAR, a holding company jointly controlled by Itaúsa and Companhia E. Johnston, de Participações, which is a holding company controlled by the former controlling stockholdersshareholders of Unibanco, the Moreira Salles Family.family.  See “Item 4B.  Business Overview – Our Ownership Structure” and “Item 7A.  Major Stockholders.Shareholders.” Our list of significant subsidiaries as of December 31, 20082009 is included as Exhibit 8.1 to this  annual report.  This list contains information relating to our significant subsidiaries in accordance with our consolidated financial statements as of and for the years ended December 31, 20082009 and 2007, which do not include any of the former significant subsidiaries of the Unibanco financial group.  For further information, see “Item 4A.  Recent Developments - Association between Itaú and Unibanco Financial Groups -U.S. GAAP.”2008.

4D.Property, Plants and Equipment
 
As of December 31, 2008, we ownedWe own our principal executive offices located in São Paulo, Brazil and a number of other administrative buildings.  The main offices and the main activities conducted in each of them are:
 
Itaú Unibanco Centro Empresarial, Itaú Conceição, located at Praça Alfredo Egydio de Souza Aranha, 100, São Paulo – head office, commercial department, back-offices and main administrative departments,departments;
 
Centro Administrativo Tatuapé, located at Rua Santa Virgínia/Rua Santa Catarina, 299, São Paulo – administrative center,center;
 
Centro Técnico Operacional, located at Avenida do Estado, 5,533, São Paulo – data processing Center, andcenter;
 
The wholesale and investment bank activities at our leased office, located at Avenida Brigadeiro Faria Lima, 3,311 and 3,400, 3rd through 12th floor, São Paulo;
Edifício WTorre, located at Avenida das Nações Unidas, 7,815, 3rd through 13th floor, São Paulo – administrative center;
Centro Administrativo Unibanco, located at Rua João Moreira Sales, 130 – Jardim Monte Alegre – São Paulo.Paulo – administrative center and data processing center;
 
As of December 31, 2008 we
Edifício Unibanco, located at Av. Eusébio Matoso, 891 – Pinheiros – São Paulo – administrative center;
Edifício Boa Vista, located at Rua Boa Vista, 162 – São Paulo – administrative center; and
Edifício Barão de Iguape, located at Praça do Patriarca, 30 / Rua Direita, 250 – São Paulo – administrative center.
We also leasedlease a portion of our administrative offices and the majority of our branches at competitive market prices from third parties and under renewable leases with terms ending from the first semester of 20092010 to the third quarter of 2027. As of that date, we owned 21%2029.  We own 16.0% of our total administrative offices and branches (including electronic service points, banking sites and parking lots) and leasedlease the remainder 79%84.0%.  We also owned 46%own 33.0% of our central administrative buildings and branches and leasedlease the remainder 54%67.0%.
 
ITEM 4A     UNRESOLVED STAFF COMMENTS
 
None.

ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
 
5A.Operating Results
 
The following discussion should be read in conjunction with our consolidated financial statements and accompanying notes and other financial information included elsewhere in this annual report, and in conjunction with the information included under “Item 3A. Selected Financial Data” and “Item 4B. Selected Statistical Information.”
 
On November 12, 2008, Itaú Unibanco entered into an agreement with Itaúsa, our controlling shareholder at that time, pursuant to which Itaú Unibanco acquired part of Itaúsa’s ownership interest in Itaúsa Export and Itaúsa Europa. The transaction is accounted for as a transaction between entities under common control that resulted in a change in reporting entity under U.S. GAAP. As a result, retroactively restatement of prior year financial statement is required to present the combined financial statement of Itaú Unibanco with Itaúsa Export and Itaúsa Europa as if the transaction had taken place on the beginning of the first period presented Accordingly, the U.S. GAAP financial statements as of and for the years ended December 31, 2007 and 2006, included in this chapter were adjusted to reflect the impact of this acquisition. See note 3 to the financial statements for additional information.
78
The retroactive restatement has resulted in an increase in our net income for the years ended December 31, 2007 and 2006 of R$ 175 million and R$ 141 million, respectively, an increase in our shareholders equity as of December 31, 2007 and 2006 of R$ 903 million and R$ 773 million, respectively, and an increase in our total assets as of December 31, 2007 of R$ 10,276 million.
Overview
 
Our results of operations are significantly affected by the following key factors, among others.

 
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Effects of the Global Financial Markets Crisis on our Financial Condition and Results of Operations
 
The global financial markets crisis has significantly affected the world economy since the last quarter of 2008.  The crisis has led to recessions and increasing unemployment in the world’s leading economies, a reduction in investments on a global scale, a decrease in commodities prices and a sharp decline in credit availability and liquidity, as well as a general reduction in the levels of transactions observed in the capital markets worldwide. The credit markets are still resuming and the capital markets are starting to recover around the world.
 
A numberSince the second half of major financial institutions, including some2009 important evidences of recovery had accumulated and positive growth on world GDP is expected for 2010. Not all countries are recovering at the largest global commercialsame pace. Particularly, the new industrialized countries in South East Asia, Latin America and, particularly Brazil are showing vigorous recovery while Europe lags behind. Some central banks investment banks, mortgage lenders, mortgage guarantorsare already removing their expansionary stance in monetary policy. Countries such as Australia and insurance companies, are experiencing significant difficulties.  In recent months, thereChina have already taken steps to reduce the monetary stimulus and the US has increased the rediscount rate in an early move to announce future exit from expansionary policy. Nonetheless important risks have been losses at several financial institutions and numerous institutions have sought additional capital. Central banks around the world have coordinated efforts to increase liquidityaccumulated in the financial markets by taking measures such as increasing the amounts they lend directly to financial institutions, lowering interest rates and significantly increasing temporary reciprocal currency arrangements.  In an attempt to prevent the failureaftermath of the financial system, governments throughoutcrisis in Europe, such as the high debt levels that impairs growth and increases the risk of sovereign default. Particularly the markets have increased the risk premiums on debt of Greece and Portugal and in lesser extend Italy, Ireland and Spain. Portugal was downgraded to A+ by Standard and Poor’s in January 2009, and more recently by Fitch on March 2010 from AA to AA-.  Greece suffered a one notch downward reclassification to A2 by Moody’s and to BBB- by Fitch and Standard & Poor’s. The debt of these countries is held by international financial institutions, what may impact the results of banks and investment funds. Although the European Union is prepared to face this difficulties, a financial deterioration of any of these countries may impair the world have intervened on an unprecedented scale.  They have taken equity stakes in several financial institutions, announced programs to guarantee financial institutions debt, increased consumer deposit guaranteesrecovery and brokered acquisitionsas consequence the recovery of struggling financial institutions, among other measures.
The effects of the global financial markets crisis hit Brazil intensively in the last quarter of 2008 and since then have been moderate. The quality of banking assets deteriorated at the end of 2008, but given the estimated 5.1% increase in the Brazilian GPD in 2008, large Brazilian financial institutions were not significantly affected by the crisis. A number of smaller and mid-size banks suffered from a lack of credit availability, but the Brazilian financial system as a whole did not suffer the same impact as the U.S. and European financial systems.  The relatively strong domestic demand for good and services produced by firms and banks has helped to reduce the impact of the international crisis on the Brazilian market.  Nonetheless, some export-oriented companies in the commodities and manufacturing sectors suffered decreases in revenues due to decreased demand in the international markets.  While liquidity in the banking industry was to some extent affected by the global financial markets crisis, the Central Bank provided sufficient liquidity to the Brazilian market throughout 2008.Brazil.
 
Our results of operations were negatively affected by the global financial markets crisis and the change in the Brazilian economic scenario. In addition, we expectThe prospects for 2010 are much better than they were for 2009, to be a difficult year due tobut risks remain and the slowdownfiscal problems in the global economy, the increase in the unemployment rate, the decrease in the purchasing power, and, as a result, the increase in credit risk.advance economies will impact future growth.

Other Factors Affecting Financial Condition and Results of Operations
 
As a Brazilian bank with most of our operations in Brazil, we are significantly affected by economic, political and social conditions in Brazil. In recent years, we have benefited from aBrazil’s generally stable economic environment, with increasingaverage annual GDP growth of 4% from 2004 to 2009, which led to increased bank loans and deposits duedeposits. The downward trend in inflation in recent years has allowed the Central Bank to ease the sustainedshort-term benchmark interest rate to 8.75% at December 2009 from 17.75% in December 2004. This reduction of interest rates lowered the cost of credit for households and businesses. As a proportion of GDP, bank lending expanded to 45.0% in 2009 from 24.5% in 2004.
In 2009, the Brazilian economy stagnated in the wake of the international financial crisis; however, the recession lasted a few quarters until the second quarter of 2009 before the Brazilian economy emerged from recession and regained its growth momentum. Notwithstanding the relatively brief effects of over 3% per annum since 2004, reaching 5.7% in 2007 and 5.1% in 2008.  We have also beenthe international crisis, we remain exposed to exchange rate volatility ofin the Brazilian currency, the real, relative with respect to the U.S. dollar, the Euro and the yen,Yen. We also continue to be exposed to inflation, tax-policy changes and regulatory changes, taken bywhich are sometimes adopted on short notice.
Recent changes in tax policy that affect financial operations include the Brazilian government, sometimes adopted at short notice.
79
Thesenate’s elimination of the provisional contribution on financial transactions (Contribuição Provisória sobre a Movimentação ou Transmissão de Valores e de Créditos e Direitos de Natureza Financeira), or CPMF, in 2008. CPMF was a temporary tax instituted in 2008 reduced tax revenues1992 that was payable on certain banking transactions at a rate of 0.38% of the Brazilian government by R$ 36.5 billion.financial value of the transaction. The CPMF tax was payable on all transfers from checking account transfers at a rate of 0.38%,accounts and financial institutions were responsible for the collection and remittance of the CPMF tax to the Brazilian tax authorities. To compensate the elimination of the CPMF tax,CPMF. In response, the Brazilian government increased the CSLL in May 2008 from 9% to 15% and the IOF beginning in January 2008. Also, in the aftermath of the international crisis, in October 2010, the government imposed a 2% IOF tax rate on foreign investment flows to the financial and capital markets. It also extended the IOF at a 1.5% tax rate to domestically negotiated operations backed by depositary receipts. The CSLL is a tax on income with specific social contributiontax rates for bankbanking institutions, andwhile the IOF is a tax levied on bank loans. The Central Bank’s decision on January 31, 2008 to impose new required reserves on deposits from leasing companies was another measure that may negatively affect the profitability of some financial operations.  The measure increased the cost of funding forforeign exchange transactions, loan underwriting. In addition to the increase in taxes, particularly the increase in the IOF tax, the increase in the cost of credit can also be attributed to an increase in delinquency rates on loans to individuals in the Brazilian banking.transactions, insurance transactions and transactions involving bonds and securities.

 
The decline in both inflation and inflation expectations since 2003 has allowed the Central Bank to decrease its overnight interest rate from 26.5% in June 2003 to 13.75% in December 2008. This reduction of interest rates eased the cost of credit to individuals and corporations.  This downward trend in interest rates created a favorable environment to banking credit that continued until the third quarter of 2008.  During 2008, banking loans increased from 34.2% of the Brazilian GDP in December 2007 to 41.3% in December 2008.  As a result, domestic demand has grown at annual rates above 5% since 2004 fostering GDP growth rates of 4.7% per annum on average during the same period. In the last quarter of 2008,
84

To moderate the impact of the decreaseinternational crisis, the Central Bank responded in 2009 with a number of measures. Besides reducing the export demand,SELIC rate, the restrains onCentral Bank deployed part of its international reserves to replace international credit lines impacted by Lehman Brothers Holdings Inc.’s bankruptcy and reduced reserve requirements with the more uncertain environment reducedspecific purpose of acquiring assets from small banks and increasing the rateinsurance limit for small banks’ time deposits. Those initiatives, along with fiscal measures, contributed to keeping the recession relatively brief (mostly concentrated between the fourth quarter of growth2008 through the first quarter of new loans.
Since August 2008,2009) and ensured a strong recovery in the real has depreciated 30% relative tosecond half of 2009. These counter-cyclical measures were possible by the U.S. dollar (there has been an appreciationgood stance of monetary and fiscal policy at the beginning of the U.S. dollar relativecrisis which allowed the government to react to adversity with expansionary demand policies. This was the real of 43%).  This trend associated with a decrease in investment and loan flows brought volatilityfirst time that the Brazilian government was prepared to the value of the real, especially during the last quarter of 2008.neutralize an adverse shock.
 
The primary fiscal surplus remained stable at 4%crisis has not had a significant effect on Brazil’s financial institutions, as most Brazilian banks generally had no material exposure to U.S. mortgages. We have not undertaken any credit operations in the U.S. market, including collateralized debt obligations. However, the recent crisis in the United States mortgage market could affect the market value of the GDP in December 2008. Nevertheless, the debt as a proportion of GDP fell from 42% in December 2007 to 36% in December 2008,Brazilian institutions, due to the exchange rate depreciation andincreased volatility in international markets. There is also a net creditor position in foreign currency by the government. Since December 2008, as a result of the decrease in the taxes paid torisk that the Brazilian government duechooses to adopt regulatory measures to avoid abrupt shifts in international financial flows, with potentially adverse effects on our operations.
Despite Brazilian regulators’ successful management of the crisis, a number of regulatory changes for the local banking sector are under consideration, such as limits to financial institution compensation packages, more disclosure of operations with derivatives and possible modifications to capital requirement models. These changes have the potential to adversely affect our operations and profitability.
One consequence of the crisis in Brazil has been a decline in fiscal revenues and, consequently, a reduction in the primary surplus. In 2009, the public sector posted a primary surplus of 2.1% of GDP, lower than the recent historical average (3.5% of GDP from 2003 to 2008). The resumption of stricter fiscal policy targets is necessary for returning to the downward trend in the debt to GDP ratio, which rose to 42.9% at the end of 2009 from 38.4% at the end of 2008, after several years of continuous reduction. Fiscal responsibility is important to safeguard the sovereign investment grade rating of Brazil and to bolster the fiscal flexibility necessary to manage future economic slowdown,downturns.
Another effect of the primarycrisis has been a contraction in export revenues to US$152,995 millions in 2009 from US$197,942 millions in 2008. The trade balance surplus remained almost stable at US$25,347 millions from US$24,836 millions in 2008, but the current account (net balance from trade of goods and services plus international transfers) posted a deficit of 1.6% of GDP, a negative number for the second consecutive year in 2009. The deficit is expected to decreasewiden in 2010. Even though Brazil’s external solvency improved considerably with US$238,520 millions in international reserves and end 2009 at 2.2% ofonly US$202,329 millions in external debt, the Brazilian GDP, a significant fall of the primary surplus compared to the previously estimated 4.0% of the Brazilian GDP.recent external account results could increase exchange-rate volatility.
 
As ofOn April 30, 2008, Standard & Poors raisedPoor’s Rating Services upgraded the sovereign long-term credit rating of theBrazil’s sovereign foreign currency debt of the Brazilian governmentto BBB- from BB+, lifting it to BBB-, the initial rating referred to as investment grade. On May 29, 2008, a second rating agency, Fitch Ratings (“Fitch”) followed suit and upgraded theBrazil to investment grade, raising its rating of Brazilto BBB- from BB+. On September 22, 2009, Moody’s Investor Service Inc. (“Moody’s”) raised the nation’s sovereign rating to BBB. These actions have been one more reason forBaa3 from Ba1. Those upgrades contributed to further increase the inflow of foreign funds,capital, which contributedin turn strengthened the real. Yet, the rating agencies have highlighted weaknesses in Brazil’s fiscal policy, including Brazil’s high debt to the appreciation of the real during the first half of 2008.GDP ratio in comparison to countries with a similar credit rating, along with structural impediments to growth and investment vis-à-vis  similarly situated countries.
 
The next presidential elections in Brazil will take place in October 2010. We do not expect drastic changes in economic policy with the new administration, but in the past, both the exchange rate and the risk spread of Brazil’s sovereign debt experienced increased volatility during the electoral campaign.

8085

The table below shows the real GDP growth, the inflation rate and the  average real interest rate in Brazil as of  and for each of the years ended December 31, 2009, 2008, 2007 and 2006:

  As of and for the year ended December 31, 
  2008  2007  2006 
Real GDP growth % (1)
  5.08   5.67   3.97 
Inflation rate % (2)
  9.10   7.89   3.79 
Inflation rate % (3)
  5.9   4.46   3.14 
Exchange rate variation %(R$ /US$)(4)
  31.94   (17.15)  (8.66)
TR – a reference interest rate %(4)
  1.63   1.45   2.04 
TR – a reference interest rate %(5)
  2.61   0.77   1.84 
CDI (interbank interest rate) %(6)
  12.32   11.77   15.03 
CDI (interbank interest rate) %(7)
  13.62   11.12   13.17 
SELIC – overnight interest rate %(4)
  12.48   11.88   15.08 
SELIC – overnight interest rate %(5)
  13.67   11.18   13.19 
  As of and for the year ended December 31, 
  2009  2008  2007  2006 
Real GDP growth % (1)
  (0.2)  5.1   6.1   4.0 
Inflation rate % (2)
  (1.4)  9.1   7.9   3.8 
Inflation rate % (3)
  4.3   5.9   4.5   3.1 
Exchange rate variation %(R$ /US$) (4)
  -25.5   31.9   -17.2   -8.7 
TR – a reference interest rate  % (5)
  0.20   2.27   0.85   1.99 
CDI (interbank interest rate) % (6)
  8.61   13.46   11.11   13.14 
SELIC – overnight interest rate % (5)
  8.65   13.66   11.18   13.19 
(1) Source:  IBGE.
(2) Source:  General Price Index - Internal Availability (Índice Geral de Preços - Disponibilidade Interna), or IGP-DI, as published by the Fundação Getulio Vargas.
(3) Source:  IPCA, as published by IBGE.
(4) Source:  Central Bank (accumulated rates for the period)period, negative numbers mean appreciation of the Brazilian real).
(5) Source:  Central Bank (period end).
(6) Source:  Custody and Settlement Chamber, or CETIP (accumulated rates for the period).
(7) Source:  CETIP (period end).
The table below shows the Brazilian general price inflation (according to the IGP-DI and the IPCA) for the years ended December 31, 2004 through 2008:

  
Inflation Rate (%) as measured by
 IGP-DI (8)
  
Inflation Rate (%) as measured 
By IPCA (9)
 
December 31, 2008  9.10   5.9 
December 31, 2007  7.9   4.5 
December 31, 2006  3.8   3.1 
December 31, 2005  1.2   5.7 
December 31, 2004  12.1   7.6 
(8) Source:  IGP-DI, as published by the Fundação Getulio Vargas.
(9) Source:  IPCA, as published by IBGE.

Certain Effects of the RealVariation and Interest Rates on Our Net Interest Income
 
The variation of the realcan affect our net interest income because a significant amountpart of our financial assets and liabilities are denominated in or indexed to foreign currencies, primarily the U.S. dollar.  When the realdevaluates, we incur losses on our liabilities denominated in or indexed to foreign currencies, such as our U.S. dollar-denominated long-term debt and short-term borrowings as the cost in reaisof the related interest expense increases.  At the same time, we realize gains on monetary assets denominated in or indexed to foreign currencies, such as our dollar-indexed trading securities and loans due to increased interest income from suchthe assets measured in reais. When the realappreciates, the effects are the opposite of those described above.  We have adopted a strategy for managing our foreign exchange risk exposure between Brazilian reais and the U.S dollar that has the objective of not permittingreducing the effects of exchange rate variations to affect the net income. In order to achieve this objective, the foreign exchange risk is neutralizedeconomically hedged by means of the use of derivative financial instruments. Our strategy for hedging also takes into consideration all the related tax effects. However, the management of the gap in foreign currencies can have material effects on the net income. Also, our trading desks takes positions in order to optimize our risk adjusted return on capital that may be affected by changes in interest rate and exchange rates.
 
Unless otherwise indicated, the discussion in “Item 5. Operating and Financial Review and Prospects” relates to our average interest rates and yields.  Our interest rates are measured in reaisand include the effect of the variation of the realagainst foreign currencies.

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Discussion of Critical Accounting Policies
 
General
 
The preparation of the financial statements included in this annual report involves certain assumptions that are derived from historical experience and various other factors that we deemed reasonable and relevant.  While we review these estimates and assumptions in the ordinary course of business, the portrayal of our financial condition and results of operations often requires our management to make judgments regarding the effects on our financial condition and results of operations on matters that are inherently uncertain. Actual results may differ from those estimated under different variables, assumptions or conditions.  Note 2 - to our consolidated financial statements includes a summary of the significant accounting policies and methods used in the preparation of the consolidated financial statements.
 
Allowance for Loans and Lease Losses
 
The allowance for loans and lease losses represents our estimate of the inherent losses on our loan and lease portfolio at the end of each reporting period.  The methodology for determining the allowance for loans and lease losses is further described in “Item 4B. Business Overview – Selected Statistical Information – Loan Approval Process - Allowance for Loan and Lease Losses.”  The determination of the amount of allowance for loans and lease losses involves judgments with respect to the amount of allowance related to credits reviewed on a portfolio basis.  The allowance determined for credits reviewed on an individual basis requires judgments in identifying the factors affecting the risk and assigning a specific rating.  Many factors affect the estimate of the range of losses in each of the categories in which we estimate the allowance on a portfolio basis, such as the specific definition of the methodology used to measure historical delinquency and the definition of the relevant historical period to be considered during the measurements.  Additionally, factors affecting the specific amount of provisions to be recorded are subjective, and include economic and political conditions, credit quality trends, the volume and growth observed in each sub-category and specific economic conditions affecting a sub-category.  Although we frequently review and improve our models, the volatility of the Brazilian economy and the relatively short credit history in a more stable economic environment result in greater uncertainty of these models than in more stable macroeconomic environments. Our total allowance for loan losses as of December 31, 20082009 and 20072008 is R$ 12,20219,968 million and R$ 7,47312,202 million, respectively and we have recognized a provision for loan losses in our statement of income of R$ 9,36115,372 million, R$ 5,5429,361 million and R$ 5,1475,542 million for the years ended December 31, 2009, 2008 2007 and 2006.2007.

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Fair Value of Financial Instruments
 
Financial instruments recorded at fair value on our balance sheet include mainly securities classified as trading, available-for-sale, and other trading assets including derivatives.  Securities classified as held-to- maturity are recorded at amortized historical cost on our balance sheet, and their corresponding fair values are shown in the notes to consolidated financial statements. Total securities at fair value in our balance sheet at December 31, 20082009 and 20072008 amount to R$ 84,905109,243 million and R$ 55,47684,905 million and we carried derivatives (net) at fair value amounting to R$ 2,014732 million and R$ 372,014 million, respectively,respectively. We determine the fair values of our financial instruments based on the concepts established by SFAS 157ASC 820 which defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. According to this standard there are threedifferent levels of inputs that mustmay be used to measure the fair value of financial instruments   and we prioritize the use of available inputs in a higher level before using inputs in level that is lower in the hierarchy. Level 1 inputs are observable inputs that reflect quoted prices for identical assets or liabilities in active markets; Level 2 inputs are directly or indirectly observable inputs other than those included in Level 1, like similar assets or liabilities, identical assets or liabilities in illiquid markets, inputs other than quoted prices, among others; Level 3 inputs are unobservable inputs that reflect our own assumptions about market participant assumptions when pricing an asset or liability. SFAS 157ASC 820 requires us to maximize the use of observable inputs and minimize the use of unobservable inputs when determining the fair values. Therefore, for instruments classified in Levels 1 and 2 of the hierarchy, where inputs are principally based on observable market data, there is less judgment applied in arriving at a fair value measurement. For instruments classified within level 3 of the hierarchy, judgments are more significant. In arriving at an estimate of fair value for an instrument within level 3, management must first determine the appropriate model to use. Second, due to the lack of observability of significant inputs, management must assess all relevant empirical data in deriving valuation inputs including but not limited to yield curves, interest rates, volatilities, equity or debt prices, foreign exchange rates and credit curves. Additionally with respect to non-exchange traded products management judgment must be applied to assess the appropriate level of valuation adjustments to reflect counterparty credit quality, our own creditworthiness, constraints on liquidity and unobservable parameters, where relevant. While we believe valuation methods are appropriate and consistent with those of other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. The securities classified as Level 3 as of December 31, 2009 and 2008 amount to and R$2,162 million and R$7,368 million respectively and net derivatives as of such date amount to R$(932) million and R$1,004 million.million, respectively. For additional information see Note 28 to our audited financial statements. Judgments are also required to determine whether a decline in fair value below amortized costs are “other-than-temporary” in available-for-sale or held-to-maturity securities, therefore requiring cost basis to be written down and recognition of related effects on our results of operations.  Factors that are used by management in determining whether a decline is “other-than-temporary” include mainly the observed period of the loss, the degree of the loss whether we will be required to sell the security before recovery and the expectation as of the date of analysis as to the potential for realization of the security.
 
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Use of Estimates and Assumptions
 
The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Estimates and assumptions are used for, but not limited to, the allowance for loan and lease losses, estimates of the fair value of financial instruments, estimates of fair value of assets and liabilities acquired in business combinations, the amount of valuation allowance on deferred tax assets, the amount of insurance reserves and of liabilities for future benefits for private retirement plans, the determination of the need for and the amount of impairment charges on long-lived assets, the selection of useful lives of certain assets and the determination of probability , the definition of assumptions used for computing pension plan liabilities, the determination of probability and the estimate of contingent losses, as well as the use of significant judgment and interpretation in the application of tax law when determining the amount of taxes payable. Therefore, actual results could differ from our estimates.During 2009 as result of the acquisition of control of Redecard and  of the Association we recognized goodwill amounting to R$ 14,376 and long-lived intangible assets (brand) of R$ 1,394. Goodwill corresponds to goodwill on the acquisition of control of Redecard which is one of our reporting units and is a publicly traded company. Long-lived intangible assets are related both to the Redecard brand and to brands acquired in connection with the Association. If the fair value of the reporting unit Redecard decreases and we concluded goodwill is impaired we may be required to recognize an impairment charge. Also if the fair value, considering market conditions and market-participants assumptions, of any of the brands acquired decreases with respect to its carrying amount we may be required also to recognize an impairment charge. In future periods we may be reducing or discontinuing the use of certain brands acquired which will likely result in a reduction on its estimated fair value.

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Results of Operations for Year Ended December 31, 20082009 Compared to Year Ended December 31, 20072008
 
Results of Operations
The following table shows the principal components of our net income for 2008 and 2007.
  Year Ended December 31, 
  
2008
  2007 
  (in millions of R$) 
       
Interest income  47,649   34,603 
Interest expense  (26,508)  (13,271)
Net interest income  21,141   21,332 
Provision for loan and lease losses  (9,361)  (5,542)
Net interest income after provision for loan and lease losses  11,780   15,790 
Non-interest income  15,775   17,015 
Non-interest expense  (24,011)  (21,027)
Income before taxes on income and minority interest  3,544   11,778 
Taxes on income  1,334   (4,147)
Net income before minority interest  4,878   7,631 
Minority interest  (29)  2 
Extraordinary item  -   29 
Net income  4,849   7,662 

During 2008, we significantly increased our operations. The average balance of total assets grew 38.3% over the previous year, and the balance of loans and leases increased 54.1%. The increase in the average volume of earning assets was offset by the effect of the exchange rate variation on our interest-bearing liabilities maintaining stable net interest income. The increase of 68.9% of allowance for loan and lease losses was mainly related to the growth of our credit portfolio and, to a lesser extent, to an adjustment to incorporate in our estimate of allowance for loan losses the effect of the international financial crisis over the growth of GDP, level of unemployment and economic activity of some industrial sectors and the effect of these events in our retail portfolio. Net interest income after allowance for loan and lease losses decreased by R$  4,010 million, or 25.4%, totaling R$ 11,780 million in 2008. During 2008, some factors affected our income tax expense including higher tax benefit on dividends paid under the form of interest on stockholders equity and the effect of exchange gain and losses of transactions in foreign currency of subsidiaries abroad that are not taxable. As a result, there was a significant impact on taxes on income, decreasing R$ 5,481 million in 2008, to a tax credit of R$ 1,334 million, compared to a tax expense of R$ 4,147 million in 2007.
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Interest Income

The following table shows the principal components of our interest income for 2008 and 2007.
  Year Ended December 31, 
  2008  2007 
  (in millions of R$) 
Interest income      
Interest on loans and leases  31,326   22,898 
Interest on deposits in banks  3,028   2,852 
Interest on Central Bank compulsory deposits  1,051   909 
Interest on securities purchased under resale agreements  5,369   2,375 
Interest on trading assets  4,141   3,418 
Interest and dividends on available-for-sale securities  2,536   1,992 
Interest on held-to-maturity securities  198   159 
Total interest income  47,649   34,603 

The R$ 13,046 million, or 37.7% increase in interest income in 2008 is primarily due to an increase in the balance of loan and lease operations and, to a lesser extent, due to an increase in the balance of securities purchased under resale agreements and trading assets. During the year, we maintained the focus on vehicle financing and loans to micro and small companies. The loans and leases portfolio reached R$ 183,213 million (including guarantees), increasing 42.6% in 2008 compared to 2007, according to our strategy to increase the net interest income.
The table below shows the trend in credit operations, with loans classified by type of creditor (individuals and corporations) and further broken down by type of product for individuals and by size of customer for corporations. We also present the information on our “regulatorily required loans,” which are sector-directed loans required by Brazilian regulation, including financing for housing and agricultural loans. See “Item 4B – Business Overview – Regulation and Supervision.” In addition, the table presents the balance of credit operations in Argentina, Chile and Uruguay.
  As of December 31, 
  
(in millions of R$, except for percentages)
 
  2008  2007 
Total of loans and leases  169,700   92.6%  116,459   90.6%
Guarantees granted  13,513   7.4%  12,042   9.4%
Total of loans and leases (including guarantees granted)
  183,213   100.0%  128,500   100.0%

  As of December 31,       
  
(in millions of R$ except for percentages)
       
  2008  2007  Variation (%) 
Loans to individuals  70,589   38.5%  55,602   43.3%  14,988   27.0%
Credit card  13,624   7.4%  10,969   8.5%  2,655   24.2%
Personal credit  15,616   8.5%  13,965   10.9%  1,651   11.8%
Vehicles  41,349   22.6%  30,667   23.9%  10,682   34.8%
Loans to companies  91,936   50.2%  57,216   44.5%  34,720   60.7%
Micro-, small- and medium-sized companies  36,926   20.2%  21,157   16.5%  15,768   74.5%
Large companies  55,010   30.0%  36,059   28.1%  18,952   52.6%
Regulatorily required loans *  8,412   4.6%  6,374   5.0%  2,039   32.0%
Argentina / Chile / Uruguay  12,275   6.7%  9,309   7.2%  2,966   31.9%
Total of loans and leases (including guarantees granted)
  183,213   100.0%  128,500   100.0%  54,713   42.6%
* Regulatorily required loans are composed by loans to individuals and companies.

Interest on loans and leases totaled R$ 31,326  million in 2008, an increase of R$ 8,428 million, or 36.8% compared to 2007. This increase is primarily a result of a 54.1% growth in the average volume of loans and leases and the increase in vehicle financing portfolio and loans to companies, as described below.
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Loans to individuals totaled R$ 70,589 million in 2008, an increase of R$ 14,988 million, or 27.0% compared to 2007. This increase is primarily a result of a 34.8% growth in vehicle financing, totaling R$ 41,349 million in 2008 due to our focus on this segment and a favorable economic environment during the first nine months of 2008. Credit card transactions increased 24.2% in 2008 compared to 2007, totaling R$  13,624 million, as a result of the consistently growing popularity of this product due to its practicality and safety. Personal credit transactions increased 11.8% in 2008 compared to 2007, totaling R$  15,616 million, as a result of a more restrictive credit policy focused on credit risk quality.
Loans to companies totaled R$  91,936 million in 2008, an increase of R$ 34,720 million, or 60.7% compared to 2007.  Loans to large companies increased 52.6% in 2008 compared to 2007, totaling R$ 55,010 million, due to the increased demand for credit by large companies and the impact of exchange rate variation on loans denominated in or indexed to foreign currencies. Loans to micro-, small- and medium-sized companies increased 74.5% in 2008 compared to 2007, totaling R$ 36,926 million, mainly as a result of our continuous focus on this segment.
At the end of 2008, loans to individuals accounted for 38.5% of the total loans and leases, compared to 43.3% in 2007. Loans to companies accounted for 50.2% of the total loans and leases in 2008, compared to 44.5% in 2007. This increase is partially related to the exchange rate variation during 2008 and the consequent impact on valuation of credit operations denominated in or indexed to foreign currencies, primarily the U.S. dollar. Credit operations in Argentina, Chile and Uruguay accounted for 6.7% of the total loans and leases in 2008, while in 2007 they represented 7.2% of the total loans and leases.
Interest on deposits in banks totaled R$ 3,028 million in 2008, an increase of R$ 176 million, or 6.2%,  compared to 2007. This increase was due primarily to the increase on the interest rates, partially offset by the decrease on the average balance of these deposits.
Interest on Central Bank compulsory deposits totaled R$ 1,051 million in 2008, an increase of R$ 142 million, or 15.6%, compared to 2007. This increase was due to higher average basic interest rates (SELIC), partially offset by the decrease on the balance of deposits related to changes on compulsory reserve requirements that occurred after the worsening of the international financial crisis.
Interest on securities purchased under resale agreements totaled R$ 5,369 million in 2008, an increase of R$ 2,994 million, or 126.1% in 2008 compared to 2007.  The income related to these operations increased due to the increase of R$ 19,914 million in the average balance of securities purchased under resale agreements related to our strategy to manage liquidity.
Interest income on trading assets totaled R$ 4,141 million in 2008, an increase of R$ 723 million, or 21.2%, compared to 2007. This increase was mainly due to a 30.9% increase in the average balance of trading assets in 2008 compared to 2007 related to our strategy to manage liquidity.
Interest income from available-for-sale securities totaled R$ 2,536 million in 2008, an increase of R$ 544 million, or 27.3%, compared to 2007. This increase was mainly due to a 24.6% growth in the average balance of available-for-sale securities in 2008 compared to 2007.
Interest Expense

The following table shows the principal components of our interest expense in 2008 and 2007.
  Year Ended December 31, 
  2008  
2007
 
 (in millions of R$) 
Interest expense   
Interest on deposits  (6,233)  (3,510)
Interest on securities sold under repurchase agreements  (6,489)  (3,453)
Interest on short-term borrowings  (7,737)  (3,329)
Interest on long-term debt  (4,721)  (1,433)
Interest credited to investment contracts account balance  (1,328)  (1,546)
Total interest expense  (26,508)  (13,271)
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Total interest expense was R$ 26,508 million in 2008, an increase of R$ 13,237 million, or 99.7%, compared to 2007.
Interest expense on deposits was R$ 6,233 million in 2008, an increase of R$ 2,723  million, or 77.6%, compared to 2007, mainly as a result of an increase of R$ 29,103 million on the average balance of deposits. The increase on the balance of deposits is related to our large customer’s base that provides us with the funding to support the expansion in credit transactions and maintain adequate liquidity levels.
Interest on securities sold under repurchase agreements was R$ 6,489 million in 2008 an increase of  R$ 3,036 million, or  87.9%, compared to 2007. This increase was mainly due to a 97.7% increase on the average balance of securities sold under repurchase agreements compared to 2007 related to different funding strategies, i.e., the increase in credit transactions is supported by funds obtained from customers, while marginal funding needs are met through funds obtained in the market.
Interest on short-term borrowings totaled R$ 7,737 million in 2008, an increase of R$ 4,408 million, or 132.4%, compared to 2007. The average balance of short-term borrowing totaled R$ 58,252 million in 2008 and was affected by the increase on the balance of securities issued and sold to customers under repurchase agreements as a result of our funding strategy to raise funds in the market and backed by own securities, and, to a lesser extent, the impact of exchange rate variation on funding denominated in or indexed to foreign currencies.
Interest on long-term debt totaled R$ 4,721 million in 2008, an increase of R$ 3,288  million, or 229.4%, compared to 2007. This increase was mainly due to the impact of exchange rate variation on liabilities denominated in or indexed to foreign currencies, and, to a lesser extent, the increase on the average balance of long-term debt.
 Interest credited to the investment contracts account balance totaled R$ 1,328 million in 2008, a decrease of R$ 218 million, or 14.1%, compared to 2007. This decrease is due to the effects of the turmoil in the international financial crisis on local financial markets. See “Item 4B – Business Overview – Retail Banking – Private Retirement Plans.”
Provision for Loan and Lease Losses
Provision for loan and lease losses totaled R$ 9,361 million in 2008, an increase of R$  3,819 million, or 68.9%, in comparison to 2007. The increase in provision for loan and lease losses was mainly due to the increase on average balance of loans and leases, and, to a lesser extent, due to adjustments to our criteria to make provisions for loan and lease losses. We based these criteria on historic information of losses and decided to adjust the information to incorporate the economic scenario during the last quarter of 2008 which resulted in deterioration of the credit risk in our loan and lease portfolio. This adjust mainly affected the expenses related to the retail portfolio, totaling R$ 1,489 million on December 31, 2008. We also considered the impact in our corporate clients’ portfolio by reviewing the consequences of the international economic turmoil over different economic sectors. It is important to emphasize that we have not made any credit operations in the U.S. subprime market, including any collateralized debt obligations.
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Non-Interest Income

The following table shows the principal components of our non-interest income in 2008 and 2007.
  Year Ended December 31, 
  
2008
  2007 
  (in millions of R$) 
Non-interest income      
Fee and commission income  8,941   7,832 
Trading income (loss)  (2,843)  1,955 
Net gain (loss) on sale of available-for-sale securities  (114)  (183)
Net gain on foreign currency transactions  1,059   83 
Net gain (loss) on transactions of foreign subsidiaries  1,938   (971)
Equity in earning of unconsolidated companies, net  474   476 
Insurance premiums, income on private retirement plans and on capitalization plans  3,917   3,500 
Other non-interest income  2,403   4,323 
Total non-interest income  15,775   17,015 

In 2008, our non-interest income totaled R$ 15,775 million, a decrease of R$ 1,240 million, or 7.3%, in 2008 compared to 2007. This decrease was primarily due to the decrease of R$ 4,798 million in trading income (loss) related mainly to our risk management strategy and administration of gaps, particularly those associated with derivative instruments used to hedge our investments abroad. This decrease was partially offset by the increase of R$  2,909 million in net gain (loss) on transactions of foreign subsidiaries and the increase of R$  976  million in net gain on foreign currency transactions. The exchange rate volatility caused by the turmoil in international financial markets was the primary cause of these variations.
Fee and commission income totaled R$ 8,941 million in 2008, an increase of R$ 1,109 million, or 14.2%, compared to 2007. This increase was primarily due to an increase of R$ 668 million in fees charged on checking account services as a result of the growth of our customers’ base and an increase of R$ 246 million in credit card fees related to the growth in our credit card base.
Trading income (loss) totaled R$ (2,843) million in 2008, a decrease of R$ 4,798 million compared to 2007. This decrease reflects losses associated with our risk management strategy and administration of gaps, particularly those associated with derivative instruments used to hedge our investments abroad due to a significant exchange rate variation and devaluation of the real against foreign currencies.
Net gain on foreign currency transactions totaled R$  1,059  million in 2008, an increase of R$  976  million, or 1175.9%, compared to 2007. This increase was mainly due to arbitrage gains on foreign currency operations due to increased market volatility.
Net gain (loss) on transactions of foreign subsidiaries totaled a gain of R$ 1,938 million in 2008 compared to a loss of R$ 971 million in 2007, mainly as a result of the effect of exchange rate variation on assets and liabilities of subsidiaries abroad. During 2008, the real depreciated 31.9% against the U.S. dollar compared to an appreciation of 17.2% during 2007.
Insurance premiums, income on private retirement plans and on capitalization plans totaled R$ 3,917 million in 2008, an increase of R$  417  million, or 11.9%, compared to 2007. This increase was mainly due to a 21.4% increase in the number of mass products insurance policies written in 2008. At December 31, 2008, insurance provisions totaled R$ 2,394 million, an increase of 18.7% during the period. At the same date, pension plans technical provisions totaled R$ 25,100 million, an increase of 21.3% during the period. The number of capitalization bonds – PIC – also increased 17.7% during the period. These increases were due to the greater acceptance of our products and the efforts of our sales force.
Other non-interest income totaled R$ 2,403 million in 2008, a decrease of R$ 1,920  million, or 44.4%, compared to 2007. This decrease was mainly due to the fact that in 2008 we did not have gains on sale of equity interest while in 2007 we carried out the sale of participations in Serasa, Redecard and BM&F Bovespa.
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Non-Interest Expense

The following table shows the main components of our non-interest expense in 2008 and 2007.
  Year Ended December 31, 
  2008  
2007
 
  (in millions of R$) 
Non-interest expense:   
Salaries and employee benefits  (6,170)  (5,705)
Administrative expenses  (6,409)  (5,472)
Amortization of intangible assets  (1,201)  (974)
Insurance claims, changes in reserves for insurance operations, for private retirement plans and acquisition costs  (3,301)  (2,509)
Depreciation of premises and equipment  (756)  (675)
Other non-interest expense  (6,174)  (5,692)
Total non-interest expense  (24,011)  (21,027)

Non-interest expense totaled R$ 24,011 million in 2008, an increase of R$ 2,984 million compared to 2007.
Salaries and employee benefits expenses totaled R$ 6,170 million in 2008, an increase of R$ 465  million, or 8.2%, compared to 2007. This increase was due to an increased number of branches and points of sales and the impact of the Worker’s Union Agreement established in September 2008 pursuant to which compensation, benefits and charges were increased by 8.15% or 10%, depending on the salary range.
Administrative expenses totaled R$ 6,409 million in 2008, an increase of R$ 937 million, or 17.1%, compared to 2007. This increase was due to the expansion of our operating activities, which affected all administrative expense items. As an example, during the year 2008, we had an expansion of 134 new branches in our branch network and the number of employees totaled 71,354 as of December 31, 2008, an increase of 5,250 compared to December 31, 2007.
Amortization of intangible assets totaled R$ 1,201 million in 2008, an increase of R$ 227 million, or 23.3%, compared to 2007. This increase was due to an increased balance of amortizable intangible assets acquired in the periods, particularly the rights to credit payrolls and perform tax collections for Municipal and State Governments.
Insurance claims, changes in reserves for insurance operations, for private retirement plans and acquisition costs totaled of R$ 3,301 million in 2008, an increase of R$ 792 million, or 31.6%,  compared to 2007. This increase is mainly related to the expansion of our operations and, to a lesser extent, the regular revision of the estimated risks of the operations of insurance and private retirement.
Depreciation of premises and equipment totaled R$ 756 million in 2008, an increase of R$ 81 million, or 12.0%, compared to 2007. This increase was mainly due to increased capital expenditures made in 2007 and 2008.
Other non-interest expenses totaled R$ 6,174 million in 2008, an increase of R$ 482 million, or 8.5%, compared to 2007. In 2008, we had a decrease of R$ 689 million in tax expenses on services, revenue and other taxes primarily related to a reversal of tax provisions for CPMF on leasing operations. We also had an increase of R$ 1,006 million in litigation expenses related to constitution of provisions for civil and tax claims. Credit card related expenses increased R$ 148 million related to increased sales efforts.
Taxes on income
Our total tax on income is composed of current income tax and deferred tax. Certain amounts of income and expenses are recognized in our statement of income but do not affect our taxable basis and, conversely certain amounts are taxable income or deductible expenses in determining our taxes on income but do not affect our statement of income. Those items are known as permanent differences. Income tax expense for the year resulted in a benefit of R$ 1,334 million in 2008 compared to a tax expense of R$ 4,147 million in the prior year.

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The main factors that contributed to the change in income tax from year to year are: (i) during 2008 we had a higher tax benefit on dividends paid under the form of interest on stockholders equity (a form of tax deductible dividend) because during 2007 most of our dividend distribution was made under the form of dividends, and (ii) the effect of exchange gains and losses on our subsidiaries abroad and the offsetting effect of economic hedge instruments on the investments. The net tax benefit on interest on stockholders’ equity totaled R$ 660 million in 2008, an increase of R$ 578 million compared to 2007. The nontaxable (deductible) exchange gains (losses) on foreign subsidiaries totaled a benefit of R$ 775 million in 2008, an increase of R$ 1,105 million compared to 2007.

For Brazilian tax purposes exchange gains and losses on our investments in subsidiaries abroad are not taxable, if gain, or not deductible, if a loss and are a permanent difference. From an economic perspective we hedge the investments in subsidiaries abroad by using foreign-currency denominated liabilities or derivative instruments. The gains or losses on derivative instruments and the exchange gains and losses on foreign-currency denominated liabilities are taxable or deductible for purposes of Brazilian taxes. During 2008 we experienced significant devaluation of the Real against the foreign currencies on which our subsidiaries operate generating non-taxable gains. The devaluation of the Real generated tax deductible losses on derivatives instruments used as economic hedge and tax deductible foreign-exchange losses on liabilities used also as economic hedges. The resulting effect is that in certain companies we had taxable losses for which a deferred tax assets was recognized.

Results of Operations for Year Ended December 31, 2007 Compared to Year Ended December 31, 2006
Results of Operations

The following table below shows the majorprincipal components of our net income for 20072009 and 2006.2008.

 Year Ended December 31,  Year Ended December 31, 
 
2007
  2006  2009  2008 
 (in millions of R$)  (in millions of R$) 
         
Interest income 34,603  28,147   72,567   47,649 
Interest expense  (13,271)  (11,104)  (31,876)  (26,508)
Net interest income 21,332  17,043   40,691   21,141 
Provision for loan and lease losses  (5,542)  (5,147)  (15,372)  (9,361)
Net interest income after provision for loan and lease losses 15,790  11,896   25,319   11,780 
Non-interest income 17,015  14,614   40,436   15,775 
Non-interest expense  (21,027)  (18,061)  (42,294)  (24,011)
Net income before taxes on income, minority interest and cumulative effect of a change in accounting principle 11,778  8,449 
Income before taxes and extraordinary item  23,461   3,544 
Taxes on income (4,147) (2,434)  (8,849)  1,334 
Net income before minority interest, extraordinary item and cumulative effect of a change in accounting principle  7,631   6,015 
Minority interest 2  22 
Cumulative effect of a change in accounting principle, net of tax effect  29   - 
Net income  7,662   6,037   14,612   4,878 
Less: Net Income attributable to noncontrolling interest  (527)  (29)
Net income Attributable to Itaú Unibanco  14,085   4,849 

During 2009, we faced two challenges that affected our results of operations. First, internally we experienced significant changes related to the association between Itaú and Unibanco Financial Groups. We significantlyannounced the Association in 2008 and the Central Bank approved it on February 18, 2009. For U.S. GAAP purposes, the Results of Unibanco are consolidated from February 18, 2009. Thus, the financial statements for the year ended December 31, 2009 present the effects from the Association and consolidate the results of operations of Unibanco in our consolidated statement of income and the financial position in our consolidated balance sheet.

During the year, we defined the management team that would lead the new institution. In addition, we finalized the selection of the members of the board of directors and board of officers who would be responsible for leading the integration process. In the first half of 2009, this process was expanded to all managerial levels. At the same time, we re-evaluated market opportunities and business models and established redefined targets for the commercial area. We commenced the branch transformation program associated with the integration of the operations of the two banks in the second half of 2009 and we expect to accelerate it in 2010.

The second challenge was related to the turmoil in the international financial markets. The main impact of the economic crisis on the Brazilian financial industry in general was an increase in nonperforming loans. Our operations were affected by a change of asset quality. During the first nine months of 2009, expenses with provision for loan and lease losses increased our operationsto address these changes in 2007, whereasset quality. But, at the end of 2009, the balance of nonperforming loans began to decrease, changing the trend of gradual deterioration of asset quality that began at the end of 2008.

The average balance of total assets grew 38.9% over53.9% in 2009 compared to the previous year, and caused a positive impact in several line items of our statement of income. This increase was mainly due to the good Brazilian economic environment and, to a lesser extent, to the consolidation of our new operations in Chile and Uruguay. In particular, we emphasize the growth of 30.2% in the balance of loans and leases that contributedincreased 58.5% mainly as result of the consolidation of Unibanco. The increase in the average volume of earning assets and the effects of exchange rate variation on our financial and derivatives instruments had a significant impact on net income. The growth of our credit portfolio and the effect of the international financial crisis over the growth of the Brazilian GDP were the main causes to the increase of the net interest income between the periods, as described below.allowance for loan and lease losses.

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Interest Income

The mainfollowing table shows the principal components of our interest income for 20072009 and 2006 are summarized in the table below.2008.

 Year Ended December 31,  Year Ended December 31, 
 2007  2006  2009  2008 
 (in millions of R$)  (in millions of R$) 
Interest income            
Interest on loans and leases 22,898  19,346   48,582   31,326 
Interest on deposits in banks 2,852  2,725   3,534   3,028 
Interest on Central Bank compulsory deposits 909  881   519   1,051 
Interest on securities purchased under resale agreements 2,375  1,251   8,673   5,369 
Interest on trading assets 3,418  2,539   7,086   4,141 
Interest and dividends on available-for-sale securities 1,992  1,236   3,996   2,536 
Interest on held-to-maturity securities  159   169   177   198 
Total interest income  34,603   28,147   72,567   47,649 

The 22.9%R$24,918 million or 52.3% increase in interest income in 20072009 is primarily due to an increase in the balance of loan and lease operations and, to a lesser extent, due to an increase in the balance of securities purchased under resale agreements and trading assets. The loans and leases portfolio reached R$278,177   million (including guarantees), increasing 51.8% in 2009 compared to 2008, mainly due to the consolidation of Unibanco.
 The table below shows the trend in credit operations, with loans classified by type of creditor (individuals and corporations) and further broken down by type of product for individuals and by size of customer for corporations. We also present the information on our “regulatory required loans,” which are sector-directed loans required by Brazilian regulation, including financing for housing and agricultural loans. See “Item 4B – Business Overview – Regulation and Supervision.” In addition, the table presents the balance of credit operations in Argentina, Chile, Uruguay and Paraguay.

  As of December 31, 
  
(in millions of R$ , except for percentages)
 
  2009  2008 
Total of loans and leases  245,736   88.3%  169,700   92.6%
Guarantees granted  32,441   11.7%  13,513   7.4%
Total of loans and leases (including guarantees granted)
  278,177   100.0%  183,213   100.0%

  As of December 31,       
  
(in millions of R$ except for percentages)
       
  2009  2008  Variation (%) 
Loans to individuals  103,306   37.1%  70,589   38.5%  32,716   46.3%
Credit card  30,115   10.8%  13,624   7.4%  16,491   121.0%
Personal credit  21,458   7.7%  15,616   8.5%  5,842   37.4%
Vehicles  51,732   18.6%  41,349   22.6%  10,383   25.1%
Loans to companies  149,521   53.8%  91,936   50.2%  57,585   62.6%
Micro-, small- and medium-sized companies  60,880   21.9%  36,926   20.2%  23,954   64.9%
Large companies  88,641   31.9%  55,010   30.0%  33,630   61.1%
Regulatorily required loans *  13,643   4.9%  8,412   4.6%  5,231   62.2%
Argentina / Chile / Uruguay/ Paraguay  11,708   4.2%  12,275   6.7%  (567)  -4.6%
Total of loans and leases (including guarantees granted)
  278,177   100.0%  183,213   100.0%  94,964   51.8%

* Regulatorily required loans are composed by loans to individuals and companies.

Interest on loans and leases totaled R$48,582 million in 2009, an increase of R$17,256 million, or 55.1% compared to 2008. This increase was primarily a result of the consolidation of Unibanco and to a lesser extent to an increase in the average volume of loans and lease transactions (other than with large companies and loans to clients of subsidiaries abroad, which experienced a decrease in 2009 compared to 2008).
Loans to individuals (including guarantees granted) totaled R$103,306 million in 2009, an increase of R$32,716  million, or 46.3% compared to 2008. This increase is primarily a result of a 121.0% growth in credit card, totaling R$30,115 million in 2009 due to the consolidation of Unibanco and to the consistently growing popularity of this product due to its practicality and safety. Vehicles transactions increased R$10,383 million, or 25.1% in 2009 compared to 2008, totaling R$51,732 million, as a result of our focus on this segment and due to the consolidation of Unibanco. Personal credit transactions increased 37.4% in 2009 compared to 2008, totaling R$21,652 million, as a result of the consolidation of Unibanco. Since 2009 we adopted a more restrictive credit policy focused on credit risk quality to face the adverse effects of the international financial turmoil.

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Loans to companies (including guarantees granted) totaled R$149,521 million in 2009, an increase of R$57,585  million, or 62.6% compared to 2008.  Loans to large companies increased R$33,630 million, or  61.1% in 2009 compared to 2008, totaling R$88,641 million, mainly due to the consolidation of Unibanco. Loans to micro-, small- and medium-sized companies increased R$23,954 million, or 64.9% in 2009 compared to 2008, totaling R$60,880 million, mainly due to the consolidation of Unibanco and, to a lesser extent as a result of our focus on this segment.
Interest on deposits in banks totaled R$3,534 million in 2009, an increase of R$506 million, or 16.7%,  compared to 2008. This increase was due primarily to the increase on the average balance of these deposits, partially related to the consolidation of Unibanco.
Interest on Central Bank compulsory deposits totaled R$519 million in 2009, a decrease of R$532   million, or 50.6%, compared to 2008. This decrease was mainly due to decreases in the levels of compulsory deposits required by the Central Bank as part of their adoption of measures to manage the international financial crisis by increasing the liquidity of the financial system as a whole. Accordingly, we redirected these resources to loans that yield higher returns.
Interest on securities purchased under resale agreements totaled R$8,673 million in 2009, an increase of R$3,304 million, or 61.5% in 2009 compared to 2008.  This increase was mainly due to the increase in the average balance of securities purchased under resale agreements related to our strategy to manage liquidity and to a lesser extent to the consolidation of Unibanco.
Interest income on trading assets totaled R$7,086 million in 2009, an increase of R$2,945 million, or 71.1%, compared to 2008. This increase was mainly due to an increase in the average balance of trading assets in 2009 compared to 2008 mainly related to the consolidation of Unibanco.
Interest income from available-for-sale securities totaled R$3,996 million in 2009, an increase of R$1,460 million, or 57.6%, compared to 2008. This increase was mainly due to a growth in the average balance of available-for-sale securities in 2009 compared to 2008 mainly related to the consolidation of Unibanco.
Interest Expense

The following table shows the principal components of our interest expense in 2009 and 2008.

  Year Ended December 31, 
  2009  2008 
  (in millions of R$) 
Interest expense          
Interest on deposits  (11,773)  (6,233)
Interest on securities sold under repurchase agreements  (7,177)  (6,489)
Interest on short-term borrowings  (5,314)  (7,737)
Interest on long-term debt  (4,586)  (4,721)
Interest credited to investment contracts account balance  (3,026)  (1,328)
Total interest expense
  (31,876)  (26,508)

Total interest expense was R$31,876 million in 2009, an increase of R$5,368 million, or 20.3%, compared to 2008.
Interest expense on deposits was R$11,773 million in 2009, an increase of R$5,540 million, or 88.9%, compared to 2008, mainly as a result of an increase of the average balance of deposits caused by the consolidation of Unibanco and to managing the adequate liquidity levels mainly by using time deposits as funding.
Interest on securities sold under repurchase agreements was R$7,177 million in 2009 an increase of  R$688 million, or  10.6%, compared to 2008. This increase was mainly due to the consolidation of Unibanco and, to a lesser extent, an increase on the average balance of securities sold under repurchase agreements related to our strategy of liquidity management.

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Interest on short-term borrowings totaled R$5,314 million in 2009, a variation of R$2,423 million, or 31.3%, compared to 2008. This decrease is mainly related to the impact of exchange rate variation on funding denominated in or indexed to foreign currencies, partially offset by an increase on the average balance of short-term borrowings mainly related to the consolidation of Unibanco.
Interest on long-term debt totaled R$4,586 million in 2009, with a variation of R$135 million, or 2.9% compared to 2008. This change was mainly due to the impact of exchange rate variation on liabilities denominated in or indexed to foreign currencies, offset by an increase on the average balance of long-term debt mainly related to the consolidation of Unibanco.
Interest credited to the investment contracts account balance totaled R$3,026 million in 2009, an increase of R$1,698  million, or 127.9%, compared to 2008. This increase is due to a growth in the average balance of investment contracts as a result of good market acceptance of our investment contracts. See “Item 4B – Business Overview – Retail Banking – Private Retirement Plans.”
Provision for Loan and Lease Losses
Provision for loan and lease losses totaled R$15,372 million in 2009, an increase of R$6,011 million, or 64.2%, in comparison to 2008, which was primarily caused by the effects of the international financial turmoil. During the first half of 2009, the adverse effects of the international economic and financial crisis spread among a number of industries, resulting in increased risk related to certain credit portfolios. Levels of non-performing loans increased for individuals and company portfolios generally, reflecting this adverse context. At the end of the first half of 2009, however, the Brazilian economic outlook improved, as a result of the tax incentive packages to foster consumption and overall economic activity levels. By the end of third quarter 2009, there was evidence that the worst moment of the adverse credit cycle for retail lending was over. At the end of 2009, we also had evidence that the quality of our commercial lending portfolio had improved.

Non-Interest Income

The following table shows the principal components of our non-interest income in 2009 and 2008.

  Year Ended December, 31. 
  2009  2008 
  (in millions of R$) 
Non-interest income      
Fee and commission income  13,479   8,941 
Trading income (loss)  9,284   (2,843)
Net gain (loss) on sale of available-for-sale securities  211   (114)
Net gain on foreign currency transactions  2,619   1,059 
Net gain (loss) on transactions of foreign subsidiaries  (3,390)  1,938 
Equity in earning of unconsolidated companies, net  (9)  474 
Insurance premiums, income on private retirement plans and on capitalization plans  8,132   3,917 
Other non-interest income  10,110   2,403 
Total non-interest income  40,436   15,775 

In 2009, our non-interest income totaled R$40,436 million, an increase of R$24,661 million, or 156.3%, in 2009 compared to 2008. This increase was primarily due to the variation of R$12,127   million in trading income (loss) related mainly to our risk management strategy and administration of gaps, particularly those associated with derivative instruments used to hedge our investments abroad, and to a lesser extent to the increase of R$4,538   million in fee and commission income and an increase of R$4,215   million in insurance premiums, income on private retirement plans and on capitalization plans, mainly associated with the consolidation of Unibanco and due to the increased acceptance of our products. We also had an increase of R$7,923   million in other non-interest income, mainly due to the recognition of a gain with the remeasurement of our previously held interest related to the acquisition of control  in Redecard and its consolidation in our financial statements. These increases were partially offset by the decrease of R$5,328   million in net gain (loss) on transactions of foreign subsidiaries. The exchange rate volatility after the turmoil in the international financial markets was the primary cause of this variation.

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Fee and commission income totaled R$13,479   million in 2009, an increase of R$4,538   million, or 50.8%, compared to 2008. This increase was primarily due to the consolidation of Unibanco and Redecard during the year, with an increase of R$2,298   million in credit card fees related to the growth in our credit card customers’ base and activities and an increase of R$1,237   million in fees charged on checking account services as a result of the growth of our customers’ base. We also had the increase of R$321   million in asset management fees and R$307   million in collection fees related to the consolidation of Unibanco.
Trading income (loss) totaled R$9,284 million in 2009, an increase of R$12,127 million compared to 2008. This increase reflects incomes associated with our risk management strategy and administration of gaps, particularly those associated with derivative instruments used to hedge our investments abroad. The main factor contributing to the significant increase is the exchange rate variation and valuation of the real against foreign currencies in 2009 in comparison to a significant devaluation of the real against foreign currencies in 2008. Also during 2009 we have positioned ourselves to take profit of volatility observed and movements in interest rates which have contributed to a lesser extent to the change observed from period to period.
Our net gain (loss) on sales of available-for-sale securities was R$211 million in 2009, an increase of R$325 million in comparison to 2008. Unlike 2008, when available-for-sale securities were traded with losses recognition, the securities traded in 2009 benefited from the perception of a more favorable macroeconomic environment, which had positive effects on the market value of the asset mix focusedsecurities.
Net gain on foreign currency transactions increased by 147.3% from R$1,059  million for 2008 to R$2,619 million for 2009, an increase of R$1,560 million. This increase in income from foreign exchange operations was mainly due to our trading performance on foreign currency market, as well as the consolidation of the operations of Unibanco in 2009.
Net gain (loss) on transactions of foreign subsidiaries totaled a loss of R$3,390 million in 2009 compared to a gain of R$1,938 million in 2008, as a result of the effect of exchange rate variation on assets and liabilities of subsidiaries abroad. During 2009, the real appreciated 25.5% against the U.S. dollar and, in 2008, the real depreciated 31.9%, mainly due to the effects of the international financial turmoil on foreign exchange market.
Equity in earnings of unconsolidated companies totaled a loss of R$9 million in 2009 compared to a gain of R$474 million in 2008. This decreased was mainly due to a impairment loss in our investment in Banco BPI.
Insurance premiums, income on private retirement plans and on capitalization plans totaled R$8,132 million in 2009, an increase of R$4,215 million, or 107.6%, compared to 2008. The results of insurance premiums, income on private retirement plans and on capitalization plans were mainly affected by the consolidation of the operations of Unibanco in 2009, as well as by the increase in our sales of insurance pension plans and capitalization products.
Other non-interest income totaled R$10,100   million in 2009, an increase of R$7,707   million, or 320.7%, compared to 2008. This increase was mainly due to the recognition of a gain with the remeasurement of our previously held interest related to the acquisition of control in Redecard and its consolidation in our financial statements, and to a lesser extent to the recognition of a bargain purchase gain related to the Association.
Non-Interest Expense

The following table shows the main components of our non-interest expense in 2009 and 2008.

  Year Ended December 31, 
  
2009
  
2008
 
  
(in millions of R$)
 
Non-interest expense:          
Salaries and employee benefits  (10,589)  (6,170)
Administrative expenses  (10,001)  (6,409)
Amortization of intangible assets  (3,663)  (1,201)
Insurance claims, changes in reserves for insurance operations, for private retirement plans and acquisition costs  (6,452)  (3,301)
Depreciation of premises and equipment  (1,250)  (756)
Other non-interest expense  (10,339)  (6,174)
Total non-interest expense
  (42,294)  (24,011)

Non-interest expense totaled R$42,294 million in 2009, an increase of R$18,283 million compared to 2008.
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Salaries and employee benefits expenses totaled R$10,589 million in 2009, an increase of R$4,419 million, or 71.6%, compared to 2008. This increase was mainly due to the consolidation of Unibanco and Redecard and to the impact of the Worker’s Union Agreement established in September 2009 pursuant to which compensation, benefits and charges were increased by 6.0%.
Administrative expenses totaled R$10,001 million in 2009, an increase of R$3,592 million, or 56.0%, compared to 2008. This increase was mainly due to the consolidation of Unibanco and Redecard and expansion of our operating activities, which affected all administrative expense items.
Amortization of intangible assets totaled R$3,663 million in 2009, an increase of R$2,462 million, or 205.0%, compared to 2008. This increase was due to an increased balance of amortizable intangible assets acquired in the periods, particularly those related to Unibanco and Redecard.
Insurance claims, changes in reserves for insurance operations, for private retirement plans and acquisition costs totaled R$6,452 million in 2009, an increase of R$3,151 million, or 95.5%,  compared to 2008. This increase was mainly related to the consolidation of Unibanco operations.
Depreciation of premises and equipment totaled R$1,250 million in 2009, an increase of R$494   million, or 65.3%, compared to 2008. This increase was mainly due to the consolidation of Unibanco and Redecard in our financial statements and, to a lesser extent, to increased capital expenditures made in 2009 compared to 2008.
Other non-interest expenses totaled R$10,339 million in 2009, an increase of R$4,165 million, or 67.5%, compared to 2008. In 2009, we had an increase of R$ 1,900   million in taxes on services, revenues and other taxes that increased in proportion to the expansion in our operating activities. The agreement with CBD led to an expense of R$550 million in the period. Credit card related expenses increased R$583   million mainly due to the consolidation of Unibanco. Losses from third-party frauds increased R$ 277   million mainly related to the consolidation of Unibanco operations.
Taxes on income
Our total tax on income is composed of current income tax and deferred tax. Certain amounts of income and expenses are recognized in our statement of income but do not affect our taxable basis and, conversely certain amounts are taxable income or deductible expenses in determining our taxes on income but do not affect our statement of income. Those items are known as permanent differences.

Income tax expense for the year resulted in a tax expense of R$8,849 million in 2009 compared to a benefit of R$1,334   million in the prior year. The main factors that contributed to the change in income tax from year to year are: (i) first we had a significant increase of 562.0% of income before taxes, in 2009 compared to 2008; (ii) the effect of exchange gains and losses on our subsidiaries abroad and the offsetting effect of economic hedge instruments on the investments. The nontaxable (deductible) exchange gains (losses) on foreign subsidiaries totaled an expense of R$1,356   million in 2009, a decrease of R$2,131   million compared to 2008; (iii) we had a higher margin products. Intax benefit on dividends paid under the form of interest on shareholders’ equity (a form of tax deductible dividend) during 2009. The net tax benefit on interest on shareholders’ equity totaled R$1,474   million in 2009, an increase of R$814   million compared to 2008; and (iv) in 2008, the impact of the increase in social contribution rate was responsible for a tax benefit of R$336   million.

For Brazilian tax purposes exchange gains and losses on our investments in subsidiaries abroad are not taxable, if gain, or not deductible, if a loss and are a permanent difference. From an economic perspective we hedge the investments in subsidiaries abroad by using foreign-currency denominated liabilities or derivative instruments. The gains or losses on derivative instruments and the exchange gains and losses on foreign-currency denominated liabilities are taxable or deductible for purposes of Brazilian taxes. During 2009 we experienced significant valuation of the real against the foreign currencies on which our subsidiaries operate generating non-taxable losses. The valuation of the real generated taxable gains on derivatives instruments used as economic hedge and taxable foreign-exchange gains on liabilities used also as economic hedges. The resulting effect is that in certain companies we had taxable gains with a significant increase in our tax expenses.

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Results of Operations for Year Ended December 31, 2008 Compared to Year Ended December 31, 2007
Results of Operations

The table below shows the major components of our net income for 2008 and 2007.

  Year Ended December 31, 
  2008  2007 
  (in millions of R$) 
    
Interest income  47,649   34,603 
Interest expense  (26,508)  (13,271)
Net interest income  21,141   21,332 
Provision for loan and lease losses  (9,361)  (5,542)
Net interest income after provision for loan and lease losses  11,780   15,790 
Non-interest income  15,775   17,015 
Non-interest expense  (24,011)  (21,027)
Income before taxes and extraordinary item  3,544   11,778 
Taxes on income  1,334   (4,147)
Net income before extraordinary item  4,878   7,631 
Extraordinary item  -   29 
Net income  4,878   7,660 
Less: Net Income attributable to noncontrolling interest  (29)  2 
Net income Attributable to Itaú Unibanco  4,849   7,662 

During 2008, we continuedsignificantly increased our operations. The average balance of total assets grew 38.3% over the previous year, and the balance of loans and leases increased 54.1%. The increase in the average volume of earning assets was offset by the effect of the exchange rate variation on our interest-bearing liabilities maintaining stable net interest income. The increase of 68.9% of allowance for loan and lease losses was mainly related to the growth of our credit portfolio and, to a lesser extent, to an adjustment to incorporate in our estimate of allowance for loan losses the effect of the international financial crisis over the growth of GDP, level of unemployment and economic activity of some industrial sectors   and the effect of these events in our retail portfolio. Net interest income after allowance for loan and lease losses decreased by R$4,010   million, or 25.4%, totaling R$11,780 million in 2008. During 2008, some factors affected our income tax expense including higher tax benefit on dividends paid under the form of interest on shareholders equity and the effect of exchange gain and losses of transactions in foreign currency of subsidiaries abroad that are not taxable. As a result, there was a significant impact on taxes on income, decreasing R$5,481 million in 2008, to a tax credit of R$1,334 million, compared to a tax expense of R$4,147 million in 2007.

Interest Income

The following table shows the principal components of our interest income for 2008 and 2007.

  Year Ended December 31, 
  2008  2007 
  (in millions of R$) 
Interest income      
Interest on loans and leases  31,326   22,898 
Interest on deposits in banks  3,028   2,852 
Interest on Central Bank compulsory deposits  1,051   909 
Interest on securities purchased under resale agreements  5,369   2,375 
Interest on trading assets  4,141   3,418 
Interest and dividends on available-for-sale securities  2,536   1,992 
Interest on held-to-maturity securities  198   159 
Total interest income  47,649   34,603 

The R$13,046 million, or 37.7% increase in interest income in 2008 is primarily due to an increase in the balance of loan and lease operations and, to a lesser extent, due to an increase in the balance of securities purchased under resale agreements and trading assets. During the year, we maintained the focus on vehicle financing and loans to micro and small companies. The loans and leases portfolio reached R$128,500183,213 million (including guarantees), increasing 42.6% in 2007, representing an increase of 37.8%2008 compared to 2006. However without2007, according to our strategy to increase the effect of the consolidation of our operations in Chile and Uruguay, the credit portfolio would have increased by 29.0% in 2007 compared to 2006.net interest income.

 
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The table below shows the trend in credit operations, with loans classified by type of creditor (individuals and corporations) and further broken down by type of product for individuals and by size of customer for corporations. We also present the information on our “regulatorily“regulatory required loans”,loans,” which are sector-directed loans required by Brazilian regulation, including financing for housing and agricultural loans. See “Item 4B – Business Overview – Regulation and Supervision.” In addition, the table presents the balance of credit operations in Argentina, Chile and Uruguay.

 As of December 31,  As of December 31, 
 
(in millions of R$ except for percentages)
  
(in millions of R$ , except for percentages)
 
 2007  2006  2008  2007 
Total of loans and leases  116,459   90.6%  83,759   89.8%  169,700   92.6%  116,459   90.6%
Guarantees granted  12,042   9.4%  9,500   10.2%  13,513   7.4%  12,042   9.4%
Total of loans and leases (including guarantees granted)
  128,500   100.0%  93,259   100.0%  183,213   100.0%  128,500   100.0%

 As of December 31,        As of December 31,       
 
(in millions of R$ except for percentages)
        
(in millions of R$ except for percentages)
       
 2007  2006  Variation (%)  2008  2007  Variation (%) 
Loans to individuals 55,602  43.3% 40,367  43.3% 15,235  37.7%  70,589   38.5%  55,602   43.3%  14,988   27.0%
Credit card 10,969  8.5% 9,157  9.8% 1,812  19.8%  13,624   7.4%  10,969   8.5%  2,655   24.2%
Personal credit 13,965  10.9% 12,811  13.7% 1,154  9.0%  15,616   8.5%  13,965   10.9%  1,651   11.8%
Vehicles 30,667  23.9% 18,398  19.7% 12,269  66.7%  41,349   22.6%  30,667   23.9%  10,682   34.8%
Loans to companies 57,216  44.5% 46,102  49.4% 11,114  24.1%  91,936   50.2%  57,216   44.5%  34,720   60.7%
Micro-, small- and medium-sized companies 21,157  16.5% 16,105  17.3% 5,053  31.4%  36,926   20.2%  21,157   16.5%  15,768   74.5%
Large companies 36,059  28.1% 29,997  32.2% 6,061  20.2%  55,010   30.0%  36,059   28.1%  18,952   52.6%
Regulatorily required loans * 6,374  5.0% 5,949  6.4% 425  7.1%  8,412   4.6%  6,374   5.0%  2,039   32.0%
Argentina / Chile / Uruguay 9,309  7.2% 842  0.9% 8,468  1005.9%
Argentina / Chile / Uruguay/Paraguay  12,275   6.7%  9,309   7.2%  2,966   31.9%
Total of loans and leases (including guarantees granted)
 128,500  100.0% 93,259  100.0% 35,241  37.8%  183,213   100.0%  128,500   100.0%  54,713   42.6%

* Regulatorily required loans are composed by loans to individuals and to companies.

Interest on loans and leases increased bytotaled R$ 3,55231,326  million in 2008, an increase of R$8,428 million, or 18.4%, totaling R$ 22,898 million in36.8% compared to 2007. This increase was mainly due to the increaseis primarily a result of R$ 19,673 million, or 30.7%, in the average volume of loans and leases. The increasea 54.1% growth in the average volume of loans and leases was mainly due to anand the increase in vehicle financing credit card operationsportfolio and loans to companies, in the micro-, small- and medium-sized segments as well as in the large corporate segment, as described below.
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Loans to individuals totaled R$ 55,60270,589 million in 2007,2008, an increase of 37.7%R$14,988 million, or 27.0% compared to 2006.2007. This increase is primarily a result of a 66.7%34.8% growth in vehicle financing, totaling R$ 30,66741,349 million in 20072008 due to our focus on this segment and a favorable economic environment.environment during the first nine months of 2008. Credit card transactions increased 19.8%24.2% in 20072008 compared to 2006,2007, totaling R$ 10,96913,624 million, as a result of the consistently growing popularity of this product due to its practicality and safety. Personal credit transactions had only a 9.0% increaseincreased 11.8% in 20072008 compared to 2007, totaling R$15,616 million, as a 25.6% increase in the prior period due to ourresult of a more restrictive credit policy focused on credit risk quality.
 
Loans to companies totaled R$ 57,21691,936 million in 2007,2008, an increase of 24.1%R$34,720 million, or 60.7% compared to 2006. Loans to micro-, small- and medium-sized companies increased 31.4% in 2007 compared to 2006, totaling R$ 21,157 million, mainly as a result of development of relationships with customers and of specific structures to offer solutions and advice on products and services.2007.  Loans to large companies increased 20.2%52.6% in 20072008 compared to 2006,2007, totaling R$ 36,05955,010 million, due to the increased demand for credit by large companies and the impact of exchange rate variation on loans denominated in or indexed to foreign currencies. Loans to micro-, small- and medium-sized companies increased 74.5% in 2008 compared to 2007, totaling R$36,926 million, mainly as a result of the favorable Brazilian economic environment.our continuous focus on this segment.

At the end of 2007,2008, loans to individuals accounted for 43.3%38.5% of the total loans and leases, compared to 43.3% in 2006.2007. Loans to companies accounted for 44.5%50.2% of the total loans and leases in 2007,2008, compared to 49.4%44.5% in 2006.2007. This increase is partially related to the exchange rate variation during 2008 and the consequent impact on valuation of credit operations denominated in or indexed to foreign currencies, primarily the U.S. dollar. Credit operations in Argentina, Chile and Uruguay accounted for 7.2%6.7% of the total loans and leases in 2007,2008, while in 20062007 they represented 0.9%7.2% of the total loans and leases becauseleases.
Interest on deposits in banks totaled R$3,028 million in 2008, an increase of R$176 million, or 6.2%,  compared to 2007. This increase was due primarily to the operations in Chile and Uruguay were not consolidated to our results during that period.increase on the interest rates, partially offset by the decrease on the average balance of these deposits.

Interest on Central Bank compulsory deposits increasedtotaled R$ 281,051 million in 2007,2008, an increase of R$142 million, or 15.6%, compared to 2007. This increase was due to higher average basic interest rates (SELIC), partially offset by the decrease on the balance of deposits related to our growth. The increase was partially offset bychanges on compulsory reserve requirements that occurred after the decrease inworsening of the basic interest rates (SELIC).international financial crisis.

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Interest on securities purchased under resale agreements increased fromtotaled R$ 1,2515,369 million in 20062008, an increase of R$2,994 million, or 126.1% in 2008 compared to R$ 2,375 million in 2007.  The income related to these operations increased by R$ 1,124 million or 89.8% in 2007 due to the increase of R$ 11,20619,914 million in the average balance of securities purchased under resale agreements related to our growth.strategy to manage liquidity.

Interest income on trading assets totaled R$ 3,4184,141 million in 2007,2008, an increase of R$ 879723 million, or 21.2%, compared to 2006.2007. This increase was mainly due to a 74.6%30.9% increase in the average balance of trading assets in 20072008 compared to 20062007 related to our growth. The increase was partially offset by the decrease in the basic interest rates.strategy to manage liquidity.

Interest income from available-for-sale securities totaled R$ 1,9922,536 million in 2007, representing2008, an increase of R$ 756544 million, or 27.3%, compared to 2006.2007. This increase was mainly due to a 74.5%24.6% growth in the average balance of available-for-sale securities in 2007 in2008 compared to 2006 related to our growth.2007.
 
Interest Expense

The following table describesshows the mainprincipal components of our interest expense in 20072008 and 2006.2007.

 Year Ended December 31,  Year Ended December 31, 
 2007  
2006
  2008  2007 
 (in millions of R$)  (in millions of R$) 
Interest expense           
Interest on deposits (3,510) (3,950)  (6,233)  (3,510)
Interest on securities sold under repurchase agreements (3,453) (2,007)  (6,489)  (3,453)
Interest on short-term borrowings (3,329) (2,328)  (7,737)  (3,329)
Interest on long-term debt (1,433) (1,455)  (4,721)  (1,433)
Interest credited to investment contracts account balance  (1,546)  (1,364)  (1,328)  (1,546)
Total interest expense  (13,271)  (11,104)  (26,508)  (13,271)

In 2007,Total interest expense was R$ 13,27126,508 million representingin 2008, an increase of R$ 2,16713,237 million, or 99.7%, compared to 2006.2007.

Interest expense on deposits was R$ 3,5106,233 million in 2007, representing a decrease2008, an increase of approximately R$ 4402,723  million, or 77.6%, compared to 2006,2007, mainly as a result of a declinean increase of R$29,103 million on the average balance of deposits. The increase on the balance of deposits is related to our large customer’s base that provides us with the funding to support the expansion in the basic interest rates (SELIC).credit transactions and maintain adequate liquidity levels.

Interest on securities sold under repurchase agreements increased bywas R$ 1.4466,489 million in 20072008 an increase of  R$3,036 million, or  87.9%, compared to 2006.2007. This increase was mainly due to a 163.2%97.7% increase inon the average balance of securities sold under repurchase agreements compared to 20062007 related to our growth.
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different funding strategies, i.e., the increase in credit transactions is supported by funds obtained from customers, while marginal funding needs are met through funds obtained in the market.
 
Given the higher demand for credit, we have been increasingly facing important questions related to the need for consistent funding sources to sustain our ability to offer credit products. Interest on short-term borrowings increased 43%totaled R$7,737 million in 20072008, an increase of R$4,408 million, or 132.4%, compared to 2006, totaling R$ 3,329 million, mainly due to an increase in the2007. The average balance of short-term borrowing totaled R$58,252 million in 2007, which2008 and was causedaffected by the increase inon the balance of securities issued and sold to customers under repurchase agreements   as a result of our funding strategy to raise funds in the market and backed by own securities.securities, and, to a lesser extent, the impact of exchange rate variation on funding denominated in or indexed to foreign currencies.
 
Interest on long-term debt decreased tototaled R$ 1,4334,721 million in 2007 from2008, an increase of R$ 1,4553,288  million, in 2006,or 229.4%, compared to 2007. This increase was mainly due to the decreaseimpact of exchange rate variation on liabilities denominated in the average yield during the period. The decrease was partially offset byor indexed to foreign currencies, and, to a lesser extent, the increase inon the average balance of long-term debt, particularly subordinated debt.

Interest paidcredited to the investment contracts account balance totaled R$ 1,5461,328 million in 2007, an increase2008, a decrease of R$ 182218 million, from 2006.or 14.1%, compared to 2007. This increasedecrease is due to a 37.3% growththe effects of the turmoil in the average balance of investment contracts as a result of good market acceptance of our investment contracts products in 2007.international financial crisis on local financial markets. See “Item 4B – Business Overview – Retail Banking – Private Retirement Plans.”

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Provision for Loan and Lease Losses

Provision for loan and lease losses totaled R$ 5,5429,361 million in 2007,2008, an increase of R$ 3953,819 million, or 68.9%, in 2007 comparedcomparison to 2006.2007. The relatively small increase in provision for loan and lease losses vis-à viswas mainly due to the significant growth in theincrease on average balance of loans and leases, in the same period was mainlyand, to a lesser extent, due to adjustments to our criteria to make provisions for loan and lease losses. We based these criteria on historic information of losses and decided to adjust the consistent improvementinformation to incorporate the economic scenario during the last quarter of 2008 which resulted in deterioration of the quality ofcredit risk in our loansloan and leaseslease portfolio. This adjust mainly affected the expenses related to the retail portfolio, as a resulttotaling R$1,489 million on December 31, 2008. We also considered the impact in our corporate clients’ portfolio by reviewing the consequences of the adoption of appropriate credit policies that have led to an improvement in the risk profile of successive harvests of credit.international economic turmoil over different economic sectors. It is also important to emphasize that we have not made any credit operations in the U.S. subprime market, including any collateralized debt obligations.

Non-Interest Income

The following table below shows the mainprincipal components of our non-interest income in 20072008 and 2006.2007.

 Year Ended December 31,  Year Ended December, 31. 
 
2007
  2006  2008  2007 
 (in millions of R$)  (in millions of R$) 
Non-interest income            
Fee and commission income 7,832  6,788   8,941   7,832 
Trading income (losses) 1,955  2,136 
Trading income (loss)  (2,843)  1,955 
Net gain (loss) on sale of available-for-sale securities (183) 283   (114)  (183)
Net gain on foreign currency transactions 83  (139)  1,059   83 
Net gain (loss) on transactions of foreign subsidiaries (971) (117)  1,938   (971)
Equity in earnings of unconsolidated companies, net 476  566 
Equity in earning of unconsolidated companies, net  474   476 
Insurance premiums, income on private retirement plans and on capitalization plans 3,500  3,479   3,917   3,500 
Other non-interest income  4,323   1,618   2,403   4,323 
Total non-interest income  17,015   14,614   15,775   17,015 

Non-interestIn 2008, our non-interest income totaled R$ 17,01515,775 million, in 2007, an increasea decrease of R$ 2,4011,240 million, or 7.3%, in 20072008 compared to 2006.2007. This increasedecrease was primarily due to the increasedecrease of R$ 4,3234,798 million in other non interesttrading income (loss) related mainly to gainsour risk management strategy and administration of gaps, particularly those associated with derivative instruments used to hedge our investments abroad. This decrease was partially offset by the increase of R$2,909 million in net gain (loss) on saletransactions of equity interests in the Bovespa and BM&Fforeign subsidiaries and the Serasa and Redecard. See “Item 4B. Business Overview – Divestitures”.increase of R$976  million in net gain on foreign currency transactions. The exchange rate volatility caused by the turmoil in international financial markets was the primary cause of these variations.

Fee and commission income reachedtotaled R$ 7,8328,941 million in 2007,2008, an increase of R$ 1,0441,109 million, in 2007or 14.2%, compared to 2006.2007. This increase was primarily due to an increase of R$ 342 million in credit card fees related to a 10.3% growth in our credit card base that reached 14,778 thousand units. The increase was, to a lesser extent, due to (i) an increase of R$ 164 million in revenues obtained from assets under management related to the growth of the balance of mutual funds that reached R$ 211,464 million in 2007 compared to R$ 179,808 million in 2006; (ii) an increase of R$ 181668 million in fees charged on checking account services as a result of the growth of our customers’ base and due to rate adjustments; and (iii) an increase of R$ 134246 million in the income from brokerage including underwriting commissions primarily duecredit card fees related to the increasegrowth in our investment banking operations. The consolidation of our operations in Chile and Uruguay also contributed to the increase of fee and commission income.
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credit card base.
 
Trading income was(loss) totaled R$ 1,955(2,843) million in 2008, a decrease of R$ 1814,798 million compared to 2006.2007. This decrease reflects lower gainslosses associated with our risk management strategy and administration of gaps, particularly those associated with derivative instruments used to hedge our investments abroad and mark-to-market effects on securities.

Net gain (loss) on sale of available for-sale securities totaled a loss of R$ 183 million in 2007 compareddue to a gainsignificant exchange rate variation and devaluation of R$ 283 million in 2006. This decrease was mainly due to the recognition of currency exchange losses on securities matured or sold in 2007 that were reclassified to the statement of income upon maturity or sale. The real appreciation in relation to the U.S. dollar contributed to this effect in the last years.against foreign currencies.

Net gain on foreign currency transactions totaled R$ 831,059  million in 2007,2008, an increase of R$ 222976  million, in 2007or 1175.9%, compared to 2006.2007. This increase was mainly due to arbitrage gains on foreign currency operations.operations due to increased market volatility.

Net gain (loss) on transactions of foreign subsidiaries totaled a lossgain of R$ 9711,938 million in 20072008 compared to a loss of R$ 117971 million in 2006,2007, mainly as a result of the effect of a greater exchange rate variation on assets and liabilities of investmentssubsidiaries abroad. During 2007,2008, the real appreciated 17.2%depreciated 31.9% against the U.S. dollar compared to 8.7%an appreciation of 17.2% during 2007.

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Insurance premiums, income on private retirement plans and on capitalization plans totaled R$3,917 million in 2006.2008, an increase of R$417  million, or 11.9%, compared to 2007. This increase was mainly due to a 21.4% increase in the number of mass products insurance policies written in 2008. At December 31, 2008, insurance provisions totaled R$2,394 million, an increase of 18.7% during the period. At the same date, pension plans technical provisions totaled R$25,100 million, an increase of 21.3% during the period. The number of capitalization bonds – PIC – also increased 17.7% during the period. These increases were due to the greater acceptance of our products and the efforts of our sales force.

Other non-interest income totaled R$ 4,3232,403 million in 2007, an increase2008, a decrease of R$ 2,7051,920  million, or 44.4%, compared to 2006.2007. This increasedecrease was mainly due to the fact that in 2008 we did not have gains on sale of equity interest while in 2007 we carried out the sale of participations in Serasa, Redecard Bovespa and BM&F. See “Item 4B. Business Overview – Divestitures.”Bm&fBovespa.
 
Non-Interest Expense

The following table shows the main components of our non-financial expensesnon-interest expense in 20072008 and 2006.2007.

 Year Ended December 31, 
 Year Ended December 31,  2008  2007 
 
2007
  2006  (in millions of R$) 
Non-interest expense: (in millions of R$)       
Salaries and employee benefits (5,705) (5,341)  (6,170)  (5,705)
Administrative expenses (5,472) (4,710)  (6,409)  (5,472)
Amortization of intangible assets (974) (609)  (1,201)  (974)
Insurance claims, changes in reserves for insurance operations, for private retirement plans and acquisition costs (2,509) (2,663)  (3,301)  (2,509)
Depreciation of premises and equipment (675) (605)  (756)  (675)
Other non-interest expense  (5,692)  (4,133)  (6,174)  (5,692)
Total non-interest expense  (21,027)  (18,061)  (24,011)  (21,027)

Non-interest expense totaled R$ 21,02724,011 million in 2007,2008, an increase of R$ 2,9662,984 million in 2007 compared to 2006. The increase is due to the reasons described below.2007.
 
Salaries and employee benefits expenses totaled R$ 5,7056,170 million in 2007, a 6.8%2008, an increase in 2007of R$465  million, or 8.2%, compared to 2006.2007. This increase was due to an increased number of branches a wage adjustmentand points of 6% undersales and the impact of the Worker’s Union Agreement (Convenção Coletiva do Trabalho) established in September 20072008 pursuant to which compensation, benefits and charges were increased by 8.15% or 10%, depending on the consolidation of our operations in Chile and Uruguay.salary range.
 
Administrative expenses totaled R$ 5,4726,409 million in 2007, a 16.2%2008, an increase in 2007of R$937 million, or 17.1%, compared to 2006.2007. This increase was mainly due to the expansion of our operating activities, which affected all administrative expense items. As an example, during the additionyear 2008, we had an expansion of 161134 new branches toin our branchesbranch network and the consolidationnumber of our operations in Chile and Uruguay.employees totaled 71,354 as of December 31, 2008, an increase of 5,250 compared to December 31, 2007.
 
Amortization of intangible assets totaled R$ 9741,201 million in 2007,2008, an increase of R$ 365227 million, in 2007or 23.3%, compared to 2006.2007. This increase was mainly due to investments madean increased balance of amortizable intangible assets acquired in BankBoston´s operations in Brazil, Chilethe periods, particularly the rights to credit payrolls and Uruguay in 2006perform tax collections for Municipal and 2007.State Governments.
 
Insurance claims, changes in reserves for insurance operations, for private retirement plans and acquisition costs totaled a negative result of R$ 2,5093,301 million in 2007, a decrease2008, an increase of R$ 154792 million, in 2007or 31.6%,  compared to 2006,2007. This increase is mainly duerelated to the lower price-level restatementexpansion of our operations and, to a lesser extent, the regular revision of the reserves.
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estimated risks of the operations of insurance and private retirement.
 
Depreciation of premises and equipment totaled R$ 675756 million in 2007, a 11.6%2008, an increase in 2007of R$81 million, or 12.0%, compared to 2006.2007. This increase was mainly due to investmentsincreased capital expenditures made in BankBoston’s operations in Brazil, Chile2007 and Uruguay in 2006 and 2007.2008.

 
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Other non-interest expenses totaled R$ 5,6926,174 million in 2007,2008, an increase of R$ 1,559482 million, in 2007or 8.5%, compared to 2006 as a result of several reasons described as follows.2007. In 2007,2008, we had an increasea decrease of R$ 573689 million in tax expenses on services, revenue and other taxes primarily related to increased operating activities.a reversal of tax provisions for CPMF on leasing operations. We also had an increase of R$ 7281,006 million in litigation expenses related to constitution of provisions for civil and tax claims. Credit card related expenses increased R$ 143148 million related to increased sales efforts.
 
Taxes on income
 
TaxesOur total tax on income increasedis composed of current income tax and deferred tax. Certain amounts of income and expenses are recognized in our statement of income but do not affect our taxable basis and, conversely certain amounts are taxable income or deductible expenses in determining our taxes on income but do not affect our statement of income. Those items are known as permanent differences. Income tax expense for the year resulted in a benefit of R$ 1,7131,334 million in 20072008 compared to a tax expense of R$4,147 million compared to R$ 2,434 million in 2006. The earnings before taxes reached R$ 11,778 million in 2007, an increase of R$ 3,229 million as compared to 2006. In 2007, we obtained a lower tax benefit from interest on stockholders’ equity compared to 2006 because an increased portion of the stockholders’ remuneration for 2007 was distributed as dividends given the decrease in the Long-Term Interest Rate (TJLP) and the increase in net income during 2007. Law No. 9,249, dated as of December 26, 1995, created interest on stockholders’ equity as an alternative means to dividends of remunerating stockholders. Interest on stockholders’ equity is deemed to be a dividend payment. However, as opposed to dividend payments, interest on stockholders’ equity is deductible for income tax calculation subject to certain limits.prior year.

Net income
In 2007, our net income was R$ 7,662 million representing a 26.9% increase compared to 2006. The increase of 32.7 % in net interest income after provision for loan and lease losses was primarily due to the growth of the balance of loans and leases, as well as the positive effects relatedmain factors that contributed to the change in our credit portfolio mix. Also, this increase wasincome tax from year to year are: (i) during 2008 we had a resulthigher tax benefit on dividends paid under the form of the improved credit risk which is the consequenceinterest on shareholders equity (a form of the adoption of credit policies that emphasize quality and diversification of clients. The increase in non-interest income is basically related to gains on sale of investments and the increase in non-interest expenses was mainly due to increases in personal, administrative and other non-interest expenses associated with the expansiontax deductible dividend) because during 2007 most of our operating segments, as well asdividend distribution was made under the form of dividends, and (ii) the effect of exchange gains and losses on our subsidiaries abroad and the consolidationoffsetting effect of economic hedge instruments on the investments. The net tax benefit on interest on shareholders’ equity totaled R$660 million in 2008, an increase of R$578 million compared to 2007. The nontaxable (deductible) exchange gains (losses) on foreign subsidiaries totaled a benefit of R$775 million in 2008, an increase of R$1,105 million compared to 2007.

For Brazilian tax purposes exchange gains and losses on our operationsinvestments in Chilesubsidiaries abroad are not taxable, if gain, or not deductible, if a loss and Uruguay.are a permanent difference. From an economic perspective we hedge the investments in subsidiaries abroad by using foreign-currency denominated liabilities or derivative instruments. The gains or losses on derivative instruments and the exchange gains and losses on foreign-currency denominated liabilities are taxable or deductible for purposes of Brazilian taxes. During 2008 we experienced significant devaluation of the real against the foreign currencies on which our subsidiaries operate generating non-taxable gains. The devaluation of the real generated tax deductible losses on derivatives instruments used as economic hedge and tax deductible foreign-exchange losses on liabilities used also as economic hedges. The resulting effect is that in certain companies we had taxable losses for which a deferred tax assets was recognized.

5B. Liquidity and Capital Resources
 
Our financial executiveinstitutional treasury and liquidity supervisory committee determines our policy regarding asset and liability management.
Our policy is to maintain a close match of our maturity, interest rate and currency exposures. In establishing our policies and limits, the institutional treasury and liquidity supervisory committee considers our exposure limits for each market segment and product, and the volatility and correlation across different markets.

We have invested in improving risk management of the liquidity inherent in our activities. We have simultaneously maintained a portfolio of bonds and securities with higher liquidity (operational reserve)(an “operational reserve”), which represents a potential source for additional liquidity.

Management controls our liquidity reserves by forecastingprojecting the resources that will be available for applicationinvestment by our treasury department. The technique we employ involves the statistical projection of scenarios for our assets and liabilities, considering the liquidity profile of our counterparts.
 
Short-term minimum liquidity limits are defined according to guidelines set by the financial executiveinstitutional treasury and liquidity supervisory committee. These limits aim at ensuringto ensure sufficient liquidity, as well as foreseeing minimum needs.  We revise theseincluding upon the occurrence of unforeseen market events. These limits are revised periodically and base themfounded on the projection of cash needs in atypical market situations (i.e., stress scenarios).
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Management of liquidity makes it possible for us to simultaneously meet our operating requirements, protect our capital and take advantage of market opportunities.  The minimum amount of liquidity is determined by the reserve requirements established by the Central Bank.  We satisfy these requirements by maintainingmaintain a proper balance between maturity distribution and diversity of sources of funds.  Our strategy is to maintain adequate liquidity to meet our present and future financial obligations and to capitalize on business opportunities as they arise.  See “Item 4B– Business Overview – Risk Management – Market and Liquidity Risk Management.”
 
Due to our stable sources of funding, which include a large deposit base, the large number of correspondent banks with which we have long-standing relationships as well as facilities in place pursuant to which we can access further funding, we have not historically experienced any liquidity problems, despite the recent disruptions in the international financial markets.

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The following table sets forth our average deposits and borrowings for 2009, 2008 2007 and 2006.2007.
 For the years ended December 31,  For the years ended December 31, 
 2008  2007  2006  2009  2008  2007 
 
Average
balance
  
% of
total
  
Average
balance
  
% of
total
  
Average
balance
  
% of
total
  
Average
balance
  
% of
total
  
Average
balance
  
% of
total
  
Average
balance
  
% of
total
 
Interest-bearing liabilities  230,083   68.8%  151,391   62.6%  104,073   59.8%  382,880   74.1%  230,083   68.8%  151,391   62.6%
Interest-bearing deposits 74,390  22.3% 45,287  18.7% 42,173  24.2%  159,296   30.8%  74,390   22.3%  45,287   18.7%
Savings deposits 29,509  8.8% 25,256  10.4% 21,797  12.5%  40,998   7.9%  29,509   8.8%  25,256   10.4%
Deposits from banks 1,461  0.4% 3,588  1.5% 3,118  1.8%  2,605   0.5%  1,461   0.4%  3,588   1.5%
Time deposits 43,421  13.0% 16,443  6.8% 17,258  9.9%  115,693   22.4%  43,421   13.0%  16,443   6.8%
                                          
Securities sold under repurchase agreements 45,234  13.5% 22,880  9.5% 8,694  5.0%  65,939   12.8%  45,234   13.5%  22,880   9.5%
Borrowings: 89,589  26.8% 67,005  27.7% 41,391  23.8%  124,953   24.2%  89,589   26.8%  67,005   27.7%
Short-term borrowings 58,252  17.4% 41,199  17.0% 23,349  13.4%  70,861   13.7%  58,252   17.4%  41,199   17.0%
Long-term debt 31,337  9.4% 25,805  10.7% 18,042  10.4%  54,093   10.5%  31,337   9.4%  25,805   10.7%
Investment contracts 20,870  6.2% 16,220  6.7% 11,816  6.8%  32,691   6.3%  20,870   6.2%  16,220   6.7%
Non-interest-bearing liabilities  68,394   20.5%  57,431   23.8%  46,934   27.0%  70,272   13.7%  68,394   20.5%  57,431   23.8%
Non-interest bearing deposits 21,198  6.3% 18,364  7.6% 13,016  7.5%  23,799   4.6%  21,198   6.3%  18,364   7.6%
Other non-interest bearing liabilities  47,196   14.1%  39,067   16.2%  33,918   19.5%  46,474   9.0%  47,196   14.1%  39,067   16.2%
Total liabilities  334,329   100.0%  241,714   100.0%  174,074   100.0%  516,428   100.0%  334,329   100.0%  241,714   100.0%

Our principal sources of funding are deposits, on-lendingdeposits received under repurchase agreements, onlending from government financial institutions, lines of credit with foreign banks and the issuance of securities abroad. For a more detailed description of our sources of funding see “Item 4B– Business Overview – Funding” and, Note 15 to our Consolidated Financial Statements – Deposits, Note 16 – Short-term borrowings and Note 17 – Long term debt.
Our current funding strategy is to continue to use all our funding sources in accordance with their cost and availability and our general asset and liability management strategy. We consider our current level of liquidity to be adequate. The strong demand for creditrecent international financial turmoil has increasedmagnified the importance of issues associated with the funding of these transactions.the transactions and the liquidity of financial institutions around the world. In order to finance the growth in our loan portfolio,operations, we increased the use ofconcentrated efforts on liquidity provided by savings and time deposits, in 2008. This was a strategic decision that was benefited by the impact of the international economic turmoildeposits received under repurchase agreements, borrowings and the consequent increased demand for sound institutions by depositors.
onlending. We also seekare seeking to increase our savings deposit base and our base of managed market funds under our management.funds. This funding strategy is designed to provide better profitability through higher spreads on our savings deposits and more favorable fees earned on market funds under our management.funds.

 
Our ability to obtain funding depends on numerous factors, including our credit ratings, general economic conditions, investors’ perception of emerging markets in general and of Brazil in(in particular, prevailing economic and political conditions in Brazil and government regulations in relation to foreign exchange currency funding and our credit ratings.funding).
 
Some of our long-term debt provides for acceleration of the outstanding principal amountbalance upon the occurrence of specified events, which are events ordinarily found in long-term financing agreements. As of December 31, 2008, none of these events, including any2009, no events of default or failure to satisfy financial covenants has occurred.had occurred and we have no reason to believe that it is reasonably likely that any of these events will occur during 2010.
 
Changes in Cash Flows
 
During the years ended December 31, 2009, 2008 and 2007, and 2006, mainlyour cash flow was affected principally by the changes in the Brazilian economic environment and market conditions affectedconditions. The “Association” also had a material impact on our cash flow.flows in 2009. The following table sets forth the main variations in our cash flows during 2009, 2008 2007 and 2006.2007.

95100

 For the Year Ended December 31,  For the Year Ended December 31, 
 2008  2007  2006  2009  2008  2007 
 (in millions of R$)  (in millions of R$) 
Net cash provided by (used in) operating activities (12,681) 2,044  3,305   56,783   (12,681)  2,044 
Net cash used in investing activities (80,328) (45,404) (19,740)  (5,541)  (80,328)  (45,404)
Net cash provided by financing activities  98,836   52,276   18,822   (13,822)  98,836   52,276 
Net increase (decrease) in cash and cash equivalents  5,827   8,916   2,387   37,420   5,827   8,916 

Operating Activities
 
Our cash flows from operating activities provided cash inflows for approximately R$56.8 billion in 2009 cash outflows for approximately R$12.7 billion in 2008 and cash inflows for approximately R$2.0 billion in 2007. In 2009, the changes in cash flows from operating activities resulted mainly from decreases in trading assets and R$ 3.3 billion for 2007 and 2006, respectively. additional generation of cash as result of the Association. In 2008, the liquidity provided by increased deposits was applied in trading assets and was the main cause for the decrease in our cash flow from operating activities.
 
Investing Activities
 
Our cash flows from investing activities generated cash outflows of approximately R$ 80.35.5 billion, R$ 45.480.3 billion and R$ 19.745.4 billion in 2009, 2008 2007 and 2006,2007, respectively.
 
In 2009, the changes in cash flows from investing activities resulted mainly from the cash of Unibanco resulting from the Association and less granting of loans as compared to prior years. In 2008 2007 and 2006,2007, the cash used in investing activities resulted mainly from the increase in credit operations.
 
Financing Activities
 
Our cash flows from financing activities generated cash outflows of approximately R$13.8 billion in 2009, and cash inflows of approximately R$98.8 billion, R$ 52.3 billion and R$ 18.852.3 billion in 2008 and 2007, respectively.
In 2009, the changes in cash flows from financing activities resulted mainly from reductions in deposits and 2006, respectively.other financing.
 
In 2008, the increase in our credit operations required us to intensify the use of different sources of funding, such as deposits and securities sold under repurchase agreements, increasing our cash flow from financing activities.
 
In 2007, the increase in our credit operations required us to gain access to different sources of funding, such as deposits, securities sold under repurchase agreements, short-term borrowings and long-term debts, increasing our cash flow from financing activities.
 
In 2006, the increase in our cash flow from financing activities was a result of the increase in securities sold under repurchase agreements and short-term borrowings, specially the issuance of securities issued and sold to customers under repurchase agreements. The increase in our credit operations required the diversification and an intensive use of different funding sources.
We paid dividends and interest on stockholders’shareholders’ equity in the amounts of approximately R$ 2.93.8 billion, R$ 2.32.9 billion and R$ 1.72.3 billion for 2009, 2008 2007 and 2006,2007, respectively. We also acquired treasury stock, generating cash outflows of approximately R$7 million, R$1.6 billion and R$261 million for 2009, 2008 and R$ 37 million for 2008, 2007, and 2006, respectively.

Capital
 
We are required to comply with Brazilian capital adequacy regulations under Central Bank rules, thatwhich require banks to have regulatorytotal capital equal to or greater than 11% of risk-weighted assets, which are similar to the recommendationsin lieu of the Banking Supervision Committee8% minimum capital requirement of Basel.the original Basel Accord, or Basel I, and Basel II. See “Item 4B – Business Overview – Regulation and Supervision –— Regulation by the Central Bank – — Capital Adequacy and Leverage/Regulatory Capital Requirements” for a detailed discussion of regulatory capital requirements.
96
Requirements.”
 
As required by Central Bank rules, we currently measure our capital compliance inaccording to two different ways:methods: (i) by consolidating only our financial institutions,subsidiaries, and (ii) on a fully consolidated basis, including all of our financial and non-financial subsidiaries. We believe we have a solid capital base as measured by our solvency ratio.both methods. As of December 31, 2009, 2008 2007 and 2006,2007 our solvency ratio measured on a fully consolidated basis was 16.3%16.7%, 17.9%16.3% and 17.2%17.9%, respectively. The decrease in our solvency ratio frommeasured on a fully consolidated basis since December 31, 2007 to 2008 was ahas been the result of several factors, such as: (a) the net income of the period less the payment of dividends and interest on stockholders’ equity; (b) the issuance of subordinated debt; (c) the change of the procedures for calculation of weighted exposure as from July 1, 2008, as described below; (d) the inclusion, in Tier 1, of the allowance for loan losses additional to the minimum percentage required by the current CMN regulation, as described below; (e) theincluding: (i) an organic increase in weightedour total risk-weighted assets, mainly due to the growth of credit operations;operations and (f)(ii) the effecteffects of the Association with Unibanco in the fourth quarter of 2008, partially offset by (iii) the impact of net income less payments of dividends and interest on shareholders’ equity for each period and (iv) the reasonsinclusion in Tier 1 Capital as of December 31, 2009 and 2008 of any excess allowance for loan losses over the minimum amounts required by CMN regulations (as described in “Item 4B. Business Overview – Selected Statistical Information – Capital – Minimum Capital Requirements”below).

 
The Required Regulatory Capital (PRE) is calculated according to the following formula:
101
 
PRE = PEPR + PCAM + PJUR + PCOM + PACS + POPR, where:
PEPR is the regulatory capital required to cover the risk-weighted exposures, or Credit Risk (0.11 X EPR);
PCAM is the regulatory capital required to cover the Market Risk in Foreign Exchange;
PJUR is the regulatory capital required to cover the Market Risk in Fixed Interest Rate, Foreign Exchange Coupon, Price and Other Indices;
PCOM is the regulatory capital required to cover the Market Risk in Commodities;
PACS is the regulatory capital required to cover the Market Risk in Stock; and
POPR is the regulatory capital required to cover the Operational Risk.
To disclose the Capital Adequacy Ratio, we used to use the formula:
(PR X 100)/(PRE/0.11)
Where PR is our regulatory capital.

CMN Resolution No. 3,490, of August 29, 2007, which provides forsets out the current criteria forcurrently applicable to our computation of the Required Referential Equity (PRE),our minimum regulatory capital required, has been in effect since July 1, 2008. For calculation of theour risk portions, we follow the procedures of the following Central Bank circulars and circular letters:
•           Circular No. 3,360, of September 12, 2007 for credit risk, ofrisk;
•           Circulars No. 3,361, 3,362, 3,363, 3,364, 3,366 and 3,368, of September 12, 2007, 3,388, of June 4, 2008, and 3,389, of June 25, 2008 and Circular Letters nºs.No. 3,309 and 3,310,of April 15, 2008 for market risk, and
•           Circular No. 3,383 and Circular Letters Nos. 3,315 and 3,316, of April 30, 2008 for operational risk, were followed.risk. For thecalculation of our operational risk portion, Itaú Unibanco Holdingwe opted for the use of the Alternative Standardized Approach.standardized alternative approach.
 
The changes arising from CMN Resolution 3,490 and the new regulation, after considering all impacts,related circulars and circular letters above have not shownresulted in significant effectschanges in theour credit risk and market riskrisks portions. TheWe expect, however, that the following three changes scheduled to come into effect in 2010 will affect our solvency ratio.
First, the operational risk portion of our total risk-weighted assets will be increasingly incorporated, as set forth by Circular No. 3,383. Initially, it stands at 20%From July 1, 2009, we incorporate 80.0% of the determinedrequired amount, and itthis percentage will be increased in every six-month period until reaching the full capital amount onincorporation of the operational risk portion in our total risk-weighted assets from January 1, 2010. Should theIf we had fully incorporated operational risk portion in our total effect be immediately considered, the Baselrisk-weighted assets as of December 31, 2009, our solvency ratio would be 15.6% on a fully consolidated basis.basis as of December 31, 2009 would have been 16.5%.
 
Second, CMN Resolution 3,674, of December 30, 2008, started permittingpermitted the full addition to Tier I,1 Capital of the additional provision amount toany excess allowance for loan losses over the minimum percentagesamounts required by CMN Resolution No. 2,682 of December 21, 1999, for loan, lease1999. This addition is reflected in our solvency ratio as of December 31, 2009 and other operations with credit characteristics.2008. However, CMN Resolution No. 3,825, of December 16, 2009, revoked Resolution No. 3,674, and will take effect from April 1, 2010. If this revocation had been in effect and we had fully incorporated the operational risk portion into our total risk-weighted assets as described in the prior paragraph as of December 31, 2009, our solvency ratio on a fully consolidated basis would have been 15.3%.
 
Circular No. 3,476, of December 28, 2009, requires that from June 30, 2010 our minimum regulatory capital required on a fully consolidated basis include an additional portion under regulatory capital to cover operational risk, which portion is calculated based on our weighted equity in the earnings of our subsidiaries and affiliated companies. If this requirement and the requirements described in the two preceding paragraphs had been in effect as of December 31, 2009, our solvency ratio on a fully consolidated basis would have been 15.2%.
Taking into account the agreement to combine the operations of Itaú and Unibanco Financial Groups entered into in November 2008, referred to in “Item 4A. History and Development ofwe have presented the Company – Recent Developments – Association between Itaú and Unibanco Financial Groups” and “Item 10C. Material Contracts – Association between Itaú and Unibanco Financial Groups” since November 2008 information on minimum capital requirements is being presented to the Central Bank only on a combined basis of Itaú and Unibanco.Unibanco since November 2008. The comparative information for 2007 corresponds only to Itaú Unibanco Holding and, as a result, it may not be directly comparable with the information in 2008. The presentation of this information on a combined basis was authorized by the Central Bank as from November 2008 in spite of approval for the transaction not having yet been granted by the Central Bank and as information useful in the analyses by the Central Bank of the request of approval. Since November 2008 we have discontinued to present to the Central Bank information on minimum regulatory requirements only for Itaú and the information below is presented on a combined basis for Itaú and Unibanco. The comparative information for 2007 corresponds only to Itaú Unibanco Holding and, as a result, it may not be directly comparable with the information in 2008.
97
 
The following table sets forth our capital positions of total risk-weighted assets, as well as our minimum capital requirements under Central Bank rules, in each case as of December 31, 2009, 2008 2007 and 2006,2007, according to the full consolidation method.

 
102

  Full Consolidation 
  As of December 31, 
  2009  2008  2007 
  (in millions of R$ , except percentages) 
Tier 1 Capital  57,706   52,156   29,611 
Tier 2 Capital  12,837   15,926   7,721 
Tier 1 plus Tier 2 Capital  70,543   68,082   37,332 
 Adjustments  (28)  (87)  (237)
Our Regulatory Capital  70,515   67,995   37,095 
Minimum regulatory capital required  46,513   45,819   22,850 
Excess over minimum regulatory capital required  24,002   22,176   14,245 
Total risk-weighted assets  422,840   416,540   207,726 
Our regulatory capital to risk-weighted assets ratio  16.7%  16.3%  17.9%
  Full Consolidation 
  As of December 31, 
  
2008
  2007  2006 
  (in millions of R$ , except percentages) 
Tier 1  52,156   29,611   28,182 
Tier 2  15,926   7,721   2,538 
Reference Capital  68,082   37,332   30,720 
Adjustments  (87)  (237)  (242)
Our Regulatory Capital  67,995   37,095   30,478 
Minimum regulatory capital required  45,819   22,850   19,446 
Excess over minimum regulatory capital required  22,176   14,245   11,032 
Capital to risk-weighted assets ratio  16.3%  17.9%  17.2%

*(*) As submitted to the Central Bank.

Interest Rate Sensitivity
 
Management of interest rate sensitivity is a key component of our asset and liability policy.  Interest rate sensitivity is the relationship between market interest rates and net interest income resulting from the maturity or re-pricing characteristics of interest-earning assets and interest-bearing liabilities.  The pricing structure is matched when an equal amount of these assets or liabilities matures or re-prices.  Any mismatch of interest-earning assets and interest-bearing liabilities is known as a gap position.  A negative gap denotes liability sensitivity and normally means that a decline in interest rates would have a positive effect on net interest income, while a positive gap denotes asset sensitivity and normally means that an increase in interest rates would have a positive effect on net interest income.  These relationships are as of one particular date only, and significant swings can occur daily as a result of both market forces and management decisions. Our interest rate sensitivity strategy takes into account rates of return, the underlying degree of risk, and liquidity requirements, including minimum regulatory cash reserves, mandatory liquidity ratios, withdrawal and maturity of deposits, capital costs and additional demand for funds.
 
Through our financial executiveOur institutional treasury supervisory committee we monitor our maturity mismatchesanalyzes the statement of income and risk information on a monthly basis and establishes limits for market risk exposure, interest rate positions and manage them within established limits.  Management reviews our positions weekly and changes positions promptly as market outlooks change.foreign currency positions.  For more detailed information on the monitoring of our positions, see “Item 4B– Business Overview – Risk Management – Market and Liquidity Risk Management.”
 
The following table sets forth our interest-earning assets and interest-bearing liabilities position as of December 31, 20082009 and therefore does not reflect interest rate gap positions that may exist as of any given date.  In addition, variations in interest rate sensitivity may exist within the re-pricing periods presented due to differing re-pricing dates within the period. Variations may also arise among the different currencies in which interest rate positions are held.

98103
 
(in millions of R$, except percentages) 
  
Up to 30
days
  
31-90
days
  
91-180
days
  
181-365
days
  
1-3
years
  
Over 3
years
  Total 
Total interest-earning assets  203,915   44,724   44,465   56,196   89,075   83,583   521,958 
Interest-bearing deposits in other banks  62,548   5,833   7,921   5,353   4,274   3,156   89,085 
Securities purchased under resale agreements and federal funds sold  48,699   4,632   3,383   -   -   -   56,714 
Central Bank compulsory deposits  13,869   -   -   -   -   -   13,869 
Trading assets  47,203   1,221   1,391   5,017   8,510   10,187   73,529 
Securities available-for-sale  8,090   2,267   4,437   5,529   9,961   10,979   41,263 
Securities held-to-maturity  5   11   -   25   413   1,308   1,762 
Loans and leases  23,501   30,760   27,333   40,272   65,917   57,953   245,736 
Total interest-bearing liabilities  236,191   13,999   15,338   21,978   72,644   51,812   408,962 
Savings deposits  48,222   -   -   -   -   -   48,222 
Time deposits  16,446   8,556   6,881   14,242   43,822   24,863   114,810 
Deposits from banks  570   301   429   543   84   65   1,992 
Securities sold under repurchase agreements and federal funds purchased  60,617   131   427   526   1,780   2,693   66,174 
Short- and long-term borrowings  69,273   5,011   7,601   6,667   26,958   24,191   139,701 
Investment contracts  38,063   -   -   -   -   -   38,063 
Asset/liability gap  (29,276)  30,725   29,127   34,218   16,431   31,771   112,996 
Cumulative gap  (29,276)  1,449   30,576   64,794   81,225   112,996     
Ratio of cumulative gap to total interest-earning assets  (5.6%)  0.3%  5.9%  12.4%  15.6%  21.6%    
  (in millions of R$, except percentages) 
  
Up to 30
days
  
31-90
days
  
91-180
days
  
181-365
days
  
1-3
years
  
Over 3
years
  Total 
Total interest-earning assets  96,723   62,599   36,188   56,702   67,635   51,879   371,726 
Interest-bearing deposits in other banks  8,671   9,445   5,594   20,769   5,050   149   49,677 
Securities purchased under resale agreements and federal funds sold  17,410   26,173   1,155   44   -   -   44,783 
Central Bank compulsory deposits  11,314   -   -   -   -   -   11,314 
Trading assets  31,975   2,795   4,426   4,916   9,774   12,597   66,483 
Securities available-for-sale  4,124   1,804   4,188   4,315   9,276   4,738   28,445 
Securities held-to-maturity  7   15   15   30   384   874   1,325 
Loans and leases  23,222   22,368   20,811   26,629   43,150   33,520   169,700 
Total interest-bearing liabilities  154,081   21,246   14,228   16,044   44,752   42,107   292,458 
Savings deposits  31,896                       31,896 
Time deposits  15,822   9,296   5,360   8,615   31,779   21,885   92,757 
Deposits from banks  449   190   679   447   265   12   2,042 
Securities sold under repurchase agreements and federal funds purchased  46,986   594   1,270   226   246   170   49,492 
Short- and long-term borrowings  34,606   11,166   6,919   6,756   12,462   20,040   91,949 
Investment contracts  24,322   -   -   -   -   -   24,322 
Asset/liability gap  (57,358)  41,353   21,960   40,658   22,883   9,772   79,268 
Cumulative gap  (57,358)  (16,005)  5,956   46,614   69,497   79,268     
Ratio of cumulative gap to total interest-earning assets  (15.4)%  (4.3)%  1.6%  12.5%  18.7%  21.3%    

Exchange Rate Sensitivity
 
The majorityA part of our operations is denominated in, or indexed to, reais. We also have assets and liabilities denominated in foreign currency, mainly in U.S. dollars, as well as assets and liabilities, which, although settled in reais, are dollar-indexed and therefore expose us to exchange rate risks.  The Central Bank regulates our maximum open, short and long foreign currency positions. AsThe gap management policy adopted by our institutional treasury supervisory committee takes into consideration the tax effects on this position. Since the profits from exchange rate variation on investments abroad are not taxed, we have set up a hedge (a liability and derivative instruments in foreign exchange) of December 31, 2008, 14.2% ofa sufficient amount, so that our total obligations were denominated in, or indexedforeign exchange exposure, net of the tax effects, is consistent with our strategy of low exposure to foreign currency.risk.
 
Our foreign currency position is composed on the liability side of the issuance of securities in the international capital markets, credit from foreign banks to finance trade operations lending borrowingsand dollar-linked onlendings from governmentalgovernment financial institutions in dollars.institutions. The proceeds of these operations are mainly applied to dollar-linked lending operations and securities purchases in dollars.purchases.
 
The following table sets forth assets and liabilities classified by currency including those settled in Brazilian reais and denominated in and indexed to foreign currencies as of December 31, 2008.2009. This table may not reflect currency gap positions at any other given rates. Variations may also arise among the different currencies that are held.

 
99104
 

(in millions of R$, except percentages) 
  As of December 31, 2009 
  R$  
Denominated
in foreign
currency
  
Indexed to
foreign
currency
  Total  
Percentage of
amounts
denominated
in and
indexed to
foreign
currency of
total
 
Assets: 534,418   53,563   11,107   599,088   10.8%
Cash and due from banks and restricted cash 4,952   346   57   5,355   7.5%
Interest - Bearing Deposits in Other Banks 75,534   13,054   497   89,085   15.2%
Securities Purchased under resale agreements 56,321   392   -   56,714   0.7%
Central Bank Compulsory Deposits 12,561   1,308   -   13,869   9.4%
Securities (2) 102,085   12,250   2,219   116,554   12.4%
Loans and leases 212,572   24,966   8,198   245,736   13.5%
Allowance for loan losses (19,290)  (677)  -   (19,968)  3.4%
Investments in affiliates and other investments 3,789   532   -   4,321   12.3%
Premises and equipment, net 4,452   120   -   4,572   2.6%
Goodwill, net 15,059   (348)  -   14,711   -2.4%
Intangibles assets, net 22,143   426   -   22,569   1.9%
Other assets (1) 44,242   1,202   127   45,570   2.9%
Percentage of total assets 89.2%  8.9%  1.9%  100.0%    
Liabilities and Stockholders’ Equity: 542,112   51,831   5,289   599,088   9.5%
Non-interest bearing deposits 17,766   7,892   227   25,885   31.4%
Interest - Bearing Deposits 143,809   21,215   -   165,024   12.9%
Securities sold under repurchase agreements 64,894   1,280   -   66,174   1.9%
Short-Term borrowings 73,738   6,045   941   80,725   8.7%
Long-Term borrowings 45,503   12,721   753   58,976   22.8%
Insurance claims reserve and reserve for private retirement plans 13,385   6   96   13,487   0.8%
Investment contracts 38,063   -   -   38,063   0.0%
Other liabilities (1) 62,774   2,673   3,273   68,720   8.7%
Nonocontrolling interest 12,757   -   -   12,757   0.0%
Stockholders’ equity 69,422   -   -   69,277   0.0%
Percentage of total liabilities and stockholders’ equity 90.5%  8.7%  0.9%  100.0%    
  
(in millions of R$, except percentages)
 
  As of December 31, 2008 
   R$  
Denominated
in foreign
currency
  
Indexed to
foreign
currency
  Total  
Percentage of
amounts
denominated
in and
indexed to
foreign
currency of
total
 
Assets:  327,294   59,067   15,014   401,375   18.5%
Cash and due from banks and restricted cash  2,976   438   79   3,493   14.8%
Loans and leases  131,454   25,885   12,360   169,699   22.5%
Securities (2)  83,146   11,594   1,513   96,253   13.6%
Premises and equipment, net  2,766   199   -   2,965   6.7%
Investments in affiliates and other investments  884   1,514   -   2,398   63.1%
Goodwill, net  1,272   (849)  -   423   -200.7%
Intangibles assets, net  6,465   211   -   6,676   3.2%
Non-performing loans  7,579   -   -   7,579   0.0%
Allowance for loan losses  (11,830)  (372)      (12,202)  3.0%
Other Assets  102,582   20,447   1,062   124,091   17.3%
Percentage of total assets  81.5%  14.7%  3.7%  100.0%    
Liabilities and Stockholders’ Equity:  344,286   51,138   5,951   401,375   14.2%
Non-interest bearing deposits  17,343   6,491   272   24,106   28.1%
Deposits, borrowings and other liabilities  291,311   44,647   5,679   341,637   14.7%
Minority interest in consolidated subsidiaries  1,245           1,245   0.0%
Stockholders’ equity  34,387           34,387   0.0%
Percentage of total liabilities and stockholders’ equity  85.8%  12.7%  1.5%  100.0%    
(1) Derivative financial instruments are presented in this table on the same basis as our consolidated financial statements presented in Item 18 in this annual report.
(1)Derivative financial instruments are presented in this table on the same basis as our consolidated financial statements presented in Item 18 in this annual report.
(2)(2) Including (i) Trading assets, at fair value;  (ii) Available-for-sale securities, at fair value; and (iii) Held-to-maturity securities, at amortized cost.

For purposes of analysing our exposure to changes in foreign currency,The the table below present the composition of our off-balance sheet derivative instruments as of December 31, 2008,2009, classified in reaisand foreign currency, which also include the instruments linked to foreign currency. We enter into these derivative instruments as part of our overall market risk strategy and we use derivatives instruments to hedge our investments in subsidiaries abroad, as well as clients' assets/liabilities positions.

(in millions of R$)(in millions of R$) 
 
(in millions of R$)
  Notional amounts 
 Notional amounts  R$  
Denominated
in or linked to
Foreign
Currency
  Total 
 
R$
  
Denominated
in or linked to
Foreign
Currency
   
Total
 
Off-balance sheet financial instruments          
Derivative financial instruments         
Swap contracts                  
Buy (Sale) commitments, net 5,475  (5,475)  0   4,641   (4,641)  - 
Forward contracts                        
Buy (Sale) commitments, net (194) 13,570  13,377   598   (1,509)  (911)
Future contracts                        
Buy (Sale) commitments, net (45,313) (16,155) (61,468)  (12,588)  (15,779)  (28,367)
Option contracts                        
Buy (Sale) commitments, net (97) (8,426) (8,523)  121,514   15,792   137,306 

Capital Expenditures
 
In 2008,2009, we made some capital expenditures inrelated to the integration process of Unibanco branches under the “Itaú” brand, as well as the opening of new branches and sales points.other points of sale. Over the past three years, we also have made significant capital expenditures to automate and upgrade our branch network and develop specific programs to improve the layout of several branches. In addition, we have made significant capital expenditures for computer systems, communications equipment and other technology designed to increase the efficiency of our operations, the services offered to our customers and our productivity.

 
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The table below sets forth our capital expenditures for the years ended December 31, 2009, 2008 2007 and 2006.2007.

 (in millions of R$) 
(in millions of R$)(in millions of R$) 
 
2008
  2007  2006  2009  2008  2007 
Land and buildings  33   20   102   168   33   20 
Furniture and data processing equipment  528   403   298   898   528   403 
Leasehold improvements  135   135   119   110   135   135 
Software developed or obtained for internal use  209   170   31   452   209   170 
Other   71   72   43   73   71   72 
Total  976   800   593   1,701   976   800 

We expect that our capital expenditures in 20092010 will not be substantially greater than our historical expenditure levelsincrease due to the integration process of Unibanco branches under the “Itaú” brand and will also consist mainly of investments to continue the upgrade of our technology, customer service and back-office administrative systems, as well as Internet-related investments.

We anticipate that, in accordance with our practice during recent years, our capital expenditures in 20092010 will be funded with our internal resources. We cannot assure you, however, that the capital expenditures will be made and, if made, that those expenditures will be made in the amounts currently expected.

5C. Research and Development, Patents and Licenses, Etc.
 
Not applicable.

5D. Trend Information
 
Several factors will affect our future results of operations, liquidity and capital resources, including:
 
• the Brazilian economic environment,
 
• the effects of any continued international financial turmoil, including on our required liquidity and capital,
• the effects of inflation in our results of operations,
 
• the effects of fluctuations in the value of the real variation and interest rates on our net interest income, and
 
• any acquisition of financial institutions we make in the future.
 
In addition, our recent acquisitions could affect the comparability of our financial statements. Each of these factors is described fully under “Item 5A – Operating and Financial Review and Prospects – Overview – Operating Results.”
 
As result of the acquisitions in 2009 we have recognized a significant amount of goodwill related to Redecard and indefinite-live brands which are subject to impairment testing at least on an annual basis. Reduction in the fair value of Redecard or reductions in the fair value of the brands may result in impairment charges if and when they are observed.
In addition, you should read “Item 3D – Key Information – Risk Factors” for a discussion of the risks we face in our business operations, which could affect our business, results of operations or financial condition.

5E. Off-Balance Sheet Arrangements
 
We do not have any off-balance sheet arrangements, other than the guarantees we granted that are described in Note 29(c) of our financial statements.

 
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5F.Tabular Disclosure of Contractual Obligations

The table below summarizes the maturity profile of our consolidated long-term debt, operating leases and other commitments as of December 31, 2008:2009:

 (in millions of R$) 
(in millions of R$)(in millions of R$) 
 Payments due by period  Payments   due   by   period 
Contractual Obligations 
Total
  
Less than 1
year
  1-3 year  3-5 year  
More than 5
years
  Total  
Less   than   1
year
  1-3   year  3-5   year  
More   than   5
years
 
Long-term debt obligations  37,672   7,745   9,885   14,293   5,749   58,976   7,827   26,958   15,071   9,120 
Operating and capital (finance) lease obligations  5,783   934   1,585   723   2,541   3,392   -   1,919   727   746 
Guarantees and stand by letters of credit   13,513   3,826   843   244   8,600   32,441   12,686   2,873   13,945   2,937 
Total  56,968   12,505   12,313   15,260   16,890   94,809   20,513   31,750   29,743   12,803 

ITEM 6  DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
 
6A.Directors and Senior ManagementDIRECTORS AND SENIOR MANAGEMENT
 
We are managed by our Conselho de Administração, or board of directors, and our Diretoria, or board of executive officers.
 
Our Pursuant to our bylaws, our board of directors maymust be composed of a minimum of ten and a maximum of fourteen14 directors elected by our stockholdersshareholders at the annual stockholdersshareholders’ meeting. It meets regularly eight times a year and extraordinarily any time it deems necessary. In 2008, it has met 21 times and 93% of meetings were attended by all members.
 
OurPursuant to our bylaws, our board of executive officers maymust be composed of a minimum of five and a maximum of 20 members. Our board of officers is elected by our board of directors.
 
All of our directors and executive officers serveare elected for a term of one year. Set forth below are the names, positions and dates of birth of the members of our board of directors and board of executive officers atas of the present date whoof this annual report. The members of our board of directors were elected on April 24, 2009 and April 29, 2009, by26, 2010 at the annual stockholders’shareholders’ meeting and the members of the board of officers were elected on May 3, 2010 at a meeting of the board of directors.
 Pursuant to Brazilian Law, the election of each member of our board of directors respectively, whichand board of officers must be approved by the Central Bank. An acting director or officer retains his or her position until he or she is reelected or a successor is elected. We have three directors who are awaitingindependent as determined pursuant to our corporate governance policy. See “16G - Principal Differences between Brazilian and U.S. Corporate Governance Practices — Majority of Independent Directors.”
 Set forth below are the ratificationnames, positions, dates of birth and brief biographical descriptions of the Central Bank.members of our board of directors and board of officers as of the date of this annual report.

 
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Directors:Directors
 
NamePositionDate of Birth
   
Pedro Moreira SallesChairman10/20/1959
Alfredo Egydio Arruda Villela FilhoVice Chairman11/18/1969
Roberto Egydio SetubalVice Chairman10/13/1954
Alcides Lopes Tapias (*)Director09/16/1942
Alfredo Egydio SetubalDirector09/01/1958
Candido Botelho BracherDirector12/05/1958
Fernando Roberto Moreira SallesDirector05/29/1946
Francisco Eduardo de Almeida PintoDirector12/14/1958
Guillermo Alejandro CortinaDirector09/09/1961
Gustavo Jorge Laboissiere Loyola (*)Director12/19/1952
Henri PenchasDirector02/03/1946
Israel VainboimDirector06/01/1944
Pedro Luiz Bodin de Moraes (*)Director07/13/1956
Ricardo Villela MarinoDirector01/28/1974
(*) Independent members.director


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Executive officers:
Officers
 
NamePositionDate of Birth
   
Roberto Egydio SetubalPresident and Chief Executive Officer or CEO10/13/1954
Alfredo Egydio SetubalExecutive Vice President09/01/1958
Candido Botelho BracherExecutive Vice President12/05/1958
Antonio Carlos Barbosa de OliveiraExecutive Officer06/13/1951
Claudia PolitanskiExecutive Officer08/31/1970
Marcos de Barros LisboaExecutive OfficerVice President08/02/1964
Ricardo BaldinExecutive Officer07/14/1954
Rodolfo Henrique FischerExecutive Officer12/26/1962
Sérgio Ribeiro da Costa WerlangExecutive OfficerVice President06/23/1959
Silvio Aparecido de Carvalho
Claudia PolitanskiExecutive Officer05/09/194908/31/1970
Carlos Elder Maciel de Aquino
Ricardo BaldinExecutive Officer04/09/196107/14/1954
Caio Ibrahim David (*)Executive Officer01/20/1968
Jackson Ricardo GomesOfficer08/21/1957
José Eduardo Lima de Paula AraujoOfficer10/22/1970
Luiz Felipe Pinheiro de AndradeOfficer09/14/1954
Marco Antonio AntunesOfficer10/31/1959
Wagner Roberto PuglieseOfficer12/15/1958
(*) Mr. David was elected a member of our board of officers on May 03, 2010, and his investiture is subject to Central Bank’s approval.
 
As described below in the biographical descriptions of our directors and executive officers, some of the members of our board of directors and our board of executive officers also perform senior management functions at other companies of theour subsidiaries and Itaúsa’s conglomerate.
Set forth below are brief biographical descriptions of our directorssa and executive officers:its subsidiaries. 
 
Mr. Pedro Moreira Salles was electedhas been chairman of our board of directors onsince November 28, 2008 (with investiture on February 19, 2009) and was our executive vice president from November 2008 to April 2009. He has workedMr. Moreira Salles began working at Unibanco sincein 1989, having beenwhere he eventually served as vice chairman of the board of directors, from 1991 to 1997, chairman of the board of directors from 1997 to 2004, and again occupying the post ofas vice chairman of the board of directors from 2004 until November 2008. Also atAt Unibanco, he held the post ofwas also chief executive officer from April 2004 to November 2008. At Unibanco Holdings he has beenserved as vice chairman of the board of directors and chief executive officer.  He has beenofficer from April 2004 to November 2008. Mr Moreira Salles served as chairman of the boards of directors of Unibanco Seguros S.A. and Banco Fininvest S.A. and vice chairman of the board of AIG Brasil Companhia de Seguros.AIU Seguros S.A. He is currently a member of the board of Ibmec and  has beenmember of the board of directors of Totvs S.A. Mr. Moreira Salles was previously a member of the board of Instituto Empreender Endeavor Brasil, as well as the president of the board of PlaNet Finance Brasil. Mr. Pedro Moreira Salles has a bachelor’s degree, magna cum laude, in economics and history from the University of California, Los Angeles. He also attended the international relations masters program at Yale University and the OPM – Owners/President Management Program at Harvard University.

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Mr. Alfredo Egydio Arruda Villela Filho was electedhas been the vice chairman of our board of directors onsince April 23, 2001 (with investiture on July 30, 2001). He has beenserved as president and CEO of Itaúsa since September 2008 and was a member of the board of directors of Itaúsa from 1995 to 2008. He is the chairman of the board of directors of Itautec S.A. and vice-chairmanvice chairman of the boardboards of Duratex S.A. and of Elekeiroz S.A. Mr. Villela Filho   has a bachelor’s degree in Mechanical Engineeringmechanical engineering from the Mauá Engineering School of the Instituto Mauá de Tecnologia (IMT) and a post-graduate degree in business administration from Fundação Getulio Vargas.

 
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Mr. Roberto Egydio Setubal was electedhas been the vice chairman of our board of directors onsince April 23, 2001 (with investiture on July 30, 2001). He has been ourserved as a director since April 1995 and our president and chief executive officer since April 1994. He wasserved as our general manager from 1990 to 1994. He has beenserved as executive vice president of Itaúsa since May 1994 and chairman of the Boardboard of Directordirectors of Itaú BBA since February 2003. Mr. Roberto Setubal was the president of the Brazilian Federation of Banks Association (Federação Brasileira de Associação de Bancos), or FEBRABAN and of the Brazilian National Federation of Banks (Federação Nacional de Bancos), or FENABAN, from April 1997 to March 2001. He was a member of the board of directors of Petróleo Brasileiro S.A. — PETROBRÁS from March 2002 to January 2003. He is currently a board member of the InstituteIIF and of International Finance, the International Monetary Conference and serves on the international advisory committee of the Federal Reserve Bank of New York and a member of the international advisory committee of the New York Stock Exchange.Exchange (“NYSE”). Mr. Roberto Setubal has a bachelor’s degree in production engineering from Escola Politécnica da Universidade de São Paulo and a Master’smaster of science degree in science engineering from Stanford University.
 
Mr. Alcides Lopes Tapias was electedhas been a member of our board of directors onsince April 30, 2002 (with investiture on August 5, 2002). He has been member of theour audit committee of Itaú’s Financial Group since 2004. PartnerHe is a partner in Aggrego Consultores; MemberConsultores and a member of the Advisory Board,its advisory board and a member of the board of directors and of the Audit, Financeaudit, finance and Actuarial, Human Resourcesactuarial, human resources and Information Technologyinformation technology committees of Medial Saúde; Memberde S.A. He served on the board of the Boarddirectors of Directors ofTigre S.A. – Tubos e Conexões Tigre from 1995 to 1999 and again since 2004; President2004. He was the president of FEBRABAN – Federation of Brazilian Bank Associations (Federação Brasileira de Associação de Bancos) from 1991 to 1994;  Chairman1994 and chairman of the Boardboard of Camargo Corrêa Holding CompanyS.A. from 1996 to 1999, of Usinas Siderúrgicas de Minas Gerais S.A. - Usiminas from 1997 to 1999 and of São Paulo Alpargatas S.A. from 1996 to 1999,1999. He was the Minister for Development, Industry and Commerce inof the Brazilian Federal Government from September 1999 to July 2001.  MemberHe was also a member of the Trustee Boardtrustee board of the Antonio Prudente Foundation Cancer Hospital from 1999 to 2005 Member ofand the Advisory Council of the BM&F – Futures and Commodities ExchangeBMF&BOVESPA from 2003 to 2008 and President2008. He also served as the president of the Fiscal Councilfiscal council of AMBEV – Cia. de Bebidas das Américas - AMBEV from 2005 to 2008. 2008. Mr. Tapias has a bachelor’s degree in business administration from Universidade Mackenzie and a bachelor’s degree in  law from Faculdades Metropolitanas Unidas.
 
Mr. Alfredo Egydio Setubal was electedhas been a member of our board of directors onsince April 25, 2007 (with investiture on June 29, 2007) and ourhas served as executive vice president onsince April 29, 1996 (with investiture on July 3, 1996). He has beenserved as our investor relations officer since 1995. He is currently responsible for theour wealth management and capital markets’markets services area of the executive directors’ office,divisions, with primary responsibility for communications with capital markets, for increasing the transparency of financial and strategic information through improvements in the quality, relevance, timeliness, reliability and comparability of information and for managing relations with the CVM, the Central Bank and other official capital markets authorities. He wasserved as our executive directorofficer between 1993 and 1996 and managing directorofficer between 1988 and 1993. He has been a member of the board of directors of Itaúsa since September 2008. He was a member of   ANBIDAssociação Brasileira das Entidades dos Mercados Financeiro e de Capitais - ANBIMA from 1994 to August 2003 and its president from August 2003 to August 2008. He has been a member of the board of directors of the Securities Dealers’ Association (Associação das Empresas Distribuidoras de Valores), or ADEVAL, since 1993, of the BOVESPABM&FBOVESPA since 1996 and of the Brazilian Association of Listed Companies (Associação Brasileira das Companhias Abertas), or ABRASCA, since 1999, and of the BOVESPA Holdings S.A. since August 2007.1999. He was a member of the board of directors of the Brazilian Settlement and Custody Company (Companhia Brasileira de Liquidação e Custódia), or CBLC, from 1998 to 2003. He was president of the board of directors of the Brazilian Institute of Investor Relations (Instituto Brasileiro de Relações com Investidores), or IBRI, from 2000 to 2003 and a member since 2004. He has beenserved as the finance directorofficer of the Museum of Modern Art of São Paulo – MAM since 1992. Mr. Alfredo Setubal   has a bachelor’s and a post-graduate degree in business management from Fundação Getulio Vargas.
 
Mr. Candido Botelho Bracher was electedhas been a member of our board of directors onsince November 28, 2008 (with investiture on February 19, 2009) and a member of our executive vice presidentboard of officers since May 2, 2005 (with investiture on August 1, 2005). He is currently responsible for theour corporate treasury area of the executive directors’ office.division. He has been a member of the board of directors of Itaú BBA since February 2003, CEO since April 2005, and is responsible for the Commercial, Capital Marketsits commercial, capital markets and the Human Resource Policies areashuman resources divisions and was director vice president – superintendentof the board of officers from February 2003 to April 2005 and was a director2005. He served as an officer at Banco BBA Creditanstalt S.A. from 1988 to 2003. He has beenserved as executive vice president from UNIBANCO – União de Banco Brasileiros S.A.of Unibanco since November 2008. He is a member of the board of directors of Pão de Açúcar S.A. and of BOVESPA.BM&FBOVESPA. Mr. Bracher has a degree in business administration from the Escola de Administração de Empresas de São Paulo - Fundação Getulio Vargas.

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Mr. Fernando Roberto Moreira Salles was electedhas been a member of our board of directors onsince November 28, 2008 (with investiture on February 19, 2009). He has been awas vice chairman of the board of directors of E. Johnston since 2005,Representação e Participações S.A. He has been a chairman of the boardboards of directors of Companhia Brasileira de Metalurgia e Mineração since 2008 and of Brasil Warrant Administração de Bens e Empresas S.A. since 1988. He has been a Director Superintendentan officer of Editora Schwarcz Ltda. since 1988. He was aserved as vice chairman of the Boardboard of Directorsdirectors of Unibanco from 1976 to 1988. He has been a member of the advisory board of Fundação Roberto Marinho since 1996 and a member of the board of directors of Instituto Moreira Salles, having exercised the presidencyserving as president of the Boardboard from 2001 to 2008. Mr. Fernando Moreira Salles   is graduatedhas a degree in Financefinance and Capital Marketscapital markets from Fundação Getúlio Vargas – FGV.Getulio Vargas.

 
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Mr. Francisco Eduardo de Almeida Pinto was electedhas been a member of our board of directors onsince November 28, 2008 (with investiture on February 19, 2009). During 1982, he was a financial assistant at Visius – Instituto Boavista de Seguridade Social; fromSocial. From 1983 to 1884,1984, he served as the technical department manager at Saga DTVM; fromInvestimentos e Participações do Brasil Ltda. From 1984 to 1993, he was at Banco da Bahia Investimentos (currently Banco BBM S.A.) (last post –, most recently as finance director); fromofficer. From 1993 to 1994, he served as deputy governor of monetary policy at the Central Bank; fromBank.  From 1994 to 1995 director-generalhe served as general officer of Banco da Bahia Investimentos;Investimentos S.A., and during 1995 director-generalas general officer of Unibanco Asset Management; from 1996 to 1998Management. He was the managing partner at Radix Gestão de Recursos Financeiros;Financeiros Ltda. from 1996 to 1998 to 2002and the chief financial officer of BBA Capital DTVM (and its successor, BBA Icatu Investimentos DTVM); from 1998 to 2002.  From 2002 to 2007, he worked formanaged his own account.assets. Since 2007 he has been a director at Brasil Warrant Administração de Bens;Bens e Empresas S.A. and from 2007 to 2008 a member ofhe served on the board of directors of UNIBANCO – União de Banco Brasileiros S.A..Unibanco. Since 2008 he has been a director of BW Gestão de Investimentos Ltda. Mr. Almeida Pinto   is graduated in Economics from the Pontifícia Universidade Católica do Rio de Janeiro (PUC). in economics.
 
Mr. Guillermo Alejandro CortinaGustavo Jorge Laboissiere Loyola was electedhas been a member of our board of directors on August 25, 2006 (with investiture on September 1, 2006). From 1986 to 1992 he held several positions at Continental Bank in Buenos Aires, Argentina, such as fixed income strategist/planner and comptroller of finance. From 1993 to 1996 he served as second vice president at Bank of America Illinois (Continental Bank) in Chicago, Illinois. Since 1997, he has been working for Bank of America Corporation, or BAC, in Charlotte, North Carolina, as senior vice president and senior corporate strategy manager, responsible for merger and acquisition (M&A) transactions and for the identification of and communication with potential and target companies. Mr. Cortina has a bachelor’s degree in accounting and finance from Universidad Católica Argentina, and a master’s degree with emphasis on entrepreneurship, management and marketing strategies from the Kellogg Graduate School of Management, in Evanston, Illinois.
Mr. Gustavo Jorge Laboissiere Loyola was elected member of our board of directors onsince April 26, 2006 (with investiture on July 31, 2006). He has also been a member of our audit committee since May 2007, and insince September 2008 he becamehas served as its president. He was an effective member and president of our fiscal council from March 2003 to April 2006. He has been a partner and a directoran officer of Gustavo Loyola Consultoria S/C since February 1998 and a member of the board of directors of Caramuru Alimentos S.A. and Mabel Alimentos S.A., since April 2008 and August 2006, respectively. He was the governor of the Central Bank from November 1992 to March 1993 and from June 1995 to August 1997, as well as the deputy governor for financial system regulationthe Financial System Regulation and organizationOrganisation from March 1990 to November 1992. He was a partner and the directorofficer of MCM Consultores Associados Ltda. from August 1993 to May 1995, assistant directorofficer of Banco de Investimento Planibanc S.A. from February to October 1989 and operating directorofficer of Planibanc Corretora de Valores S.A. from November 1987 to January 1989. Mr. Loyola   has a bachelor’s degree in economics from Universidade de Brasília and a master’s degree and Ph.D. in Economicseconomics from the Fundação Getulio Vargas.
 
Mr. Henri Penchas was electedhas been a member of our board of directors on April 25, 1997since November 01, 2002 (with investiture on June 26, 2007)March 10, 2003) and he was ourserved as senior vice president from April 1997 to April 2008, our executive vice president from 1993 to 1997 and our executive officer from 1988 to 1993. He was an executive directorofficer of Itaúsa from December 1984 to April 2008, has been its Investor Relations Officerinvestor relations officer since 1995 and its Executive Vice Presidentexecutive vice president since April 2009. He has also been a Director Generalthe chief executive officer of Duratex S.A. since April 2009. Mr. Penchas was the vice president of the board of directors of Itaú BBA from February 2003 to April 2008. Mr. Penchas has a bachelor’s degree in mechanical engineering from Universidade Mackenzie and a post-graduate degree in finance from Fundação Getulio Vargas.
 
Mr. Israel Vainboim was electedhas been a member of our board of directors onsince November 28, 2008 (with investiture on February 19, 2009). He was elected to the board of directors of Unibanco in 1988 and to the board of directors of Unibanco Holdings in 1994. He was chairman of Unibanco from 1988 to 1992. He has beenserved as executive chairman of Unibanco Holdings since 1992. He joined Unibanco in 1969. He has been a member ofserved on the board of directors of Souza Cruz Iochpe Maxion,S.A., Iochpe-Maxion S.A., E-Bit Tecnologia em Marketing S.A., Vinhedo Investimentos Ltd.Ltda., Casa da Cultura de Israel, Museu de Arte Moderna de São Paulo - MAM and Hospital Israelita Albert Einstein. Mr. Vainboim has a bachelor’s degree in mechanical engineering from the Universidade Federal do Rio de Janeiro (UFRJ) and a master’s degree in business administration, or MBA, from Stanford University.

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Mr. Pedro Luiz Bodin de Moraes was electedhas been a member of our board of directors onsince November 28, 2008 (with investiture on February 19, 2009). PartnerHe was a partner in Icatu Holding S.A. and a member of the Boardboard of Directorsdirectors of Unibanco, from April 2003 to November 2008. He was an officer and partner at Banco Icatu S.A from 1993 to 2002, also serving2002. He served as deputy governor for Monetary Policymonetary policy at the Central Bank of Brazil from 1991 to 1992 and directorofficer of the BNDES from 1990 to 1991. Mr. Bodin de Moraes has a bachelor’s and master’s degreesdegree in economics from the Pontifícia Universidade Católica do Rio de Janeiro (PUC-Rio) and a Ph.D. in economics from the Massachusetts Institute of Technology (MIT).
 
Mr. Ricardo Villela Marino was electedhas been a member of our board of directors onsince April 23, 2008 (with investiture on June 2, 2008) and memberto our board of our executive officerofficers on September 1, 2006 (with investiture on September 1, 2006). He is currently responsible for theour human resources and international units areas of the executive directors’ office.division. He wasserved as our senior managing directorofficer from May 2005 to August 2006, managing directorofficer from April 2004 to April 2005;2005, head of the Derivatives Dealing Desk (headedderivatives dealing desk (heading the team responsible for the structuring and sale of derivative solutionsproducts to middle market companies, institutional investors and private individuals) from 2003 to 2004;2004 and head of Business Intelligencebusiness intelligence (responsible for the mission to introduce radical and advancedimplementation of new technologies and methodologies which have helped Itaúus become a benchmark leader in the credit card industry in Brazil) from 2002 to 2003. He has beenserved as chairman of Federación Latino Americana de Bancos, or FELABAN, since November 2008. He was a manager of the emerging markets’ equities portfolio covering Argentina, Chile, Peru, Colombia and South Africa as well asand of the relations with governments, banks and directorsmanager of companies in each of these countries at Goldman Sachs Asset Management –in London. Mr.  Villela Marino has a degree in business administration from MIT Sloan School of Management, Cambridge, a master’s degree in business administration with specialization in financial administration and bachelor’s degree in mechanical engineering from Escola Politécnica (USP).

 
Mr. Antonio Carlos Barbosa de Oliveira was elected our executive officer on March 28, 1994 (with investiture on April 25, 1994) and currently is responsible for the technology, legal and compliance area of the executive directors’ office. He was an executive officer between 1994 and 2002 and a managing director between 1991 and 1994. He was a member of the board of director of Itaú BBA from February 2002 to February 2009 and has been its executive vice president since February 2003. He was a general executive officer of Banco Itaú Argentina between 1995 and 2001. Mr. Barbosa de Oliveira has a bachelor’s degree in production engineering from Escola Politécnica da Universidade de São Paulo and a master’s degree in science from the Massachusetts Institute of Technology (MIT).
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Ms. Claudia Politanski was electedhas been a member of our executive officer onboard of officers since November 12, 2008 (with investiture on November 27, 2008) and is currently responsible for theour legal and compliance legal divisions of the executive directors’ office and also actsserves as general legal counsel. She joined Unibanco in 1991 and was elected executive officer of Unibanco in 2007. Ms. Politanski   has a law degree from the Universidade de São Paulo. She also holds a master’s degree in laws,law, or LL.M., from the University of Virginia and a MBA from the Fundação Dom Cabral, Minas Gerais.
 
Mr. Marcos de Barros Lisboa was electedhas been a member of our executive officer onboard of officers since April 29, 2009 (election pending ratification by the Central Bank)(with investiture on September 1, 2009) and is currently responsible for theour operational risk and efficiency area of the executive directors’ office.divisions. He was elected executive officer of Unibanco in July 2006. From 2001 to 2003, he was the academic director of the graduate school of economics of Fundação Getulio Vargas, Rio de Janeiro. He was also the Secretary of Economic Policy at the Finance Ministry of Brazil from 2003 to 2005 and chief executive officer of the Brazilian Reinsurance Institute (Instituto de Resseguros do Brasil) from 2005 to 2006. He was also elected member ofto the boards of directors of AIG Brasil Cia. de Seguros and Unibanco AIG Seguros S.A. in 2008. He holds a bachelor’s degree and a master’s degree in economics from the Universidade Federal do Rio de Janeiro and a Ph.D. in economics from the University of Pennsylvania. Mr. Lisboa   held academic positions at the department of economics of Stanford University and at the Fundação Getulio Vargas, São Paulo.
 
Mr. Ricardo Baldin was electedhas been a member of our executive officer onboard of officers since April 29, 2009 (election pending ratification by the Central Bank)(with investiture on September 1, 2009) and is currently responsible for theour internal audit division of the executive directors’ office.division. In 1977 he joined PricewaterhouseCoopers as a trainee and was a partner there for 18 years. As an independent auditor, he was the leading partner in the area of the financial institutions area.institutions. He was also the partner responsible for PwC’sPricewaterhouseCoopers’ financial institutions group in South America, where he was responsible for the coordinating various projects in the region, including the evaluation of the Ecuadorian financial system. He was a directoran officer of the National Association of Financial, Administrative and Accounting Executives, or ANEFAC, and was also responsible for the financial institutions group at IBRACON for several years. MrMr. Baldin has a bachelor’s degree in accounting science from the Universidade do Vale do Rio dos Sinos, Rio Grande do Sul and university extension courses in management and finance from the Fundação Dom Cabral and Fundação Getulio Vargas.
 
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Mr. Rodolfo Henrique Fischer was elected our executive officer on February 22, 1999 (with investiture on March 18, 1999) and is currently responsible for the corporate treasury, banking, ALM, products and clients division of the executive directors’ office.  He has held various positions in Itaú Holding between 1984 and 1999, among which, general manager of exchange and foreign trade between 1991 and 1994 and managing director of exchange and foreign trade between 1994 and 1999. Mr. Fischer is the head of our treasury and financial area. He has been an executive officer of Unibanco since November 2008. He was a member of the board of directors of Itaú BBA from February 2003 to February 2009 and the president of the board of CIP – Câmara Interbancária de Pagamentos. Mr. Fischer has been a member of the board of directors of the Emerging Markets Trade Association, or EMTA, since January 2006. He was a member of the board of directors of the National Association of Financial Market Institutions (Associação Nacional das Instituições do Mercado Financeiro), or ANDIMA, until April 2007 and member of the board of directors of the BM&F until October 2007. Mr. Fischer has a bachelor’s degree in civil engineering from Escola Politécnica da Universidade de São Paulo and a master’s degree in management from the Massachusetts Institute of Technology (MIT).
Mr. Sérgio Ribeiro da Costa Werlang was electedhas been a member of our executive officer onboard of officers since April 30, 2003 (with investiture on October 1, 2003) and has served as our chief risk officer since May 2008. He is currently our chief financial officer since May 3, 2010. He is currently responsible for theour risk and financial controls area of the executive directors’ office.divisions. He was our senior managing directorofficer from March 2002 to March 2003. He has been a member of Itaú BBA since April 2005 and an executive officer of Unibanco since November 2008.2005. He was a deputy governor for economic policy for the Central Bank from February 1999 to September 2000; he was2000 and an executive officer of Banco BBM S.A. from October 1997 to December 1998. He was a directoran officer for research and administrative resources and asset management of Banco BBM S.A. from 1994 to 1998. Mr. Werlang has a degree in naval engineering from the Universidade Federal do Rio de Janeiro, a mastermaster’s degree in mathematical economics from Instituto de Matemática Pura e Aplicada do Rio de Janeiro and a PhDPh.D. in economics from the Princeton University.
 
Mr. Silvio Aparecido de CarvalhoCaio Ibrahim David was elected a member of our executive officerboard of officers on October 23, 2000 (withMay 3, 2010 and member of the board of officers of Itaú Unibanco S.A. on April 30, 2010 (his investiture on January 2, 2001) and our chief financial officer since May 2008.both positions is subject to Central Bank’s approval). He is currently responsible for the controller’s division of the executive directors’ office. He was our general manager from 1984 to 1986, our technical officer from 1986 to 1988, a managing director from 1988 to 1999, and our senior managing officer from 1999 to 2000. He was the investor relationshas served as an officer of Itaubank LeasingItaú BBA since April 2003. He began working at Itaú Unibanco S.A. Arrendamento Mercantilin May 1987. Mr. Caio David also worked at Bankers Trust Co. from September 2007May 1998 to February 2009.August 1998. Mr. CarvalhoCaio David has a bachelor’s degree in business administrationmechanical engineering from Universidade Mackenzie, specialization in accounting and finance – CEFIN, master’s in accounting sciencesand controlling from the Economics, Business Administration and Accounting Sciences Faculty of the Universidade de São Paulo a master’s degree and Ph.D. in comptrollership and accounting from the same university, both obtained with honors. He concluded the Stanford Executive Program at Stanford University in 1985 and also concluded INSEAD (France) Specialization Courses in the Banking Area. He has been a lecture at the Universidade de São Paulo since 1976.
Mr. Carlos Elder Maciel de Aquino has been our officer since April 29, 2009 (pending on the ratification of the Central Bank) and is currently responsible for the audit division I (cross functional alignment auditing). He joined Unibanco in 2001 and holds the position of officer for the audit area. Mr. Maciel de Aquino is has a degree in accounting sciences from the Universidade Federal de Pernambuco, a postgraduate degree in financial administration from FESP-PE, a post-graduation in economic engineering from Universidade Católica de Pernambuco and an executive MBA in finance from IBMEC-SP.New York University.

 
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Mr. Jackson Ricardo Gomeshas been a member of our officerboard of officers since August 28, 1995 (with investiture on September 29, 1995) and is currently responsible for theour credit risk, insurance and operational division.divisions. He began working for the Itaú groupUnibanco Holding in 1983 as an analyst in the area of economic control. He was a department manager from 1988 to 1989 and general manager/superintendent from 1990 to 1995. He has been an officer of Itaucred since December 2003, of Banco Itaucard S.A. since April 2000 and a managing directorofficer of Banco Itauleasing S.A. since April 2000. Mr. Gomes has a degree in aeronautical engineering from the Instituto Tecnológico da Aeronáutica and an MBA from the University of Chicago.

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Mr. José Eduardo Lima de Paula Araujohas been a member of our officerboard of officers since May 5, 2008 (with investiture on July 1, 2008) and is currently responsible for theour legal compliance division. He was responsible for legal support forto our proprietary M&A division.division from 2008 to 2009. He was our legal business superintendent from August 2001 to April 2008. At that time he was in charge of the: (i) negotiations involving acquisitions, divestments, corporate restructurings, strategic partnerships and associations; (ii) management of the intellectual property rights of Itaú and its affiliates (copyrights, patents and more than 1,500 applications for registering trade marks) and the coordination of the procedures (economic concentration acts and administrative processes of conduct) with the Brazilian Anti-Trust Authorities; (iii) Secretary of the U.S. SEC 20-F disclosure committee and consultant on disclosure of material acts or facts and trading policies. He was a consultant ofat the Inter-American Development Bank from March 1998 to October 1999. Mr. Paula Araujo   has a law degree from the Universidade de São Paulo. He has an LL.M. degree and an MBA from the George Washington University.
 
Mr. Luiz Felipe Pinheiro de Andrade has been a member of our officerboard of officers since April 29, 2009 (election pending ratification by the Central Bank)(with investiture on September 1, 2009) and is currently responsible for theour market risk and liquidity division. He was an executive officer of Unibanco Asset Management between 2005 and 2009 and of Unibanco Serviços de Investimentos’ back office and financial control of investment funds between 2003 and 2005 and was a deputy officer between 1998 and 2003. He was a lecturer ofat Fundação GetúlioGetulio Vargas from 1998 to 2005 and ofat the PUC-RJPUC-Rio from 1989 to 1990. Mr. Pinheiro de Andrade has a Ph.D. in finance from the University of Colorado, a master of science degree in industrial engineering from the Pontifícia Universidade Católica do Rio de Janeiro and a master of science degree in mechanical engineering from the Universidade Federal de Minas Gerais.
 
Mr. Marco Antonio Antunes was electedhas been a member of our officer onboard of officers since March 13, 2000 (with investiture on April 12, 2000) and is currently responsible for theour accounting division. He was the manager of the budget control department from December 1990 to May 1997 and general manager from June 1997 to February 2000. He has been an officer of Itaucred since February 2003, of Banco Itaucard S.A. since July 2000 and a managing directorofficer of Banco Itauleasing S.A. since April 2003. Mr. Antunes holds a degree in metallurgical engineering from Universidade Presbiteriana Mackenzie and a specialization (master’s degree level) in accounting and financesfinance from the Universidade de São Paulo.
 
Mr. Wagner Roberto Pugliese was electedhas been a member of our officer onboard of officers since May 8, 2006 (with investiture on July 31, 2006) and is currently responsible for theour audit division II (specific business structures alignment).with respect to our investment banking, foreign entities and corporate departments. He was our deputy managing directorofficer from May 2005 to April 2006. He was an auditing manager from 1990 to 1997, auditing superintendent from 1997 to 2002, and superintendent of auditing coordination from 2002 to 2005,2005. He was responsible for the financing, international, capital markets and overseas operations and commercial and administration areas.divisions. Mr. Pugliese was an auditor at an independent auditor international auditing firm from 1978 to 1980. He has been a sector directorofficer for internal accounting and compliance at FEBRABAN since 2004. He was a coordinator of the sub commissionsub-commission for internal accounting from 1999 to 2004, a second vice-presidentvice president of the CLAIN - Latin American Internal Audit and Risk Management Committee within the FELABAN from 2002 to May 2007 and has been its president since June 2007. He has also been a representative of FELABAN in FEBRABAN since 1999. He was a national directorofficer of training at the Brazilian Institute of Internal Auditors from 1995 to 1997. Mr. Pugliese has a degree in business administration from IMES, an accounting degree from Universidade São Judas, and a post graduation degree in business administration from the Fundação Dom Cabral.
 
There are no pending legal proceedings in which any of our directors nominees for director, or executive officers areis a party adverse to us. We have no knowledge of any arrangement or understanding with major stockholders,shareholders, customers, suppliers or any other person pursuant to which any person was selected as a director or executive officer, except the shareholders’ agreements mentioned inbetween (i) Itaúsa and Companhia E. Johnston governing their relationship as shareholders of IUPAR, Itaú Unibanco Holding and its subsidiaries and (ii) Itaúsa and BAC. See “Item 10C. Material Contracts7A - Association between Itaú and Unibanco Financial Groups” and “Acquisition of BankBoston in Brazil, Chile and Uruguay.Major Shareholders.”

6B.Compensation
 
For the year ended December 31, 2008,2009, the aggregate compensation accrued by us for the benefit of all members of our board of directors and our executive officers and the executive officers of our controlled entities for services rendered during that year in all capacities was approximately R$ 272.7195.3 million. This number includes salaries in the amount of approximately R$ 229.0147.3 million, profit-sharing plans and management participation in the amount of approximately R$ 43.547.8 million and contributions to pension plans we sponsor in the amount of approximately R$ 109.9105.3 thousand. WeExcept for the highest and lowest compensation per body without identification of individuals, we are not required under Brazilian law to disclose the compensation of our directors, executive officers and members of our administrative, supervisory or management bodies on an individual basis, and we do not otherwise publicly disclose this information.

 
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In addition, our executive officers and members of our board of directors receive additional benefits generally provided to our employees, such as medical assistance and dental care and private pension plan, in the amount of R$ 9.0 million.
We have established a profit sharing or management participation plan for our management, including our executive officers. The program and its rules have been approved by our board of directors. Under the terms of the program each member of our management (including our executive officers) participating in the plan is assigned annually, with payment by the end of each semester as an advance, a base amount for computation of the profit sharing plan. The final amount of the profit sharing payment to an individual is determined by multiplying the base amount by an index applicable to all participants. This index depends on a specified level of return on stockholders’ equity measured based on information derived from amounts in accordance with accounting practices adopted in Brazil .

The members of our fiscal council and the alternate members have received a monthly compensation of R$ 10,000 and R$ 4,000, respectively.  As of the extraordinary shareholders’ meeting held on April 24, 2009, the members of our fiscal council and the alternate members are entitled to receive a monthly compensation of R$ 12,000 and R$ 5,000, respectively.

We have also granted options to our executive officers under the plan described in “Item 6E. Share Ownership – Stock Option Plan.” Each option gives to the holder the right to purchase one preferred share. When the share options are exercised, we can issue new shares or transfer treasury shares to the holder of the option. See “Item 6E. Share Ownership – Stock Option Plan” for information of the stock option plan and the changes deliberated at the extraordinary stockholders’shareholders’ meeting held on April 24, 2009.

 
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We present below the main terms of the options outstanding as of December 31, 2008:2009 relating to Itaú Unibanco Holding granted under Banco Itaú Holding Financeira’s stock option plan:

 
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As of December 31, 2008
Exercise price (in R$) Quantity of options 
Remaining term
period (in years)
12.58  1,921,275 1 year
8.52  3,858,750 2 years
12.88  8,767,825 3 years
18.12  8,186,575 4 years
26.96  10,460,675 5 years
34.33  9,758,613 6 years
39.58  10,581,125 7 years
Total  53,534,838  
  As of December 31, 2009
  
Exercise price (in R$)
  
Quantity of options
 
Exercise Period
        
   7.62   576,687 12/31/10
   11.52   1,886,792 12/31/11
   16.21   7,121,057 12/31/12
   24.12   9,595,251 12/31/13
   27.43   874,167 12/31/14
   30.72   10,297,528 12/31/14
   31.69   29,551 12/31/14
   35.41   11,552,064 12/31/15
   23.16   16,875,734 12/31/16
  Total   58,808,831  

In February 2008,We present below the main terms of the options outstanding as of December 31, 2009, which were initially issued by Unibanco under the simple options plan and for which replacement awards were issued by Itaú Unibanco Holding on April 24, 2009:

  As of December 31, 2009
  Exercise price (in R$)  Quantity of options Exercise Period
   7.77   38,263 02/25/10
   12.16   29,516 07/18/10
   7.07   329,506 05/05/10
   15.31   1,287,893 01/31/11
   19.42   37,950 09/18/11
   25.62   158,127 07/03/12
   28.37   63,251 08/29/12
   32.32   227,703 03/20/13
   32.29   88,550 03/21/13
   40.17   75,901 05/13/14
  Total   2,336,660  

We present below the main terms of the bonus options outstanding as of December 31, 2009, issued originally by Unibanco under the bonus options plan and for which replacement awards were issued by Itaú Unibanco Holding on April 24, 2009:

As of December 31, 2009
Quantity of optionsExercise Period
684,98109/03/12
66,94809/03/12
846,40203/03/13
1,004,35309/03/13
1,539,63703/06/14
158,89103/06/14
4,301,212

During 2009, we issued 10,579,37518,050,550 stock options with an exercise pricerelating to Itaú Unibanco Holding, and 1,856,427 bonus options under Itaú Unibanco Holding (stock option plan originally by Unibanco). In addition we issued as replacement awards for existing stock options plans of R$ 36.00. Unibanco the quantity of 5,263,990 of stock options under the Simple Option and 2,818,737 under the Bonus Options plan . The award issued as replacement maintained all the original terms of the original award except that the awards give the beneficiary the right to acquire or receive shares of Itaú Unibanco Holding instead of shares of Unibanco and Unibanco Holdings. The exchange ratio used was the same exchange ratio used to issue shares of Itaú Unibanco Holding under the terms of the Association. These options will expire inuntil December 2015.2016.
 
In May 2008, we issued 18,750 stock options with an exercise price of R$ 36.00. These options will expire in December 2015.

Our compensation expense related to the stock option plans amounted to R$ 181618 million, R$ (181) million (reversal of compensation), and R$ 339 million and R$ 717 million for the years ended December 31, 2009, 2008 2007 and 2006.2007. The reversal of compensation in 2008 results from the decrease of the quotequoted market price of our shares.

In addition, our executive officers and members of our board of directors receive additional benefits generally provided to our employees, such as medical assistance and dental care, educational expenses and private pension plan, in the amount of approximately R$ 4.2 million.
We have established a profit sharing or management participation plan for our management, including our board of directors and executive officers. The program and its rules have been approved by our board of directors. Under the terms of the program each member of our management (including our board of directors and executive officers) participating in the plan is assigned semi-annually a base amount for computation of the profit sharing plan. The final amount of the profit sharing payment to an individual is determined by multiplying the base amount by an index applicable to all participants. This index depends on our level of return on stockholders’ equity.
The members of our fiscal council and the alternate members have received a monthly compensation of R$ 10,000 and R$ 4,000, respectively.  As of the extraordinary stockholders’ meeting held on April 24, 2009, the members of our fiscal council and the alternate members are entitled to receive a monthly compensation of R$ 12,000 and R$ 5,000, respectively.
The data presented in this section does not include the information regarding Unibanco.

6C.Board Practices
 
For information concerning the election of our directors and officers and their respective term of office, please see “Item 6A. Directors, Senior Management and Employees – Directors and Senior Management.”

 
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Our directors have not entered into any service contract with us or any of our subsidiaries providing for benefits upon termination of employment.
 
For information concerning the duties of the board of directors, see “Item 10B. Memorandum and Articles of Association.”
 

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STATUTORY BODIES
 
Fiscal Council
 
According to the Brazilian Corporate Law,corporate law, the adoption of a fiscal council is voluntary. Our fiscal council has been established annually since 2000, even when our bylaws did not provide a permanentgranted non-permanent status to our fiscal council. The fiscal council may be adopted on a permanent or temporary basis. The fiscal council is an independent body elected by stockholdersshareholders annually to supervise the activities of management and independent auditors. The responsibilities of the fiscal council are established by the Brazilian Corporate Lawcorporate law and encompass the oversight of management’s compliance with the laws and bylaws, the issuance of a report onincluded in the annual and quarterly reports and certain matters submitted for stockholders’shareholders’ approval and calling of stockholders’shareholders’ meetings and the reporting of specific adverse matters arising at those meetings. Our fiscal council is composed of the following individuals, each of whom serves for a term of one year and werewas elected on April 24, 2009, by26, 2010, at the annual stockholders’shareholders’ meeting:
 
NamePositionDate of Birth
   
Iran Siqueira Lima (*)MemberPresident05/21/1944
Alberto Sozin Furuguem (*)Member02/09/1943
Marcos de Andrade Reis Villela
Artemio Bertholini (**)Member 04/12/194401/1947
José Marcos Konder Comparato (*)DeputyAlternate09/25/1932
Paulo Alberto Schibuola
João Costa (*)Alternate08/10/1950
Osvaldo Roberto Nieto (**) (***)Deputy09/20/1945Alternate12/27/1950

(*)  Members indicatedappointed by the controlling block of stockholders.shareholders.
(**) Members indicatedappointed by the holders of preferred shares.
(***) Member’s investiture still subject to Central Bank approval.
 
Audit Committee
 
In accordance with CMN regulation,regulations, all financial institutions that (i) have reference assets or consolidated reference assets equal to or in excess of R$1 billion;1.0 billion, (ii) manage third-party funds of at least R$1 billion;1.0 billion, or (iii) hold deposits and manage third-party funds in an aggregate amount of at least R$55.0 billion, are required to have an in-house audit committee.
CNSP, which defines the rules and the guidelines of private insurance, also requires the establishment of an in-house audit committee if an insurance entity has its (i) adjusted net worth in an amount equal or superior to R$ 0.5 billion or (ii) technical reserves in an amount equal or superior to R$ 0.7 billion. However, if an entity under CNSP supervision is part of a financial conglomerate, a single audit committee may be created at the parent company level. Accordingly, Itaú Unibanco Holding has opted for a single committee.
 
Audit committees should be created subject to an express provision in the bylaws of the respective financial institution and should be composed of at least three members, one of which specializes in accounting and auditing.  For further information, see “Item 16.A - Audit Committee Financial Expert.” 
Audit committee members of publicly held financial institutions may not (a) be or have been in the previous twelve12 months: (i) an officer of the institution or its affiliates;affiliates, (ii) an employee of the institution or its affiliates;affiliates, (iii) an officer, manager, supervisor, technician, or any other member of the team involved in auditing activities at the institution;institution, or (iv) a member of the institution’s fiscal council or that of its affiliatesaffiliates; and (b) be a spouse or relative (first or second-degree relative) of the persons described in items (a)(i) to (iii).
 
Audit committee members of publicly held financial institutions are also prohibited from receiving any other kind of compensation from the institution or its affiliates other than that relating to their respective office as a member of the audit committee. In the event an audit committee member of the institution is also a member of the board of directors of the institution or its affiliates, such member must opt for compensation related to only one of the offices.  positions.

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The audit committee should reportreports to the board of directors or officers, as applicable and its principal functions are to oversee:
 
 ·the quality and integrity of the financial statements of Itaú Unibanco Holding’s financial group,Holding;
 
 ·the compliance with legal and regulatory requirements,requirements;
 
 ·the performance, independence and quality of the services rendered by the independent auditors of Itaú Unibanco Holding’s financial group,Holding;
 
 ·the performance, independence and quality of the work performed by the internal auditors of Itaú Unibanco Holding’s financial group,Holding;
 
 ·the quality and the effectiveness of the internal controls and risk management systems of Itaú Unibanco Holding’s financial group,Holding; and

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 ·the recommendations for hiring and replacement of independent auditors to the board of directors.
 
According to Central Bank regulations, the audit committee is required to be a corporate body, created by stockholdershareholder resolution, which is separate from the board of directors. Notwithstanding the requirement of separate corporate bodies, the members of the audit committeeboard of directors may be members of the board of directors,audit committee, provided that they meet certain independence requirements. In addition, under Brazilian law, the hiring of the independent auditor is a function reserved exclusively for the board of directors of a company. Furthermore, Brazilian regulation permits the creation of a single committee for an entire group of companies.
 
Independent auditors and the audit committee must immediately notify the Central Bank of the existence or evidence of error or fraud within a maximum period of three business days from the respective identificationdate they identified the evidence of the same,error or fraud, including:
 
 ·non-compliance with legal and regulatory norms that place the continuity of the audited entity at risk;
 
 ·fraud of any amount perpetratedconducted by the administration of said institution;financial institution’s management;
 
 ·relevant fraud perpetratedconducted by entitythe financial institution’s employees or third parties; orand
 
 ·errors that result in significant mistakes in the accounting records of the entity.financial institution.
 
If an entity under CNSP supervision is involved in those errors or frauds, SUSEP shall also be notified.
Our audit committee is comprised of the following individuals, named in the table below, and each of whom serves for a one year term.one-year term and was elected by our board of directors. For more information on our audit committee, see “Item 16D. Exemptions from the Listing Standards for Audit Committees.”
 
NamePosition
Gustavo Jorge Laboissiere LoyolaChairmanPresident
Alcides Lopes TapiasMember
Eduardo Augusto de Almeida GuimarãesMember
Guy Almeida AndradeMember and financefinancial expert
Tereza Cristina Grossi TogniAlkimar Ribeiro MouraMember and finance expert

Our board of directors has determined that one member of our audit committee, Mr. Guy Almeida Andrade, is audit committee financial expert and meets the requirements set forth by the SEC and the NYSE. Our audit committee financial expert, along with the other members of our audit committee, is independent pursuant to CMN Resolution No. 3, 198. Mr. Andrade is also an expert in U.S. GAAP, which is the accounting standard used by us in our primary financial statements filed with the SEC. Other members of our audit committee are experts in accounting practices adopted in Brazil and we believe the skills, experience and education of our audit committee members qualify them to carry out all of their duties as members of the audit committee, including overseeing the preparation of our U.S. GAAP financial statements. In addition, our audit committee has the ability to retain independent accountants, financial advisors or other consultants, advisors and experts whenever it deems appropriate.

See “Item 6A. Directors and Senior Management” for the biographies of Gustavo Jorge Laboissiere Loyola and Alcides Lopes Tapias. Set forth below are brief biographical descriptions of Mr. Eduardo Augusto de Almeida Guimarães, Mr. Guy Almeida Andrade and Ms. Tereza Cristina Grossi Togni.Mr. Alkimar Ribeiro Moura.

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Mr. Guy Almeida Andrade has been member of our audit committee since December 2008. He was a member of the audit committee of Unibanco from April 2004 to December 2008. He began his career in 1974 at Magalhães Andrade S/S Auditores Independentes, where he became a partner in 1982, a position he currently holds. In 1984, he joined an internsintern program at Dunwoody & Co., Toronto, Canada. In 1983 he was admitted  to the Chamber of Independent Auditors of the IBRACON. From 2002 to 2004, he was president of the National Executive Board of IBRACON, where he held the position of alternate Directordirector for Brazil for the Inter-American Accounting Association from 1999 to 2003. In 2000, he was elected as a member of the board of directors of the International Federation of Accountants – IFAC, headquartered in New York, a position he held until November 2006. Mr. Andrade iswas the chairman of IFAC’s Audit Committee.audit committee from 2003 to 2006. In 2003 he founded RBA Global Auditores Independentes, where he holds the position of administrative director.officer. Mr. Guy Almeida Andrade has a bachelor’s degree in accounting from the Universidade de São Paulo and a bachelor’s degree in business administration from Universidade Mackenzie.

Mr. Eduardo Augusto de Almeida Guimarães has been a member of our audit committee since December 2008. He was a member of the audit committee of Unibanco from April 2004 to December 2008. He previously held the positions of president of the IBGE, from 1990 to 1992;1992, National Treasury Secretary at the Ministry of Finance, from 1996 to 1999;1999, chairman of the Banco do Estado de São Paulo S.A. – BANESPA, from 1999 to 2000 and chairman of Banco do Brasil, from 2001 to 2003. He has been a member of the boards of directors of various companies such as Banco do Brasil, Caixa Econômica Federal, BNDESPARCEF, BNDES Participações S.A. (“BNDESPAR”) and Banco Nossa Caixa.Caixa S.A. He has also undertaken various academic functions such as Deandean of the Economics Institute of the Universidade Federal of Rio de Janeiro, lecturer in the Economics Department of the Pontifícia Universidade Católica of Rio de Janeiro and a member of the Economics and Business Administration Faculty of the Universidade Federal Fluminense. Mr. Guimarães has a degree in civil engineering, a degree in economics, a master’s degree in production engineering from the Universidade Federal do Rio de Janeiro and a Ph.DPh.D. in economics from the University of London.

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Ms. Tereza Cristina Grossi Togni has beenMr. Alkimar Ribeiro Moura was elected on May 3, 2010 as a member of our board of directors since February 2004audit committee being his investiture subject to Central Bank’s approval. Mr. Moura has a bachelor’s degree in Economics from Universidade Federal de Minas Gerais, a master degree in Economics from California University and a memberPhD in Economic from Stanford University. Mr. Moura is professor at EAESP of Fundação Getúlio Vargas and was the audit committeeFinancial and Market Capital vice-president of Itaú Unibanco Holding’s financial group since July 1, 2004. Ms. GrossiBanco do Brasil. He was appointed by our boardalso the Regulation and Organization officer of directors as our financial expert in compliance with the requirements and responsibilities set forth by Resolution 3,198 of the CMNCentral Bank and the Sarbanes-Oxley Act, due to her qualifications in the accounting and auditing areas. She was a member of the board of directors and deputy governorofficer responsible for banking supervision ofmonetary policy and government debt at the Central Bank, from April 2000 to March 2003, she was also a consultant, deputy head and department head for supervision from 1997 to March 2000 and inspector and supervision coordinator in Belo Horizonte from August 1984 to February 1997. Sheas well as officer of Banco Pirelli-Fintec. Moreover, Mr. Moura has been a member of the advisory banking board of the Toronto International Leadership Centre for Financial Sector Supervision since 2003. She graduated in business administration and accounting from the Universidade Católica de Minas Gerais in 1977 and has completed post graduation courses in Switzerland andparticipated in the United States.
boards of directors of Banco Nossa Caixa, Câmara Interbancária de Pagamentos, Cia. Brasil de Seguros, Telenorte Leste Participações, Telemar Participações, CBLC and Banco Bandeirantes.
For more information abouton the regulation of audit committees and exemptions applicable thereof, see “Item 4.B Business Overview – Regulation and Supervision – Regulation by the Central Bank – Regulation of Independent Auditors” and “Item“ Item 16.D – Exemptions from the Listing Standards for Audit Committees.”

COMMITTEES OF THE BOARD OF DIRECTORS
 
The information provided below relate to the members of the appointments and compensation committee,strategy, capital and risks management, committee, accounting policies committee, disclosureappointment and trading committee, advisory boardcorporate governance and international advisory boardpersonnel committees as of December 31, 2008.2009.

Appointments and Compensation Committee

In 2005, our annual stockholders’ meeting approved the creation of the compensation committee with one independent board member. The compensation committee establishes the compensation of our directors, allocation of global and annual budget determined by our annual stockholders’ meetings, payments under profit sharing programs, stock options and benefits of any kind and representation budgets, taking into account the responsibilities, time spent on duties, competence and professional reputation and market value of services.  The committee also guides compensation policy for directors of subsidiaries. According to the decisions taken by the annual and extraordinary stockholders’ meeting held on April 26, 2006, we changed the name of the compensation committee to appointments and compensation committee and the committee’s composition, objectives and purposes were expanded to include the following responsibilities:  (i) the analysis and proposal of candidates for appointment to the board of executive officers; (ii) the proposal to the board of directors of candidates for the statutory committees; (iii) the raising of potential conflict of interest relatedgenerally appoints members to the participation of members of the board of directors or the board of executive officers in the statutory bodies of other corporations; and (iv) the proposal of criteria for evaluating the activities of the board of directors. For information regarding the responsibilities of our appointments and compensationeach committee see “Item 6E. Share Ownership.”

Our appointments and compensation committee is composed by six to eight persons elected annually by our board of directors from among the members of our board from our board of executive officers and from our subsidiaries and professionals of proven knowledge in the area, conditional upon the majority of the committee being members of our board of directors.  On December 31, 2008, our appointments and compensation committee was composed by the following individuals, as appointed by our board of directors’ meeting held on May 5, 2008:

NamePositionDate of  Birth
Carlos da Camara PestanaPresident07/27/1931
Alfredo Egydio Arruda Villela FilhoMember11/18/1969
Fernão Carlos Botelho BracherMember04/03/1935
José Carlos Moraes AbreuMember07/15/1922
Roberto Egydio SetubalMember10/13/1954
Roberto Teixeira da CostaMember02/05/1934

Capital and Risks Management Committee

In 2008, our annual stockholders’ meeting approved the creation of the capital and risks management committee.  The capital and risks management committee is responsible for reviewing and approving the policies and methodologies and monitoring the management of the risks and of the allocation of capital: (i) establishing limits of exposure to credit, market, operational and subscription risks; (ii) establishing limits for allocation of capital, considering the adjusted return to the risk and ensuring full compliance to the regulatory requirements.

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Our capital and risks management committee is composed by six to eight persons elected annually by our board of directors, from among the membershowever, key employees of our board, from our board of executive officers and from our subsidiaries and from among professionals of proven knowledge in the area of risk management and the allocation of capital, conditional on the majority the committee’s members being members of the board of directors. On December 31, 2008, our capital and risks management committee was composed by the following individuals, each of whom serves for a term of one year, as indicated by the board of directors’ meeting held on May 5, 2008:

NamePositionDate of Birth
Roberto Egydio SetubalPresident10/13/1954
Candido Botelho BracherMember12/05/1958
Henri PenchasMember02/03/1946
Pérsio AridaMember03/01/1952
Ricardo Villela MarinoMember01/28/1974
Rodolfo Henrique FischerMember12/26/1962
Sérgio Ribeiro da Costa WerlangMember 06/23/1959

Accounting Policies Committee

In 2008, our annual stockholders’ meeting approved the creation of the accounting policies committee. The accounting policies committee is responsible for reviewing and approving the accounting policies and procedures: (i) assuring full compliance with the regulatory standards and their uniform application throughout the Itaú Unibanco Holding group, with an emphasis on estimative, evaluation and judgmental criteria; (ii) monitoring the preparation of the account statements and the management’s discussion and analysis of the operation, on a quarterly basis, for the purposes of publication and dissemination.

Our accounting policiesspecialists in each specific committee is composed by sixarea may be invited to eight members elected annually by our board of directors from among thebe members of our board, from our board of executive officers and from our subsidiaries and from among professionals of proven knowledge in the accounting and auditing areas, conditionala committee. Members are appointed on the majority of the committee’s members being members of our board of directors. On December 31, 2008, our accounting policies committee was composed by the following individuals, each of whom serves for a term of one year, as indicated by the board of directors’ meeting held on May 5, 2008:

NamePositionDate of Birth
Roberto Egydio SetubalPresident10/13/1954
Alfredo Egydio Arruda Villela FilhoMember11/18/1969
Alfredo Egydio SetubalMember09/01/1958
Antonio Carlos Barbosa de OliveiraMember 06/13/1951
Henri PenchasMember02/03/1946
Sérgio Ribeiro da Costa WerlangMember 06/23/1959
Silvio Aparecido de CarvalhoMember05/09/1949
Tereza Cristina Grossi TogniMember01/25/1949

Disclosure and Trading Committee

Our disclosure and trading committee is responsible for the management of the corporate policies regarding the disclosure of material facts and procedures for preventing insider trading, in order to:  (1) assure the transparency, quality and safekeeping of the information provided to stockholders, investors, the press, government authorities and other capital markets entities; (2) observe and apply the criteria established by the policies, for the purpose of maintaining the ethical and legal standards of the corporation’s management, stockholders, controlling stockholders, employees and third parties in the trading of stockholders’ equity or other securities benchmarked against stockholders’ equity, among other responsibilities.

The scope of our committees’ performance covers a range of internal actions aimed at improving information flows and upholding the ethical conduct of their administrators and collaborators.  We were the first listed company in Brazil to introduce and maintain a governance committee. CVM’s Instruction No. 358 established that it is compulsory for listed companies to adopt a disclosure policy, which facilitated the adoption of a trading policy. In addition to adopting both policies, we expanded the scope of Instruction No. 358 by establishing the committee, which was not specifically required by law. We used to have two committees, the trading and the disclosure Committees, which were considered statutory bodies at thean annual stockholders’ meeting held in 2005 and were later unified into a single committee (the disclosure and trading committee) at the annual stockholders’ meeting held in 2006.

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basis.
 
Our disclosure and trading committee is composed by our investor relations officer and from six to ten persons elected annually by our board of directors from among the members of our board, from our board of executive officers and our subsidiaries and from among professionals of proven knowledge in the capital markets' area, conditional on the committee's majority being comprised of members of our board of directors. On December 31, 2008, our disclosure and trading committee was composed by the following individuals, each of whom serves for a term of one year, as indicated by the board of directors’ meeting held on May 5, 2008:

NamePositionDate of Birth
Alfredo Egydio SetubalPresident and Investor Relations Officer09/01/1958
Alcides Lopes TapiasMember09/16/1942
Alfredo Egydio Arruda Villela FilhoMember11/18/1969
Henri PenchasMember02/03/1946
Roberto Teixeira da CostaMember02/05/1934
Tereza Cristina Grossi TogniMember01/25/1949
Antonio Jacinto MatiasMember09/11/1946
Silvio Aparecido de CarvalhoMember05/09/1949
Antonio Carlos Barbosa de OliveiraMember06/13/1951

Advisory Boards

We have an advisory board composed by three to twenty members, elected annually by our board of directors. It is the board's function to cooperate with the board of executive officers through suggestions for the solution of specific themes, the examination of which has been requested of it.

On December 31, 2008, our advisory board was composed by the following individuals, each of whom serves for a term of one year, as indicated by the board of directors’ meeting held on May 5, 2008:

NamePositionDate of Birth
Fernando de Almeida Nobre NetoMember03/28/1951
Licio Meireles FerreiraMember01/06/1920
Vacant

Our international advisory board is a deliberating entity with no decision-making power that meets annually to assess the world economic outlook and the application of internationally accepted codes and standards, especially with respect to monetary and financial policy, corporate governance, capital markets, payment systems and money laundering, as a means of contributing to our increasing presence in the international financial community. Our international advisory board is comprised of our president and CEO, as well as three to twenty other members who are knowledgeable of international economics and finance affairs.

Our international advisory board is composed by three to twenty members, elected annually by our board of directors. On December 31, 2008, our international advisory board was composed by the following individuals, each of whom serves for a term of one year, as indicated by the board of directors’ meeting held on May 5, 2008:

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NamePositionDate of Birth
Roberto Egydio SetubalPresident10/13/1954
Artur Eduardo Brochado dos Santos SilvaMember05/22/1941
Carlos da Camara PestanaMember07/27/1931
Fernão Carlos Botelho BracherMember04/03/1935
Henri PenchasMember02/03/1946
José Carlos Moraes AbreuMember07/15/1922
Maria de Lourdes Egydio VillelaMember09/08/1943
Roberto Teixeira da CostaMember02/05/1934
Rubens Antonio BarbosaMember06/13/1938
Sergio Silva de FreitasMember01/16/1943

At the extraordinary stockholders’ meeting held on April 24, 2009, our stockholders eliminated the provisions related to our appointments and compensation committee, capital and risks management committee, accounting policies committee, disclosure and trading committee, advisory board and international advisory board.  As part of the process of integrating the financial activities of Itaú and Unibanco financial groups, we have engaged outside advisors to evaluate our existing practices and, in light of the best international corporate governance practices, establish a new structure of corporate governance. Thus, on June 24, 2009, our board of directors approved the following structure of committees of our board of directors:

Strategy Committee

Our strategy committee is responsible for corporate strategy, investments and budget.

The strategy committee also establishes an economic scenarios sub-committee, made up of key employees of Itaú Unibanco Holding and its controlled companies that have recognized expertise in macroeconomy. This sub-committee supplies macroeconomic input to the strategy committee to provide support for its considerations in defining strategy, investments and budgets.
The following members of our board of directors were appointed to compose our strategy committee: Pedro Moreira Salles, Roberto Egydio Setubal, Alfredo Egydio ArrudaRicardo Villela Filho,Marino, Henri Penchas and Israel Vainboim.

Capital and Risk Management Committee

Our capital and risk management committee is responsible for managing our risks and assets.

The following members of our board of directors were appointed to compose our capital and risk management committee: Roberto Egydio Setubal, Gustavo Loyola, Pedro Luiz Bodin de Moraes, Francisco Eduardo de Almeida Pinto and Candido Botelho Bracher.


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Appointment and Corporate Governance Committee

Our appointment and corporate governance committee is responsible for certain corporate governance matters;matters, such as the selection, and appointment of members of our board of directors and CEO; and the assessment of members of our board of directors and our CEO.

The following members of the board of directors were appointed to compose the appointmentsappointment and corporate governance committee: Pedro Moreira Salles, Alfredo Egydio Arruda Villela Filho, Alfredo Egydio Setubal, Henri Penchas, Israel Vainboim and Fernando Roberto Moreira Salles.

Personnel Committee

Our personnel committee is responsible for establishing compensation models for the Itaú Unibanco Holding’s employees (including the determination of compensation packages for the CEO, vice presidents and executive officers, subject to the Board of Directors’ approval). Such committee is also responsible for defining stock options, talents,recruiting, training, advising and retaining talented employees, recruiting and training.

The following members of our board of directors were appointed to compose our personnel committee: Pedro Moreira Salles, Roberto Egydio Setubal, Ricardo Villela Marino, Francisco Eduardo de Almeida Pinto and Candido Botelho Bracher.

In relationCOMMITTEES OF THE BOARD OF OFFICERS
Disclosure and Trading Committee
Our disclosure and trading committee’s main responsibility is to manage our trading and disclosure policies and is comprised of our principal investor relations officer and from two to ten persons elected annually among the committees existing asmembers of December 31, 2008, ourthe board of directors, determined (i)board of officers or controlled companies and specialists in capital markets.

Currently the extinctionmembers of the accounting policies committee, which former responsibilities were assigned to our management; (ii) that the disclosure and trading committee shall report to the our executive officers; (iii) that the appointmentsare Alcides Lopes Tápias, Alfredo Egydio Arruda Villela Filho, Alfredo Egydio Setubal, Claudia Politanski, Fernando Marsella Chacon Ruiz, Rogério Paulo Calderón Perez and compensation committee will have its responsibilities assigned to our personnel committee and to our appointments and corporate governance committee.Viviane Behar de Castro.

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6D.Employees
6D.           Employees

General

The following table sets forth the number of our employees as of December 31, 2009, 2008 2007 and 2006:2007:

  December 31, 
  
2008
  2007  2006 
  Number of Employees 
Employees (on a consolidated basis)  71,354   66,104   59,907 
Brazil  66,464   61,455   58,547 
Abroad  4,890   4,649   1,360 
Banco Itaú Argentina and subisidiaries  1,414   1,383   1,120 
Banco Itaú Chile and subisidiaries  1,989   1,850   - 
Banco Itaú Uruguay and subisidiaries  553   477   - 
OCA Casa Financiera (Uruguay)  448   440   - 
Banco Itaú Europa and subisidiaries  323   362   149 
Others  199   167   118 
  December 31, 
  2009  2008  2007 
  Number of Employees 
Employees (on a consolidated basis)  101,640   71,354   66,104 
Brazil  96,240   66,464   61,455 
Abroad  5,400   4,890   4,649 
Argentina  1,376   1,394   1,368 
Chile  2,012   1,989   1,850 
Uruguay  983   1,001   917 
Paraguay  461   -   - 
Europa  345   323   362 
Others  223   183   152 

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Employees from each of our business operations as of December 31, 2009, 2008 2007 and 20062007 are presented in the following table:

  December 31, 
  
2008
  2007  2006 
  Number of Employees 
Itaú Unibanco Holding and subsidiaries:         
      Itaú Unibanco  61,098   55,165   50,733 
      Banco Itaú BBA  1,094   963   802 
      Itaucred  8,953   9,859   8,283 
      Corporation (Parent Company)  209   117   89 
Total  71,354   66,104   59,907 
  December 31, 
   2009  2008  2007 
   Number of Employees 
Commercial Banking  89,360   61,098   55,165 
Itaú BBA  2,310   1,094   963 
Consumer Credit  9,888   8,953   9,859 
Corporate  82   209   117 
Total  101,640   71,354   66,104 

The number of our employees increased by 19.1%34.96% from December 31, 20062007 to December 31, 2008,2009, as a result of new acquisitions and developmentthe Association. During 2009, we have implemented the integration process at the level of various segments, such as financing of vehicles, insurance, credit cards, consortium.our employees.

All of ourOur employees are represented by one of the 209 labor unions in Brazil. TheBrazil, which consist of banking labor unions in various localities in which we operate; as set forth in the table below.  Employees represented by main localities:
RegionEmployees Number
Sao Paulo (city)32,073
Rio de Janeiro (city)4,891
Belo Horizonte (city)2,035
Curitiba (city)1,651
Porto Alegre (city)730
Since 1986, the banking industry in Brazil has been the target of strikes organized by labor unions.  During the course of a strike, part of the normal officeactivities of our branches activities suffers from disruptions.  Despite the disruptions carried out by labor unions.  However, although we may suffer a disruption into our retail banking operations and, to a lesser extent, our corporate banking operations, we have not suffered significant losses in either sector through strike action.

The employer entity representingNational Federation of Banks (Federação Nacional dos Bancos), or FENABAN, represents banking institutions is FENABAN, whichas employers and negotiates with the two Confederations, CONTRAF -entities representing the employees, the National ConfederationFederation of Financial Industry Workers (Confederaç( Confederação Nacional dos Trabalhadores do Ramo Financeiro), or CONTRAF, and CONTEC, representing the employees.National Federation of Credit Industry Workers ( Confederação Nacional dos Trabalhadores nas Empresas de Crédito , or CONTEC.  They carry out annual wage negotiations to establishupdate salaries, update, banks’ overtime pay levels and other benefits.  The negotiation takes place in September of each year.  We traditionally set the salary structure of our employees above these levels.
For wage negotiations, only FENABAN represents the Brazilian financial system and FENABAN negotiating with the two national professional federations above that, for wage negotiations, represent employees in negotiations.
We seek to havemaintain good relationships with our employees and with the labor unions, thatwhich represent them.  However, we are defendants in approximately 371 lawsuits in which labor unions dispute a variety of issues, such as economic plans, the integration of semester bonus on the base salary and certain aspects of legislation compliance.

We sponsor 14Itaú Unibanco Holding, through sponsored enterprises, offers its employees 19 pension plans for our employees that are administered by nine entities described below, eight of which are closed pensions funds and one of which is an open pension fund.  The plans’ main objective is to provide a supplement what they receive under theto Brazilian federal social security system.  Thirteenbenefits.  Twelve of these pensionthe plans are managed by seven pension funds, independent legal entities established for that purpose only, under the supervision and control of a management board that is comprised of representatives of employers and employees. Eight of these plans are known as defined benefit plans, whereunder which the calculation of the benefit amount on retirement is determined by a set formula the other remaining plansdefined in regulation.  Three are known as defined contribution plans, whereunder which the determinationcontribution values are defined and benefit will be proportional to what has been accumulated and capitalized over time.  Four are variable contribution plans under which contributions can vary as needed by the participant and the accumulated fund and the income will determine the value of the benefit amount depends onbenefit.  New employees can participate in a defined contribution plan managed by Itaú Vida e Previdência S.A.
The plans are administered by the investment returns. All these plans do no longer accept new members.following entities (closed pension funds):

·Fundação Itaubanco manages the following plans:  PAC, Itaubanco CD Plan, PBF, PB002, PBI and PSI;
·Funbep - Fundo de Pensão Multipatrocinado manages the following plans:  Funbep I and Funbep II;
·Prebeg - Caixa de Previdência dos Funcionários do BEG manages the PREBEG plan;
·Fundação Bemgeprev manages the ACMV plan;
·Itaubank Sociedade de Previdência Privada manages the Itaubank plan;
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·Itaú Fundo Multipatrocinado, or IFM, manages the following plans:  Itaú defined benefit plan and Itaú defined contribution plan; (the former plan Citiprev Plan is managed by IFM);

The only
·UBB PREV – Previdência Complementar manages the following plans:  Unibanco pension plan, basic plan and IJMS;
·Fundação Banorte that manages the following plans:  Plano I and Plano II;
Our pension plan provided to new employees is the PGBL Plan (a defined contribution plan), which was established on August 1, 2002.

plans are managed in accordance with our corporate governance principles.  As required by Brazilian regulatory authorities in Brazil, an independentagencies, actuarial valuations are made by the actuary determines the actuarial position ofresponsible for each plan every year, in accordance with actuarial methods generally accepted in Brazil and independent accountants examine the financial statements of entities that manage the plans.year.  During 2009, 2008 and 2007, we made contributions to the pension plans at levels required by actuarial standards.  We made contributions to our pension plans of approximately R$43 million, R$34 million and R$30 million in 2009, 2008 and 2007, respectively.

Training and Development

Personnel development is one of our main values, and we make an effort to train high performance teams engaged and motivated by sustainable development. For this reason we created the Itaú Unibanco Business School, which provides continuing education in three areas: business (knowledge management of different business areas), leadership (knowledge management for more senior employees for development of leadership) and performance (knowledge management of general application, such as corporate MBA programs, certification preparation programs and IT courses). The Itaú Unibanco Business School was created to further the unification of processes at the two banks prior to the Association by combining the best programs of each bank in Itaú Unibanco Holding. The continuing education of our teams and leaders promotes a high level of discussion on themes such as ethics, sustainability, and social and environmental responsibility.
Our dedication to the development of our employees is illustrated by our International Organization for Standardization 9001 certification. All certifications are valid for three years, during which there must be annual follow-up audits. After three years, there is a recertification audit.
During the course of 2009 the issues listed below have been audited by SGS ICS Certificadora Ltda:
·Record of working hours - Electronic TimeSheet;
·Payroll - Calculation, Credit, Accounting and Collection;
·Fundação Itaubanco - Analysis of Credit Granting and Benefits Payment;
·Fundação Prebeg - Analysis of Credit Granting and Benefits Payment;
·Fundação Funbep - Analysis of Credit Granting and Benefits Payment; and
·Fundação Bemgeprev - Analysis of Credit Granting and Benefits Payment.

The only process recertified in 2009 was the Itaú Unibanco Business School Management.

6E.Share Ownership
 
Except for the stock indirectly owned by our controlling stockholdersshareholders (owned through their participation in IUPAR, Itaúsa and Companhia E.Johnston), the members of our board of directors and our board of executive officers, on an individual basis and as a group, beneficially own less than 1% of the shares of our common stock and less than 1% of the shares of our preferred stock. See “Item 7A. Major Stockholders”Shareholders” for more information."
 
Stock Option Plan
 
We have been one of the first Brazilian companies to compensate executives withissuing stock options a practice that we have hadas compensation since 1995. Accordingly, part of our management’s variable compensation is in the form of stock options, thus generatingwhich we believe reinforces their commitment to our performance. Our stock options plan became official and available at our investor relations’ website since 2002.
Ouroption plan has been instituted with the purpose of integrating officers into Itaú Unibanco Holding’sour medium and long-term development. Our stockholders,shareholders, at the general extraordinary meetingmeetings, held on April 24, 2009 haveand April 26, 2010, included the board of directors, among the employees of Itaú Unibanco Holding and the employees and management members of its controlled companies as beneficiaries of the plan. This facilitates their participation in theWe believe that this will allow them to benefit from additional value whichthat their work and dedication have created for the shares which represent Itauof Itaú Unibanco Holding’s capital. ItHolding. Our stock option plan is designed to retain the services of our members of management and our board of directors and to obtain highly qualified employees.  Each option gives the holder the right to one preferred share. When the share options are exercised, we can issue new shares or transfer treasury shares to the holder of the option.
 
TheOur stock option plan is governed by athe personnel committee, to bewhose members are appointed by our board of directors for the purposes of the plan.directors. The personnel committee periodically designates the members of our management to whom stock options shall beare granted in the quantities specified. In exceptional circumstances, stock options may be granted to the members of management of controlled companies or to senior employees of Itaú Unibanco or the aforesaid companies. Our board of directors may modify the decisions of the personnel committee atin their first meeting after the date the options wereare granted. ThisIf not being the case,modified, the options granted by the personnel committee can beare deemed to have been confirmed. The personnel committee may only grant the options if our profits are sufficient to allowpermit the distribution of the mandatory dividend in accordance with Brazilian Corporate Law.corporate law. The amount of options granted in any given year may not exceed 0.5% of our total shares at the end of the relevant fiscal year. If in a specific fiscal year, the amount of stock options granted during such year is below the 0.5% maximum limit of the total number of shares, the difference may be added to those options granted in any one of the seven subsequent fiscal years.
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The options have an exercise period of between five and ten years from the date of their issuance; however, they may only be exercised after a vesting period determined by the personnel committee and outside certain suspensionblackout periods. The vesting period may vary,varies, at the personnel committee’s discretion, from one to fiveseven years from the date of issuance of the options. SuspensionBlackout periods are time periods during which the CVM forbids directorsmanagement from trading shares of the company with which they are affiliated and therefore no options may be exercised.
 
The exercise price of thean option is determined by the personnel committee at the time of the grant and shallcan be restated up to the month prior to the exercisingexercise of the option. In determining the exercise price, the personnel committee will considerconsiders the average prices for our preferred shares on the days the BOVESPABM&FBOVESPA is open for business for thea period of at least one and at the most three months prior to the issuance of the stock option, at the committee’s discretion.option. An adjustment of up to 20% more or less than the average price is permitted.
 
The plan also stipulates that, afterAs decided  by our shareholders at the general extraordinary meeting held on April 26, 2010, the availability of the shares, which the beneficiaries shall subscribe through the exercise of the option may be subject to additional restrictions in accordance with resolutions adopted by the stockholder can disposepersonnel committee (imposition of half of his or her shares immediately and may dispose of the other half only after a period of two years from the date of the exercise of his or her option.holding periods).
 
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In addition, the general extraordinary meeting held on April 24, 2009 also created a new mechanism for the granting of options for officersto beneficiaries who are considered to have had outstanding performance and have potential according to the criteria established by the personnel committee and through the use of performance and leadership evaluation tools outstanding performance and potential.tools. The personnel committee may grant options for which the strike price is paid through the obligation of the beneficiary to invest 20% of the portion of his or her bonus that is tied to profits and results in shares of Itaú Unibanco Holding, 20% of the net participation in the profits and results which they have received with respect to the preceding year.Holding. The officersbeneficiaries to whom these options wereare granted must keep the propertyownership of the shares unaltered and with no encumbrances of any nature from the date the option wasis granted until its exercise. Each share acquired pursuant this procedure entitles the officersexercise of the option. This mechanism was expanded by our shareholders at the general extraordinary meeting held on April 26, 2010 in order to receive one(i) allow that a portion or the full net amount of the bonus may be invested and (ii) allow the personnel committee to impose additional conditions to the exercise of the shares. Thus, as the beneficiaries are encouraged to invest their own bonuses in our shares, and consequently they participate in the appreciation of the shares, we believe that they become more committed to our performance, which is the main objective of the stock option.option plan.
 
The general extraordinary meeting held on April 24, 2009 has also approved the assumption by Itaú Unibanco Holding of all the rights and obligations that Unibanco and Unibanco Holdings had under their respective stock option plans. After this assumption, the options held by the executivesbeneficiaries to acquire shares issued by Unibanco and Unibanco Holdings were exchanged byfor replacement awards options to acquire shares of Itaú Unibanco Holding, at the same exchange ratio used for the Association.
 
For further information relating to the issuance of our stock options, see “Item 6B. Compensation.” For more information regarding our stock option plans, see Notenote 26 to our consolidated financial statements.

ITEM 7    MAJOR STOCKHOLDERS
ITEM 7MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
 
7A.Major StockholdersShareholders
 
In accordance with our bylaws, our capital stock is divided into two classes of shares: common shares (ações ordinárias) and preferred shares (ações preferenciais). Each common share entitles its holder to one vote at meetings of our stockholders,shareholders, and there are no differences in the voting rights conferred by each of our common shares. The preferred shares are non-voting. See “Item 10B. Memorandum and Articles of Association – Voting Rights” for information regarding our capital stock and our two classes of stock.
 
The following table sets forth certain information as of April 30, 2009March 31, 2010 with respect to:
 
•             any person known to us to be the beneficial owner of more than 5% of our outstanding common shares,
·  any person known to us to be the beneficial owner of more than 5.0% of our outstanding common shares; and
 
•             any person known to us to be the beneficial owner of more than 5% of our outstanding preferred shares, and
·  any person known to us to be the beneficial owner of more than 5.0% of our outstanding preferred shares.
 
•             other significant holders of our common and preferred shares.
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  Common Shares  
Preferred Shares
  
Total
 
  Total     Total     Total    
  Number of  % of  Number of  % of  Number of  % of 
  Shares     
Shares
     
Shares
    
  (per share, except percentage amounts) 
                   
IUPAR – Itaú Unibanco Participações S.A.  1,061,396,457   51.00   0.00   0.00   1,061,396,457   25.54 
CNPJ 04.676.564/0001-08                        
Itaúsa – Investimentos Itaú S.A.  749,877,846   36.03   70,075   0.01   749,947,921   18.05 
CNPJ 61.532.644/0001-15                        
Bank Of America Corporation (BAC)  51,342,090   2.47   171,295,235   8.26   222,637,325   5.36 
CNPJ 08.387.504/0001-18                        
Barclays Plc (by its subsidiaries)  0.00   0.00   111,406,191   5.37   111,406,191   2.68 
CNPJ 08.387.504/0001-18                        
Treasury Stock  2,002   0.00   52,966,075   2.55   52,968,077   1.27 
Others  218,551,128   10.50   1,738,489,464   83.81   1,957,040,592   47.10 
Total  2,081,169,523   100.00   2,074,227,040   100.00   4,155,396,563   100.00 

Until March 24, 2003, Itaúsa was the direct controlling stockholder of Itaú Unibanco (formerly Banco  Itaú) through its 85.6% direct ownership of its common shares. Itaúsa is a holding company controlled by members of the Egydio de Souza Aranha Family, which includes Alfredo Egydio Arruda Villela Filho, one of our vice chairmen, Alfredo Egydio Setubal, one of our directors and one of our executive vice presidents, Ricardo Villela Marino, one of our directors and officers and Roberto Egydio Setubal, one of our vice chairmen and chief executive officer. Itaúsa holds equity interests in several companies active in the financial and real estate industries, as well as the lumber, ceramic, chemical and electronics industries.

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After March 24, 2003, as a result of a corporate reorganization, Itaú Unibanco Holding became the direct controlling stockholder of Itaú Unibanco  with 100% of its stock.
  Common shares  Preferred shares  Total 
   Total Number of
Shares		  %  Total Number of
Shares		  %  Total Number of
Shares		  % 
  (per share, except percentage amounts) 
IUPAR – Itaú Unibanco Participacões S.A.  1,167,536,097   51.00   0.00   0.00   1,167,536,102   25.54 
CNPJ 04.676.564/0001-08                        
Itaúsa – Investimentos Itaú S.A.  828,666,680   36.20   77,082   0.01   828,743,762   18.13 
CNPJ 61.532.644/0001-15                        
Bank of America Corporation  56,476,299   2.47   188,424,758   8.26   244,901,057   5.36 
CNPJ 08.387.504/0001-18                        
Treasury stock  2,202   0.00   39,689,942   1.74   39,692,144   0.87 
Others  236,605,197   10.33   2,053,457,962   89.99   2,290,063,154   50.10 
Total  2,289,286,475   100.00   2,281,649,744   100.00   4,570,936,219   100.00 
 
As a result of the Association, betweenIUPAR became the controlling shareholder of Itaú Unibanco Holding. IUPAR is a holding company controlled by Itaúsa and Unibanco,Companhia E. Johnston. The control of IUPAR and Itaú Unibanco Holding is controlledequally shared by IUPAR,Itaúsa and Companhia E. Johnston and all decisions are taken by consensus. Itaúsa, a holding company controlled (i) by Itaúsa, whichthe Villela family and the Setubal family, holds 50% of itsthe common stock and 100% of itsthe preferred stock of IUPAR and (ii) by  E.Johnston,also holds, directly, 36.20% of our common stock. Companhia E. Johnston, a holding company controlled by the Moreira Salles Family, whichfamily, holds 50% of the common stock of IUPAR.

Itaúsa and the Moreira Salles family have entered into a shareholders’ agreement to regulate their relationship regarding IUPAR, Itaú Unibanco Holding and its common stock.subsidiaries.  The shareholders’ agreement main provisions are the following:
 
See “Item 4A. History(1) Corporate Governance.  The board of directors of IUPAR will be composed by four members: two appointed by Itaúsa and Developmenttwo by the Moreira Salles family, and its board of officers will be composed by four executive officers: two appointed by Itaúsa and two by the Company – Recent Developments – Association between Itaú and Unibanco Financial Groups” and “Item 10C. Material Contracts - Association between Itaú and Unibanco Financial Groups.”
Moreover, BAC is an important stockholderMoreira Salles family.  The board of directors of Itaú Unibanco Holding will be composed by up to 14 members, out of which six will be appointed by Itaúsa and holdsthe Moreira Salles family, and will always vote jointly. Currently, four of our directors are members of the Villela and Setubal families and two of our directors are members of the Moreira Salles family.
(2) Lock-up Period, Right of First Refusal and Tag-Along Rights.  (i) The shares issued by IUPAR may not be transferred by Itaúsa or the Moreira Salles family to third parties until November 3, 2018.  (ii) After this period, in case one of the parties decides to transfer shares of IUPAR, the other party may choose to (a) exercise its right of first refusal to acquire the shares, or (b) exercise its tag-along right, in the exact same terms and conditions, or (c) waive both its rights of first refusal and tag-along.  (iii) Itaúsa may freely transfer the shares issued by Itaú Unibanco Holding that are directly owned by it.  (iv) In case Itaúsa and the Moreira Salles family decide to jointly transfer the totality of their shares issued by IUPAR, Itaúsa may exercise its tag-along right in order to include all or part of the shares issued by Itaú Unibanco Holding that are directly owned by Itaúsa.

(3) Term.  The shareholders’ agreement will be in effect for a period of 20 years from January 27, 2009 and may be automatically renewed for successive periods of ten years, unless otherwise required by any of the shareholders, according to the procedures set forth in the shareholders’ agreement.
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In addition, BAC held 5.36% of our total capital as of April 30, 2009.March 31, 2010.

On April 6, 2009, Barclays Plc through its subsidiaries acquired 5.37% of the preferred shares of Itaú Unibanco Holding.
The table below contains information regarding the ownership of our shares and ADSs as filed by the holders of suchthe shares and ADSs in the United States, according to our internal share record, as of April 30, 2009:March 31, 2010:

 April 2009  March 2010 
 
Number
  Number of  Number  Number of 
 of Shares  Shareholders  of Shares  Shareholders 
Common Shares  51,374,979   8   58,043,846   18 
Preferred Shares  349,584,083   294   396,484,108   311 
Preferred Shares Represented by ADS  681,060,730   1(*)  752,844,447   1(*)
Total  1,082,019,792   303   1,207,372,401   330 
(*) The Bank of New York Mellon.

7B.Related Party Transactions
 
We have engaged in a number of transactions with related parties.  Our granting of credit to our executive officers, directors or affiliates is subject to restrictions under Brazilian law. Under Brazilian law, financial institutions may not grant loans or advances to:
 
any individual, or the immediate family members of the individual, or entity that controls the financial institution or any entity under common control with the financial institution,
 
•any executive officer, director or member of the fiscal council of the financial institution, or the immediate family members of these individuals, or entity in which the individual directly or indirectly holds 10% or more of the capital stock,
•any entity controlled by the financial institution, or
any executive officer, director or member of the fiscal council of the financial institution, or the immediate family members of these individuals, or entity in which the individual directly or indirectly holds more than 10.0% of the capital stock,
any entity controlled by the financial institution, or
 
any entity in which the financial institution directly or indirectly holds 10% or more than 10.0% of the capital stock or which directly or indirectly holds more than 10%10.0% of the financial institution’s capital stock.
 
As of the date of this annual report, we believe that we are in compliance with the restrictions under Brazilian law. The prohibition does not limit our ability to enter into transactions in the interbank market with our affiliates that are financial institutions.  See “Item 4B. Business Overview – Regulation and Supervision.”
 
We have always conducted transactions with companies that are part of our consolidated group on an arm’s length basis, according to prices, terms and rates that follow market standards and practices.  We have eliminated the results of these transactions in our consolidated position. These operations are generally banking and interbanking transactions.  The table below sets forth the details of these operations.

119124
 
  
(in millions of R$)
 
Balances 
2008
  2007  2006 
Interest-bearing deposits and non-interest bearing deposits of consolidated entities at other consolidated entities  187,716   172,081   101,393 
Securities issued by consolidated entities and acquired by other consolidated entities  96,107   68,816   50,664 
Securities repurchased and resale agreements between consolidated entities  34,475   19,520   14,825 
Investment revenues  22,680   16,029   11,283 
Derivative financial instruments - Liabilities  9,747   4,055   3,665 
Debentures revenues  30,385   11,773   3,658 
Loans to consolidated entities  4,389   2,922   1,030 
Dividends  2,524   2,244   1,034 
Foreign currency purchases and sales to be settled between consolidated entities  4,987   10,931   1,484 
Borrowings and on-lendings between consolidated entities  10,431   6,681   1,306 
Fees receivable/payable between consolidated entities  96   406   172 
Tax and social securities contributions  319   289   275 
Deferred income  16   18   14 
Interbank accounts of subsidiaries  15   32   25 
Negotiation and intermediation of securities  183   17   6 
Interest Expense  (31,507)  (20,633)  (14,186)
Other balances between consolidated entities  (13,541)  7,934   13,615 

(in millions of R$)
 
Balances 
2009
  2008  2007 
Securities issued by consolidated entities and acquired by other consolidated entities  114,563   96,107   68,816 
Loans to consolidated entities  2,394   4,389   2,922 
Foreign currency purchases and sales to be settled between consolidated entities  32,925   4,987   10,931 
Interest-bearing deposits and non-interest bearing deposits of consolidated entities at other consolidated entities  241,055   187,716   172,081 
Securities repurchased and resale agreements between consolidated entities  75,893   34,475   19,520 
Interbank accounts of subsidiaries  105   15   32 
Borrowings and on-lendings between consolidated entities  8,989   10,431   6,681 
Derivative financial instruments - Liabilities  4,104   9,747   4,055 
Dividends  4,702   2,524   2,244 
Income Taxes and other taxes payable  -   319   289 
Negotiation and intermediation of securities  33   183   17 
Receivables/Payables between consolidated entities  9,095   96   406 
Deferred income  24   16   18 
Interest on federal funds sold and securities purchased under agreements to resell  26,158   22,680   16,029 
Interest on securities  20,472   30,385   11,773 
Interest Expense  (34,595)  (31,507)  (20,633)
Other income and expenses between consolidated entities  (34,761)  (13,541)  7,934 
The table below sets forth the operations between Itaú Holding and its consolidated subsidiaries with entities that follow the equity method. The transactions between Itaú Holding and its consolidated subsidiaries and the equity investees are mainly banking transactions carried out at the terms summarized below.

 (in millions of R$) 
(in millions of R$)(in millions of R$) 
 2008  
2007
  
2006
  2009  2008  2007 
ASSETS                  
Dividends receivable                  
Unibanco Rodobens Administradora de Consórcios Ltda  15   -   - 
Serasa S.A.  -   -   17   -   -   - 
Redecard S.A.  -   -   37   -   -   - 
LIABILITIES                        
Non-interest bearing deposits                        
Itaú XL  129   -   -   54   129   - 
Redecard S.A.  -   -   192 
Unibanco Rodobens Administradora de Consórcios Ltda  59   -   - 
CNF - Adinistradora de Consórcios Nacional Ltda  57   -   - 
Tecnologia Bancária S.A.  3   -   - 
Deposits received under securities repurchase agreements                        
Olimpia  28   -   -   26   28   - 

120125
 
The table below presents balances and transactions between Itaú Unibanco Holding and others entities of the Itaúsa group.

 (in millions of R$, except percentages) 
(in millions of R$, except percentages)
(in millions of R$, except percentages)
 
 
2008
  
2007
  
2006
  
2009
  
2008
  
2007
 
LIABILITIES
                  
Demand deposits                  
ITH Zux Cayman Company Ltd.  55   -   -   41   55   - 
Duratex S.A.  32   -   -   18   32   - 
Interest-bearing deposits                        
Elekeiroz S.A.  38   22   -   11   38   22 
Annual interest (%) 101.50% of CDI  101.50% of CDI   -  100.00% of CDI  101.50% of CDI  101.50% of CDI 
Elekeiroz S.A.  21   -   -   -   21   - 
Annual interest (%) 101.50% of CDI   -   -   -  101.50% of CDI   - 
Itaúsa Empreendimentos S.A.  28   -   -   31   28   - 
Annual interest (%) 102.30% of CDI   -   -  101.10% of CDI  102.30% of CDI   - 
Itaúsa Empreendimentos S.A.  16   -   -   17   16   - 
Annual interest (%) 102% of CDI   -   -  100.80% of CDI  102% of CDI   - 
Duratex S.A.  39   10   -   -   39   10 
Annual interest (%) 102.37% of CDI  104.45 of CDI   -   -  102.37% of CDI  104.45 of CDI 
Deposits received under securities repurchase agreements            
Itaúsa Empreendimentos S.A.  48   -   - 
Itaú Gestão de Ativos S.A.  1   -   - 
Trade notes payable                        
Itautec S.A.  7   8   16 
Itautec S.A. (1)  10   7   8 
Itaúsa - Investimentos Itaú S.A.  73   -   - 
TRANSACTIONS (other than interest income and interest expense recognized in the financial transactions above)                        
Services expenses                        
Itautec S.A. (1)  -   181   154 
FUNBEP - Fundo de Pensão Multipatrocinado  2   -   - 
Itaúsa - Investimentos Itaú S.A.  1   -   -   2   -   - 
Rent expenses                        
Duratex S.A.  (2)  -   - 
Itautec Philco S.A.  (2)  -   - 
FUNBEP - Fundo de Pensão Multipatrocinado  6   -   - 
Itaúsa - Investimentos Itaú S.A.  1   -   -   1   -   - 
Equipment and software purchase                        
Itautec S.A.  324   125   112   396   324   125 
(1) Maintenance and services related to electronic equipment and software. 
(1) Maintenance and services related to electronic equipment and software.

Itaú Unibanco Holding has made regular donations to Fundação Itaú Social, a charitable foundation whose objectives are:
 
·
•             to create the “Programa Itaú Social,”, aimed at coordinating activities of interest to the community, supporting and developing social, scientific and cultural projects, mainly in the areas of education and health;
 
·
•             to support ongoing projects or initiatives, sustained or sponsored by entities qualified under the “Programa Itaú Social,”, and
 
•             
·to act as a supplier of ancillary services to companies of the group.
 
Itaú Unibanco Holding is the founding partner and sponsor of the Instituto Itaú Cultural – IIC, an entity whose purpose is the promotion and preservation of the Brazilian cultural heritage.
 
The table below shows the donations to both entities and services rendered by Fundação Itaú Social to Itaú Unibanco Holding:

121126
 

(in millions of R$)
(in millions of R$)
 
 
(in millions of R$)
  2009  2008  2007 
 
2008
  2007  2006 
Donations by Itaú to         
Donations by Itaú Unibanco Holding to         
Fundação Itaú Social  -   2   2   -   -   2 
Instituto Itaú Cultural  36   4   27   39   36   4 
Instituto Unibanco de Cinema  10   -   - 
Associação Clube "A"  1   -   - 
Rent expenses                        
Fundação Itaubanco  23   -   -   24   23   - 
FUNBEP - Fundo de Pensão Multipatrocinado  6   -   - 
Service fees and commission income                        
Fundação Itaubanco  6   -   -   9   6   - 
FUNBEP - Fundo de Pensão Multipatrocinado  2   -   - 

7C.Interests of Experts and Counsel
 
Not applicable.

ITEM 8    
ITEM 8FINANCIAL INFORMATION
 
8A.Consolidated Financial Statements and Other Financial Information
 
The information included in Item 18 of this annual report is referred to and incorporated by reference into this Item 8A.
 
Litigation
 
Overview
We are party to numerous lawsuits and administrative proceedings that arise during the normal course of our business. We are routinely involved in legal proceedings as part ofconsumer complaints filed with SUSEP and the normal course of business, most frequently as plaintiff seeking recovery of overdue credits.  In addition, we are defendants in various lawsuits brought by customers, seeking indemnification for damages, as well as by account holding customers disputing adjustments to deposits required by the government under previous economic stabilization plans and various labor suits by employees disputing salary adjustments. We are also a defendant in several claims filed by labor unions.Central Bank, which do not constitute administrative proceedings. We are not a defendantdefendants in any material administrative proceeding with the CVM, SUSEP, the Central Bank or Municipalities. We are routinely involved in consumer complaints filed with the SUSEP and the Central Bank, which do not constitute an administrative proceeding. any municipalities.
 
Our financial statements only include reserves for probable losses that can be reasonably estimated and expenses that we may incur in connection with pending litigation or administrative proceedings, or as otherwise required by Brazilian law. As of December 31, 2009, our provisions for such contingencies were R$13,988 million, of which R$8,343 million are related to tax contingencies, R$3,158 million are related to labor contingencies, R$2,487 million are related to civil contingencies. Our management believes that our provisions, including interest, for legal proceedings in which we are the defendant,defendants are sufficient to meetcover probable andlosses that can be reasonably estimated losses in the event of unfavorable court decisions. It is currently not possible to estimate the amount of all potential costs that we may incur or penalties that may be imposed on us other than those amounts for which we have reserves. As of December 31, 2008, we had established reserves in the amount of R$ 1,550 million for civil litigation, R$ 1,990 million for labor-related lawsuits and R$ 7,834 million for tax-relatedWe believe that any potential liabilities related to these lawsuits and administrative proceedings involving federal and municipal taxes as well as social security taxes, in which we are contesting the tax levy  based on facts, illegality or unconstitutionality.  Although we cannot assure you that we will prevail in every case, our management does not believe that the ultimate outcome of these matters, individually or in the aggregate, will have a material adverse effect on our financial condition or results of operations.”
results. There are no material proceedings in which any of our directors, any member of our senior management or any of our affiliates is either a party adverse to us or to our subsidiaries or has a material interest adverse to us or our subsidiaries.
 
Civil Litigation
Litigation Arising from Government Monetary Stabilization Plans
From 1986 to 1994, the Brazilian federal government implemented several consecutive monetary stabilization plans to combat hyper-inflation. In order to implement these plans, the Brazilian federal government enacted several laws based on its power to regulate the monetary and financial systems as granted by the Brazilian federal constitution.
Holders of savings accounts during the periods when the monetary stabilization plans were implemented have challenged the constitutionality of the laws that implemented those plans, claiming from the banks where they held their savings accounts additional amounts of interest based on the inflation rates applied to savings accounts under the monetary stabilization plans.
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We are defendants in numerous standardized lawsuits filed by individuals in respect of the monetary stabilization plans. We record provisions for such claims upon receipt of summons to present a defense based on statistical criteria, considering the average amount paid in similar lawsuits. Each provision may be adjusted based on the balance in the savings account statements of each plaintiff during the relevant periods and based on the collateral we may be required to post with respect to each lawsuit.
In addition, we are defendants in class actions, similar to the lawsuits by individuals, filed by either (i) consumer protection associations or (ii) public attorneys’ office ( Ministério Público ) on behalf of holders of savings accounts. Upon final judgment of a class action, holders of savings accounts may collect any amount due based on such a decision. We record provisions when individual plaintiffs apply to enforce such decisions, using the same criteria used to determine provisions for individual lawsuits.
The Federal Supreme Court ( Supremo Tribunal Federal ) has issued some decisions in favor of the holders of savings accounts, but has not issued a final ruling with respect to the constitutionality of the monetary stabilization plans as applicable to savings accounts. In relation to a similar dispute with respect to the constitutionality of monetary stabilization plans as applicable to time deposits and other private agreements the Federal Supreme Court has decided that the laws were in accordance with the federal constitution. Due to this contradiction, the Confederação Nacional do Sistema Financeiro – Consif filed a special proceeding with the Federal Supreme Court ( Arguição de Descumprimento de Preceito Fundamental nº 165 – ADPF, 165), in which the Central Bank has filed an amicus brief, challenging the existing Federal Supreme Court ruling with respect to savings accounts and arguing that holders of savings accounts did not incur actual damages and that the monetary stabilization plans as applicable to savings accounts were in accordance with the federal constitution.
Other Civil Litigation
In addition to litigation arising from government monetary stabilization plans, we are defendants in numerous civil lawsuits arising from the normal course of our business. We are not able to currently predict the total amounts involved in these claims, due to the nature of the matters disputed. However, we believe that any potential liabilities related to these lawsuits will not have a material adverse effect on our financial condition or results.
As of December 31, 2009, our total amount of provisions related to civil litigation, including the monetary stabilization plans, was R$2,487 million.
Tax Litigation
We are involved in several tax disputes, including judicial lawsuits and administrative proceedings, mainly relating to the constitutionality and legality of certain taxes imposed on us by the Brazilian government, among which the most relevant are claims in connection with: (i) the imposition of different rates of CSLL on companies participating in the financial system; and (ii) the imposition of the CPMF on the disposal of leasing companies’ cash accounts.
Regarding item (i), we have filed several lawsuits contesting the increase of CSLL’s rate based on the fact that it applies only to companies participating in the financial system. Such lawsuits are still pending a decision from the São Paulo Federal Court Circuit.
In relation to item (ii), on February, 2008, following previous cases, the Superior Court of Justice published a ruling concerning a discussion of Unibanco Leasing according to which leasing companies will be considered financial institutions and therefore will benefit from the CPMF exemption on financial transfers related to any funding or investments made in the course of financial business. Such ruling is favorable to all of our remaining claims.
In addition, special payment conditions were created by Law No. 11,941, enacted on May 27, 2009, with respect to tax debts, especially those under litigation (the “Tax Program”). Under those special payment conditions, litigating taxpayers who agree to discontinue the litigation can pay only the principal amount under dispute without any penalty and only 45.0% of the interest regularly applicable to such tax debts.
We applied for inclusion in the Tax Program tax disputes in which we considered that an unfavorable decision “more likely than not” would occur (higher then a 50.0% chance of loss) based on legal counsel opinion. The most relevant lawsuits included in the Tax Program were those filed by certain financial institutions of ours against the increase of the scope of the PIS/COFINS assessment.
Due to application to this Tax Program, we have recorded a effect in net income of R$292 million as result of the reversal of tax provisions related to the litigation we discontinued.
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Labor Litigation
Labor unions and former employees file lawsuits against us seeking compensation for alleged violations of their labor contract or related statutory rights. As of December 31, 2009, there were approximately 43,000 labor claims filed against us. Individual labor lawsuits against us are primarily related to overtime pay and salary parity.  Collective labor lawsuits against us are primarily related to maintenance of healthcare plans, security rules, strikes and salary differences resulting from monetary stabilization plans implemented by the Brazilian federal government. We are also defendants in labor lawsuits filed by the Public Labor Prosecutor Office related to union classification, outsourcing, occupational disease, health and safety, determination of working days, and compliance with minimum share of disabled personnel. For the fiscal year ended December 31, 2009, we paid approximately R$567 million in settlements with former employees and judgments imposed by the labor courts.

Dividend Policy and Dividends
 
General
 
Under Brazilian Corporate Law, distributable profits may be paid in the form of normal dividends or in the form of interest on stockholders’ equity.  The principal difference between dividends and interest on stockholders’ equity is their tax treatment, as discussed below.

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Brazilian Corporate Lawcorporate law generally requires that the bylaws of each Brazilian corporation specify a minimum percentage of the distributable profits of the corporation, comprising normal dividends and/orand interest on stockholders’shareholders’ equity, that must be distributed to the stockholdersshareholders as described below. Under Brazilian corporate law, distributable profits may be paid in the form of normal dividends or in the form of interest on shareholders’ equity. The principal difference between dividends and interest on shareholders’ equity is their tax treatment.
Interest on shareholders’ equity is limited to the daily pro rata variation of the Brazilian long-term interest rate ( Taxa de Juros de Longo Prazo), or TJLP, and cannot exceed the greater of 50% of the net income for the period in respect of which the payment is made and 50% of retained earnings. Distribution of interest on shareholders’ equity may also be accounted for as a tax deductible expense, and any payment of interest on preferred shares to shareholders, whether Brazilian residents or not, including holders of ADSs, is subject to Brazilian withholding tax at the rate of 15%. See “Item 10E. Taxation – Brazilian Tax Considerations – Interest on Shareholders’ Equity.” The amount paid to shareholders as interest on shareholders’ equity, net of withholding tax, may be included as part of the mandatory distribution. In such cases, we are required to distribute to shareholders an amount sufficient to ensure that the net amount received by the shareholders, after the payment by us of applicable withholding taxes in respect of the distribution of interest on shareholders’ equity, is at least equal to the mandatory distribution. See “Item 10B. Memorandum and Articles of Association – Preferred Shares and Common Shares – Calculation of Distributable Amount”.Amount.”
 
Under our bylaws, we are required to distribute to our stockholdersshareholders as dividends in respect to each fiscal year ending on December 31 an amount equal to not less than 25% of the distributable amount (adjusted net profit, as per article 202 of Law No. 6,404/76), or the mandatory dividend, in any particular year.dividend. Our board of directors may also declare the payment of interim dividends from retained earnings and profit reserves. Any payment of interim dividends or payment of interest on stockholders’shareholders’ equity will be netted against the amount of the mandatory dividend for that fiscal year. Each preferred share will be entitled to a priority minimum annual dividend of R$0.022.
 
Under Brazilian Corporate Law,corporate law, a company is allowed to withhold payment of the mandatory dividend in respect of common shares and preferred shares if management reports to stockholdersshareholders at a meeting that the distribution would be incompatible with the financial circumstances of the company and the stockholdersshareholders ratify this decision at a meeting. In this case, the fiscal council if active, must prepare and issue an opinion about the report of management and management must forward an explanation to the CVM within five days of the stockholders’shareholders’ meeting, justifying the decision made at the stockholders’ meeting.decision. The profits that were not distributed are to be recorded as a special reserve and, if not absorbed by losses in subsequent fiscal years, should be paid as dividends as soon as the company’s financial situation permits.
 
Payment of Dividends
 
We are required to hold an annual stockholders’shareholders’ meeting by no later than April 30 of each year at which an annual dividend may be declared or ratified. Additionally, interim dividends may be declared by our board of directors. According to Brazilian Corporate Law,corporate law, the payment of dividends must occur prior to the end of the fiscal year in which the dividend was declared. A stockholdershareholder has a three-year period from the dividend payment date to claim dividends in respect of its shares, after which we have no liability for that payment.
 
StockholdersShareholders who doare not reside in BrazilBrazilian resident must generally register with the Central Bank to have dividends and/orand interest on stockholders’shareholders’ equity, sales proceeds or other amounts with respect to their shares eligible to be remitted, inas foreign currency, outside of Brazil. See “Item 10E. Taxation – Brazilian Tax Considerations – Registered Capital”.
The preferred shares underlying the ADSs will beare held in Brazil by the custodian (as agent for the depositary), which will beis the registered owner on the records of the registrar of our preferred shares. The registrar will beis The Bank of New York Mellon.
129
 
Payments of cash dividends and cash distributions, if any, on preferred shares underlying the ADSs will be made in Brazilian currency to the custodian or to the depositary, which will then convert or cause to be converted as promptly as practicable those proceeds into U.S. dollars. The custodian or the depositary will deliver the converted proceeds to the holders of our ADSs, in proportion to the number of ADSs representing the preferred shares held by holders; provided, however, that in the event that we, the custodian or the depositary are required to withhold from cash dividend or other cash distribution an amount of taxes or other governmental charges, the amount distributed to the holder of the ADSs shall be reduced accordingly.

In the event that the custodian or the depositary is unable to immediately convert the Brazilian currency received as dividends and/or interest on stockholders’shareholders’ equity into U.S. dollars, the amount of U.S. dollars payable to holders of ADSs may be adversely affected by devaluations of the Brazilian currency that occur before those distributions are converted and remitted.  See “Item 3A.  Selected Financial Data – Exchange Rates” and  “Item 10E. Taxation – Brazilian Tax Considerations” (for tax implications).

Dividend Policy
 
We currently intend to pay dividends and/orand interest on stockholders’shareholders’ equity equal to the mandatory dividend, subject to any determination by our board of directors that such distribution would be inadvisable in view of our financial condition and provided that our board of directors determines to pay solely the minimum, non-cumulative preferred dividend in respect of the preferred shares. We pay a fixed amount of dividends monthly, which is equalequivalent to R$0.012 per share. As this fixed amount per share will be maintained after the inclusion in the stockholders’ position of the stock dividend approved by our extraordinary stockholders’ meeting held on April 24, 2009, the total value we pay monthly to stockholders will be increased in 10% as a result of such inclusion.

123
 

Regarding our monthly distributions, theThe record date in Brazil for the monthly payment is the last business day of the preceding month and in the United States the record date is three business days after the Brazilian record date. The payment of the dividenddividends is the first business day of the following month. For example, for
The calculation of the dividendsmonthly advance of June 2009,mandatory minimum dividend is based on the record date in Brazil is May 29, 2009,share position on the record date inlast day of the United States is June 3, 2009 andprior month, taking into consideration that the payment date is July 1, 2009.made on the first business day of the subsequent month.

8B.Significant Changes
 
See “Item 4A. History and DevelopmentWe are not aware of any significant changes bearing on the financial condition since the date of the Company – Recent Developments – Association between Itaú and Unibanco Financial Groups” and “Item 10C. Material Contracts – Association between Itaú and Unibanco Financial Groups.”consolidated financial statements included in this annual report.

ITEM 9    
ITEM 9THE OFFER AND LISTING
 
9A.Offer and Listing Details
 
Our preferred shares trade on the New York Stock Exchange, or NYSE, under the symbol “ITUB” in the form of American Depositary Shares, or ADSs.  We listed our ADSs on the NYSE and became a U.S. registered company on February 21, 2002 and have therefore complied with the exchange’s criteria and those of the SEC, which include disclosure of financial statements in U.S. GAAP and compliance with U.S. legislative requirements, including the 2002 Sarbanes-Oxley Act.  Each ADS represented 500 preferred shares at the time.  On October 20, 2004, we effected a reverse stock split whereby each two ADSs representedrepresents one preferred share.  On October 2005, another stock split was effected in Brazil and the ADS to preferred share ratio changed to 1:1.  On October 2007, we effected a stock split, whereby a new ADR was distributed for each ADR being traded on the NYSE.  On June 2008, we effected a stock split, whereby four new ADRs were distributed for each ADR then being traded on the NYSE. The ADSs are evidenced by ADRs issued by The Bank of New York Mellon, as depositary, under a deposit agreement, datedd ated as of May 31, 2001, as amended and restated as of February 20, 2002 and among us, the depositary and the owners and beneficial owners of ADRs from time to time.
 
We are a publicpublicly held company with shares traded on the market since our foundation, in 1945, date of our registration with the BOVESPA,BM&FBOVESPA, which is the principal trading market for our preferred shares and common shares. Our shares trade on the BOVESPABM&FBOVESPA under the symbol “ITUB4” for the preferred shares and “ITUB3” for the common shares without par value.
 
As of December 31, 2008,2009, there were:
 
an aggregate of 2,074,227,0402,281,649,744 preferred shares issued, including 58,763,00043,588,307 held as treasury shares, and 2,081,169,5232,289,286,475 common shares issued, including 2,202 held as treasury shares (including the issuance of 527,750,941 common shares and 614,237,130 preferred shares, in light of the Association with Unibanco, according to the extraordinary stockholders’shareholders’ meeting held on November 28, 2008), and
 
51,706,999
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57,174,784 common shares and 713,451,1601,376,780,347 preferred shares held by foreign investors (this number was calculated based on the investors’ addresses indicated in our records related to the shares that are in our custody and also includes the stake held by BAC), representing 3.3%2.5% and 48.5%60.3%, respectively, of the total of each class outstanding.
 
We have registered one class of ADSs under the registration statement on Form F-6 pursuant to the Securities Act.  As a result of a stock split effected on October 3, 2005, one ADS came to represent one preferred share without par value.  As of December 31, 2008,2009, there were approximately 289.1768.5 million ADSs outstanding, representing approximately 19.7%33.7% of the preferred shares.  All of the ADSs were registered in the name of The Depository Trust Company and The Bank of New York Mellon. As of December 31, 2008,2009, there were 5060 registered holders of ADSs.
 
We also trade our preferred shares in the form of Argentine Certificates of Deposits (Certificados de Depósitos Argentinos) or CEDEARs, inon the Argentine Stock Exchange (Bolsa de Comércio de Buenos Aires), or BCBA.  Currently, one CEDEAR represents one preferred share without par value. As of December 31, 2008,2009, there were approximately 4.674.0005,141,400 CEDEARs outstanding.

 
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The following table sets forth, for the periods indicated, the reported high and low sales prices for our preferred shares on the BOVESPA,BM&FBOVESPA, in reaisand U.S. dollars at the commercial rate for the sale of U.S. dollars at the last day of each respective period. See “Item 3A. Selected Financial Data - Exchange Rates” for information with respect to exchange rates applicable during the periods set forth below. All information for periods prior to June 2008 when the stock bonus of 25% was effectedaffected is presented after giving retroactive effect to suchthe bonus.

  R$ per  US$ per 
  Preferred Share  Preferred Share 
Calendar Period High  Low  High  Low 
2004  16.40   8.92   6.06   2.85 
2005  23.96   15.02   10.99   5.65 
2006  31.00   20.41   14.80   8.93 
2007  41.20   27.00   23.34   12.62 
2008  41.90   16.91   25.38   7.32 
                 
2007                
1st quarter  32.00   27.00   15.26   12.62 
2nd quarter  36.00   28.04   18.52   13.69 
3rd quarter  37.84   28.48   20.45   13.48 
4th quarter  41.20   32.82   23.34   17.74 
                 
2008                
1st quarter  36.78   28.46   21.68   16.14 
2nd quarter  41.90   31.64   25.38   18.39 
3rd quarter  34.89   27.00   22.06   13.96 
4th quarter  32.44   16.91   16.88   7.32 
                 
2009                
1st quarter  30.28   20.32   13.83   8.39 

  R$ per  US$ per 
   Preferred Share  Preferred Share 
Calendar Period High  Low  High  Low 
2005  21.78   13.65   9.99   5.14 
2006  28.18   18.56   13.45   8.12 
2007  37.45   24.55   21.22   11.48 
2008  38.09   15.37   23.07   6.65 
2009  40.63   18.47   23.44   7.63 
                 
2008                
1st quarter  33.43   25.87   19.71   14.68 
2nd quarter  38.09   28.76   23.07   16.72 
3rd quarter  31.72   24.55   20.05   12.69 
4th quarter  29.49   15.37   15.35   6.65 
                 
2009          ��     
1st quarter  27.53   18.47   12.58   7.63 
2nd quarter  30.36   22.93   15.54   10.01 
3rd quarter  36.21   26.73   20.36   13.38 
4th quarter  40.63   33.00   23.44   18.91 
                 
Share prices for the most recent six months are as follows:
                 
November 2009  38.79   33.55   22.60   19.07 
December 2009  40.63   37.50   23.44   21.11 
January 2010  40.49   35.05   23.49   19.08 
February 2010  38.03   33.81   20.87   18.03 
March 2010  39.25   36.46   22.04   20.19 
April 2010  40.27   36.21   22.91   20.58 
May 2010 (through May 4)  37.58   36.48   21.40   20.78 
                 
Source: Economática System
Share prices for the most recent six months are as follows:

January 2009  30.28   22.11   13.83   9.38 
February 2009  26.43   21.91   11.73   9.21 
March 2009  26.93   20.32   12.04   8.39 
April 2009  30.72   25.22   14.10   11.01 
May 2009  33.40   28.00   16.45   13.34 
June 15, 2009  31.63   30.14   16.26   15.49 

Source: Economática System

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The following table sets forth, for the periods indicated, the high and low sales prices in U.S. dollars for the ADSs in the over-the-counter market and NYSE during the period indicated.

 US$ per ADS  US$ per ADS 
Calendar Period High  Low  High  Low 
2004 6.07  2.83 
2005 11.07  5.64   10.07   5.13 
2006 14.58  8.87   13.25   8.07 
2007 23.50  12.62   21.37   11.47 
2008 25.88  6.70   23.53   6.09 
        
2007        
1st quarter 15.28  12.62 
2nd quarter 18.64  13.72 
3rd quarter 20.47  13.38 
4th quarter 23.50  17.87 
2009  23.95   7.55 
                
2008                
1st quarter 21.80  16.02   19.82   14.57 
2nd quarter 25.88  18.48   23.53   16.80 
3rd quarter 22.03  11.42   20.03   10.38 
4th quarter 19.48  6.70   17.71   6.09 
                
2009                
1st quarter 13.96  8.30   12.69   7.55 
2nd quarter  15.52   9.95 
3rd quarter  20.50   13.32 
4th quarter  23.95   18.80 
        
Share prices for the most recent six months are as follows:Share prices for the most recent six months are as follows: 
        
November 2009  22.97   19.10 
December 2009  23.95   20.62 
January 2010  23.79   18.89 
February 2010  21.00   17.86 
March 2010  22.09   20.20 
April 2010  22.97   20.50 
May 2010 (through May 4)  21.41   20.76 
        
Source: Economática System        

Share prices for the most recent six months are as follows:

January 2009  13.96   9.05 
February 2009  11.79   8.56 
March 2009  12.12   8.30 
April 2009  14.15   10.95 
May 2009  16.40   13.27 
June 15, 2009  16.25   15.36 

Source: Economática System

9B.         
9B.Plan of Distribution
 
Not applicable.

9C.         
9C.Markets
 
Trading on the Brazilian Stock Exchanges
 
In 2000, the stock exchanges in Brazil executed a memoranda of understanding, and from that date on all securities are traded only on the BM&F and the São Paulo Stock Exchange, or BOVESPA, with the exception of electronically traded public debt securities and privatization auctions, which continued to be traded on the Rio de Janeiro Stock Exchange.
 
The principal trading market for our preferred shares and common shares is the BOVESPA.BM&FBOVESPA.  Settlement of transactions is effected three business days after the trade date.  Delivery of and payment for shares are made through the facilities of separate clearinghouses for each exchange, which maintain accounts for member brokerage firms.  The seller is ordinarily required to deliver the shares to the clearinghouse on the second business day following the trade date.
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The BOVESPABM&FBOVESPA is the largest stock trading center in Latin America, concentrating approximately 70% of the volume of trades carried out in the region.America.
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Throughout its history, the BOVESPABM&FBOVESPA has undergone changes in order to streamline its structure.  On August 28, 2007 there was a corporate restructuring process that resulted in the merger of BM&F and BOVESPA. The group underwent another restructuring process in November 28, 2008, by which the holding company of the group, BOVESPA incorporated the fully-owned subsidiaries, the Bovespa – Bolsa de Valores de São Paulo (BVSP), which was responsible for the operations of the stock exchange and the organized over-the-counter markets and the CBLC, which provided settlement, clearing and depository services.
 
Those corporate restructurings have consolidated the demutualization process, thereby causing the access to the tradingstrading and other services rendered by the stock exchange to be unpegged from the stock ownership.  In the former operating format of the BOVESPA,BM&FBOVESPA, only the brokers that were members of the stock exchange were allowed to trade.
 
The BOVESPABM&FBOVESPA has two open outcry trading sessions each day in Electronic Trading System: Pre-Opening Fixing, from 9:45 a.m. to 10:00 a.m., to input orders for the calculation of the theoretical opening price; Continuous Trading Session, from 10:00 a.m. to 5:00 p.m., for all securities traded on all markets; Closing Call, from 4:55 p.m. to 5:00 p.m., for all the stocks traded on the cash market comprising the portfolio of the BOVESPA index and options series with higher liquidity. After Market Trading Session: Pre-opening from 5:30 p.m. to 5:45 p.m.Session (Pre-opening), period for cancellation of bids and asks registered in the regular trading session; Trading session from 5:45 p.m. to 7:00 p.m.session.
 
In order to better control volatility, the BOVESPABM&FBOVESPA adopted a “circuit breaker” system pursuant to which trading sessions may be suspended for a period of 30 minutes or one hour whenever the indices of the BOVESPA falls below the limits of 10% or 15%, respectively, in relation to the index registered in the previous trading session.
 
The BOVESPA is significantly less liquid than the NYSE or other major exchanges in the world. As of December 31, 2008, the aggregate market capitalization of the 392 companies listed on the BOVESPA was equivalent to approximately R$ 1,375 billion, and the 10 largest companies listed on the BOVESPA represented 52.4% of the total market capitalization of all listed companies. By comparison, as of December 31, 2008, the aggregate market capitalization of the nearly 1,913 companies listed on the NYSE was approximately US$ 14.3 trillion, and the 10 largest companies listed on the NYSE represented approximately 15% of the total market capitalization of all listed companies. Although any of the outstanding shares of a listed company may trade on the BOVESPA, in most cases fewer than half of the listed shares are actually available for trading by the public, the remainder being held by small groups of controlling persons, by government entities or by one principal stockholder.
Trading on the BOVESPABM&FBOVESPA by a holder not deemed to be domiciled in Brazil for Brazilian tax and regulatory purposes, a non-Brazilian holder, is subject to certain limitations under Brazilian foreign investment legislation. With limited exceptions, non-Brazilian holders may only trade on Brazilian stock exchanges in accordance with the requirements of Resolution No. 2,689, of the CMN. Resolution No. 2,689 requires that securities held by non-Brazilian holders be maintained in the custody of, or in deposit accounts with, financial institutions and be registered with a clearinghouse. Such financial institutions and clearinghouses must be duly authorized to act as such by the Central Bank and the CVM. In addition, Resolution No. 2,689 of the CMN requires non-Brazilian holders to restrict their securities trading to transactions on Brazilian stock exchanges or qualified over-the-counter markets. With limited exceptions, non-Brazilian holders may not transfer the ownership of investments made under Resolution No. 2,689 of the CMN to other non-Brazilian holders through a private transaction. See “Item 10E. Taxation - Brazilian Tax Considerations” for a description of certain tax benefits extended to non-Brazilian holders who qualify under Resolution No. 2,689.
 
Regulation of Brazilian Securities Markets
 
The Brazilian securities markets are regulated by the CVM, which has authority over stock exchanges and the securities markets generally, the CMN, and the Central Bank, which has, among other powers, licensing authority over brokerage firms and regulates foreign investment and foreign exchange transactions.
 
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Under Brazilian Corporate Law, a company is either public, a companhia aberta, such as we are, or private, a companhia fechada.  All public companies are registered with the CVM and are subject to reporting requirements.  A company registered with the CVM may have its securities traded either on the Brazilian stock exchanges or in the Brazilian over-the-counter market.  The shares of a public company may also be traded privately, subject to certain limitations.  To be listed on the Brazilian stock exchanges, a company must apply for registration with the CVM and the stock exchange where the head office of the company is located.  Once this stock exchange has admitted a company to listing and the CVM has accepted its registration as a public company, its securities may, under certain circumstances, be traded on all other Brazilian stock exchanges.
 
Trading in securities on the Brazilian stock exchanges may be suspended at the request of a company in anticipation of a material announcement.  Trading may also be suspended on the initiative of a Brazilian stock exchange or the CVM, based on or due to, among other reasons, a belief that a company has provided inadequate information regarding a material event or has provided inadequate responses to inquiries by the CVM or the relevant stock exchange.
 
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The Brazilian securities law, the Brazilian Corporate Law and the laws and regulations issued by the CVM, the CMN and the Central Bank provide for, among other things, disclosure requirements applicable to issuers of traded securities, restrictions on insider trading and price manipulation, and protection of minority stockholders.shareholders.  On January 3, 2002, the CVM issued Instruction No. 358 which amended the rules applicable to the disclosure of relevant facts, which became effective on April 18, 2002.  In accordance with this regulation, we established internal policies applicable to the disclosure of relevant facts and the confidentiality of non-public information.  See “Corporate Governance Practices” below.  The CVM has also issued several instructions regarding disclosure requirements, namely, Instructions No. 361 and No. 400 for the regulation of public offerings, Instruction No. 380 for the regulation of Internet offerings and Instruction No. 381 for the regulation of independent auditors. Instruction No. 480 for the regulation of registry of security issuers admitted to negotiation in regulated markets in Brazil, and Instruction No. 481 for the regulation of information and public request of proxy for shareholders meeting. Instruction No. 480 also requests that publicly held companies present a reference form ( Formulário de Referência ) which consists in maintaining a permanently updated file containing relevant information on the issuer, to which would be added supplementary offer notes at each new public offer.
 
Corporate Governance Practices
 
In 2000, the BOVESPABM&FBOVESPA introduced three special listing segments, known as Levels 1 and 2 of Differentiated Corporate Governance Practices and Novo Mercado, aimed at fostering a secondary market for securities issued by Brazilian companies with securities listed on the BOVESPABM&FBOVESPA by prompting such companies to follow good practices of corporate governance.  The listing segments were designed for the trading of shares issued by companies voluntarily undertaking to abide by corporate governance practices and disclosure requirements in addition to those already imposed by Brazilian law.  These listing segments increase stockholders’shareholders’ rights and enhance the quality of information provided to stockholders.shareholders.
 
To become a Level 1 (Nível 1) company, in addition to the obligations imposed by current Brazilian law, an issuer must agree, among other things, to (a) ensure that shares of the issuer representing 25% of its total capital are effectively available for trading (free-float), (b) adopt offering procedures that favor widespread ownership of shares whenever making a public offering, (c) comply with minimum quarterly disclosure standards, (d) follow stricter disclosure policies with respect to transactions made by controlling stockholders,shareholders, directors and officers involving securities issued by the issuer, (e) disclose the terms of the agreements entered with related parties, and (f) make a schedule of corporate events available to stockholders.shareholders.
 
To become a Level 2 (Nível 2) company, in addition to the obligations imposed by current Brazilian law, an issuer must agree, among other things, to (a) comply with all of the listing requirements for Level 1 companies, (b) grant tag-along rights for all stockholdersshareholders in connection with a transfer of control of the company, offering the same price paid per share for the controlling block of common shares and 80% of the price paid per share of the controlling block of preferred shares, (c) grant voting rights to holders of preferred shares in connection with certain corporate restructurings and related party transactions, such as (i) any transformation of the company into another corporate form, (ii) any merger, consolidation or spin-off of the company, (iii) approval of any transactions between the company and its controlling stockholder,shareholder, including parties related to the controlling stockholder,shareholder, (iv) approval of any valuation of assets to be delivered to the company in payment for shares issued in a capital increase, (v) appointment of an expert firm to ascertain the fair value of the company in connection with any deregistration and delisting tender offer, and (vi) any changes to these voting rights, (d) have a board of directors comprised of at least five members with a term of two years maximum, from which at least 20% are independent members as determined by the rules of Level 2, (e) prepare annual financial statements in English, including cash flow statements, in accordance with international accounting standards, such as U.S. GAAP or International Financial Reporting Standards, (f) if it elects to delist from the Level 2 segment, hold a tender offer by the company’s controlling stockholdershareholder (the minimum price of the shares to be offered will be determined by an appraisal process), and (g) adhere exclusively to the rules of the BOVESPABM&FBOVESPA Arbitration Chamber for resolution of disputes between the company and its investors.
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To be listed in the Novo Mercado, an issuer must meet all of the requirements described above, in addition to (a) issuing only voting shares and (b) granting tag-along rights for all stockholdersshareholders in connection with a transfer of control of the company, offering the same price paid per share for the controlling block of common shares.
 
We focus on creating value for our stockholders.shareholders.  We believe that one of the ways have found to generate value for our stockholdersshareholders is to maintain good practices of corporate governance, as a long-term continuous process, designed to ensure sustained growth of the company.  For many years we have been following principles relating to disclosure, minority stockholders’shareholders’ rights and transparency as part of our corporate governance initiatives. For example, we are a public company with shares traded on the market since its foundation, in 1945, date of our register at the BOVESPA.BM&FBOVESPA.  In February 2002, we listed our Level II ADRs on the NYSE and have therefore complied with the exchange’s criteria and those of the SEC, which include disclosure of financial statements in U.S. GAAP format and fulfilling U.S. legislative requirements, including the 2002 Sarbanes-Oxley Act.
 
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Public meetings are one of the most important channels of communication with the bank and are highly appreciated by investors, analysts and stockholders.shareholders.  The opportunity to interact with members of our senior management and discuss strategies and profitability can be a decisive factor when making an investment decision.  The BOVESPABM&FBOVESPA requires companies listed on the Corporate Governance Levels to hold at least one meeting with investors every year.  We have been holding public meetings at the regional offices of the Association of Capital Market Investment Analysts and Professionals (locally APIMEC) and making several presentations in the United States and Europe since 1996.  When making these presentations, have the opportunity to provide the financial community with details regarding our performance, strategies for adding value and perspectives for the future and other relevant issues. As a commitment to further strenghtenstrengthen its position in the Brazilian capital market, we have also made presentations at APIMEC’s regional offices in different cities covered by APIMEC regional offices since 2002.  In 20072009 we made sixteentwenty two presentations at APIMEC, nine roadshows in the United States, Europe and Europe, fourAsia, five teleconferences in Portuguese and fourfive teleconferences in English on quarterly reports and relevant facts among other presentations that were made in Brazil at seminars, conferences and congresses on a wide range of subjects related to our performance and the capital market.
 
In November 2004, we became the first Brazilian company to voluntarily adopt treasury operational rules.  These rules are the result of an international study of the market’s best practices and now govern all of our stock.  Our senior management believes these rules provide a number of benefits such as decrease in operational, financial and strategic risk, reduced risk of market concentration or improper price formation, reinforcement of the strategy of repurchasing securities aimed at preserving liquidity and value for stockholdersshareholders and corporate governance best practices, guaranteeing greater transparency for transactions.
 
On June 8, 2006 we became the first non-U.S. bank listed on the NYSE to comply with all of the requirements set forth in Section 404 of the Sarbanes-Oxley Act, regarding internal controls over financial reporting, one year before the deadline established by the SEC.
 
We were the first company in Brazil to adopt ABRASCA’s Control and Disclosure of Relevant Information Guide in 2007.
 
In May 5 2008, our board of directors decided to accept the proposal of the disclosure and trading committee to establish a corporate governance policy, consolidating our corporate governance principles and practices. Our corporate governance policy is included as Exhibit 11.2 to this Annual Report. The key principle upon which our policy rests is the quest for excellence in corporate governance with a view of strengthening and creating the best conditions for the development of our subsidiaries.
 
In August 10 2009, our board of director resolved to amend pursuant to the proposal the text of Corporate Governance Policy.
In line with best disclosure practices, the Bank has voluntarily made available the financial statements for the years 2006 and 2007 in XBRL format.

For more information about the members of our board of directors, stock options plan, fiscal council, audit committee, appointments and compensation committee and policy on disclosure and trading committee, see “Item 6C.  Directors, Senior Management and Employees - Board Practices.”
 
For more information on our corporate governance practices, including tag-along rights and our Code of Ethics, see “Item 10B. Memorandum and Articles of Association” and “Item 16B. Code of Ethics”.
 
Disclosure Requirements
 
Pursuant to the CVM Rule No. 358 of January 3, 2002, the CVM revised and consolidated the requirements regarding the disclosure and use of information related to material facts and acts of publicly held companies, including the disclosure of information in the trading and acquisition of securities issued by publicly held companies.
 
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Such requirements include provisions that:
 
 ·establish the concept of a material fact that gives rise to reporting requirements.  Material facts include decisions made by the controlling stockholders,shareholders, resolutions of the general meeting of stockholdersshareholders and of  management of the company, or any other facts related to the company’s business (whether occurring within the company or otherwise somehow related thereto) that may influence the price of its publicly traded securities, or the decision of investors to trade such securities or to exercise any of such securities’ underlying rights;
 
 ·specify examples of facts that are considered to be material, which include, among others, the execution of stockholders’shareholders’ agreements providing for the transfer of control, the entry or withdrawal of stockholdersshareholders that maintain any managing, financial, technological or administrative function with or contribution to the company, and any corporate restructuring undertaken among related companies;
 
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 ·oblige the officer of investor relations, controlling stockholders,shareholders, other officers, directors, members of the fiscal committee and other advisory boards to disclose material facts;
 
 ·require simultaneous disclosure of material facts to all markets in which the corporation’s securities are admitted for trading;
 
 ·require the acquirer of a controlling stake in a corporation to publish material facts, including its intentions as to whether or not to de-list the corporation’s shares, within one year;
 
 ·establish rules regarding disclosure requirements in the acquisition and disposal of a material stockholdingshareholding stake; and
 
 ·forbid the use of insider information.
Pursuant to the CVM Rule No. 480 of December 7, 2009, the CVM expand the quantity and improve the quality of information reported by issuers. This Rule represents a significant step forward in providing the market with greater transparency over securities issuers. For that purpose, the Annual Information Report (IAN) was replaced by a reference form ( Formulário de Referência ), which comprised the information requested by IAN and added several other data required under CVM Rule 400/2003 that were only subject to disclosure upon a public offering.
Such reference form ( Formulário de Referência ) is in line with the Shelf Registration System recommended by the International Organization Securities Commission (IOSCO) and adopted in other countries (England and USA, among others), by means of which the information regarding an specific issuer is consolidated into one document and is subject to periodic update (the “Shelf Document”). This mechanism offers the investor the possibility to analyze one single document for relevant information about the issuer.
CVM Rule No. 480 also created two groups of issuers per type of securities traded. Group A issuers are authorized to trade in any securities, whereas Group B issuers must not trade in stocks, depositary receipts (BDRs, Units) and securities convertible or exchangeable into stocks or depositary receipts. The greater extend of Group A authorization is followed by more stringent disclosure and reporting requirements. We, as issuers of stocks, are part of Group A.
CVM has also enacted Rule No. 481 of December 17, 2009 to regulate two key issues involving general meetings of shareholders in publicly held companies: (i) the extent of information and documents to be provided in support of call notices (subject to prior disclosure to shareholders); and (ii) proxy solicitation for exercise of voting rights.
CVM Rule No. 481 is intended to (i) improve the quality of information disclosure by publicly held companies to shareholders and to market in general, favoring the use of Internet as a vehicle to that end; (ii) make the exercise of voting rights less costly and foster the participation of shareholders in general meetings, specially for companies with widely dispersed capital; and, consequently (iii) facilitate the oversight of corporate businesses.
 
Changes in the Brazilian Corporate Law
 
On October 31, 2001, Law No. 10,303, amending the Brazilian Corporate Law, was enacted.  The main goal of Law No. 10,303 is to broaden the rights of minority stockholders.shareholders.  Law No. 10,303:
 
 ·obligates our controlling stockholdersshareholders to make a tender offer for our shares if it increases its interest in our share capital to a level that materially and negatively affects the liquidity of our shares, as defined by the CVM;
 
 ·requires any acquirer of control to make a tender offer for our common shares at a price equal to 80% of the per share price paid for the controlling block of shares;
 
 ·authorizes us to redeem minority stockholders’shareholders’ shares if, after a tender offer, our controlling stockholdersshareholders increase their participation in our total share capital to more than 95%;
 
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 ·entitles dissenting or, in certain cases, non-voting stockholdersshareholders to obtain redemption upon a decision to conduct a spin-off that results in (a) a change of our corporate purpose, (b) a reduction in the mandatory dividend or (c) any participation in a group of companies (as defined by the Brazilian Corporate Law);
 
 ·requires that the preferred shares have one of the following advantages in order to be listed and to trade on a stock exchange:  (a) priority in receipt of dividends corresponding to at least 3% of the book value per share (after this priority condition is met, equal conditions apply to common shares); (b) dividends 10% higher than those paid for common shares; or (c) a tag-along right at 80% of the price paid to the controlling stockholdershareholder in case of a transfer control.  No withdrawal rights arise from such amendments made before December 31, 2002;
 
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 ·entitles stockholdersshareholders that are not controlling stockholdersshareholders but that together hold (a) preferred shares representing at least 10% of our total share capital or (b) common shares representing at least 15% of our voting capital the right to appoint one member and an alternate to our board of directors.  If no group of common or preferred stockholdersshareholders meets the thresholds described above, stockholdersshareholders holding preferred or common shares representing at least 10% of our total share capital are entitled to combine their holdings to appoint one member and an alternate to our board of directors.  Until 2005, the board members that may be elected pursuant to (a) above or by the combined holdings of holders of preferred and common shares are to be chosen from a list of three names drawn up by the controlling stockholder.shareholder.  Any such members elected by the minority stockholdersshareholders will have veto powers on the selection of our independent auditors;
 
 ·requires controlling stockholders, stockholdersshareholders, shareholders that appoint members of our board of directors or fiscal council and members of our board of directors, board of executive officers or fiscal council to file immediately with the CVM and the stock exchanges (or the over-the-counter markets on which our securities are traded) a statement of any change in their shareholdings; and
 
 ·requires us to send copies of the documentation we submit to our stockholdersshareholders in connection with stockholders’shareholders’ meetings to the stock exchanges on which our shares are most actively traded.
 
On July 13, 2007, the CVM issued Rule No. 457 to require listed companies to publish their consolidated financial statements according to IFRS starting with the year ending December 31, 2010.
 
On December 28, 2007, Law No. 11,638 was enacted and amended numerous provisions of the Brazilian Corporate Law relating to accounting principles and authority to issue accounting standards.  Law No. 11,638 sought to enable greater convergence between Brazilian GAAP and IFRS.  To promote convergence, Law No. 11,638 modified certain accounting principles of the Brazilian Corporate Law and required the CVM to issue accounting rules conforming to the accounting standards adopted in international markets.  Additionally, the statute acknowledged a role in the setting of accounting standards for the Committee for Accounting Pronouncements (Comitê(Comitê de Pronunciamentos Contábeis)beis), or CPC, which is a committee of officials from the BOVESPA,BM&FBOVESPA, industry representatives and academic bodies that has issued accounting guidance and pursued the improvement of accounting standards in Brazil.  Law No. 11,638 permits the CVM and the Central Bank to rely on the accounting standards issued by the CPC in establishing accounting principles for regulated entities.
 
9D.        Selling StockholdersAdditionally, on May 27, 2009, Law No. 11,941 was enacted and, among other issues, amended numerous provisions of the Brazilian Corporate Law and tax regulation, to enable greater convergence between Brazilian GAAP and IFRS. The Law is currently subject to several accounting complementary regulations that affect, among others, the accounting of goodwill, deferred expenses, stocks, provisions, real state investments. Amendments added broader criteria to be observed upon the elaboration of the notes to the financial statements. The financial statements of Brazilian listed companies as of December 2010 shall already be published according to new regulations. Financial Institutions shall additionally continue to follow regulations of Brazilian Central Bank. The adoption of such new accounting criteria in tax computations is still optional. As per current regulation of the Central Bank, banks are required to present the financial statements for the year ended December 31, 2010 prepared in accordance with International Financial Reporting Standards except that no comparative information for the year ended December 31, 2009 is required.

9D.Selling Shareholders
 
Not applicable.
 
9E.        
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9E.Dilution
 
Not applicable.

9F.        
9F.Expenses of the Issue
 
Not applicable.

ITEM 10  ADDITIONAL INFORMATION
 
10A.      
10A.Share Capital
 
Not applicable.

10B .Memorandum and Articles of Association

Set forth below is certain information concerning our capital stock and a brief summary of certain significant provisions of our bylaws and Brazilian Corporate Law. This description does not purport to be complete and is qualified by reference to our bylaws (an English translation of which has been filed with the Commission) and to the Brazilian Corporate Law.
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Registration and Purpose

We are a publicly held corporation with our principal place of business in the city of São Paulo, Brazil, governed mainly by our bylaws and by the Brazilian Corporate Law. Our Corporate Taxpayer Enrollment No. (CNPJ) is 60.872.504/0001-23 and we are registered with the São Paulo Commercial Registry (Junta Comercial do Estado de São Paulo) under No. 35300010230.

Our corporate purpose, as set forth in Article 2 of our bylaws, is to perform operations and services that Brazilian law permits financial institutions to perform, including foreign exchange transactions.

Directors Powers

Pursuant to Brazilian Corporate Law, only stockholdersshareholders of a company are entitled to serve as its directors. Brazilian Corporate Law does not establish a minimum number of shares that a director must own.

Pursuant to our bylaws the age limit for holding a position on our board of directors is 70 years old.

Our board of directors is responsible, among other things, for:
·establishing our general business policies,
·electing and removing the members of our board of executive officers and establishing their functions,
·appointing officers to comprise the boards of executive officers of the controlled companies as specified,
·supervising our management and examining our corporate books,
·convening shareholders’ meetings,
·expressing an opinion on the annual report and management’s financial statements,
·deciding on budgets for results and for investments and respective action plans,
·choosing and removing the external auditors,
·electing and removing the members of our audit committee and approving the operational rules that this committee may establish for its own functioning,
·determining the payment of interim dividends, interest on shareholders’ equity,
 
establishing our general business policies,
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electing and removing the members of our board of executive officers and establishing their functions,
·deciding on buy-back operations on a non-permanent basis,
 
appointing officers to comprise the boards of executive officers of the controlled companies as specified,
·deciding on the purchase and writing of put and call options supported by the shares issued by us for the purposes of cancellation, holding as treasury stock or sale, observing the limits pursuant to the specific legislation,
 
supervising our management and examining our corporate books,
·to decide on the institution of committees to handle specific issues within the scope of our board of directors,
 
convening stockholders’ meetings,
·approving investments and divestments direct or indirect in corporate stakes for amounts higher than 15% of the book value of our company as registered in the last audited balance sheet,
 
expressing an opinion on the annual report and management’s financial statements,
·deciding on the increase of capital within the limit of the authorized capital, pursuant to our bylaws.
deciding on budgets for results and for investments and respective action plans,
choosing and removing the external auditors,
electing and removing the members of our audit committee and approving the operational rules that this committee may establish for its own functioning,
determining the payment of interim dividends, interest on stockholders’ equity,
deciding on buy-back operations on a non-permanent basis,
deciding on the purchase and writing of put and call options supported by the shares  issued by us for the purposes of cancellation, holding as treasury stock or sale, observing the limits pursuant to the specific legislation,
to decide on the institution of committees to handle specific issues within the scope of our board of directors,
approving investments and divestments direct or indirect in corporate stakes for amounts higher than 15% of the book value of our company as registered in the last audited balance sheet,
deciding on the increase of capital within the limit of the authorized capital, pursuant to our bylaws.

Our board of directors may be composed of a minimum of ten and a maximum of fourteen directors elected by our stockholdersshareholders at the annual stockholders’shareholders’ meeting. The directors elect one chairman and three vice-chairmen from among their peers. The annual stockholders’shareholders’ meeting held on April 24, 2009 elected26, 2010 reelected the fourteenthirteen members of our current board of directors for a term of one year, whose term ends upon the election of the directors at the annual stockholders’shareholders’ meeting to be held in 2010.2011.

Our board of executive officers is responsible for our day-to-day management. It may be composed of a minimum of five and a maximum of 20 members. Our board of directors as of April 29, 2009May 3, 2010 elected the 1613 members of our current board of executive officers, which consists of the president, two executive vice presidents, sevenfive executive officers and sixfive officers, who collectively comprise our board of executive officers, all for a term of one year, whose term ends at the board meeting following the 20102011 annual stockholders’shareholders’ meeting.
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Certain Provisions of Brazilian Law

Under Brazilian law, the controlling stockholders,shareholders, directors and officers may not take or receive loans, pledges or advances from financial institutions in which they are stockholders,shareholders, directors and/or officers. In addition, financial institutions may not grant loans or advances to their affiliates, controlling stockholders,shareholders, officers, directors and their respective relatives nor to companies in which these persons hold more than 10% of the capital stock or the control, or companies in which our officers hold a managing position. In addition, directors and officers may not take part in any corporate transaction or deliberate with respect to any corporate transaction in which they have a conflict of interest with the company of which they are a director or officer. Any director or officer who believes he may have a conflict must inform the company’s other officers and/or directors, as the case may be, of the nature and extent of his interest in the transaction.

The aggregate compensation of our directors is established at our annual stockholders’shareholders’ meeting and our board of directors is responsible for regulating the use of this amount.

Audit Committee

See “Item 6C. Board Practices” for information regarding our Audit Committee.

Fiscal Council

See “Item 6C. Board Practices” for information regarding our Fiscal Council.

Preferred Shares and Common Shares

General

Each common share entitles its holder to one vote at meetings of our stockholders.shareholders. Holders of common stock are not entitled to any preference relating to our dividends or other distributions or any preference upon our liquidation.

Each preferred share is non-voting except under limited circumstances and entitles its holder to (a) priority in the receipt of a non-cumulative dividend of not less than the dividend entitled to each common share, (b) priority in the receipt of a minimum annual dividend of R$ 0.022 for each preferred share, and (c) participation on equal conditions with the common shares in the receipt of the dividend established in article 13 of our bylaws, after ensuring the common shares the dividend established in (b) above.
 
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There are no redemption provisions associated with the preferred shares.

On April 30, 2002, our stockholdersshareholders approved a proposal from our board of directors to grant our holders of preferred stock tag-along rights, whereby in the event of a change of our control, the preferred stockholdersshareholders are assured the right to sell their shares at a price of at least 80% of the price paid for the shares of the controlling block.

Capital Increases and Payment for Subscribed Stock

Our bylaws authorize our board of directors to increase our capital stock up to a limit of six billion shares, of which three billion must consist of common shares and three billion of preferred shares, without amending our bylaws. The issuance of our stock may be made without considering our stockholdersshareholders preemptive rights if made for the sale on a stock exchange, by a public subscription and exchange for our stock or in a public offering for the acquisition of our control. Regardless of this provision, all increases in our capital stock must be ratified by the stockholdershareholder and the Central Bank.

Once a capital increase is duly approved, the stockholdershareholder must pay the amount corresponding to the subscribed stock in accordance with the terms of the subscription bulletin. If the stockholdershareholder fails to make such payment, he will be considered to be in default under the terms of the law.
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Liquidation

Pursuant to Brazilian Corporate Law, when a company’s bylaws do not have a provision concerning liquidation, its stockholdersshareholders at an annual stockholder’sshareholder’s meeting shall determine the manner in which liquidation shall be conducted. StockholdersShareholders shall also appoint a liquidator and a fiscal council, which shall be installed during the period of liquidation, when liquidation occurs under the following circumstances: (a) due to the expiration of the company’s length of life (b) in cases set forth by the company’s bylaws; (c) by resolution of the annual stockholders’shareholders’ meeting; (d) when a company’s stock is held by a single stockholder,shareholder, except when the single stockholdershareholder is a Brazilian corporation, and a minimum of two stockholdersshareholders is not reinstated by the following year and (e) when a company’s authorization to operate is legally extinguished.

Before the completion of the liquidation process and after all creditors have been paid, our stockholders,shareholders, at our stockholders’shareholders’ meeting, may resolve to make a pro-rata distribution among them, as corporate assets are being calculated. The liquidator is responsible for, among other duties, the winding up of the company’s businesses, sale of its assets, payment of liabilities and distribution of the remaining assets among stockholders.shareholders.

Liability of Our StockholdersShareholders for Further Capital Calls

Brazilian Corporate law does not provide for capital calls. If there is an increase in our capital stock, the ownership interest of our stockholdersshareholders could be reduced if they elect not to exercise their preemptive rights to subscribe for stock in the capital stock increase.

Calculation of Distributable Amount

At each annual stockholders’shareholders’ meeting, our board of directors is required to recommend how our earnings for the preceding fiscal year are to be allocated. For purposes of the Brazilian Corporate Law, a company’s net income after income taxes and social contribution taxes for that fiscal year, net of any accumulated losses from prior fiscal years and amounts allocated to employees’ and management’s participation in earnings, represents its “net profits” for that fiscal year derived from financial statements prepared in accordance with accounting practices adopted in Brazil. In accordance with Brazilian Corporate Law, an amount equal to our net profits as further (i) reduced by amounts allocated to the legal reserve, (ii) reduced by amounts allocated to other reserves established by us in compliance with applicable law and (iii) increased by reversions of reserves constituted in prior years, will be available for distribution to stockholdersshareholders (the “adjusted net profits,” herein referred to as the “distributable amount”) in any particular year.

Our bylaws authorize a profit sharing plan for our directors and executive officers, as well as a stock option plan for management and employees. Payment of compensation of our directors and executive officers will be established annually by our annual stockholders’shareholders’ meeting in the form of an aggregate and annual amount specified for each one of these bodies. It is the responsibility of our board of directors to regulate the use and allocation of the amount set aside for compensation. The board of directors, under Brazilian law, provides that the amount of compensation, as a whole, does not exceed the minimum of 10% of the net profits (total profits after tax income net of accumulated losses) in any fiscal year, and 100% of the amounts paid as fees to directors and officers.

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Legal Reserve. Under the Brazilian Corporate Law, we are required to maintain a legal reserve to which we must allocate 5% of our “net profits” for each fiscal year until the amount of the reserve equals 20% of our paid-in capital. Net losses, if any, may be charged against the legal reserve, after the deduction of the accrued profits and profit reserves.

Mandatory Dividend.Pursuant to our bylaws, at least 25% of the distributable amount must be allotted to the payment of a minimum mandatory dividend on all of our shares of any type or class (as discussed below).

Dividend Rights.Pursuant to Brazilian Corporate Law, a stockholder’sshareholder’s right to receive dividends expires within three years from the date the dividends are declared. If the amount is not claimed by the stockholder,shareholder, the dividends will revert to our profit reserve.

Statutory Reserves.Under Brazilian Corporate Law, we may establish other reserves as long as we specify their purpose, the criteria for determining the annual portion of the net profits to be allocated to these reserves and their maximum limit.
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Based on those conditions, prior to our stockholders’shareholders’ meeting that took place on October 8, 2001, which approved changes to our bylaws, we had established a special reserve which could be used for any of the following purposes: (i) exercise preemptive rights of subscription in capital increases of companies in which we hold interests, (ii) convert these funds into our capital stock and (iii) pay intermediate dividends. This reserve was made up of (i) net profits, (ii) the reversal to the accumulated profits account of any reserve for profits to be realized and (iii) the reversal of any amount of intermediate dividends re-credited to the special reserve account.

The amount of this reserve could not (a) individually exceed 95% of our capital stock and (b) together with the legal reserve, exceed 100% of our capital stock.

At a stockholders’shareholders’ meeting, which took place on October 8, 2001, our stockholdersshareholders approved changes in our bylaws regarding the statutory reserves. Based on conditions pursuant to Brazilian Corporate Law, we have established in our bylaws that, according to a proposal by our board of directors, the annual meeting of our stockholdersshareholders may decide on the creation of the following reserves:

·
Dividend EqualizationReserve, limited to 40% of the value of our capital stock, for the purpose of paying dividends, including interest on shareholders’ equity, with the objective of maintaining a payment flow to shareholders. This reserve will be created with: (a) up to 50% of the fiscal year’s net profit; (b) up to 100% of the realized portion of revaluation reserves, recorded as retained earnings; (c) up to 100% of the amount of the adjustments from previous fiscal years, recorded as retained earnings; and (d) credits corresponding to the anticipation of dividends. Reserve, limited to 40% of the value of our capital stock, for the purpose of paying dividends, including interest on stockholders’ equity, with the objective of maintaining a payment flow to stockholders. This reserve will be created with:  (a) up to 50% of the fiscal year’s net profit; (b) up to 100% of the realized portion of revaluation reserves, recorded as retained earnings; (c) up to 100% of the amount of the adjustments from previous fiscal years, recorded as retained earnings; and (d) credits corresponding to the anticipation of dividends.

·
Reinforcement for Working Capital Reserve,limited to 30% of the value of our capital stock, for the purpose of guaranteeing resources for our operations, is created with up to 20% of the fiscal year’s net profit. limited to 30% of the value of our capital stock, for the purpose of guaranteeing resources for our operations, is created with up to 20% of the fiscal year’s net profit.

·
Reserve for Capital Increase in Companies Held by Itaú Unibanco Holding, limited to 30% of the value of our capital stock, for the purpose of guaranteeing the right of first refusal in capital increases of participating companies, is created with up to 50% of the fiscal year’s net earnings. Upon the proposal of our board of directors, amounts will be regularly capitalized from these reserves so that its aggregate balance never exceeds the limit of 95% (ninety-five percent) of our capital stock. The balance of these reserves added to the Legal Reserve may not exceed the capital stock., limited to 30% of the value of our capital stock, for the purpose of guaranteeing the right of first refusal in capital increases of participating companies, is created with up to 50% of the fiscal year’s net earnings.

Upon the proposal of our board of directors, amounts will be regularly capitalized from these reserves so that its aggregate balance never exceeds the limit of 95% (ninety-five percent) of our capital stock. The balance of these reserves added to the Legal Reserve may not exceed the capital stock.
·
Contingency Reserve . Under the Brazilian Corporate Law, a portion of our net profits may also be discretionally allocated by the shareholders’ meeting to a contingency reserve for an anticipated loss that they deem probable in future years. Any amount so allocated in a prior year must be either (i) reversed in the fiscal year in which the loss was anticipated if such loss does not in fact occur or (ii) charged off in the event that the anticipated loss occurs.
Contingency Reserve. Under the Brazilian Corporate Law, a portion of our net profits may also be discretionally allocated by the stockholders’ meeting to a contingency reserve for an anticipated loss that they deem probable in future years. Any amount so allocated in a prior year must be either (i) reversed in the fiscal year in which the loss was anticipated if such loss does not in fact occur or (ii) charged off in the event that the anticipated loss occurs.

We determine our calculation of net profits and allocations to reserves for any fiscal year on the basis of financial statements prepared in accordance with accounting practices adopted in Brazil. The consolidated financial statements included in this annual report have been prepared in accordance with U.S.GAAP and, although our allocations to reserves and dividends will be reflected in these consolidated financial statements, you will be unable to calculate those allocations or required dividend amounts from the consolidated financial statements. Our consolidated statement of changes in stockholders’shareholders’ equity presents the amount of dividends and interest on stockholders’shareholders’ equity distributed in each of the years ended December 31, 2009, 2008 2007 and 2006.2007.

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The Brazilian Corporate Law provides that all discretionary allocations of net profits are subject to approval by the stockholdersshareholders voting at the annual meeting.

Interest on Stockholders’Shareholders’ Equity

We are allowed to pay interest on stockholders’shareholders’ equity as an alternative form of payment to stockholders.shareholders. This interest is limited to the daily pro rata variation of the Brazilian long-term interest rate ((Taxa Taxa de Juros de Longo Prazo), or TJLP, and cannot exceed the greater of 50% of the net income for the period in respect of which the payment is made and 50% of retained earnings. Distribution of interest on stockholders’shareholders’ equity may also be accounted for as our tax deductible expense, and any payment of interest on preferred shares to stockholders,shareholders, whether Brazilian residents or not, including holders of ADSs, is subject to Brazilian withholding tax at the rate of 15%. See “Item 10E. Taxation – Brazilian Tax Considerations – Interest on Stockholders’Shareholders’ Equity.” The amount paid to stockholdersshareholders as interest on stockholders’shareholders’ equity, net of any withholding tax, may be included as part of the mandatory distribution. In such case, we are required to distribute to stockholdersshareholders an amount sufficient to ensure that the net amount received by the stockholders,shareholders, after the payment by us of applicable withholding taxes in respect of the distribution of interest on stockholders’shareholders’ equity, is at least equal to the mandatory distribution.

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Voting Rights

Each common share entitles the holder thereof to one vote at meetings of our stockholders.shareholders. Holders of preferred stock are not entitled to vote at our stockholders’shareholders’ meetings.

The Brazilian Corporate Law provides that non-voting preferred shares acquire voting rights when a company has failed for the term provided for in its bylaws (but no longer than a period of three consecutive fiscal years) to pay any fixed or minimum dividend to which such shares are entitled and continuing until payment thereof is made if those dividends are not cumulative or until those cumulative dividends are paid. Our bylaws set forth the period of three fiscal years.

Any change in the preferences or advantages of our preferred shares, or the creation of a class of shares having priority over the preferred shares, would require the approval of at least 50% of the voting stockholdersshareholders with prior or future ratification of a majority of the preferred shares, voting as a class at a special meeting. This meeting would be called by publication of a notice on at least three occasions in an official gazette and a newspaper of wide circulation in São Paulo, our principal place of business, at least 15 days prior to the meeting but would not generally require any other form of notice.

Brazilian Corporate Law provides for multiple voting rights. Despite the lack of provision of our bylaws, a stockholdershareholder representing at least one tenth of our voting capital may request multiple voting rights. Once multiple voting rights have been duly required within 48 hours prior to the annual stockholders’shareholders’ meeting, to each stock will be attributed as many votes as the number of our directors and the stockholdersshareholders right to accumulate votes for a single candidate or distribute them among various candidates will be recognized.
Whenever the election of our board of directors is conducted through a multiple voting process and the holders of common or preferred stock elect a director, the stockholdershareholder or group of stockholdersshareholders bound by a voting agreement holding more than 50% of our voting rights will be entitled to elect directors in a number equal to the number of directors elected by the other stockholdersshareholders plus one, regardless of the number of directors that, pursuant to our bylaws, comprises the board. It is the responsibility of the presiding officials at a stockholders’shareholders’ meeting to previously inform our stockholdersshareholders about the number of votes necessary for the election of each member of our board.

Our bylaws do not provide for staggered intervals. Therefore, our directors may be reelected consecutively without interruption. Whenever the election has been conducted through a multiple voting process, the removal from office of any of our directors by our stockholders,shareholders, at an annual stockholders’shareholders’ meeting, shall result in the removal from office of all of the remaining directors and a new election shall be arranged. In order not to affect the management of the company as a result of the removal of its directors, Brazilian Corporate Law provides that despite the removal, the same directors may continue to exercise their functions until the newly elected board members take office.

Transfer of Control

Our bylaws do not contain any provision that would have the effect of delaying, deferring or preventing a change in our control or that would operate only with respect to a merger, acquisition or corporate restructuring involving ourselves or any of our subsidiaries. However, Brazilian banking regulations require that any transfer of control of a financial institution follow the specific procedures of and be previously approved by the Central Bank.

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Additionally, Brazilian Corporate Law provides that acquisition of control of a publicly held company is contingent on tender offers for all outstanding common shares at a price equivalent to at least 80% of the price per share paid for the controlling block. Our bylaws provide that in the event of a change in our control, the acquirer will be required to pay the holders of our preferred stock 80% of the price per share paid to our controlling stockholders.shareholders.

Brazilian Corporate Law also obliges our controlling stockholdershareholder to make a tender offer for all of our shares if it increases its interest in our capital stock to a level that materially and negatively affects the liquidity of our stock.

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Stockholders’Shareholders’ Meeting

Under the Brazilian Corporate Law, a general meeting of stockholdersshareholders is empowered to decide all matters relating to our business objectives and pass resolutions deemed necessary for the protection of our interests. StockholdersShareholders voting at a general meeting have the exclusive power, among others, to:
 
• ·amend the bylaws,
 
appoint or dismiss members of the board of directors at any time,
·appoint or dismiss members of the board of directors at any time,
 
appoint members of the fiscal council,
·appoint members of the fiscal council,
 
receive the yearly accounts prepared by management and accept or reject management’s financial statements, including the appropriation of net profits and the distributable amount for payment of the mandatory dividend and allocation to the various reserve accounts,
·receive the yearly accounts prepared by management and accept or reject management’s financial statements, including the appropriation of net profits and the distributable amount for payment of the mandatory dividend and allocation to the various reserve accounts,
 
accept or reject the valuation of assets contributed by a stockholder in consideration for the issuance of capital stock, and
·accept or reject the valuation of assets contributed by a shareholder in consideration for the issuance of capital stock, and
 
pass resolutions to reorganize our legal form, merge, consolidation or split, dissolution and liquidation, appoint and dismiss our liquidators and examine our accounts.
·pass resolutions to reorganize our legal form, merge, consolidation or split, dissolution and liquidation, appoint and dismiss our liquidators and examine our accounts.

It is our board of directors’ responsibility to call a stockholders’shareholders’ meeting. The first notice of the stockholders’shareholders’ meeting must be published no later than 15 days before the date of the meeting on the first call.

Brazilian Corporate Law establishes that under specific circumstances, the meeting may also be convened by the fiscal council or any stockholder.shareholder.

The notice of a stockholders’shareholders’ meeting must be published on three different dates on official newspapers widely circulated in São Paulo, setting forth the place, date and time of the meeting, the day’s agenda and, in the event of an amendment to our bylaws, an indication of the subject matter. We also inform our stockholdersshareholders of our stockholders’shareholders’ meeting through our website and through the CVM, the BOVESPA, the SEC, the NYSE and the BCBA (Bolsa de Comercio de Buenos Aires).

As a general rule, Brazilian Corporate Law provides that a quorum for a stockholders’shareholders’ meeting consists of stockholdersshareholders representing at least 25% of a company’s issued and outstanding voting capital stock on the first call and, if that quorum is not reached, any percentage of the company’s voting capital stock on the second call.

Generally, our meetings are held with a quorum representing two thirds of our voting capital.

In order to attend a stockholders’shareholders’ meeting a stockholdershareholder must present a document evidencing his identity and proof of deposit issued by the financial institution responsible for the bookkeeping of our stock.

A stockholdershareholder may be represented at a stockholders’shareholders’ meeting by a proxy appointed less than a year before the meeting, which proxy should be our stockholder,shareholder, our corporation officer, a lawyer or a financial institution. An investment fund must be represented by its investment fund officer.

 
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Withdrawal Rights

Neither our common shares nor our preferred shares are redeemable. A dissenting stockholdershareholder under the Brazilian Corporate Law may, however, seek withdrawal, subject to certain conditions, following a decision made at a stockholders’shareholders’ meeting by stockholdersshareholders representing at least 50% of the voting stock:
to create preferred shares or increase disproportionately an existing class of preferred shares relative to the other types or classes of shares, unless this action is provided for or authorized by the bylaws,
to modify a preference, privilege or condition of redemption or amortization conferred on one or more classes of preferred shares, or create a new class with greater privileges than the existing classes of preferred shares,

 
• ·to create preferred shares or increase disproportionately an existing class of preferred shares relative to the other types or classes of shares, unless this action is provided for or authorized by the bylaws,
·to modify a preference, privilege or condition of redemption or amortization conferred on one or more classes of preferred shares, or create a new class with greater privileges than the existing classes of preferred shares,
·to reduce the mandatory distribution of dividends,
 
• ·to change our corporate purposes,
 
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·
to transfer all of our stock to another company in order to make us a wholly owned subsidiary of that company or vice versa (incorporação de ações) ,
 
·to acquire another company, the price of which exceeds certain limits set forth in Brazilian Corporate Law,
 
to transfer all of our stock to another company in order to make us a wholly owned subsidiary of that company or vice versa (incorporação de ações),
·to merge into another company, including if we are merged into one of our controlling companies, or to consolidate with another company,
 
to acquire another company, the price of which exceeds certain limits set forth in Brazilian Corporate Law,
·to participate in a group of companies as defined under Brazilian Corporate Law, or
 
to merge into another company, including if we are merged into one of our controlling companies, or to consolidate with another company,
·in the event that the entity resulting from (i) a transfer of all our stock to another company in order to make us a wholly owned subsidiary of that company or vice versa, as discussed in the fifth bullet point above, (ii) a spin-off, (iii) a merger or (iv) a consolidation of a Brazilian publicly held company fails to become a Brazilian publicly held company within 120 days of the annual shareholders’ meeting in which such decision was taken.
to participate in a group of companies as defined under Brazilian Corporate Law, or
in the event that the entity resulting from (i) a transfer of all our stock to another company in order to make us a wholly owned subsidiary of that company or vice versa, as discussed in the fifth bullet point above, (ii) a spin-off, (iii) a merger or (iv) a consolidation of a Brazilian publicly held company fails to become a Brazilian publicly held company within 120 days of the annual stockholders’ meeting in which such decision was taken.

The right to withdraw in the circumstances discussed in the first and second bullet points above only applies to the holders of the affected shares.

In accordance with Brazilian Corporate Law, the right to withdrawal lapses 30 days after publication of the minutes of the relevant stockholders’shareholders’ meeting unless, in the first two bullet points above, the resolution is subject to confirmation by the preferred stockholdersshareholders (which must be made at a special meeting to be held within one year), in which case the 30-day term is counted from the date the minutes of the special meeting are published. We are entitled to reconsider any action giving rise to a stock redemption within ten days following the expiration of the 30-day term mentioned above if such redemption would jeopardize our financial stability. In addition, the rights to withdrawal in the seventh and eighth bullet points above may only be exercised by holders of shares if those shares are not part of the BOVESPA Index and if less than 50% of our shares is outstanding.

The Brazilian Corporate Law provides that common and preferred shares are redeemable under delisting of shares at a fair price determined upon the criteria provided thereof. If the stockholders’shareholders’ meeting giving rise to withdrawal rights occurs more than 60 days after the date of the last approved balance sheet, a stockholdershareholder may demand that its shares be redeemed at a value on the basis of a new balance sheet that is dated within 60 days of that stockholders’shareholders’ meeting. In such case, we will pay 80% of the value calculated according to the last approved balance sheet and, after the preparation of the new balance sheet, we will pay the balance within 120 days from the date of the relevant stockholders’shareholders’ meeting.

Preemptive Rights on Increase in Preferred Share Capital

Each stockholdershareholder has a general preemptive right to subscribe for shares in any capital increase, in proportion to its stockholding, except in the event of the grant and exercise of any option to acquire shares of our capital stock. A minimum period of 30 days following the publication of notice of the capital increase is allowed for the exercise of the right, and the right is negotiable. However, our bylaws provide for the elimination of preemptive rights with respect to the issuance of new preferred shares up to the limit of the authorized share capital, provided that the distribution of those shares is effected through either of the following:

• ·a stock exchange or in a public offering, or
·an exchange of shares in a public offering, the purpose of which is to acquire control of another company.

an exchange of shares in a public offering, the purpose of which is to acquire control of another company.144

In the event of a capital increase which would maintain or increase the proportion of capital represented by preferred shares, holders of ADSs, except as described above, would have preemptive rights to subscribe only for newly issued preferred shares. In the event of a capital increase which would reduce the proportion of capital represented by preferred shares, holders of ADSs, except as described above, would have preemptive rights to subscribe for preferred shares, in proportion to their shareholdings and for common shares only to the extent necessary to prevent dilution of their interest in us.

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Other aspects on the Brazilian Corporate Law

The following aspects are also significant on the Brazilian Corporate Law:
 
preferred shares representing 10% of the outstanding shares not held by the controlling stockholders would be entitled to appoint a representative to our board of directors,
·preferred shares representing 10% of the outstanding shares not held by the controlling shareholders would be entitled to appoint a representative to our board of directors,
 
disputes among our stockholders as well as among our stockholders and us would be subject to arbitration, if provided for in our bylaws,
·disputes among our shareholders as well as among our shareholders and us would be subject to arbitration, if provided for in our bylaws,
 
a tender offer at a purchase price equal to fair value for all outstanding stock would be required upon a delisting or a substantial reduction in liquidity of our stock as a result of purchases by the controlling stockholders,
·a tender offer at a purchase price equal to fair value for all outstanding stock would be required upon a delisting or a substantial reduction in liquidity of our stock as a result of purchases by the controlling shareholders,
 
any sale of control would require the stockholders to tender for the minority stockholders´ common shares and, as provided for in our bylaws, for the minority stockholders´ preferred shares, at a purchase price equal to 80% of the price per share paid to the controlling stockholder,
·any sale of control would require the shareholders to tender for the minority shareholders’ common shares and, as provided for in our bylaws, for the minority shareholders’ preferred shares, at a purchase price equal to 80% of the price per share paid to the controlling shareholder,
 
stockholders would be entitled to withdraw from us upon a spin-off only if it entailed a change in the corporate purpose, a reduction in mandatory dividends or the participation in a centralized group of companies,
·shareholders would be entitled to withdraw from us upon a spin-off only if it entailed a change in the corporate purpose, a reduction in mandatory dividends or the participation in a centralized group of companies,
 
the controlling stockholders, the stockholders that appoint members to our board of directors and fiscal council, the members of our board of directors and fiscal council and our executive officers would be required to disclose any purchase or sale of our stock to the CVM and the BOVESPA,
·the controlling shareholders, the shareholders that appoint members to our board of directors and fiscal council, the members of our board of directors and fiscal council and our executive officers would be required to disclose any purchase or sale of our stock to the CVM and the BOVESPA,
 
we would be permitted to satisfy our information disclosure requirements through the Internet, and
·we would be permitted to satisfy our information disclosure requirements through the Internet, and
 
direct or indirect controlling stockholders and stockholders that appoint members to our board of directors or fiscal council, as well as any natural person or corporate entity, or group of persons, acting jointly or representing the same interests, that reach a participation, directly or indirectly, corresponding to 5% or more of type or class of stock representative of the capital of a listed company, must notify the company and, also whenever such participation increases by 5% for the type or class of shares representative of the company’s capital stock.  In cases when an acquisition results in or was effected for the purpose of altering the controlling stockholding composition or the management structure of the corporation, as well as in cases in which the acquisition creates an obligation to conduct a public offering, the acquirer must further publish a notice in the press containing the required legal information about the transaction.  The investor relations officer is responsible for informing the CVM, and as the case may be, the stock exchange or organized over-the-counter market entities on which the company’s shares are eligible for trading.
·direct or indirect controlling shareholders and shareholders that appoint members to our board of directors or fiscal council, as well as any natural person or corporate entity, or group of persons, acting jointly or representing the same interests, that reach a participation, directly or indirectly, corresponding to 5% or more of type or class of stock representative of the capital of a listed company, must notify the company and, also whenever such participation increases by 5% for the type or class of shares representative of the company’s capital stock. In cases when an acquisition results in or was effected for the purpose of altering the controlling shareholding composition or the management structure of the corporation, as well as in cases in which the acquisition creates an obligation to conduct a public offering, the acquirer must further publish a notice in the press containing the required legal information about the transaction. The investor relations officer is responsible for informing the CVM, and as the case may be, the stock exchange or organized over-the-counter market entities on which the company’s shares are eligible for trading.

Form and Transfer

According to the Brazilian Corporate Law, all shares issued by Brazilian companies must be nominative and either registered within the companies’ registry books (Registro de Ações Nominativas) or placed under the custody of a financial institution specifically designated to perform custodial services by each company. The transfer of shares is effected by either an entry made by us in our books by debiting the share account of the transferor and crediting the share account of the transferee or by a book entry by the custodian in case the board of directors authorizes the maintenance of our shares under the custody of a financial institution specifically designated by the stockholdersshareholders to perform book-entry services.

Under our bylaws (article 3, sub item 3.3), our shares are in the form of book-entry shares and the transfer of those shares is effected through an order to the financial institution, that controls the registration of those shares, Itaú Corretora.

Transfers of preferred shares by a foreign investor are made in the same way and executed by that investor’s local agent on the investor’s behalf except that, if the original investment was registered with the Central Bank pursuant to the Annex IV Regulations, the foreign investor also should seek amendment, if necessary, through its local agent, of the certificate of registration to reflect the new ownership.

 
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The BM&FBOVESPA operates a central clearing system. A holder of our shares may choose, at its discretion, to participate in this system and all shares elected to be put into the system will be deposited in custody with the stock exchange (through a Brazilian institution that is duly authorized to operate by the Central Bank or by the CVM, as the case may be, having a clearing account with the stock exchange). The fact that these shares are subject to custody with the stock exchange will be reflected in our registry of stockholders.  shareholders.

Each participating stockholdershareholder will, in turn, be registered in our register of beneficial stockholdersshareholders maintained by the stock exchange and will be treated in the same way as registered stockholders.shareholders.

Limitations on Rights to Own Securities

Except as described above, there are no limitations under Brazilian law on the rights of non-residents or foreign stockholdersshareholders to own non-voting preferred shares of Brazilian financial institutions, including the rights of such non-resident or foreign stockholdersshareholders to hold or exercise voting rights due to future circumstances that may grant voting rights to such stockholders.shareholders. Our bylaws reflect the inexistence of such limitations in connection with our preferred shares.

Registered Capital

The amount of an investment in preferred shares held by a non-Brazilian holder who qualifies under the CMN’s Resolution No. 2,689 and obtains registration with the CVM or by the depositary representing that holder, is eligible for registration with the Central Bank; besides repatriation of the principal amount invested, such registration (the amount so registered is referred to as registered capital) allows the remittance outside Brazil of foreign currency, converted at the commercial market rate, equivalent to the amount so distributed in reaisin favor of those preferred shares. The registered capital for each preferred share purchased in Brazil, and deposited with the depositary, will be equal to its purchase price (in U.S. dollars). The registered capital for a preferred share that is withdrawn upon surrender of an ADS will be the U.S. dollar equivalent of (i) the average price of a preferred share on the Brazilian stock exchange on which the greatest number of such shares was sold on the day of withdrawal, or (ii) if no preferred shares were sold on that day, the average price on the Brazilian stock exchange on which the greatest number of preferred shares were sold in the fifteen trading sessions immediately preceding that withdrawal. The U.S. dollar value of the preferred shares is determined on the basis of the average commercial market rates quoted by the Central Bank on such date (or if the average price of preferred shares is determined under clause (iii) of the preceding sentence, the average of such quoted rates on the same fifteen dates used to determine the average price of the preferred shares).

A non-Brazilian holder of preferred shares may experience delays in effecting such registration, which may delay remittances abroad. Such a delay may adversely affect the amount, in U.S. dollars, received by the non-Brazilian holder.
American Depositary Receipts
The Bank of New York, as depositary, has executed and delivered the ADRs representing our preferred shares. Each ADR is a certificate evidencing a specific number of American Depositary Shares, also referred to as ADSs. Each ADS represents one preferred share (or a right to receive one preferred share) deposited with the principal São Paulo office of Itaú Unibanco S.A., as custodian for the depositary in Brazil. Each ADS also represents any other securities, cash or other property which may be held by the depositary.
You may hold ADSs either directly (by having an ADR registered in your name) or indirectly through your broker or other financial institution. If you hold ADSs directly, you are an ADR holder. We do not treat ADR holders as our shareholders and ADR holders have no shareholder rights. Brazilian law governs shareholder rights. The depositary is the holder of the preferred shares underlying the ADSs. Holders of ADRs have ADR holder rights. A deposit agreement among us, the depositary and you, as an ADR holder, and the beneficial owners of ADRs sets out ADR holder rights as well as the rights and obligations of the depositary. New York law governs the deposit agreement and the ADRs.

10C.       Material Contracts
 
Joint Venture with AenikNone.
 
On September 3, 2007, Itaú Unibanco Holding entered into an agreement with Aenik Participações Ltda., or Aenik, to create and develop a company named Kinea Investimentos S.A., or Kinea, which is held 80% by Itaú Unibanco and 20% by Aenik. Kinea’s purpose is to manage alternative investments, focused on the operation of hedge and real estate equity funds and also private equity funds targeted at high net worth individual and corporate clients.
Joint Venture with Lopes
On December 28, 2007, Itaú Unibanco Holding, Itaú Unibanco, LPS Brasil – Consultoria de Imóveis S.A., or Lopes, and SATI – Assessoria Imobiliária Ltda., or SATI, a subsidiary of Lopes, entered into a joint venture agreement pursuant to which Itaú Unibanco Holding and its affiliates were granted a twenty-year exclusive right to distribute and sell financial products and services, such as real estate mortgage credit and financing of durable goods, to Lopes’ clients.  Lopes is the largest real estate brokerage and consulting company in Brazil. This joint venture has combined Lopes’ real estate know-how and distribution network with Itaú Unibanco Holding’s innovative and high quality financial products. The deal was structured as a profit sharing agreement, pursuant to which Itaú Unibanco Holding is entitled to 50% of the results of the operation and SATI is entitled to the remaining 50%. The joint venture agreement also sets forth the incorporation of a company, of which each Itaú Unibanco and SATI hold 50% of the capital stock.  The main purpose of this company is to expand credit availability particularly in the secondary market (used real estate properties) by offering, on an exclusive basis, the financial products and services of Itaú Unibanco Holding and its affiliates to Lopes’ clients during the twenty-year period.

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Partnership with Dafra
On March 5, 2008, Itaú Unibanco and Dafra da Amazônia, Indústria e Comércio de Motocicletas Ltda., or Dafra, entered into a partnership agreement pursuant to which Itaú Unibanco and its affiliates were granted a ten-year exclusive right to (i) offer floor plan to Dafra’s authorized dealers, (ii) offer and distribute financial products relating to the sale of Dafra’s motorcycles, and (iii) have its financial products and services recommended by Dafra to its dealers.  Dafra is a recently created motorcycle manufacturer and seller belonging to the Itavema group, one of the largest groups of automobile dealers in Latin America.  The deal was structured as a profit sharing agreement, under which Itaú Unibanco is entitled to 60% of the results of the operation and Dafra is entitled to the remaining 40%.
Partnership with Coelho da Fonseca
On April 7, 2008, Itaú Unibanco Holding, Itaú Unibanco and Coelho da Fonseca Empreendimentos Imobiliários Ltda., or Coelho da Fonseca, entered into a partnership agreement pursuant to which Itaú Unibanco Holding and its affiliates were granted a ten-year exclusive right to distribute and sell financial products and services, such as real estate mortgage credit and financing of durable goods, in the Brazilian real estate market to Coelho da Fonseca’s clients.  Coelho da Fonseca is one of the largest Brazilian real estate brokers and its business focus on secondary real estate market (used real estate properties).  The partnership has combined Coelho da Fonseca’s real estate know-how and distribution network with Itaú Unibanco Holding’s innovative and high quality financial products.  Pursuant to the partnership agreement executed, Coelho da Fonseca is entitled to a commission fee based on the financial products and services that its clients contract with us.
Association between Itaú and Unibanco Financial Groups
On November 3, 2008, the controlling stockholders of Itaúsa and Unibanco Holdings entered into an agreement to combine the operations of Itaú and Unibanco financial groups.  The Association was carried out through a series of merger of shares (“incorporação de ações,” as defined by Brazilian Corporate Law No. 6,404/76) that were approved by Itaú Unibanco Holding, Itaú Unibanco, E. Johnston, Unibanco Holdings and Unibanco at extraordinary stockholders’ meetings held on November 28, 2008. The transactions were approved by the Central Bank on February 18, 2009, being considered effective as from November 28, 2008. The minutes of the stockholders meetings reflecting the approval of the merger of shares were registered by the Commercial Registry of the State of São Paulo in March 2009.  For further information on the Association, See “Item 4A. History and Development of the Company – Recent Developments – Association between Itaú and Unibanco Financial Groups.”
Itaú Unibanco Holding is controlled by IUPAR, owner of 51% of Itaú Unibanco common shares. IUPAR is a holding company jointly owned by Itaúsa and the former controlling stockholders of Unibanco Holdings, the Moreira Salles Family. The control of IUPAR and Itaú Unibanco is equally shared by Itaúsa and the Moreira Salles Family and all decisions are taken by consensus.
Itaúsa and the Moreira Salles Family have entered into a stockholders’ agreement to regulate their relationship regarding IUPAR, Itaú Unibanco Holding and its subsidiaries.  The stockholders’ agreement main provisions are the following:
(1) Corporate Governance.  The board of directors of IUPAR will be composed by four members: two appointed by Itaúsa and two by the Moreira Salles Family, and its board of executive officers will be composed by four executive officers: two appointed by Itaúsa and two by the Moreira Salles Family.  The board of directors of Itaú Unibanco Holding will be composed by up to 14 members, out of which six will be appointed by Itaúsa and the Moreira Salles Family, and will always vote jointly on certain matters.
(2) Lock-up Period, Right of First Refusal and Tag-Along Rights.  (i) The shares issued by IUPAR may not be transferred by Itaúsa or the Moreira Salles Family to third parties until November 3, 2018.  (ii) After this period, in case one of the parties decides to transfer of shares of IUPAR, the other party may choose to (a) exercise its right of first refusal to acquire the shares, or (b) exercise its tag-along right, in the exact same terms and conditions, or (c) waive both its rights of first refusal and tag-along.  (iii) Itaúsa may freely transfer the shares issued by Itaú Unibanco Holding that are directly owned by it.  (iv) In case Itaúsa and the Moreira Salles Family decide to jointly transfer the totality of their shares issued by IUPAR, Itaúsa may exercise its tag-along right in order to include all or part of the shares issued by Itaú Unibanco Holding that are directly owned by Itaúsa.

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(3) Term.  The stockholders’ agreement will be in effect for a period of 20 years from January 27, 2009 and may be automatically renewed for successive periods of ten years, unless otherwise required by any of the stockholders, according to the procedures set forth in the stockholders’ agreement.
For more information about the Association see “Item 4A. History and Development of the Company – Recent Developments – Association between Itaú and Unibanco Financial Groups”.
Transaction with AIG
On November 26, 2008, Unibanco entered into an agreement with American International Group, Inc., or AIG, regarding the exchange of shares that each Unibanco and AIG held in Brazilian insurance companies, as follows: (i) Unibanco acquired the shares held by AIG in Unibanco AIG Seguros S.A., or Unibanco Seguros, which had its name changed to Unibanco Seguros S.A., and (ii) AIG acquired the shares held by Unibanco in AIG Brasil Companhia de Seguros S.A. Upon completion of the Association, Unibanco Seguros and its former controlled companies Unibanco AIG Vida e Previdência S.A. and Unibanco AIG Saúde Seguradora S.A. became part of the Itaú Unibanco Group.
Partnership with Marisa S.A.
On December 4, 2008, Itaú Unibanco, Marisa S.A. and Credi-21 Participações Ltda., or Credi-21, (Marisa S.A. and Credi-21, jointly referred to as “Marisa”) entered into a partnership agreement pursuant to which Itaú Unibanco and its affiliates were granted a ten-year exclusive right to offer and sell financial products and services, namely co-branded credit cards, personal loans and other types of consumer credit financial products through Marisa’s sales network (physical and online stores).  Marisa is the largest Brazilian department store chain specialized in women’s clothing.  Its business and operational strategies focus on medium/low income women with ages ranging from 20 to 35 years.  Both parties have combined the strengths of their renowned business operations which comprise valuable brands, clientele, market share and vast capillarity in their respective segments.  The deal was structured as a profit sharing agreement, under which each party is entitled to 50% of the results of the partnership operation.
Acquisition of Redecard control
See “Item 4A. History and Development of the Company – Recent Developments.”
Acquisition of BankBoston in Brazil, Chile and Uruguay

Itaú Unibanco Holding and Itaúsa entered into a stockholders’ agreement with BAC, which became effective upon completion of the acquisition of BankBoston Brazil on September 1, 2006. Pursuant to the terms of this stockholders’ agreement, BAC has the right to appoint one member of Itaú Unibanco Holding’s board of directors and may not increase its stockholdings in Itaú Unibanco Holding above 20% of Itaú Unibanco Holdings’ issued and outstanding shares of capital stock. The newly-issued shares to BAC are subject to a three-year lock-up, which will expire in September 2009, and BAC does not have a right of first refusal, but is entitled to tag along rights in the case of control of Itaú Unibanco Holding.

10D.       Exchange Controls
 
There are no restrictions on ownership of our stock by individual or legal entities domiciled outside Brazil. However, the right to convert dividend payments and proceeds from the sale of our shares into foreign currency and to remit such amounts abroad is subject to restrictions under foreign investment legislation which generally requires, among other things, that the relevant investment be registered with the Central Bank and the CVM.
 
Foreign investors may register their direct investment in our shares under Law No. 4,131, dated September 3, 1962, or Resolution No 2,689. Registration under Resolution No. 2,689 affords favorable tax treatment to non-Braziliannon-resident investors who are not residents in aBrazil nor in tax haven jurisdictionjurisdictions (i.e., countries that do not impose income tax or where the maximum income tax rate is lower than 20%), as defined by Brazilian tax laws. See “Item 10E. Taxation – Material Brazilian Tax Considerations” for more information.
 
Under Resolution No. 2,689 non-Braziliannon-resident investors may invest in almost all financial assets and engage in almost all transactions available in the Brazilian financial and capital markets, provided that certain requirements are fulfilled. In accordance with Resolution No. 2,689, the definition of non-Braziliannon-resident investor includes individuals, legal entities, mutual funds and other collective investment entities, domiciled or headquartered abroad.outside Brazil.

 
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Under Resolution No. 2,689, a non-Braziliannon-resident investor must:
 
·• appoint at least one representative in Brazil with powers to perform actions relating to its investment;
 
·• appoint an authorized custodian in Brazil for its investment;
 
·• register as a non-Brazilian investor with the CVM; and

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·• register its foreign investment with the Central Bank.
 
Additionally, the investor operating under the provisions of Resolution No. 2,689 must be registered with the Brazilian internal revenue service (Receita Federal) pursuant to the latter’s Regulatory Instruction No. 854, dated June 30, 2008. This registration process is undertaken by the investor’s legal representative in Brazil.
 
SecuritiesPursuant to Resolution No. 2,689, securities and other financial assets held by non-Brazilianforeign investors pursuant to Resolution No. 2,689 must be registered, safe kept or maintained in deposit accounts or under the custody of an entity duly licensed by the Central Bank or the CVM. In addition,
The trading of securities tradingunder the regime of Resolution No. 2,689 is restricted to transactions carried out in the stock exchanges or through organized over-the-counter markets licensed by the CVM, except for transactions resulting from subscriptions, stock dividends, conversion of debt securities into shares, securities-referenced indexes, purchase and sale of shares of opened-end investment funds in securities and, when previously authorized by the CVM, cases resulting from going private transactions, cancellation or suspension of trading, judicial settlements and trading of shares covered by shareholder agreements.
In addition, any transfer or ownership assignment of investments in securities or other financial instruments held by non-resident investors not foreseen by Resolution No. 2,689 is prohibited, except for transfers resulting from amergers, spin-off, and other corporate reorganization, or occurring uponreorganizations carried out abroad, as well as the deathcases of an investor by operation of law or will. See “Item 10B. Memorandum and Articles of Association – Form and Transfer” for more information.hereditary succession.

10E.        Taxation
 
This summary contains a description of the main Brazilian and U.S. federal income tax considerations of the acquisition, ownership and disposition of preferred shares or ADSs, but it does not purport to be a comprehensive description of all the tax considerations that may be relevant to these matters. This summary is based upon tax laws of Brazil and the United States in effect as of the date hereof, which laws are subject to change and to differing interpretations (possibly with retroactive effect). Prospective purchasers of preferred shares or ADSs should consult their own tax advisors as to the Brazilian, United States or other tax consequences of the acquisition, ownership and disposition of preferred shares and ADSs, including, in particular, the effect of any non-U.S., non-Brazilian,non-resident, state or local tax laws.
 
Although there is at present no income tax treaty between Brazil and the United States, the tax authorities of the two countries have had discussions that may result in such a treaty. No assurance can be given, however, as to whether or when a treaty will enter into force or how it will affect a U.S. holder (as defined below) of preferred shares or ADSs. Prospective purchasers of preferred shares or ADSs should consult their own tax advisors as to the tax consequences of the acquisition, ownership and disposition of preferred shares and ADSs, including, in particular, the effect of any non-U.S., non-Brazilian,non-resident, state or local tax laws.
 
Brazilian Tax Considerations
 
The following discussion summarizes the principalmain Brazilian tax consequences related to the acquisition, ownership and disposition of preferred shares or ADSs by a holder that is not domiciled in Brazil for purposes of Brazilian taxation, or by a holder of preferred shares with an investment in preferred shares registered with the Central Bank as a U.S. dollar investment (in each case, a “non-Brazilian“non-resident holder”).
 
This discussion is based on Brazilian law as currently in effect, which is subject to change. Any change in that law may change the consequences described below.  Each non-Braziliannon-resident holder should consult his or her own tax adviser concerning Brazilian tax consequences of an investment in preferred shares or ADSs.
 
The preferred shares may be registered pursuant to Resolution No. 2,689 of the Brazilian Monetary Counsel - CMN.  The dispositions of Resolution No. 2,689 allowallows foreign investors to invest in almost all financial assets and to enter into almost all transactions available in the Brazilian financial and capital markets, provided that the main requirements described below are fulfilled. According to Resolution No. 2,689, the definition of foreign investor includes individuals, companies, mutual funds and other collective investment entities domiciled or headquartered abroad.
Pursuant to Resolution No. 2,689, a foreign investor must:
• appoint at least one representative in Brazil with powers to take actions relating to foreign investment,
• complete the appropriate foreign investor registration form,
• register as a foreign investor with the CVM, and
• register the foreign investment with the Central Bank.
Pursuant to Resolution No. 2,689, securities and other financial assets held by foreign investors must be registered or maintained in deposit accounts or under the custody of an entity duly licensed by the Central Bank or the CVM.  In addition, the trading of securities is restricted to transactions carried out on stock exchanges or organized over-the-counter markets licensed by the CVM, except See “Item 10D. Exchange Controls” for transfers resulting from a corporate reorganization, or occurring upon the death of an investor by operation of law or will.more information.

 
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Taxation of Dividends
 
Payment of dividends to the ADS depositary entity or to non-Braziliannon-resident holders of preferred shares paid from profits generated after January 1, 1996, including dividends paid in kind, are not subject to withholding income tax in Brazil.
 
Stock dividends derived from profits generated before January 1, 1996 are  not subject to Brazilian taxation provided, however, (i) that we do not redeem these stocks or that the stock is sold in Brazil within five years after the distribution of stock dividends, and (ii) that the capital stock has not been reduced in the five years prior to the distribution of stock dividends. When calculating the capital or net gain from the disposal of stock, the acquisition cost of the stock will be considered to be zero, even though such disposal is made after five years from the distribution of stock dividends).  The gain from the disposal of the stock is the difference between the price of sale and the price of acquisition of the stock.
Cash dividends derived from profits generated afterbefore January 1, 1996 may be subject to Brazilian withholding income tax at variable rates according to the year when the profits were generated.
 
Interest on Stockholder'sShareholder's Equity
 
Distribution to stockholdersshareholders of interest on stockholders’shareholders’ equity deriving from preferred or common shares as an alternative form of dividend distributions to stockholdersshareholders who are either Brazilian residents or non-Brazilian residents,non-residents, including holders of ADSs, is subject to withholding income tax at the rate of 15%. If the distribution of interest on stockholders’shareholders’ equity is made to a beneficiary resident or domiciled in a “tax haven” jurisdiction, the payment of interest is subject to withholding income tax at the rate of 25% (the 15% rate is not being applicable).
 
These payments, except for certain limitations, are deductible from the calculation of taxable income for purposes of income tax payment in Brazil, and from 1997 they also became deductible from the calculation of taxable income for purposes of social contribution on net income payment, as soon as the amount of interest is credited to the liabilities of the company that makes the distribution (when the amount payable to each stockholdershareholder is already known) or paid to the stockholder,shareholder, whichever occurs first.  To the extent this payment is treated as a portion of the mandatory dividend, as provided for by the current legislation, the interest on stockholders’shareholders’ equity paid to stockholdersshareholders is discounted from the mandatory dividend payable to stockholders.shareholders. However, if the amount of interest on stockholders’shareholders’ equity exceeds that of the mandatory dividend, the amount will not be refunded to stockholdersshareholders and will be considered a form of additional dividend. Resolutions on the distribution of interest on stockholders'shareholders' equity are made by the board of directors, although the approval for the use of profits is obtained at the annual stockholders’shareholders’ meeting that approves the financial statements.
 
Taxation of Gains
 
(a)Sale of ADS
Gains realized outside Brazil by a non-Braziliannon-resident holder related to the disposal of ADSs to another non-Braziliannon-resident holder are not subject to Brazilian taxation. However, after the publication of Law No. 10,833/03, the disposal of assets located in Brazil by a non-Braziliannon-resident holder to another non-Brazilian holder or a Braziliannon-resident holder  may be subject to tax charges in Brazil.  Although there is no current legal case providing accurate definition for such new Law and although the Law is not completely clear, ADSs are generally not recognized asconsidered assets located in Brazil for the purposes of Law No. 10,083/10,833/03, because they represent securities issued and negotiated in an offshore exchange market. It is important to note, however, as the law is unclear and there is no case law regarding its interpretation, it is not possiblethat even if ADS were considered assets located in Brazil, then investors resident in non-tax haven locations could apply for exemption of capital gain tax according to assure you that such understanding will prevail in courts.article 81 of Law No. 8.981/95.
 
Although there are strong grounds supporting that the redemption of ADSs in exchange for preferred shares should be subject to Brazilian taxation, the tax authorities have not confirmed this understanding.  
(b)Conversion of preferred shares into ADS
The deposit of preferred shares in exchange for ADSs isADS may be subject to Brazilian capital gain tax charges (if, if the investor is resident in a tax haven location or if the preferred shares were acquired from funds that were not remittedregistered according to Brazil as provided for by CMN Resolution No. 2,689/00) if the amount previously registered with the Central Bank as a foreign investment in the preferred shares is lower than (i) the average price per preferred share on a Brazilian stock exchange on which the greatest number of such shares were sold on the day of deposit; or (ii) if no preferred shares were sold on that day, the average price on the Brazilian stock exchange on which the greatest number of preferred shares were sold in the 15 trading sessions immediately preceding that deposit. In such case, the00. The difference between the acquisition price or the amount otherwise previously registered at the Brazilian Central Bank and the average price of the preferred shares calculated as mentioned above, willmay be considered to be ataxable capital gain and willmay be subject to income tax at thea general rate of 15% or 25% if the non-Brazilian holder resides in a “tax haven” jurisdiction. The deposit of preferred shares in exchange for ADSs. Tax haven investors may be subject to tax on25% capital gain tax in Brazil if the sale or transfer of shares out of the financial markets.
On the other hand, when non tax-haven investors deposit preferred shares were acquired from funds that were remitted to the country as provided for by CMNregistered in Resolution No. 2,689/00 and the funds were not from “tax haven” jurisdiction.  Although there are strong grounds supporting that the deposit of preferred sharesportfolio in exchange for ADSsADS such deposit should not be subject to tax on capital gains, the tax authorities have not confirmed this understanding.

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gain tax.
 
(c)Preferred Shares negotiated in Brazil
 
Upon receipt of the ADS underlying the preferred shares, the non-Brazilian holder registered under CMN Resolution No. 2,689/00 will be entitled toForeign investors resident in non-tax haven locations that register the U.S. dollar value of those shares according to the value determined above.  However, if this non-Brazilian holder does not register under Resolution No. 2,689, he will be subject to the less favorable tax treatment described below.
Non-Brazilian holders are not required to pay tax in Brazil on gains realized from the sale of preferred shares made abroad, including those resulting from the redemption and cancellation of ADSs. Non-Brazilian holders are generally required to pay income tax at the rate of 15% on gains realized from the sale or exchange of preferred shares in Brazil that is not carried out on a Brazilian stock exchange.  An income tax at a rate of 25% will be imposed on gains from a sale or exchange that is not carried out on a Brazilian stock exchange in case the non-Brazilian holder resides in a “tax haven" jurisdiction.  Gains obtained on Brazilian futures and commodities stock exchanges, will be subject to a general tax rate of 15%.  If these gains were obtained in day trade transactions, they will be subject to an income tax at the rate of 20%. The net gains from transactions carried out on stock, commodities, futures and similar exchanges, except from day trade transactions and gains on transactions carried out on over-the-counter market, with intermediation, in addition to forwards markets out of the exchanges, is also subject to income tax withholding at the rate of 0.005%.  This tax can be deducted from the tax on net gains determined in the month of withholding or offset against the tax levied on net gains determined in the months subsequent to the withholding at the calendar year that it occurs.  The gains from day trade transactions carried out on stock, commodities, futures and similar exchanges are subject to a withholding income tax at the rate of 1%. The withholding income tax rate can be offset against the income tax on net gains determined in the month itself or the subsequent months, in other words, the income tax withheld at source may be offset against the payable income tax at the rates of 15% and 20%, in the case of day trade.
The treatment described above is also applicable to non-Brazilian holders whose funds’ origins are from “tax haven" jurisdictions.
For non-Brazilian holders who receive ADSs underlying preferred shares and have registered the amountstheir portfolio according to CMN Resolution No. 2,689/00 and whose funds are not frombenefit of a “tax haven” jurisdiction, the proceedsspecial tax treatment according to which any capital gain arising from the sale of stock onsecurities within Brazilian exchanges is exempt of income tax. On the other hand, sale of shares not registered according to Resolution No. 2,689/00 or made out of stock exchanges are exempt from incomeis generally subject to 15% capital gain tax.

 
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Such special treatment is not applicable to investors resident in tax haven locations, who are subject to general taxation rules applicable to Brazilian residents on the sale of ADSs underlying preferredtheir investments in financial markets, including exchanges and out-of-the-counter markets. The taxation rate is then generally 15%. If such investors sell shares held by non-Brazilians (that is, the sale of preferred shares other than the preferred shares that were delivered to the non-Brazilian holder in exchange for the ADSs owned by such holder), if such sale is made on a stock exchange, the gains from the sale are exempt from income tax, provided that the provisionsout of the CMN andfinancial markets, the Central Bank are complied with, and the funds remittedincome taxation rate shall raise to Brazil for the acquisition of the stock are not from a “tax haven” jurisdiction.25%.
 
Any exercise of preemptive rights related to the preferred shares (and in connection with the ADS program) will not be subject to Brazilian taxation.  The gains from the sale or assignment of preemptive rights will be subject to an income tax ataccording to rates that vary depending on the ratelocation of the non-resident holder and the market in which such rights are sold. If the holder is located in a non-tax haven jurisdiction, the sale of preemptive rights is exempt of tax if made within Brazilian exchange markets or is subject to 10% income tax if made beyond exchange markets. If the holder is located in a tax haven jurisdiction, the sale of preemptive rights is generally subject to 15% income tax if made within Brazilian financial markets or 25% tax if the sale or assignment is made in Brazil outside a Brazilian stock exchange, and provided that the funds of holder of the preemptive rights are not from a “tax haven” jurisdiction.  Under these same conditions, if the sale or assignment is carried out on a Brazilian stock exchange, the gains will be exempt from income tax.  If the funds of the holder are not from a “tax haven” jurisdiction and the sale or assignment is carried out on a stock exchange, the gains will be subject to an income tax at the rate of 15%; if the sale or assignment is not carried out on a stock exchange and the funds are from or the holder resides in a "tax haven” jurisdiction, the gains will be subject to an income tax, as a capital gain, at the rate of 25%.sold beyond such markets.
 
Beneficiaries Resident or Domiciled in Tax Havens or Low Tax District
 
For the purpose of investments in financial markets, Brazilian legislation defines “tax haven” jurisdictions as countries or locations that do not impose any income tax or where the maximum income tax rate is 20% or where the laws of that country or location impose restrictions on stockholding composition or the ownership of the investment..  Except for certain situations, income from transactions of a beneficiary resident or domiciled in a country considered a “tax haven” jurisdiction, is subject to withholding income tax at the rate of 25%.
 
Tax on Foreign Exchange on Financial transactionsTransactions (IOF/Câmbio)
 
Pursuant to Decree No. 6,306/07, amended by Decrees No. 6,339/08, 6,445/08, 6,391/08, 6,354/6,453/08, 6,556/08,  6,613/08 and 6,613/08,6.983/09, IOF/Câmbio may be levied on foreign exchange transactions.transactions, affecting either or both the inflow or outflow of investments.  The IOF rates are set by the Brazilian executive branch, and the highest applicable rate is 25%.

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The rate of IOF tax imposed on foreign exchange transactions carried out by a foreign investor for the purpose of investing in the financial and capital markets willmay vary from time to time as defined by the government and the rates may be 0.38% or zero.  Depending upondifferent based on the type andof investment as well as the time ofin which such investment is maintained in Brazil. The inflow of foreign funds to Brazil,for the IOF tax may be levied on the outflow and inflowpurchase of funds (it may also be levied when the type of investment is changed; in many cases, the outflow and inflow of funds will require simultaneous foreign exchange transactions).
If the inflow of foreign funds is made according toshares under CMN Resolution No. 2,689/02 or Resolution No. 1,927 (which regulates the ADR programs for investing in Brazilian stock exchanges or00 is subject to 2% IOF tax. The acquisition of stockADS is not subject to IOF tax.  IOF rate is zero in connection with the public offering or subscription of stock (provided that in both cases the issuing company is registered with the CVM)), the rate of IOF tax will be zero.  In relation to these investments, the rate of IOF tax imposed on the outflow of funds from Brazil will be zero, as well as on the remittance of interest on stockholders’ equity and dividends.foreign investment.
 
Tax on Transactions Involving Bonds and Securities
Tax on transactions Involving bonds and securities, or IOF/Bonds tax, is also levied on the acquisition, assignment, redemption, renegotiation or payment for settlement of securities, even though these transactions are carried out on a Brazilian stock exchange.  The IOF/Bonds Tax will be assessed at a rate of up to 1.5% per day, on the value of the securities transactions.
The IOF/Bonds tax applicable to transactions involving preferred shares and ADSs is currently zero, but the Executive branch of the Brazilian government may increase it up to 1.5% per day.  In the event the rate is increased, the new rate will be levied only on gains earned after the increase. The IOF/Bonds tax rate can be higher than zero in some cases, such as when an investor sells or redeems its investment fund during the grace period while the respective proceeds are still being credited.
Temporary Contribution on Financial Transactions
The CPMF tax was imposed at a rate of 0.38% on financial transactions.  The CPMF tax ceased to be charged as of January 1, 2008.  As a general rule, the CPMF tax was levied on debits from bank accounts.
Currently, the CPMF tax is no longer charged, but many discussions have been held about whether it will be charged again or not; it is impossible to say if this tax will be charged again thus far.
Other Brazilian Taxes
 
There are no Brazilian inheritance, gift or succession taxes applicable to the transfer of ownership or title (ownership without beneficial interest) of preferred shares or ADSs or the vesting of free beneficial interest of such shares or ADSs by a non-Brazilian and non-resident holder, except for gift, inheritance and legacy taxes that are not  charged by some states of Brazil on gift, inheritance and legacy bestowed in such states of Brazil or, if bestowed abroad, by gift, inheritance or legacy receiver domiciled in these states of Brazil. There is no Brazilian stamp, issue, registration, or similar taxes or duties payable by holders of preferred shares or ADSs.
 
Registered Capital
 
The amount of an investment in preferred shares made by a non-Braziliannon-resident holder, who qualifiesas so qualified under CMN’s Resolution No. 2,689 and obtains registrationregistered with the CVM, or by the depositary representing that holder,such non-resident holder’s representative, is eligible for registration with the Central Bank.  This registration (theBank of Brazil (whereby the amount registered is referred to as registered capital)“Registered Capital”); such registration allows the remittance outside Brazil of foreign currency outside Brazil, converted atby the commercial market rate and purchased with the amount distributed and realized in relationamounts related to thosethe distribution of such preferred shares. The registered capitalRegistered Capital of each preferred share purchased in Brazil after this date and deposited with the depositary, willshall be equal to its purchase price (in U.S. dollars)Dollars).
 
A non-BrazilianThe non-resident holder of preferred shares may experiencemeet delays in obtaining such registration, which may consequently delay the remittances abroad. ThisSuch delay may also adversely affect the amount in U.S. dollars,Dollars received by the non-Braziliannon-resident holder.
 
U.S. Federal Income Tax Considerations
 
The following discussion is a general summary of the material U.S. federal income tax considerations of the acquisition, ownership and disposition of our preferred shares or ADSs. This discussion applies only to “U.S. holders” of such shares or ADSs.  For purposes of this discussion, a “U.S. holder” is a beneficial owner of our preferred shares or ADSs that is, for U.S. federal income tax purposes:

 
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•           an individual that is a citizen or resident of the United States;
 
•           a corporation or other entity treated as a corporation for U.S. federal income tax purposes created or organized in or under the laws of the United States or any state thereof or  the District of Columbia;
 
•           an estate the income of which is subject to U.S. federal income tax regardless of its source; or
 
•           a trust if (i) a court within the United States is able to exercise primary supervision over the administration of the trust, and one or more U.S. persons have the authority to control all substantial decisions of the trust, or (ii) the trust has validly elected under applicable Treasury regulations to be treated as a U.S. person.
 
If a partnership holds our preferred shares or ADSs, the U.S. federal income tax treatment of a partner generally will depend upon the status of the partner and upon the activities of the partnership.  Partners of partnerships holding our preferred shares or ADSs should consult their own independent tax advisors.
 
In general, for U.S. federal income tax purposes, holders of American Depositary Receipts evidencing ADSs will be treated as the beneficial owners of the preferred shares represented by those ADSs.  Deposits and withdrawals of our preferred shares by U.S. holders in exchange for ADSs will not result in the realization of gain or loss for U.S. federal income tax purposes.
 
This discussion does not address all aspects of U.S. federal income tax law that may be relevant to a U.S. holder in light of such U.S. holder’s particular circumstances, and does not discuss any aspect of state, local or non-U.S. tax law.  Further, this discussion does not address U.S. federal estate and gift tax, the Medicare tax on net investment income or the alternative minimum tax consequences of acquiring, holding or disposing of our preferred shares or ADSs or the indirect consequences to holders of equity interests in partnerships (or any other entity treated as a partnership for U.S. federal income tax purposes) that hold our preferred shares or ADSs. Moreover, this discussion deals only with our preferred shares or ADSs that a U.S. holder will hold as capital assets (generally, property held for investment), and it does not apply to U.S. holders that may be subject to special tax rules, such as banks and other financial institutions, insurance companies, securities dealers, tax-exempt organizations, persons that hold our preferred shares or ADSs as part of an integrated investment (including a straddle), persons owning directly, indirectly or constructively, 10% or more of the total combined voting power of our shares and persons whose “functional currency” for U.S. federal income tax purposes is not the U.S. dollar.
 
This discussion is based on provisions of the U.S. Internal Revenue Code of 1986, as amended, (the “Code”),or the Code, its legislative history, existing final, temporary and proposed Treasury regulations promulgated thereunder, and administrative and judicial interpretations thereof, all as now in effect, and all of which are subject to change, possibly with retroactive effect, and to different interpretations. U.S. holders are urged to consult their own independent tax advisors as to the tax consequences relevant to the ownership of our preferred shares or ADSs in light of their particular circumstances, including the effect of any state, local or non-U.S. laws. This discussion is also based in part on the representations of the depositary and the assumption that each obligation in the deposit agreement and any related agreement will be performed in accordance with its terms.
 
Except where specifically described below, this discussion assumes that we are not a passive foreign investment company, (“PFIC”)or PFIC, for U.S. federal tax income purposes. Please seeSee the discussion under “Passive“—Passive Foreign Investment Company Rules” below.Rules.”
 
Taxation of Distributions
 
In general, distributions of cash or property with respect to our preferred shares or ADSs including distributions of interest on stockholders’shareholders’ equity, as described above under “Brazilian“—Brazilian Tax Considerations - Interest on Stockholders’ Equity”,Shareholders’ Equity,” to a U.S. holder will, to the extent made from our current or accumulated earnings and profits, as determined under U.S. federal income tax principles, constitute dividends to such U.S. holder for U.S. federal income tax purposes. If a distribution exceeds the amount of our current and accumulated earnings and profits, the excess will be treated first as a non-taxable return of capital to the extent of a U.S. holder’s adjusted tax basis in our preferred shares or ADSs, and thereafter as capital gain which will be either long-term or short-term capital gain depending on whether the U.S. holder held the preferred shares or ADSs for more than one year. As used below, the term “dividend” means a distribution that constitutes a dividend for U.S. federal income tax purposes.

 
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The gross amount of any taxable dividend (including amounts withheld in respect of Brazilian taxes) paid with respect to our preferred shares or ADSs generally will be subject to U.S. federal income taxation as ordinary dividend income and will not be eligible for the dividends received deduction allowed to corporations. Dividends generally will be includible in the gross income of a U.S. holder on the day on which suchthe dividends are actually or constructively received by the U.S. holder, in the case of our preferred shares, or on the day on which such dividends are actually or constructively received by the depositary, in the case of our ADSs.
 
A U.S. holder will be entitled, subject to a number of complex limitations and conditions, to claim a U.S. foreign tax credit in respect of any Brazilian income taxes withheld on dividends received on our preferred shares or ADSs.  U.S. holders who do not elect to claim a credit for any foreign income taxes paid during the taxable year may instead claim a deduction in respect of such Brazilian income taxes.  Dividends received with respect to our preferred shares or ADSs will be treated as foreign source income, subject to various classifications and other limitations.  For purposes of the U.S. foreign tax credit limitation, foreign source income is separated into different “baskets,” and the credit for foreign taxes on income in any basket is limited to the U.S. federal income tax allocable to such income.  Dividends paid with respect to our preferred shares and ADSs generally will constitute “passive category income” in most cases.  U.S. holders should be aware that the U.S. Internal Revenue Service, (IRS)or IRS, has expressed concern that parties to whom ADSs are released may be taking actions that are inconsistent with the claiming of foreign tax credits by U.S. holders of ADSs. Accordingly, the discussion above regarding the creditability of Brazilian income tax withheld on dividends could be affected by future actions that may be taken by the IRS. The rules with respect to foreign tax credits are complex and U.S. holders should consult their own independent tax advisors regarding the availability of foreign tax credits in light of their particular circumstances.
 
Subject to certain exceptions for short-term and hedged positions, the U.S. dollar amount of dividends received by certain U.S. holders (including individuals) prior to January 1, 2011 with respect to the ADSs will be subject to taxation at a maximum rate of 15% if the dividends represent “qualified dividend income.”  Dividends paid on the ADSs will be treated as “qualified dividend income” if (i) the ADSs are readily tradable on an established securities market in the United States and (ii) we were not in the year prior to the year in which the dividend was paid, and are not in the year in which the dividend is paid, a passive foreign investment company, or PFIC.  The ADSs are listed on the New York Stock Exchange, and may qualify as readily tradable on an established securities market in the United States so long as they are so listed.  However, no assurances can be given that the ADSs will be or remain readily tradable.  See below for a discussion regarding our PFIC determination.
 
Based on existing guidance, it is not entirely clear whether dividends received with respect to the preferred shares will be treated as “qualified dividend income”,income,” because the preferred shares are not themselves listed on a U.S. exchange. U.S. holders should consult their own independent tax advisors regarding the availability of the preferential dividend tax rate in the light of their own particular circumstances.
 
Dividends paid in Brazilian currency will be included in the gross income of a U.S. holder in a U.S. dollar amount calculated by reference to the exchange rate in effect on the date the U.S. holder actually or constructively receives the dividends, or, in the case of dividends received in respect of ADSs, on the date the dividends are actually or constructively received by the depositary, whether or not such dividends are converted into U.S. dollars.  A U.S. holder will have a tax basis in any distributed Brazilian currency equal to the amount included in gross income, and any gain or loss recognized upon a subsequent disposition of such Brazilian currency generally will be U.S. source ordinary income or loss.  If dividends paid in Brazilian currency are converted into U.S. dollars on the day the U.S. holder or the depositary, as the case may be, receive such dividends, the U.S. holder generally should not be required to recognize foreign currency gain or loss in respect of the dividend income.  U.S. holders should consult their own independent tax advisors regarding the treatment of any foreign currency gain or loss if any Brazilian currency received by them or the depositary is not converted into U.S. dollars on the date of receipt.
 
Taxation of Capital Gains
 
In general, gain or loss, if any, realized by a U.S. holder  upon a sale or other taxable disposition of preferred shares or ADSs will be subject to U.S. federal income taxation as capital gain or loss in an amount equal to the difference between the amount realized (including the gross amount of the proceeds of the sale or other taxable disposition before deduction orof any Brazilian income tax) on the sale or other taxable disposition and such U.S. holder’s adjusted tax basis in our preferred shares or ADSs.  Such capital gain or loss will be long-term capital gain or loss if, at the time of sale or other taxable disposition, the U.S. holder held our preferred shares or ADSs for more than one year.  Certain non-corporate U.S. holders (including individuals) are eligible for preferential rates of U.S. federal income taxation in respect of long-term capital gains.  The deductibility of capital losses is subject to certain limitations under the Code.  Gain or loss, if any, recognized by a U.S. holder on the sale or other taxable disposition of our preferred shares or ADSs generally will be treated as U.S. source gain or loss for U.S. foreign tax credit purposes.  Consequently, if a Brazilian income tax is withheld on the sale or other taxable disposition of our preferred shares, a U.S. holder may not be able to derive effective U.S. foreign tax credit benefits in respect of such Brazilian income tax if such U.S. holder does not receive sufficient foreign source income from other sources. Alternatively, the U.S. holder may take a deduction for the Brazilian income tax if it does not elect to claim a foreign tax credit for any foreign taxes paid during the taxable year. We urge U.S. holders of our preferred shares or ADSs to consult their own independent tax advisors regarding the application of the U.S. foreign tax credit rules to their investment in, and disposition of, such preferred shares or ADSs.

 
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Passive Foreign Investment Company Rules
 
Special U.S. federal income tax rules apply to U.S. persons owning shares of a PFIC. A non-U.S. corporation generally will be classified as a PFIC for U.S. federal income tax purposes in any taxable year in which, after applying relevant look-through rules with respect to the income and assets of subsidiaries, either:
 
 ·at least 75% of its gross income is “passive income”; or
 
 ·on average at least 50% of the gross value of its assets is attributable to assets that produce passive income or are held for the production of passive income.
 
For this purpose, passive income generally includes, among other things, dividends, interest, rents, royalties, gains from the disposition of passive assets and gains from commodities transactions.
 
The application of the PFIC rules to banks is unclear under present U.S. federal income tax law.  Banks generally derive a substantial part of their income from assets that are interest bearinginterest-bearing or that otherwise could be considered passive under the PFIC rules. The IRS has issued a notice and has proposed regulations that exclude from passive income any income derived in the active conduct of a banking business by a qualifying foreign bank (the “Active Bank Exception”). The IRS notice and proposed regulations have different requirements for qualifying as a foreign bank and for determining the banking income that may be excluded from passive income under the Active Bank Exception. Moreover, the proposed regulations have been outstanding since 1994 and will not be effective unless finalized.
 
Based on estimates of our current and projected gross income and gross assets, we do not believe that we will be classified as a PFIC for our last taxable year or our current or future taxable years. The determination of whether we are a PFIC, however, is made annually and is based upon the composition of our income and assets (including, among others, entities in which we hold at least a 25% interest), and the nature of our activities (including our ability to qualify for the Active Bank Exception).
 
Because final regulations have not been issued and because the notice and the proposed regulations are inconsistent, our status under the PFIC rules is subject to considerable uncertainty.  While we conduct, and intend to continue to conduct, a significant banking business, there can be no assurance that we will satisfy the specific requirements for the Active Bank Exception under either the IRS notice or the proposed regulations.  Accordingly, U.S. holders could be subject to U.S. federal income tax under the rules described below.  U.S. holders should consult their own independent tax advisors regarding the application of the PFIC rules under their particular circumstances.
 
If we are treated as a PFIC for any taxable year, unless a U.S. holder elects to be taxed annually on a mark-to-market basis with respect to our preferred shares and ADSs, as described below, any gain realized on a sale or other taxable disposition of our preferred shares or ADSs and certain “excess distributions” (generally distributions in excess of 125% of the average distribution over a three-year period or, if shorter, the holding period for our preferred shares or ADSs) will be treated as ordinary income and will be subject to tax as if (a) the excess distribution or gain had been realized ratably over the U.S. holder’s holding period for our preferred shares or ADSs, (b) the amount deemed realized in each year had been subject to tax in each such year at the highest marginal rate for such year (other than income allocated to the current period of any taxable period before we became a PFIC, which would be subject to tax at the U.S. holder’s regular ordinary income rate for the current year and would not be subject to the interest charge discussed below), and (c) the interest charge generally applicable to underpayments of tax had been imposed on the taxes deemed to have been payable in those years.
 
We do not expect to provide information that would allow U.S. holders to avoid the foregoing consequences by making a “qualified electing fund” election.
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If we are treated as a PFIC and, at any time, we invest in non-U.S. corporations that are classified as PFICs (each, a “Subsidiary PFIC”), U.S. holders generally will be deemed to own, and also would be subject to the PFIC rules with respect to, their indirect ownership interest in that Subsidiary PFIC.  If we are treated as a PFIC, a U.S. holder could incur liability for the deferred tax and interest charge described above if either (1) we receive a distribution from, or dispose of all or part of our interest in, the Subsidiary PFIC or (2) the U.S. holder disposes of all or part of our preferred shares or ADSs.

 
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A U.S. holder of stock in a PFIC (but not a subsidiary PFIC, as discussed below) may make a “mark-to-market” election, provided the PFIC stock is “marketable stock” as defined under applicable Treasury regulations (i.e. “regularly traded” on a “qualified exchange.”exchange” or other“other market”). Under applicable Treasury regulations, a “qualified exchange” includes a national securities exchange that is registered with the SEC or the national market system established under the Securities Exchange Act of 1934. Under applicable Treasury regulations, PFIC stock traded on a qualified exchange is regularly traded on such exchange for any calendar year during which such stock is traded, other than in de minimis quantities, on at least 15 days during each calendar quarter.  We cannot assure U.S. holders that our preferred shares or ADSs will be treated as “marketable stock” for any taxable year. In particular, it is unclear whether the BOVESPA would meet the requirements for a “qualified exchange or other market” for this purpose.
 
If an effective mark-to-market election is made, an electing U.S. holder generally would (i) include in gross income, entirely as ordinary income, an amount equal to the excess, if any, of the fair market value of the PFIC stock as of the close of such taxable year and such holder’s adjusted tax basis, and (ii) deduct as an ordinary loss the excess, if any, of such holder’s adjusted tax basis of the PFIC stock over the fair market value of such stock at the end of the taxable year, but only to the extent of the net amount previously included in gross income as a result of the mark-to-market election.  A U.S. holder’s adjusted tax basis in our preferred shares or ADSs would increase or decrease by the amount of the gain or loss taken into account under the mark-to-market regime.  Although a U.S. holder may be eligible to make a mark-to-market election with respect to our preferred shares or ADSs, no such election may be made with respect to the stock of any Subsidiary PFIC that such U.S. holder is treated as owning, because such Subsidiary PFIC stock is not marketable. The mark-to-market election is made with respect to marketable stock in a PFIC on a stockholder-by-stockholdershareholder-by-shareholder basis and, once made, can only be revoked with the consent of the IRS.  Special rules would apply if the mark-to-market election is not made for the first taxable year in which a U.S. person owns stock of a PFIC.
 
A U.S. holder who owns our preferred shares or ADSs during any taxable year that we are treated as a PFIC would be required to file IRS Form 8621, reporting any distributions received and gains realized with respect to each PFIC (including Subsidiary PFICs) in which the U.S. holder holds a direct or indirect interest.  If we are deemed to be a PFIC for a taxable year, dividends on our ADSs would not constitute “qualified dividend income” subject to preferential rates of U.S. federal income tax, as discussed above.
Recently enacted legislation requires U.S. persons who are shareholders in a PFIC to file an annual report containing information set forth as required under applicable Treasury Regulations. As of the date of this annual report, however, such Treasury Regulations have not yet been promulgated.
U.S. holders should consult with their own independent tax advisors regarding the application of the PFIC rules to our preferred shares or ADSs and the availability and advisability of making an election to avoid the adverse tax consequences of the PFIC rules should we be considered a PFIC for any taxable year.
 
U.S. Backup Withholding and Information Reporting
 
A U.S. holder of our preferred shares or ADSs may, under certain circumstances, be subject to information reporting and “backup withholding,” at a current rate of 28%, with respect to certain payments to such U.S. holder, such as dividends we pay or the proceeds of a sale or other taxable disposition of our preferred shares or ADSs, unless the U.S. holder (i) establishes that it is a corporation or  otheran exempt recipient, or (ii) with respect to backup withholding,  provides a correct taxpayer identification number and certifies, under penalty of perjury, that is a U.S. person and that no loss of exemption from backup withholding has occurred. For taxable years beginning after October 31, 2010, the backup withholding rate is currently scheduled to increase to 31%. Backup withholding is not an additional tax.  Any amount withheld under these rules will be creditable against a U.S. holder’s U.S. federal income tax liability, provided the requisite information is timely furnished to the IRS. A U.S. holder generally may obtain a refund of any amounts withheld under the backup withholding rules that exceed its U.S. federal income tax liability by filing a timely refund claim with the IRS.
Recently enacted legislation requires certain U.S. holders to report information with respect to an investment in certain “foreign financial assets” not held through a custodial account with a U.S. financial institution to the IRS.  Investors who fail to report required information could become subject to substantial penalties. U.S. holders are encouraged to consult with their own tax advisors regarding the possible implications of this new legislation on their investment in our preferred shares.

10F.        Dividends and Paying Agents
 
Not applicable.

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10G.       Statement by Experts
 
Not applicable.

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10H.       Documents on Display
 
We are subject to the informational requirements for foreign private issuers of the U.S. Securities Exchange Act of 1934, as amended, which is also knownor as the Exchange Act. Accordingly, we are required to file reports and other information with the Commission, including annual reports on Form 20-F and reports on Form 6-K. You may inspect and copy reports and other information to be filed with the Commission at the public reference facilities maintained by the Commission at 100 F Street, N.W., Washington D.C. 20549 and at the Commission’s regional offices at 500 West Madison Street, Suite 1400, Chicago Illinois 60661, and 233 Broadway, New York, New York 10279. Copies of the materials may be obtained by mail from the Public Reference Room of the Commission at 100 F Street, N.W., Washington, D.C. 20549 at prescribed rates. The public may obtain information on the operation of the Commission’s Public Reference Room by calling the Commission in the United States at 1-800-SEC-0330. In addition, the Commission maintains an Internet website at http://www.sec.gov, from which you can electronically access those materials, including this annual report and the registration statement and its materials.accompanying exhibits. We also file financial statements and other periodic reports with the CVM located at Rua Sete de Setembro, 111, Rio de Janeiro, Rio de Janeiro 20050-901, Brazil. The CVM maintains an Internet website at http://www.cvm.gov.br.
 
Copies of our annual report on Form 20-F will be available for inspection upon request at our offices at Praça Alfredo Egydio de Souza Aranha 100 - São Paulo - SP - 04344-902 – Brazil.
 

10I.         Subsidiary Information
 
Not required.

 
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ITEM 11                QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Derivative instruments qualifying for hedge accounting
 
During the last quarter of 2008 certain exchange-traded future contracts, (DI Futures)or DI Futures, were designated as hedging instruments of variable-rate subordinated certificates of deposit in a cash flow hedge strategy. During 2009 some of those hedges were discontinued because they were no longer effective. The carrying amount at December 31, 20082009 of subordinated certificates of deposits designated in this hedge strategy and the notional amount of the DI Futures of the designated hedging instruments is R$ 9712 million.

The hedge relationships were all designated in the last quarter of 2008, with maturitiesmaturity of the hedged item and the derivatives at dates between 2012 and 2014.is 2012.

This hedge strategy aims to protect changes in the interest cash flows of certain variable-interest rate subordinated certificates of deposit, attributable to changes in CDI rate. CDI rate is considered the benchmark interest rate for the Brazilian Reaisreais -denominated financial market and is set daily. The hedge strategy results in fixing the cash flows associated with the variability of the CDI rate. In order to hedge the variability in the cash flows of interest payments, Itaú Unibanco Holding uses DI Futures contracts traded on BM&F BOVESPA.&FBOVESPA. Under the DI Futures contracts a net payment is made for the difference between an amount computed as the notional amount multiplied by the CDI rate and the notional amount multiplied by a fixed rate.

Considering the irrelevance of the notional amount of these derivatives and of the carrying amount of hedged items in relation to our overall market risk, our disclosure about market risk corresponds to our overall market risk comprising the instruments designated in a hedge relationship for accounting purposes aforementioned and all other instruments.
 
Market Risk
 
Market risk management is the process through which we observemonitor and manage the potential risks of changes in market prices of financial instruments that may, either directly or indirectly, affect the valuesvalue of assets, our liabilities and off-balance sheet positions.

AWe conduct comprehensive analysis of market risk is conducted based on market risk factors, which may affect our positions. The operations,Transactions, including derivatives, are separated according to their risk factors, which may affect their market value and are then grouped in different ways in accordance with business strategies. A risk factor refers to a measure of market impact, which causes changes in the potential loss in future earnings. Each risk factor is related to market parameters whose variation may affect the market value of our operations. The risktransactions. Risk analyses are conducted for each risk factor estimating potential losses (VaR)using Value at Risk, or VaR, models based on the statistical behaviourbehavior of risk factors at a confidence level of 99%. The main technique employed for the quantification of risk is the measurement based on market parameters of the potential reduction (increase)(or increase) in the fair value of assets (liabilities)(or liabilities) associated with a change in market factors by parametric method.market parameter. The risk analysis process quantifies the exposure and risk appetite using risk limits based on market risk factors, Statistical VaR (99%(at 99% confidence level), stress simulations, or VaR Stress, simulations (VaR Stress) and capital to cover economic capital.capital for market risk.

Our risk controlmanagement process begins with determining limits, which are approved by the financial risks superiorinstitutional treasury supervisory committee, based on the risk appetite and the financial capacity of each business unit. These limits are informed toby each business unit’s risk control areadivision that carries out daily risk management and provides information periodically to Itaú Unibanco Holding’s risk control area. Thisdivision. Our risk control division monitors the scope, precision and quality of theour controls. The risk control cycle is concluded with a consolidated risk report to the financial risks superiorinstitutional treasury supervisory committee. The committee is the superior instance responsible for monitoring all strategies and exposures, understanding, controlling and managing market risk on a consolidated corporate level.

In order to monitor our market risk exposure, we manage it in two categories of exposures: our structural gap
·            Trading portfolio (trading book): consists of all transactions in financial instruments and ourcommodities, including derivatives, which are held with the intention of trading or to hedge other elements of the trading book and are not subject to limitations on their marketability. Transactions held in the trading book are those intended for resale. The trading book is managed by the flow book trading desk and the proprietary trading desk.desk; and
·            Non-trading portfolio (banking book or “structural gap”): consists of all transactions not classified in the trading book. It consists of structural transactions and their hedges, as well as transactions to manage our non-trading portfolio.
As result of the Association during 2009 we have unified the risk models and control and procedures existing in Itaú BBA, Unibanco and Itaú.
We monitor our trading book through the use of VaR models, VaR Stress scenarios, maximum loss limits, or Stop Loss, and maximum loss alerts (which alerts that the Stop Loss may be reached under stress scenarios). We manage our banking operations and strategic positions inbook through the structural gap (also called assets and liabilities management), using economic risk measures and simulating accounting exposures. The proprietary trading desk is responsible for the directional exposures (which represent positions in specific risk factors), mainly controlled byuse of VaR models, VaR Stress scenarios and Statistical VaR measuresprofit and stop loss limits. We also operate through different business desks, notably, the customer’s desk, focused on customized operations, and the treasury operation desk, responsible for hedging customer’s desk and other conglomerate market risks.simulations under stress scenarios.

 
152155
 
 
VaR is a statistical measure that estimates the maximum potential economic loss under normal market conditions based on probability and time horizon. As presented in the following tables, VaR corresponds to the maximum potential economic loss in one day with a confidence level of 99%. VaR Stress is a scenario analysis that evaluates the assets and liabilities of a portfolio assuming extreme market conditions, based on historical and projected scenarios. In certain cases, we further analyze VaR Stress based on worst-scenario and worst-combination. Stop Loss is a maximum loss amount, measured based on the materiality standards for our financial statements that a single trader, a group of traders or a trading desk can reach in one day. Maximum loss alerts are triggered by actual losses considered together with the maximum potential loss under stress scenarios. Profit and loss simulations under stress scenarios is a scenario analysis that evaluates profits and losses of a portfolio assuming extreme market conditions that vary from optimistic, pessimistic and very pessimistic.  The stress scenarios for VaR Stress and profit and loss simulations under stress scenarios are defined by the institutional treasury superior committee, which projects interest rates, inflation, spreads, exchange rates, GDP and other inputs and determines the optimistic, pessimistic and very pessimistic scenarios.
The foreign exchange rate exposures disclosed under “foreign exchange rate” in the VaR tables represent the aggregate potential loss from changes in foreign currency exchange rates measured under VaR.
 
Domestic MarketOperations
 
The main market risk factors that we identifyanalyze in the domestic marketoperations risk control process are: dollar-linked
·            Fixed rate;
·            TR: those linked to other referential rates, primarily the reference interest rates andrate ( Taxa Referencial),   or TR;
·            Dollar linked interest rates in local currency, including between fixed rates,rate:
·            Foreign exchange rate;
·            Equity;
·            Brazilian inflation index linked rates (mainly theinterest rate: including General Market Price Index (Índice Geral de Preços – Mercado)Mercado), or IGP-M, and Large Consumer Price Index - Wide (Índice de Preços ao Consumidor – AmpliadoAmplo), ) or IPC-A) and those linkedIPCA;
·            Sovereign risk;
·            Commodities;
·            Diversification effect: reducing risk due to other referential rates (mainly the referential rate (Taxa Referencial), or TR).combination of several risk factors.
 
VaR of Structural Gap
 
In the following table,tables, we showpresent VaR levels for theour banking book, or structural gap (which excludes the operations of our proprietary trading desk and flow book trading desk). The structural gap tends to be steadierhas historically stayed within a close range because it is composed mainly byof assets and liabilities in our retail business and derivatives used to hedge the structural gap portfolio’s market risk.
 
In 2008,2009, the structural gap made up ofincluded commercial transactions and related financial instruments showed a significant increase in the averageand its period-end and maximum VaR values decreased significantly due to increased financial market stability and our conservative management of the remarkable volatility levels forcomposition of the vast majoritystructural gap portfolio. In 2009, our average VaR of risk factors  duethe structural gap was R$137.6 million, or 0.27% of total equity, compared to the U.S. subprime credit crisis that took placeR$150.8 million in year2008, or 0.45% of 2008. As local fixed rates are expected to respond to Brazil’s positive economic fundamentals, we continued to pursue our strategy of optimizing the risk/return ratio in this market. Despite the increase in the Global VaR as of December 31, 2008, we maintained our risk at a reduced level with respect to the unit’s stockholders’ equity (Global VaR was 0.45 % of equity).total equity.

 
VaR(*) of Structural Gap
156
 
2008

  
(in millions of R$)
 
Risk Factor
 
December 31
  
Average
  
Minimum
  
Maximum
 
Fixed rate  145.6   145.7   51.8   707.8 
Referential rate (TR)  13.8   12.5   5.1   56.7 
Dollar linked interest rate  13.7   14.4   4.1   71.1 
FX risk (adjusted for tax purposes) – U.S. Dollar  7.6   8.6   0.0   75.6 
Equity  10.0   7.1   1.6   22.4 
Brazilian inflation index linked interest rate  3.3   5.7   2.7   10.2 
Diversification effect  (33.3)            
Total  160.8   150.8   53.8   674.1 
(*)  VaR corresponds to the maximum potential loss of one day, with a confidence level of 99%.
2007
 
VaR of Structural Gap
VaR of Structural Gap
 
2009
2009
 
 (in millions of R$)  
December 31
  
Average
  
Minimum
  
Maximum
 
Risk Factor
 
December 31
  
Average
  
Minimum
  
Maximum
  (in millions of R$) 
Fixed rate  94.5   84.9   44.1   315.0   49.3   126.7   46.8   252.6 
Referential rate (TR)  7.6   5.0   2.3   27.8 
TR  12.4   15.9   6.9   30.5 
Dollar linked interest rate  19.3   15.8   6.0   49.6   7.2   14.3   2.7   58.6 
FX risk (adjusted for tax purposes) – U.S. Dollar  0.2   1.6   0.0   8.1 
Foreign exchange rate – U.S. dollar  4.2   2.2   0.0   18.4 
Equity  1.8   12.1   1.8   21.5   3.3   4.9   0.4   11.7 
Brazilian inflation index linked interest rate  7.9   5.5   1.3   11.9   16.8   8.6   2.4   21.1 
Others  0.0   0.7   0.0   8.2 
Diversification effect  (30.3)              (37.4)  -   -   - 
Total  101.0   92.1   42.4   299.5   55.7   137.6   53.4   251.7 
(*)                VaR correspondsAdjusted to reflect the maximum potential losstax treatment of one day, with a confidence levelindividual asset classes.
VaR of Structural Gap
 
2008
 
  
December 31
  
Average
  
Minimum
  
Maximum
 
Risk Factor (in millions of R$) 
Fixed rate  145.6   145.7   51.8   707.8 
TR  13.8   12.5   5.1   56.7 
Dollar linked interest rate  13.7   14.4   4.1   71.1 
Foreign exchange rate – U.S. dollar  7.6   8.6   0.0   75.6 
Equity  10.0   7.1   1.6   22.4 
Brazilian inflation index linked interest rate  3.3   5.7   2.7   10.2 
Diversification effect  (33.3)  -   -   - 
Total  160.8   150.8   53.8   674.1 

(*)                Adjusted to reflect the tax treatment of 99%.
individual asset classes.
 
VaR of ProprietaryFlow Book Trading Desk
 
We present the VaR for the operations of our proprietaryflow book trading desk in the following table.tables. Our proprietaryflow book trading desk negotiatestrades in the domestic and foreign markets, searching forspecifically to hedge the best business opportunities according toexposure of our portfolio’s market view.risk. The VaR of these operations is more sensitive to market conditions and the expectations of portfolio managers, and may presentresult in significant day-to-day changes. The natureHowever, the liquidity of the markets for these trading instruments and a more dynamicour active management of the flow book trading desk portfolio allow the reversal of positions inwithin a shortershort period, which automatically leads to the decrease inreduces market exposure in cases of economic instability. We monitor the proprietaryflow book trading desksdesk by using VaR Stress Scenarios.scenarios and statistical VaR, the latter of which was incorporated into our flow book trading desk’s controls in the third quarter of 2009.
During 2009, the main positions that contributed to our flow book trading desk risk exposure were related to fixed rate, Libor and equity (variable income transactions).  In 2009, our average VaR Stress is based onof the maximum loss that proprietary trading is subjectflow book was R$117.7 million, or 0.23% of total equity, compared to R$84.8 million in a combination2008, or 0.25% of stressed scenarios, which are independently defined by the economic scenarios evaluation committee. This committee is composed by members of Itaú Unibanco Holding’s senior management.total equity.

VaR Stress of Flow Book Trading Desk
 
2009
 
  
December 31,
  
Average
  
Minimum
  
Maximum
 
Trading Desk (in millions of R$) 
Total  (121.5)  (117.7)  (49.1)  (437.7)
153157
 
During the year of 2008 the main market risk exposures were related to transactions carried out in the dollar domestic market.
VaR Stress of Proprietary Trading Desk
2008
VaR Stress of Flow Book Trading Desk
 
2008
 
  
December 31,
  
Average
  
Minimum
  
Maximum
 
Trading Desk (in millions of R$) 
Total  (79.4)  (84.8)  (32.2)  (162.7)
 
  (in millions of R$) 
Trading Desk December 31,  Average  Minimum  Maximum 
Total  (79.4)  (84.8)  (32.2)  (162.7)
2007
VaR of Flow Book Trading DeskVaR of Flow Book Trading Desk 
20092009 
 
(in millions of R$)
   December 31,     Average     Minimum     Maximum   
Trading Desk December 31,  Average  Minimum  Maximum 
Risk Factor  (in millions of R$) 
Fixed rate  2.9   2.6   0.4   7.6 
Dollar linked interest rate  6.7   1.0   0.4   2.1 
Foreign exchange rate – U.S. dollar  0.7   1.5   0.1   6.5 
Equity  1.2   4.3   0.8   13.8 
Sovereign risk  0.7   1.8   0.0   5.6 
Brazilian inflation index linked interest rate  0.9   1.1   0.0   1.6 
Foreign interest rate  1.4   1.7   0.5   4.3 
Commodities  0.1   0.4   0.0   2.2 
Others foreign exchange rate risk  0.0   0.0   0.0   0.0 
Other  0.3   1.0   0.0   3.4 
Diversification effect  (6.2)  -   -   - 
Total  (40.6)  (231.5)  (31.6)  (531.5)  2.7   6.6   0.4   14.4 
 
Itaú BBA
(*)                Adjusted to reflect the tax treatment of individual asset classes.
VaR of Proprietary Trading Desk
 
The proprietary trading desks of Itaú BBA negotiate independently from Itaú Unibanco, allocatingdesk takes proprietary positions in order to optimize theour risk adjusted return.
return on capital. In 2008, Itaú BBA’s2009, our treasury continued to play its role as a competent pricing source for commercial operations and taking advantage of arbitrage opportunities. Itaú Unibanco Holding understands that a sound risk control system is an essential part of a solid treasury operation, and adequate market risk controls are also established for Itaú BBA.
 
Our effective control and management of market risk assisted uswas an important tool in efficiently handling the changes in economic scenarios and in continuing to carry out diversified and sophisticated transactions.
The last quarter of 2009 was marked by an improvement in global financial markets and an improvement in the Brazilian economy. The values atof risk of Itaú BBA increased as a result of the high volatility of the local and international markets in 2008.  This fact, however,assumed did not change the exposure characteristicsignificantly in 2009 compared to 2008.  In 2009, our average VaR of the risk with respectproprietary trading was R$45.3 million, or 0.09% of total equity, compared to Itaú BBA’sR$ 26.0 million in 2008, or 0.08% of total equity. The average VaR remained below 1% of Itaú BBA's Tier 1 capital.
The VaR of Itaú BBA is shown in the following table:
2008
 
VaR of Proprietary Trading Desk 
2009 
   December 31,     Average   Minimum     Maximum   
Risk Factor  (in millions of R$) 
Fixed rate  25.9   33.7   4.3   107.6 
Dollar linked interest rate  5.1   3.6   0.5   11.3 
Foreign exchange rate – U.S. dollar  10.3   15.0   0.1   40.8 
Equity  5.7   5.6   1.4   17.8 
Sovereign risk  0.1   3.2   0.0   9.6 
Brazilian inflation index linked interest rate  1.2   1.6   0.6   7.2 
Foreign interest rate  1.5   4.1   0.8   11.5 
Commodities  3.0   0.9   0.0   4.1 
Others foreign exchange rate risk  4.1   3.0   0.2   30.9 
Other  3.6   2.7   0.5   10.2 
Diversification effect  (20.7)  -   -   - 
Total  39.7   45.3   16.5   108.2 
  
(in millions of R$)
 
Risk Factor December 31  Average  Minimum  Maximum 
Fixed rate  14.0   4.5   0.5   17.8 
Dollar linked interest rate  3.1   6.0   0.7   18.9 
FX risk (adjusted for tax purposes) – U.S. Dollar  8.7   17.4   0.0   126.3 
Equity  3.7   4.3   0.7   16.3 
Sovereign risk  9.6   12.0   0.7   35.7 
Brazilian inflation index linked interest rate  2.7   2.7   1.1   7.4 
Foreign interest rate  1.9   3.3   0.4   11.2 
Commodities  0.0   0.4   0.0   2.2 
Others foreign exchange risk  1.0   1.5   0.3   4.3 
Others  8.6   4.8   0.6   28.4 
Diversification effect  (35.6)            
Total  17.6   26.0   6.9   112.8 

(*)                Adjusted to reflect the tax treatment of individual asset classes.

 
154158
 
2007
  
(in millions of R$)
 
Risk Factor December 31  Average  Minimum  Maximum 
Fixed rate  2.8   8.0   0.3   31.6 
Dollar linked interest rate  10.6   4.1   1.8   13.6 
FX risk (adjusted for tax purposes) – U.S. Dollar  6.5   6.4   0.1   21.5 
Equity  10.1   6.0   0.4   26.7 
Sovereign risk  4.2   8.1   0.6   31.8 
Brazilian inflation index linked interest rate  7.5   6.3   1.6   11.9 
Foreign interest rate  1.8   6.8   0.8   26.2 
Commodities  0.4   1.4   0.2   6.9 
Others foreign exchange risk  1.0   2.2   0.3   5.4 
Others  0.9   0.8   0.0   6.0 
Diversification effect  (28.6)            
Total  17.3   22.7   7.6   55.5 
International Markets
We maintain active positions in the international markets. The main risk factors which we are exposed to are: the Libor interest rate and the market risk of bonds issued by the Brazilian government and corporate bonds. We carry out these transactions through our Itaubank, Grand Cayman and New York branches, whose VaR is presented below gathered as Foreign Units.
Banco Itaú Argentina’s VaR is presented separately in the second set of tables below.
Banco Itaú Chile and Banco Itaú Uruguay also have local risk management teams that monitor our exposure in banking (assets and liabilities management) and trading positions in those locations since the beginning of 2008. Banco Itaú Chile and Banco Itaú Uruguay’s VaR in 2008 are also presented in the tables below.
In the next table we present Banco Itaú Europa’s VaR, Banco Itaú Europa was incorporated in the last quarter of 2008. The results below show amounts of VaR much smaller than structural gap VaR, reflecting the low exposure level of our operations in the international markets when compared to the positions in Brazil.
The main risk factor comes from the oscillation in the market price of the bonds. The exposure to variations in the Libor is significant.
VaR of Foreign Units
2008
 
  
(in millions of US$)
 
Risk Factor December 31  Average  Minimum  Maximum 
Sovereign and private bonds  13.6   8.6   5.2   14.4 
Libor  2.5   2.6   0.2   6.4 
Diversification effect  (2.7)            
VaR of Foreign Units  13.4   9.0   4.1   13.4 
2007
  
(in millions of US$)
 
Risk Factor December 31  Average  Minimum  Maximum 
Sovereign and private bonds  6.2   6.6   3.6   9.9 
Libor  1.3   0.6   0.1   1.9 
Diversification effect  (1.8)            
VaR of Foreign Units  5.7   6.4   3.5   9.8 

155
The following table presents the VaR of our operations in Argentina. The exposure to risks in Argentina maintains its low exposure level and the VaR as of December 31, 2008 represents less than 1% of our consolidated stockholders’ equity.
VaR – Banco Itaú Argentina
2008
  (in millions of US$) 
Risk Factor December 31  Average  Minimum  Maximum 
Inflation index linked interest rate (CER)  0.36   0.13   0.01   0.40 
Libor  0.30   0.23   0.03   0.99 
Interest rate local currency  1.58   2.23   0.79   5.06 
Badlar  0.09   0.30   0.05   0.86 
Euros  0.27   0.09   0.00   0.75 
Diversification effect  (0.41)            
VaR – Banco Itaú Argentina  2.20   2.42   0.80   5.01 
2007
  (in millions of US$) 
Risk Factor December 31  Average  Minimum  Maximum 
Inflation index linked interest rate (CER)  0.02   0.04   0.0   0.11 
Libor  0.06   0.01   0.0   0.24 
Interest rate local currency  0.85   0.86   0.06   4.18 
Badlar  0.10   0.43   0.0   1.02 
Euros  0.06   0.02   0.0   0.10 
Diversification effect  (0.22)            
VaR – Banco Itaú Argentina  0.88   1.03   0.07   4.92 
The following table presents the VaR of our operations in Chile.
VaR – Banco Itaú Chile
2008
  (in millions of US$) 
Risk Factor December 31  Average  Minimum  Maximum 
Chilean Peso (CLP) + inflation index linked interest rate (UF)  0.26   0.39   0.01   1.03 
Dollar linked interest rate  0.46   0.46   0.07   0.80 
Diversification effect  (0.26)            
VaR – Banco Itaú Chile  0.46   0.62   0.23   1.29 
The following table presents the VaR of our operations in Uruguay.
VaR – Banco Itaú Uruguay
2008
  
(in millions of US$)
 
Risk Factor December 31  Average  Minimum  Maximum 
Uruguayan Peso (UYU)  0.34   0.57   0.34   0.99 
inflation index linked interest rate (UI)  0.36   0.51   0.33   0.85 
Dollar linked interest rate  0.41   0.64   0.35   0.93 
Foreign exchange rate  0.97   1.87   0.97   2.95 
Diversification effect  (0.87)            
VaR – Banco Itaú Uruguay  1.21   1.62   0.90   3.28 

156
The following table presents the VaR of our operations in Banco Itaú Europa.
VaR – Banco Itaú Europa
2008
VaR of Proprietary Trading Desk
VaR of Proprietary Trading Desk
 
2008
2008
 
 (in millions of US$)   December 31,     Average     Minimum     Maximum   
Risk Factor December 31  Average  Minimum  Maximum   (in millions of R$)   
Euribor 0.08  0.14  0.05  0.52 
Libor 2.51  2.29  0.40  8.47 
Fixed rate  14.0   4.5   0.5   17.8 
Dollar linked interest rate  3.1   6.0   0.7   18.9 
Foreign exchange rate – U.S. dollar  8.7   17.4   0.0   126.3 
Equity  3.7   4.3   0.7   16.3 
Sovereign risk 0.27  0.51  0.18  0.86   9.6   12.0   0.7   35.7 
Brazilian inflation index linked interest rate  2.7   2.7   1.1   7.4 
Foreign interest rate  1.9   3.3   0.4   11.2 
Commodities  0.0   0.4   0.0   2.2 
Others foreign exchange rate risk  1.0   1.5   0.3   4.3 
Other  8.6   4.8   0.6   28.4 
Diversification effect  (0.32)              (35.6)  -   -   - 
VaR – Banco Itaú Europa  2.54   2.35   0.41   8.49 
Total  17.6   26.0   6.9   112.8 
(*)           Adjusted to reflect the tax treatment of individual asset classes.
 International Operations
We maintain active positions with respect to our international operations. The main risk factors to which we are exposed are the LIBOR interest rate and the market risk of corporate bonds and bonds issued by the Brazilian government. We carry out these transactions through Itaubank Ltd., located in the Cayman Islands, and our New York branch, whose VaR is presented below under “-VaR of Foreign Units.”
Banco Itaú Argentina S.A.’s (“Banco Itaú Argentina”) VaR is presented separately in the second set of tables below. In 2009, our average VaR of the Banco Itaú Argentina was US$1.68 million, or 1.70% of total equity, compared to US$2.42 million in 2008, or 2.30% of total equity.
Banco Itaú Chile S.A. (“Banco Itaú Chile”) and Banco Itaú Uruguay S.A. (“Banco Itaú Uruguay”) also have local risk management teams that, since 2008, monitor our exposure in banking (assets and liabilities management) and trading positions in those locations. Banco Itaú Chile and Banco Itaú Uruguay’s VaR for 2009 and 2008 are also presented in the tables below. In 2009, our average VaR of Banco Itaú Chile was US$0.71 million, or 0.095% of total equity, compared to US$0.62 million in 2008, or 0.091% of total equity. In 2009, our average VaR of the Banco Itaú Uruguay was US$0.32 million, or 0.20% of total equity, compared to US$1.62 million in 2008, or 1.14% of total equity.
The last set of tables present Banco Itaú Europa S.A.’s (“Banco Itaú Europa”) VaR. Banco Itaú Europa was incorporated in the last quarter of 2008. The results show VaR amounts much smaller than structural gap VaR, reflecting the relatively low exposure level of our international operations when compared to Brazil. In 2009, our average VaR of the Banco Itaú Europa was US$1.57 million, or 0.16% of total equity, compared to US$2.35 million in 2008, or 0.34% of total equity.
VaR of Foreign Units
 
2009
 
  
December 31
  
Average
  
Minimum
  
Maximum
 
Risk Factor (in millions of US$) 
Sovereign and private bonds  1.3   8.1   1.4   10.9 
LIBOR  1.2   3.4   1.0   7.7 
Diversification effect  (0.6)  -   -   - 
Total  2.0   6.4   1.7   9.5 
159
VaR of Foreign Units
 
2008
 
  
December 31
  
Average
  
Minimum
  
Maximum
 
Risk Factor (in millions of US$) 
Sovereign and private bonds  13.6   8.6   5.2   14.4 
LIBOR  2.5   2.6   0.2   6.4 
Diversification effect  (2.7)  -   -   - 
Total  13.4   9.0   4.1   13.4 
VaR of Banco Itaú Argentina
 
2009
 
  
December 31
  
Average
  
Minimum
  
Maximum
 
Risk Factor (in millions of US$) 
Inflation index linked interest rate  0.00   0.02   0.00   0.16 
LIBOR  0.44   0.20   0.08   0.84 
Interest rate local currency  0.76   1.93   0.71   4.50 
Badlar(*)  0.10   0.14   0.06   0.29 
Foreign exchange rates - euros  0.03   0.04   0.00   0.39 
Diversification effect  (0.52)  -   -   - 
Total  0.82   1.68   0.68   3.91 
(*)  “Badlar” is a wholesale rate, an average of the interest rates for time deposits above 1 million pesos with a maturity of 30 to 35 days offered by commercial banks, based on BCRA survey.
VaR of Banco Itaú Argentina
 
2008
 
  
December 31
  
Average
  
Minimum
  
Maximum
 
Risk Factor (in millions of US$) 
Inflation index linked interest rate  0.36   0.13   0.01   0.40 
LIBOR  0.30   0.23   0.03   0.99 
Interest rate local currency  1.58   2.23   0.79   5.06 
Badlar(*)  0.09   0.30   0.05   0.86 
Foreign exchange rates - euros  0.27   0.09   0.00   0.75 
Diversification effect  (0.41)  -   -   - 
Total  2.20   2.42   0.80   5.01 
(*)  “Badlar” is a wholesale rate, an average of the interest rates for time deposits above 1 million pesos with a maturity of 30 to 35 days offered by commercial banks, based on BCRA survey.
VaR of Banco Itaú Chile
 
2009
 
  
December 31
  
Average
  
Minimum
  
Maximum
 
Risk Factor (in millions of US$) 
Chilean peso + inflation index linked interest rate  0.28   0.52   0.16   1.10 
Dollar linked interest rate  0.31   0.42   0.08   1.22 
Diversification effect  (0.15)  -   -   - 
Total  0.44   0.71   0.23   1.94 

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VaR of Banco Itaú Chile
 
2008
 
  
December 31
  
Average
  
Minimum
  
Maximum
 
Risk Factor (in millions of US$) 
Chilean peso + inflation index linked interest rate  0.26   0.39   0.01   1.03 
Dollar linked interest rate  0.46   0.46   0.07   0.80 
Diversification effect  (0.26)  -   -   - 
Total  0.46   0.62   0.23   1.29 
VaR of Banco Itaú Uruguay
 
2009
 
  
December 31
  
Average
  
Minimum
  
Maximum
 
Risk Factor (in millions of US$) 
Foreign exchange rate – Uruguayan peso  0.07   0.06   0.03   0.30 
Inflation index linked interest rate  0.14   0.15   0.05   0.45 
Dollar linked interest rate  0.15   0.21   0.08   0.69 
Other foreign exchange rate  0.07   0.11   0.00   0.41 
Diversification effect  (0.23)  -   -   - 
Total  0.20   0.32   0.14   0.65 
VaR of Banco Itaú Uruguay
 
2008
 
  
December 31
  
Average
  
Minimum
  
Maximum
 
Risk Factor (in millions of US$) 
Foreign exchange rate – Uruguayan peso  0.34   0.57   0.34   0.99 
Inflation index linked interest rate  0.36   0.51   0.33   0.85 
Dollar linked interest rate  0.41   0.64   0.35   0.93 
Other foreign exchange rate  0.97   1.87   0.97   2.95 
Diversification effect  (0.87)  -   -   - 
Total  1.21   1.62   0.90   3.28 
VaR of Banco Itaú Europa
 
2009
 
  
December 31
  
Average
  
Minimum
  
Maximum
 
Risk Factor (in millions of US$) 
EURIBOR  0.22   0.33   0.05   1.20 
LIBOR  0.51   0.63   0.18   1.94 
Foreign exchange rate  0.33   0.71   0.07   1.60 
Other  0.18   0.24   0.09   0.60 
Diversification effect  (0.26)  -   -   - 
Total  0.99   1.57   0.27   3.64 
VaR of Banco Itaú Europa
 
2008
 
  
December 31
  
Average
  
Minimum
  
Maximum
 
Risk Factor (in millions of US$) 
EURIBOR  0.08   0.14   0.05   0.52 
LIBOR  2.51   2.29   0.40   8.47 
Sovereign risk  0.27   0.51   0.18   0.86 
Diversification effect  (0.32)  -   -   - 
Total  2.54   2.35   0.41   8.49 
 
Global VaR
 
As explained before, some portfolios are managed using specific VaR stress techniques. In order to achieve more convergence between the information disclosed and the implementation of market risk management,The Global Statistic VaR includes only the portfolios where Statistic VaR is applied.
The global VaR shown in the following tabletables encompasses the consolidated VaR of Itaú Unibanco Holding’s both domestic and international operations, including the portfolios of Itaú Unibanco, Itaú BBA, Banco Itaú Europa, Banco Itaú Argentina, Banco Itaú Chile and Banco Itaú Uruguay and excluding Itaú’s Proprietary Trading Desk.
Uruguay. The year 2008 was characterized by high volatility in both international and domestic financial markets mainly during the last semester. In the endportfolios of 2008 market volatilities had already returned to less stressed levels since their peak in the beginning of fourth quarter. The increased risk observed in 2008 was not driven by any exposure to subprime customers, but rather by changes in market risk factors affected by the crisis, which are part of our normal business risk. In addition, there was significant diversification of the business units’ risks, allowing Itaú Unibanco Holding to maintain a small aggregate exposure to marketand Itaú BBA are presented together, segregated by risk when compared to its stockholders’ equity.
In spite of recent financial turmoil in international markets, Brazil’s macroeconomic fundamentals remain solid, and we maintain a privileged position in the Brazilian banking system through several competitive differentials. Our well succeeded strategy both in commercial and in investment banking, aiming to maximize returns with a prudent and controlled risk exposure, is a key element for the sustainability of our results.
2008
  (in millions of R$) 
Risk Factor December 31  Average  Minimum  Maximum 
Fixed rate  159.3   148.2   56.1   713.8 
Referential rate (TR)  13.8   12.5   5.1   56.7 
Dollar linked interest rate  16.6   15.0   4.2   58.6 
FX risk (adjusted for tax purposes)  U.S. Dollar  17.2   25.6   0.1   168.7 
Equity  15.5   11.4   1.4   29.1 
Brazilian inflation index linked interest rate  4.6   6.3   3.0   10.6 
Sovereign and private bonds  22.2   19.8   11.2   44.8 
Foreign interest rate  7.8   9.3   0.8   26.2 
Commodities  0.0   0.4   0.0   2.2 
Others foreign exchange risk  1.0   1.4   0.3   4.3 
Others  8.6   4.8   0.6   28.4 
Itaú Argentina  5.1   5.7   1.9   11.7 
Itaú Chile  1.1   1.5   0.5   3.0 
Itaú Uruguay  2.8   3.8   2.1   7.7 
Itaú Europa  5.9   5.5   0.9   19.8 
Diversification effect  (97.9)            
Global VaR  183.7   165.5   65.1   673.4 
factor.

 
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2007Itaú Unibanco Holding seeks to maintain a policy of operating within low limits relative to our capital base. We observed that the diversification of risk within our business units was significant in 2009 reducing our global VaR. In 2009, our average VaR of the global VaR was R$160.8 million, or 0.32% of total equity, compared to R$165.5 million in 2008, or 0.50% of total equity.
 
Global VaR (*)
2009
  
December, 31
  
Average
  
Minimum
  
Maximum
Risk Factor (in millions of R$)
Fixed rate  69.1   147.5   30.7   219.7 
TR  11.7   16.0   8.8   23.4 
Dollar linked interest rate  11.3   8.8   2.6   18.8 
Foreign exchange rate– U.S. dollar  13.7   21.7   1.2   35.1 
Equity  7.4   15.1   6.2   31.5 
Brazilian inflation index linked interest rate  16.2   14.1   10.2   21.0 
Sovereign and private bonds  2.2   14.4   2.2   22.8 
Foreign interest rate  1.8   8.6   1.7   20.5 
Commodities  3.1   2.0   0.7   4.4 
Other foreign exchange risk  3.7   3.2   0.1   6.8 
Other  3.8   3.1   0.9   8.8 
Itaú Argentina  1.4   2.9   1.2   6.8 
Itaú Chile  0.8   1.2   0.4   3.4 
Itaú Uruguay  0.3   0.6   0.3   1.1 
Itaú Europa  1.7   2.7   0.5   6.3 
Diversification effect  (62.9)  -   -   - 
Total  87.2   160.8   60.9   241.6 
(*)  Adjusted to reflect the tax treatment of individual asset classes.
Global VaR(*)
Global VaR(*)
 
2008
2008
 
 (in millions of R$)  
December, 31
  
Average
  
Minimum
  
Maximum
 
Risk Factor December 31  Average  Minimum  Maximum  (in millions of R$) 
Fixed rate 97.1  88.0  34.6  325.7   159.3   148.2   56.1   713.8 
Referential rate (TR) 7.6  5.0  2.3  27.8 
TR  13.8   12.5   5.1   56.7 
Dollar linked interest rate 14.3  15.9  6.3  47.8   16.6   15.0   4.2   58.6 
FX risk (adjusted for tax purposes) U.S. Dollar 6.7  7.2  0.0  22.4 
Foreign exchange rate – U.S. dollar  17.2   25.6   0.1   168.7 
Equity 16.4  16.3  4.6  47.0   15.5   11.4   1.4   29.1 
Brazilian inflation index linked interest rate 10.0  10.2  3.6  19.2   4.6   6.3   3.0   10.6 
Sovereign and private bonds 12.1  13.3  8.0  22.0   22.2   19.8   11.2   44.8 
Foreign interest rate 4.1  6.8  0.8  26.2   7.8   9.3   0.8   26.2 
Commodities 0.4  1.4  0.2  6.9   0.0   0.4   0.0   2.2 
Others foreign exchange risk 1.0  2.2  0.3  5.4 
Others 0.9  0.8  0.0  6.0 
Other foreign exchange risk  1.0   1.4   0.3   4.3 
Other  8.6   4.8   0.6   28.4 
Itaú Argentina 1.6  1.8  0.1  8.7   5.1   5.7   1.9   11.7 
Itaú Chile  1.1   1.5   0.5   3.0 
Itaú Uruguay  2.8   3.8   2.1   7.7 
Itaú Europa  5.9   5.5   0.9   19.8 
Diversification effect  (53.9)              (97.9)  -   -   - 
Global VaR  118.2   117.4   48.8   312.3 
Total  183.7   165.5   65.1   673.4 
(*)  Adjusted to reflect the tax treatment of individual asset classes.
 
Backtesting for Our Domestic Market Operations
 
We validate our statistical models on a daily basis by using backtesting techniques. We update stress scenarios on a monthly basis to ensure that market risks are nevernot underestimated.

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Risks are calculated with a confidence level of 99%. This means that, i.e., there is only a 1% probability that financial losses could be greater than the losslosses forecasted by our models.
 
One way of evaluating the adopted method for risk measurement is to calculate the percentage of cases in which actual daily profits and losses fell outside the VaR interval. Due to the reducedlimited importance of our VaR in international markets,operations, the analysis below refers only to the portfolio related to our domestic market portfolio.operations.
 
In order to illustrate the quality of our risk management models, we present below backtesting graphs for the fixed rate plus referential rate (TR) and for foreign exchange rate risk as well as for the global VaR (fixed rate, TR and foreign exchange rate) for our domestic market operations. Those values come from our structural positions.
In the fixed rate plus referential rate (TR) market, delta MtM (Market to Market) surpassed VaR six times during the year ended December 31, 2008,2009 for each of the VaR of our structural gap positions based on fixed rate and TR risk factors, the two most material risk factors for this portfolio, and  the overall VaR for our proprietary trading desk. In the first case, financial losses were greater than the losses forecasted by our models on only three days, a result that is within the expectations set by our calculations.99% confidence level we use to calculate risk.
 
With respect to the overall VaR of our proprietary trading desk, financial losses were greater than the losses forecasted by our models on only two days during the period, a result which is also within the 99% confidence level we use to calculate risk.

 
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The distribution of risk versus return observed during the year ended December 31, 2008 for the foreign exchange rate risk factor shows that losses surpassed the VaR three times during this period.
As a result of the portfolio effects, there were four days during the year ended December 31, 2008 on which losses were above the VaR calculated for the consolidated portfolio of our domestic operations, as shown in the graph below.

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ITEM 12                DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
 
12A.      Debt Securities
 
Not applicable.
 
12B.      Warrants and Rights
 
Not applicable.
 
12C.      Other Securities
 
Not applicable.

12D.      American Depositary Shares

Not applicable.In the United States, our preferred shares trade in the form of ADSs. Since 2005 each ADS represents one preferred share, issued by The Bank of New York Mellon, as depositary, under a deposit agreement, d ated as of May 31, 2001, as amended and restated as of February 20, 2002 and as of March 30, 2009, effective as of  April 3, 2009, among us, the depositary and the owners and beneficial owners of ADSs from time to time. The depositary’s principal executive office is located at One Wall Street, New York, New York 10286.
We do not treat ADR holders as our shareholders and ADS holders have no shareholder rights.  Brazilian Corporate Law governs shareholder rights. The depositary is the holder of the preferred shares underlying the ADSs.  Holders of ADSs have ADS holder rights.
Fees and Expenses
The following table summarizes the fees and expenses payable by holders of ADSs:

164
Persons depositing preferred shares or ADR holders must pay:
For:
US$5.00 (or less) per 100 ADSs (or portion of    100 ADSs)
Issuance of ADSs, including issuances resulting from a distribution of preferred shares or rights or other property
Cancellation of ADSs for the purpose of withdrawal, including if the deposit agreement terminates
US$0.02 (or less) per ADS (to the extent not prohibited by the rules of any stock exchange on which the ADSs are listed for trading)Any cash distribution to you
A fee equivalent to the fee that would be payable if securities distributed to you had been preferred shares and the shares had been deposited for issuance of ADSsDistribution of securities distributed to holders of deposited securities which are distributed by the depositary to ADS holders
US$0.02 (or less) per ADS per calendar year (to the extent the depositary has not collected a cash distribution fee of $.02 per ADS during the year)Depositary services
Registration or transfer feesTransfer and registration of preferred shares on our preferred share register to or from the name of the depositary or its agent when you deposit or withdraw preferred shares
Expenses of the depositary in converting foreign currency to U.S. dollars
Expenses of the depositaryCable, telex and facsimile transmissions (when expressly provided in the deposit agreement)
Taxes and other governmental charges the depositary or the custodian have to pay on any ADR or preferred share underlying an ADS, for example, stock transfer taxes, stamp duty or withholding taxesAs necessary
Any charges incurred by the depositary or its agents for servicing the deposited securitiesNo charges of this type are currently made in the Brazilian market
Payment of Taxes
The depositary may deduct the amount of any taxes owed from any payments to you.  It may also sell deposited securities, by public or private sale, to pay any taxes owed.  You will remain liable if the proceeds of the sale are not sufficient to pay the taxes.  If the depositary sells deposited securities, it will, if appropriate, reduce the number of ADSs to reflect the sale and pay to you any proceeds, or send to you any property, remaining after it has paid the taxes.
Reimbursement of Fees
The Bank of New York Mellon, as depositary, has agreed to reimburse us for expenses we incur that are related to establishment and maintenance expenses of the ADS program. The depositary has agreed to reimburse us for our continuing annual stock exchange listing fees. The depositary has also agreed to pay the standard out-of-pocket maintenance costs for the ADSs, which consist of the expenses of postage and envelopes for mailing annual and interim financial reports, printing and distributing dividend checks, electronic filing of United States federal tax information, mailing required tax forms, stationery, postage, facsimile, and telephone calls.  It has also agreed to reimburse us annually for certain investor relationship programs or special investor relations promotional activities.  In certain instances, the depositary has agreed to provide additional payments to us based on any applicable performance indicators relating to the ADS facility. There are limits on the amount of expenses for which the depositary will reimburse us, but the amount of reimbursement available to the Company is not necessarily tied to the amount of fees the depositary collects from investors.

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The depositary collects its fees for delivery and surrender of ADSs directly from investors depositing shares or surrendering ADSs for the purpose of withdrawal or from intermediaries acting for them.  The depositary collects fees for making distributions to investors by deducting those fees from the amounts distributed or by selling a portion of distributable property to pay the fees. The depositary may collect its annual fee for depositary services by deduction from cash distributions or by directly billing investors or by charging the book-entry system accounts of participants acting for them. The depositary may generally refuse to provide fee-attracting services until its fees for those services are paid.
Reimbursement of Fees Incurred in 2009
From January 1, 2009 until the date of this annual report, the Company received from the depositary US$11.9 million for promoting and encouraging the ADR program in the market, out-of-pocket maintenance costs for the ADSs (consisting of the expenses of postage costs and envelopes for mailing annual and interim financial reports, printing and distributing dividend checks, electronic filing of U.S. Federal tax information, mailing required tax forms, stationery, postage, facsimile, and telephone calls), any applicable performance indicators relating to the ADS facility, underwriting fees and legal fees.

PART II
 
ITEM 13                DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
 
No matters to report.

ITEM 14MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
 
No matters to report.

 
160166
 
 
ITEM 15                CONTROLS AND PROCEDURES
 
(a) Disclosure Controls and Procedures
 
We carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer, or CEO, and our chief financial officer, or CFO, of the effectiveness of our “disclosure controls and procedures”procedures��� (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e) as required by paragraph (b) of the Exchange Act Rules 13a-15 or 15d-15) as of December 31, 2008.2009. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Therefore, our management does not expect that the controls will prevent all errors and all fraud.
 
Based upon the evaluation performed, our CEO and CFO have concluded that as of December 31, 2008,2009, Itaú Unibanco Holding’s disclosure controls and procedures were effective to provide reasonable assurance that material information relating to Itaú Unibanco Holding  and it’s consolidated subsidiaries is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
 
(b) Management’s Annual Report on Internal Control over Financial Reporting
 
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities and Exchange Act of 1934.  Our internal control was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
 
All internal control systems, no matter how well designed, have inherent limitations.  Therefore, even those systems determined to be effective may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may decline.
 
Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2008.2009.  In making this assessment, it used the criteria established by the Internal Control – Integrated Framework of COSO.  Based on its evaluation and those criteria, our management has concluded that our internal control over financial reporting was effective as of December 31, 2008.2009.
 
The effectiveness of internal control over financial reporting as of December 31, 2008,2009, was audited by PricewaterhouseCoopers Auditores Independentes, an independent registered public accounting firm, as stated in their report appearing on page F-2 of this Form 20-F.
 
(c) Attestation Report of the Independent Registered Public Accounting Firm
 
For the report of PricewaterhouseCoopers Auditores Independentes, our independent registered public accounting firm, dated June 30, 2009,May 9, 2010, on the effectiveness of our internal control over financial reporting as of December 31, 2008,2009, see “Item 18. Financial Statements”.
 
(d) Changes in Internal Control over Financial Reporting
 
In connection with the evaluation required by the Securities Exchange Act of 1934 Rule 13a-15(d), our management, including our CEO and CFO, concluded that the changes occurred during the year ended December 31, 20082009 have not materially affected, or are not reasonably likely to materially affect, our internal controls over financial reporting.

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ITEM 16                [RESERVED]
 
16A.       Audit Committee Financial Expert
 
Our board of directors has determined that two membersone member of our audit committee, Mr. Guy Almeida Andrade, and Ms. Tereza Cristina Grossi Togni, areis audit committee financial expertsexpert and meetmeets the requirements set forth by the SEC and the NYSE.  Our audit committee financial experts,expert, along with the other members of our audit committee, are independent.is independent pursuant to CMN Resolution No. 3,081, which requires that the members not be, or have been in the last year, an officer or employee of the company or its affiliates or an employee with managerial responsibilities in the internal audit division of the financial institution. Mr. Andrade is also an expert in U.S. GAAP, which is the accounting standard used by us in our primary financial statements filed with the SEC. Other members of our audit committee are experts in accounting practices adopted in Brazil and we believe the skills, experience and education of our audit committee members qualifiesqualify them to carry out all of their duties as members of the audit committee, including overseeing the preparation of our U.S. GAAP financial statements. In addition, our audit committee has the ability to retain independent accountants, financial advisors or other consultants, advisors and experts whenever it deems appropriate.

167

16B16B.       Code of Ethics
 
We have adopted a Code of Ethics that applies to all of our employees, including directors, principal executive officers, principal financial officers, principal controllers, other officers and other officers.certain third parties, such as suppliers, who have relationship with us.  Our board of directors approved our current code of ethics, which has been effective since February 2010.  The full text of our Code of Ethics is published on our website, at the following address: http://ww13.itau.com.br/portalri/index.aspx.  Our Code of Ethics, however, does not apply to the former companies pertaining to the Unibanco's Financial Group. Our board of directors has already approved, on April 29, 2009, the principles of conduct that will replace the code of ethics of Itaú Unibanco Holding and Unibanco. We expect to publish the new code, applicable to Itaú Unibanco Holding, by November 2009 and promptly post it on our website. Until then, the existing Codes of Ethics of Itaú Unibanco Holding and Unibanco wil continue to apply. Our Code of Ethics encourages a responsive action, dialog, cooperation, transparency, accountability, diversity and commitment to the socio-environmental matters related to the activities of Itaú Unibanco Holding.
Ethics Policy Management
Our senior ethics commission is responsible for defining the guidelines of our corporate ethics policy. The management system comprises sub-committees, with codes of conduct, rules, and ethics advising related to their respective business units.
Ethics management at Itaú Unibanco Holding complies with ECS2000 recommendations (Ethics Compliance Standard), an international standard devised and managed by Reitaku University Business Ethics and Compliance Research Center, an education and research institution recognized world-wide as a reference regarding corporate ethics.
The Corporate Ethics Policy goes through an external assessment once every two years by a qualified independent reviewer from outside of the organization. In 2008, it has been assessed by SGS, the world’s leading inspection, verification, testing and certification company, and recognized as the global benchmark for quality and integrity.
Ethical Compliance
Our ethical compliance is responsible for implementing the required measures to assure a permanent compliance to our ethical standards.  It is responsible for (i) monitoring ethical risks and improving processes; (ii) further developing and disseminating the existing channels for inquiry and exposure; (iii) reporting to stakeholders; (iv) assessing ethical climate, including evidence of the organization’s ethical commitment; and (v) training in ethical compliance.
Communication channels
Employees are encouraged to communicate any breach, or suspicion of breach of our Code of Ethics to the Head of the department, the internal controls and risks officer or the ethics committee of the department involved, to our ethics committee, our senior ethics commission or our audit committee.
Ethics Ongoing Education Program
This program aims at: communicating to all our staff the principles, values and standards of conduct within the organization; training our staff to deal with ethical dilemmas related to daily activities and to disseminate the corporate ethics framework within our work environment.  In 2006 a mandatory e-learning program was launched. We also promote events such as trainings, workshops and lectures to our employees.

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Engagement and Dialogue with Stakeholders – Compliance with AA1000 Standards
In 2006, we improved our sustainable administration mechanisms by adopting a set of Accountability standards (the AA1000 Series) – international standards on ethics and social report, which establishes corporate standards for transparency and accountability.
Public Recognition of Itaú Ethics Policy
We have been listed in the Dow Jones Sustainability World Index for the ninety consecutive year and in the Corporate Sustainability Index of the BOVESPA for the thirty consecutive year. In addition we awarded the title of Latin America’s Most Sustainable and Ethical Bank by Latin Finance and Management & Excellence for the fourth time.

16C.       Principal Accountant Fees and Services
 
PricewaterhouseCoopers Auditores Independentes acted as our independent registered public accounting firm for the fiscal years ended December 31, 2009, 2008 2007 and 2006.2007. The chart below sets forth the total amount billed to us by PricewaterhouseCoopers Auditores Independentes for services performed in the years 2009, 2008 2007 and 2006,2007, and breaks down these amounts by category of service in thousands of reais:

 Total Fees  Total Fees 
 (in thousands of R$)  (in thousands of R$) 
 2008  2007  2006  2009  2008  2007 
Audit Fees  23,515   21,018   16,413   33,200   23,515   21,018 
Audit-Related Fees  1,565   1,207   4,744   4,973   1,565   1,207 
Tax Fees  429   0   2   135   429   0 
All Other Fees  60   179   137   13   60   179 
Total  25,568   22,404   21,296   38,320   25,568   22,404 

Audit Fees
 
Audit fees in 2009, 2008 and 2007 are fees billed for the audit of our annual consolidated financial statements and for the reviews of our quarterly financial statements, as well as the audit and review of financial statements of our subsidiaries, services relating to the issuance of comfort lettersletter in securities offerings, and audit of internal controls in compliance with the Sarbanes-Oxley Act.
 
Audit-Related Fees
 
Audit-related fees in 2009, 2008 and 2007 refer to services provided in connection with the preparation of accounting appraisal reports, assistance related to the preparation of documents to be sent to local and foreign regulatory bodies, including documents regarding compliance with legislation and regulations and audit of specific financial statements for management purposes, due diligence activities and issuance of special-purpose audit reports, evaluation of existing disclosure controls and procedures, as well as evaluation of compliance with regulatory requirements in certain subsidiaries and other attest services.special purpose reports.
 
Tax Fees
 
Tax fees in 2009, 2008 and 2007 were related to tax compliance and consulting services.
 
All Other Fees
 
All other fees in 2009, 2008 and 2007 includei ncluded u se of electronic library Comperio, technical material,materials, and participation in training and advice related to operative efficience benchmarkefficient benchmark..

Pre-Approval Policies and Procedures
 
In 2004, we approved the creation of our audit committee, reporting directly to our board of directors. Among our committee’s responsibilities is the approval, on an annual basis, of policies and procedures regarding non-audit services that (i) can be provided by our external auditors, as well as the list of those services, which are pre-approved (ii) can not be provided by our external auditors, due to the fact that such services could affect the independence of the external auditors, and (iii) need to be previously approved by the audit committee. As a result, we enhanced our corporate governance even further, also ensuring its alignment with the best practices dictated by the Sarbanes-Oxley Act.

 
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16D.       Exemptions from the Listing Standards for Audit Committees
 
Under the listed company audit committee rules of the NYSE and the SEC, we must comply with Rule 10A-3 of the Securities Exchange Act (Listing Standards Relating to Audit Committees).  Rule 10A-3 requires that we either establish an audit committee composed of members of the board of directors that meets specified requirements, or designate and empower a board of auditors or similar body to perform the role of the audit committee in reliance on the general exemption for audit committees of foreign private issuers set forth in Rule 10A-3(c)(3) of the Securities Exchange Act.
 
In accordance with Central Bank regulations, we have established a body similar to the audit committee of the board of directors of a U.S. company, which we are required to call an “audit committee.”  For more information, see “Item 6C – Board Practices – Statutory Bodies - Audit Committee”.Committee.”
 
Our audit committee, to the extent permitted under Brazilian law, performs all the functions required of an audit committee under Rule 10A-3.  As required by Brazilian law, our board of directors and audit committee are separate corporate bodies. Only two of the five members of our audit committee are also members of our board of directors.  In addition, under Brazilian law, the function of hiring independent auditors is a power reserved exclusively for a company’s board of directors.  Therefore, our board of directors acts as our audit committee, as permitted under Rule 10A-3(c)(3)(v) of the Securities Exchange Act for the purpose of the appointment of our independent auditors.
 
Except in these respects, our Audit Committeeaudit committee is comparable to, and performs the functions of, an audit committee of the board of directors of a U.S. company.  We believe that our Audit Committeeaudit committee is able to act independently in performing the responsibilities of an audit committee under the Sarbanes-Oxley Act, satisfies the other requirements of the exemption of Rule 10A-3(c)(3) and therefore is in compliance with Rule 10A-3 of the Securities Exchange Act.

16E.��      Purchases of Equity Securities by the Issuer and Affiliated Purchasers

Period (1) 
(a) Total number of
preferred shares
purchased
  
(b) Average price paid 
per preferred share
  
(c) Total number of
preferred shares
purchased as part of
publicly announced
plans or programs
  
(d) Maximum number of
preferred shares that
may yet be purchased
under the plans or
programs
 
01/02 to 01/31/2008  5,030,000   39.07   5,030,000   72,370,000 
02/01 to 02/28/2008  5,478,300   42.29   10,508,300   66,891,700 
03/03 to 03/31/2008  14,123,000   41.19   24,631,300   52,768,700 
04/01 to 04/30/2008  6,748,600   41.50   31,379,900   46,020,100 
05/01 to 05/31/2008          31,379,900   46,020,100 
Share bonus (2)  7,844,975       39,224,875   57,525,125 
06/02 to 06/30/2008          39,224,875   57,525,125 
07/01 to 07/30/2008          39,224,875   57,525,125 
08/01 to 08/31/2008          39,224,875   57,525,125 
09/01 to 09/30/2008          39,224,875   57,525,125 
10/01 to 10/31/2008  13,097,100   25.06   52,321,975   44,428,025 
11/03 to 11/30/2008          52,321,975   68,500,000 
12/01 to 12/30/2008          52,321,975   68,500,000 
Period (1) 
(a) Total number
of preferred  shares
purchased
 
(b) Average price paid
per  preferred share
 
(c) Total number  of
preferred  shares
purchased as  part of
publicly  announced
plans  or programs
  
(d) Maximum number  of
preferred shares  that
may yet be  purchased
under the  plans or
programs
 
01/02 to 01/30/2009      0   68,500,000 
02/02 to 02/27/2009      0   68,500,000 
03/02 to 03/31/2009      0   68,500,000 
04/01 to 04/30/2009      0   68,500,000 
05/04 to 05/29/2009      0   68,500,000 
06/01 to 06/30/2009      0   68,500,000 
07/01 to 07/31/2009      0   68,500,000 
08/03 to 08/31/2009      0   68,500,000 
Share bonus (2)      0   75,350,000 
09/03 to 09/30/2009      0   75,350,000 
10/01 to 10/30/2009      0   56,700,000 
11/03 to 11/30/2009 185,460 37.52  185,460   56,514,540 
12/01 to 12/30/2009      185,460   56,514,540 
(1) Our board of directors approved on November 3, 2008October 30, 2009 the purchase of up to 68,500,00056,700,000 of our book-entry preferred shares, maturing on November 3, 2009.2010.
(2) At the ASM/ESM of April 23, 2008, stockholders24, 2009, shareholders approved the bonus sharesstock dividend of 25%10% of capital stock, which was effected on June 1, 2008August 28, 2009 in the stock exchange.

16F.      Change in Registrant’s Certifying Accountant
 
Not applicable.

 
164169
 

16G.      Corporate Governance
 
Principal Differences between Brazilian and U.S. Corporate Governance Practices

We are subject to the NYSE corporate governance listing standards. As a foreign private issuer, the standards applicable to us are considerably different than those applied to U.S. listed companies. Under the NYSE rules, we are only required to: (a)(i) have an audit committee or audit board, pursuant to an applicable exemption available to foreign private issuers, that meets certain requirements, as discussed below, (b)(ii) provide prompt certification by our chief executive officer to the NYSE each year that he is not aware of any material non-compliance with anyviolation by the company of NYSE corporate governance listing standards, (iii) submit an executed written affirmation annually to the NYSE and submit an interim written affirmation each time a change occurs to the board or any of the committees subject to Section 303A of the NYSE rules, and (c)(iv) provide a brief description of the significant differences between our corporate governance practices and the NYSE corporate governance practice required to be followed by U.S. listed companies. The discussion of the significant differences between our corporate governance practices and those required of U.S. listed companies follows below:below.
 
Majority of Independent Directors
 
The NYSE rules require that a majority of the board must consist of independent directors.  Independence is defined by various criteria, including the absence of a material relationship between the director and the listed company.  Brazilian law does not have a similar requirement.  Under Brazilian law, neither our board of directors nor our management is required to test the independence of directors before their election to the board.  However, the Brazilian Corporate Law, the Central Bank and the CVM have established rules that require directors to meet certain qualification requirements and that address the compensation and duties and responsibilities of, as well as the restrictions applicable to, a company’s  officers and directors and our directors meet the qualification requirements of the Brazilian Corporate Law, the Central Bank and the CVM. Our corporate governance policy discloses the criteria used by our board of directors to determine if a director is independent. According to those criteria, three of our directors are considered independent.  The Brazilian Corporate Law requires that our directors be elected by our stockholdersshareholders at an annual stockholders’shareholders’ meeting.  All of our directors are elected by our controlling stockholdershareholder and six of our directors are members of the Egydio de Souza AranhaVillela, Setubal and Moreira Salles families that control IUPAR.
 
Executive Sessions

NYSE rules require that the non-management directors must meet at regularly scheduled executive sessions without management present.  The Brazilian Corporate Law does not have a similar provision.  According to the Brazilian Corporate Law, up to one-third of the members of the board of directors can be elected from management.  Our president Roberto Setubal, our executive vice-presidentvice presidents Alfredo Egydio Setubal and Candido Botelho Bracher and the Executive Officerexecutive officer of Itaú Unibanco Holding, Ricardo Villela Marino are members of our board of directors. There is no requirement that non-management directors meet regularly without management. As a result, the non-management directors on our board do not typically meet in executive session.sessions. Our board of directors consists of 119 non-management directors.
 
Committees

NYSE rules require that listed companies have a nominating/nominating and corporate governance committee and a compensation committee composed entirely of independent directors and governed by a written chartercharters addressing the committee’scommittees’ required purposepurposes and detailing itstheir required responsibilities. The responsibilities of the nominating/nominating and corporate governance committee include, among other things, identifying and selecting qualified board member nominees and developing a set of corporate governance principles applicable to the company. The responsibilities of the compensation committee, in turn, include, among other things, reviewing corporate goals relevant to the chief executive officer’s compensation, evaluating the chief executive officer’s performance, approving the chief executive officer’s compensation levels and recommending to the board non-chief executive officer compensation, incentive-compensation and equity-based plans.
 
We are not required under applicable Brazilian Corporate Law to have a nominating committee, corporate governance committee and compensation committee. However, we have aan appointment and corporate governance committee the “disclosure and trading committee,” and we also have an appointments and compensation committee. Seea personnel committee.See “Item 6C. Board Practices.”  Pursuant to our bylaws our directors are elected by our stockholdersshareholders at an annual stockholders’shareholders’ meeting.  Global compensation for our directors and officers is established by our stockholders,shareholders. The appointment and compensationpersonnel committee is also responsible for the management of our stock option plan, which was approved by our stockholders.shareholders.  This plan defines the objectives, guidelines, conditions, limits, characteristics of the plan to be observed by the appointments and compensationpersonnel committee and grants it some responsibilities in deciding cases not covered by the plan.

 
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Audit Committee and Audit Committee Additional Requirements

NYSE rules require that listed companies have an audit committee that (i) is composed of a minimum of three independent directors who are all financially literate, (ii) meets the SEC rules regarding audit committees for listed companies, (iii) has at least one member who has accounting or financial management expertiseexpertise; and (iv) is governed by a written charter addressing the committee’s required purpose and annual performance evaluation of the audit committee and detailing its required responsibilities.
 
Brazilian banking law (Resolution No. 3,198 from the Central Bank) requires us to have an audit committee of at least three members, and the Brazilian Corporate Law requires us to have a fiscal council, which is composed of three to five members.  Pursuant to Brazilian Corporate Law and Resolution Nº 3,198 of the Central Bank, the fiscal council members are elected at the annual stockholders’shareholders’ meeting and the audit committee is elected by the board of directors among its members and professionals of proven knowledge of the audit area, provided that accordingly to our By-Laws its chairman must be also a member of our board of directors.

CNSP, which defines the rules and the guidelines of private insurance, also requires the establishment of an in-house audit committee if an insurance entity has its (i) adjusted net worth in an amount equal or superior to R$ 0.5 billion or (ii) technical reserves in an amount equal or superior to R$ 0.7 billion. However, if an entity under CNSP supervision is part of a financial conglomerate, a single audit committee may be created at the parent company level. Accordingly, Itaú Unibanco Holding has opted for a single committee.

The fiscal council operates independently from our management and from our external auditors. Its main function is to examine the financial statements of each fiscal year and provide a formal report to our stockholders.shareholders. We have a fiscal council that consists of three members and three alternates and which meets once a month.
 
In April 2003 the SEC stated that the listing of securities of foreign private issuers will be exempt from the audit committee requirements if the issuer meets certain requirements. We believe that our audit committee is able to act independently in performing the responsibilities of an audit committee under the Sarbanes-Oxley Act, satisfies the other requirements of the exemption of Rule 10A-3(c)(3) and therefore is in compliance with Rule 10A-3 of the Securities Exchange Act (for further information, see “Item 16D. Exemptions from the Listing Standards for Audit Committees”). Our audit committee is currently composed of five members, of which two members are also members of our board of directors.
 
StockholderShareholder Approval of Equity Compensation Plans
 
NYSE rules require that stockholdersshareholders be given the opportunity to vote on all equity compensation plans and material revisions thereto, with limited exceptions.  Under the Brazilian Corporate Law, stockholdersshareholders must approve all stock option plans.  In addition, any issuance of new shares that exceeds our authorized share capital is subject to stockholdershareholder approval.  Our stockholdersshareholders do not have the opportunity to vote on all equity compensation plans.  However, any issuance of new shares that exceeds the authorized capital is subject to the stockholders’shareholders’ meeting confirmation.
 
Corporate Governance Guidelines
 
NYSE rules require that listed companies adopt and disclose corporate governance guidelines.  We comply with the corporate governance guidelines set forth in the rules imposed upon us by applicable Brazilian law.  We believe the corporate governance guidelines applicable to us under Brazilian law are consistent with the guidelines established by the NYSE.  We also go beyond the scope of the legislation, as can be seen from our voluntary adherence to BOVESPA’s levelBM&FBOVESPA’s Level 1 of Corporate Governance and adoption of tag-along rights for all stockholders,shareholders, regardless of their voting rights.  We have adopted and observe (i) the Policy of Material Information Disclosure, which deals with the public disclosure of all relevant information as per CVM’s Instruction No. 358 guidelines; and (ii) the Policy on Trading of Securities, which restricts the negotiation of securities on certain periods and requires management to inform all transactions relating to our securities, and which was an optional device included in the CVM’s Instruction No. 358.  Going beyond the scope of the law, in July 2002 we created the disclosure and trading committees, which were unified in the disclosure and trading committee in April 2006.
 
Code of Business Conduct and Ethics
 
NYSE rules require that listed companies adopt and disclose a code of business conduct and ethics for directors, officers and employees, and promptly disclose any waivers of the code for directors or executive officers. Applicable Brazilian law does not have a similar requirement. We haveHowever, we adopted a Code of Ethics in 2000 which regulates the conduct of our managers in connection with the registration and control of financial and accounting information and their access to privileged and non-public information and data.information. In 2004, we included a supplement to our Code of Ethics in order to comply with the requirements of the Sarbanes-Oxley Act and the NYSE rules. In October 2005, as part of its policy of constantly seeking development, we announced our newly and updated Code of Ethics.Ethics, and this Code was reviewed in February 2010 due to the Association. See “Item 16B. Code of Ethics.”

 
166171
 

Internal Audit Function
 
NYSE rules require that listed companies maintain an internal audit function to provide management and the audit committee with ongoing assessments of the company’s risk management processes and system of internal control.
 
Our Internal Auditing Directorate works independently to conduct methodologically structured examinations, analysis, surveys and fact finding to evaluate the integrity, adequacy, effectiveness, efficiency and economy of the information systems processes and internal controls related to our risk management.  The Directorate reports continually to our board of directors and interacts with the audit committee and, in carrying out its duties, the Internal Auditing Directorate has access to all documents, records, systems, locations and people involved with the activities under review.
 
Sarbanes Oxley Act of 2002
 
We maintain controls and procedures designed to ensure that we are able to collect the information we are required to disclose in the reports we file with the SEC, and to process, summarize and disclose this information within the time periods specified in the rules of the SEC.  On June 8, 2006 we became the first non-U.S. bank listed on the NYSE to comply with all of the requirements set forth in Section 404 of the U.S. Sarbanes-Oxley Act of 2002, regarding internal controls over financial reporting, one year before the due date established by the SEC.  The certifications are included as Exhibits 12.1 and 12.2 to this Annual Report.

 
167172
 

PART III
 
ITEM 17                FINANCIAL STATEMENTS
 
We have responded to Item 18 in lieu of responding to this item.

ITEM 18                FINANCIAL STATEMENTS
 
The following financial statements, together with the report of the independent registered public accounting firm, are filed as part of this annual report:
 
Consolidated Financial Statements
 
Management’s Report on Internal Control Over Financial Reporting.ReportingF-1
  
Report of Independent Registered Public Accounting Firm.Firm
F-2
  
Consolidated Balance Sheet as of December 31, 20082009 and 2007.2008F-3
  
Consolidated Statement of Income for the years ended December 31, 2009, 2008 2007 and 2006.2007F-5
  
Consolidated Statement of Comprehensive Income for the years ended December 31, 2009, 2008 2007 and 20062007F-6
  
Consolidated Statement of Cash Flows for the years ended December 31, 2009, 2008 2007 and 2006.2007.F-7
  
Consolidated Statement of Changes in Stockholders’Shareholders’ Equity for the years ended December 31, 2009, 2008 2007 and 2006.2007.F-8
  
Notes to the Consolidated Financial Statements for the years ended December 31, 2009, 2008 2007 and 2006.2007.F-10

 
168173
 

Management’sManagement´s Report on Internal Control over Financial ReportingReport

The management of Itaú Unibanco Holding S.A (current denomination of Banco Itaú Holding Financeira S.A). is responsible for establishing and maintaining adequate internal control over financial reporting for the company.

The company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The company’s internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositionsdisposals of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permitallow for the preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management assessed the effectiveness of the company’s internal control over financial reporting as of December 31, 2008,2009, based on the criteria set forth by the COSO – Committee of Sponsoring Organization of the Treadway Commission in Internal Control – Integrated Framework.

Management's assessment included documenting, evaluating and testing of the design and operating effectiveness of its internal control over financial reporting. Based on that assessment, management has concluded that as of December 31, 20082009 the company’s internal control over financial reporting is effective.

The effectiveness of the Corporation’s internal control over financial reporting as of December 31, 2008,2009, has been audited by PricewaterhouseCoopers Auditores Independentes, an independent registered public accounting firm, as stated in their report which appears herein.

/s/ Roberto Egydio Setubal /s/Sérgio Ribeiro da Costa Werlang /s/ Silvio Aparecido de Carvalho
Roberto Egydio Setubal Sérgio Ribeiro da Costa Werlang Silvio Aparecido de Carvalho
Chief Executive Officer Chief RiskFinancial Officer Chief Financial Officer

A signed original copy of this report has been provided to the registrant and will be retained by the registrant and furnished to the Securities and Exchange Commission or its staff upon request.

Date: June 30, 2009.
May 10, 2010.

F-1
 
Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders
Itaú Unibanco Holding S.A
(formerly “Banco Itaú Holding Financeira S.A.”)

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, of comprehensive income, of cash flows and of changes in stockholders equity present fairly, in all material respects, the financial position of Itaú Unibanco Holding S.A. and its subsidiaries at December 31, 20082009 and 2007,2008, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 20082009 in conformity with accounting principles generally accepted in the United States of America.  Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008,2009, based on criteria established in Internal Control - Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying “Management's Report on Internal Control over Financial Reporting”.  Our responsibility is to express opinions on these financial statements and on the Company's internal control over financial reporting based on our integrated audits.  We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects.  Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation.  Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.  Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

As discussed in Notes 2.c and 28Note 2.z to the consolidated financial statements respectively, the Company changed its definition of cash equivalents and, effectivethe manner in which it accounts for business combinations consummated on or after January 1, 2008, adopted Statement of Financial Accounting Standards No. 157, “Fair Value Measurement”.2009 and for non-controlling interests.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

PricewaterhouseCoopers
Auditores Independentes
São Paulo, Brazil
June 30, 2009May 9, 2010

 
F-2
 


ITAÚ UNIBANCO HOLDING S.A.
Consolidated Balance Sheet at December 31
 (In(In millions of Reais)

ASSETS 2009  2008 
Cash and due from banks  5,355   3,408 
Restricted cash  -   84 
Interest-bearing deposits in other banks  89,085   49,677 
Securities purchased under resale agreements  56,714   44,783 
Central Bank compulsory deposits  13,869   11,314 
Trading assets, at fair value  73,529   66,483 
Available-for-sale securities, at fair value  41,263   28,445 
Held-to-maturity securities, at amortized cost  1,762   1,325 
Net loans and leases  225,768   157,498 
Loans and leases  245,736   169,700 
Allowance for loan and lease losses  (19,968)  (12,202)
Investments in unconsolidated companies  4,321   2,398 
Premises and equipment, net  4,572   2,965 
Goodwill, net  14,711   423 
Intangible assets, net  22,569   6,676 
Other assets  45,570   25,896 
         
TOTAL ASSETS  599,088   401,375 
ASSETS 2008  2007 
Cash and due from banks  3,408   3,098 
Restricted cash  84   89 
Interest-bearing deposits in other banks  49,677   38,288 
Securities purchased under resale agreements  44,783   21,309 
Central Bank compulsory deposits  11,314   17,214 
Trading assets, at fair value  66,483   40,524 
Available-for-sale securities, at fair value  28,445   18,825 
Held-to-maturity securities, at amortized cost  1,325   1,428 
Net loans and leases  157,498   108,986 
Loans and leases  169,700   116,459 
Allowance for loan and lease losses  (12,202)  (7,473)
Investments in unconsolidated companies  2,398   1,859 
Premises and equipment, net  2,965   2,755 
Goodwill, net  423   635 
Intangible assets, net  6,676   6,948 
Other assets  25,896   17,848 
TOTAL ASSETS  401,375   279,806 

The accompanying notes are an integral part of these consolidated financial statements.

 
F-3
 


ITAÚ UNIBANCO HOLDING S.A.
Consolidated Balance Sheet at December 31
(In millions of Reais)

LIABILITIES AND STOCKHOLDERS' EQUITY 2009  2008 
Deposits  190,908   150,802 
Non-interest bearing deposits  25,884   24,106 
Interest-bearing deposits  165,024   126,696 
Securities sold under repurchase agreements  66,174   49,492 
Short-term borrowings  80,725   54,277 
Long-term debt  58,976   37,672 
Insurance claims reserves, reserves for private retirement plans and reserves for capitalization  13,487   4,766 
Investment contracts  38,063   24,322 
Other liabilities  68,721   44,412 
         
Total liabilities  517,054   365,743 
         
Commitments and contingent liabilities (Note 30)  -   - 
         
Stockholders’ equity:        
Stockholders’ equity of Itaú Unibanco :        
         
Common shares – no par value  ( 3,300,000,000 authorized at December 31, 2009 and 2008; 2,289,286,475 and 1,708,760,440 issued at December 31, 2009 and 2008, respectively) (*)  21,046   7,372 
         
Preferred shares – no par value  ( 3,300,000,000 authorized at December 31, 2009 and 2008; 2,281,649,744 and 1,605,988,901 issued at December 31, 2009 and 2008, respectively) (*)  24,208   9,882 
         
Treasury shares ( 43,588,307 and 64,639,300  preferred shares at December 31, 2009 and 2008, respectively; 2,202 common shares at December 31, 2009) (*)  (1,031)  (1,526)
Additional paid-in capital  12,932   62 
Appropriated retained earnings  5,954   16,014 
Other accumulated comprehensive income:        
         
Net unrealized gains (losses) on available-for-sale securities, net of taxes  301   203 
Cumulative translation adjustment  (146)  921 
Defined benefit of pension plans and other post-retirement plans, net of taxes  786   400 
Cash flow hedge – Effective portion, net of taxes  (4)  (4)
Unappropriated retained earnings (accumulated losses)  5,231   1,063 
Total stockholders’ equity of Itaú Unibanco  69,277   34,387 
Noncontrolling interest  12,757   1,245 
         
Total equity  82,034   35,632 
         
TOTAL LIABILITIES AND EQUITY  599,088   401,375 
LIABILITIES AND STOCKHOLDERS' EQUITY 2008  2007 
Deposits  150,802   81,625 
Non-interest bearing deposits  24,106   28,134 
Interest bearing deposits  126,696   53,491 
Securities sold under repurchase agreements  49,492   23,399 
Short-term borrowings  54,277   48,178 
Long-term debt  37,672   31,027 
Insurance claims reserves, reserves for private retirement plans and reserves for capitalization plans  4,766   5,394 
Investment contracts  24,322   18,630 
Other liabilities  44,412   33,944 
         
Total liabilities  365,743   242,197 
         
Commitments and contingent liabilities (Note 30)  -   - 
         
Minority interest in consolidated subsidiaries  1,245   1,354 
         
Common shares - no par value (3,000,000,000 and 2,500,000,000 authorized at December 31, 2008 and 2007, respectively; 1,553,418,582 and 1,566,250,640 issued at December 31, 2008 and 2007, respectively) (*)  7,372   5,948 
Preferred shares - no par value (3,000,000,000 and 2,500,000,000 authorized at December 31, 2008 and 2007, respectively; 1,459,989,910 and 1,488,739,910 issued at December 31, 2008 and 2007, respectively) (*)  9,882   8,560 
Treasury stock (58,763,000 and 45,844,525 preferred shares at December 31, 2008 and 2007, respectively, 12,832,058 common shares at December 31, 2007) (*)  (1,526)  (1,173)
Additional paid-in capital  62   643 
Appropriated retained earnings  16,014   19,183 
Other accumulated comprehensive income:        
Net unrealized gains (losses) on available-for-sale securities, net of taxes  203   611 
Cumulative translation adjustment  921   184 
Defined benefit pension plans and other post-retirement plans, net of taxes  400   1,697 
Cash flow hedge -  effective portion, net of taxes  (4)  - 
Unappropriated retained earnings (accumulated losses)  1,063   602 
         
Total Stockholders' equity  34,387   36,255 
         
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY  401,375   279,806 
(*) After giving retroactive effect to the bonus of shares  in June 2008 (Noteand August 2009 (Note 19a)
The accompanying notes are an integral part of these consolidated financial statements.

 
F-4
 


ITAÚ UNIBANCO HOLDING S.A.
Consolidated Statement of Income
Year EndedYears ended December 31
(In millions of Reais, except per share information)

 2008  2007  2006  2009  2008  2007 
INTEREST INCOME  47,649   34,603   28,147   72,567   47,649   34,603 
Interest on loans and leases  31,326   22,898   19,346   48,582   31,326   22,898 
Interest on deposits in banks  3,028   2,852   2,725   3,534   3,028   2,852 
Interest on Central Bank compulsory deposits  1,051   909   881   519   1,051   909 
Interest on securities purchased under resale agreements  5,369   2,375   1,251   8,673   5,369   2,375 
Interest on trading assets  4,141   3,418   2,539   7,086   4,141   3,418 
Interest and dividends on available-for-sale securities  2,536   1,992   1,236   3,996   2,536   1,992 
Interest on held-to-maturity securities  198   159   169   177   198   159 
INTEREST EXPENSE  (26,508)  (13,271)  (11,104)  (31,876)  (26,508)  (13,271)
Interest on deposits  (6,233)  (3,510)  (3,950)  (11,773)  (6,233)  (3,510)
Interest on securities sold under repurchase agreements  (6,489)  (3,453)  (2,007)  (7,177)  (6,489)  (3,453)
Interest on short-term borrowings  (7,737)  (3,329)  (2,328)  (5,314)  (7,737)  (3,329)
Interest on long-term debt  (4,721)  (1,433)  (1,455)  (4,586)  (4,721)  (1,433)
Interest credited to investment contracts account balance  (1,328)  (1,546)  (1,364)
Interest credit to investment contract account balance  (3,026)  (1,328)  (1,546)
NET INTEREST INCOME  21,141   21,332   17,043   40,691   21,141   21,332 
Allowance for loan and lease losses  (9,361)  (5,542)  (5,147)  (15,372)  (9,361)  (5,542)
NET INTEREST INCOME AFTER ALLOWANCE FOR LOAN AND LEASE LOSSES  11,780   15,790   11,896   25,319   11,780   15,790 
            
NON-INTEREST INCOME  15,775   17,015   14,614   40,436   15,775   17,015 
Fee and commission income  8,941   7,832   6,788   13,479   8,941   7,832 
Trading income (losses)  (2,843)  1,955   2,136   9,284   (2,843)  1,955 
Net gain (loss) on sale of available-for-sale securities  (114)  (183)  283   211   (114)  (183)
Net gain (loss) on foreign currency transactions  1,059   83   (139)  2,619   1,059   83 
Net gain (loss) on transactions of foreign subsidiaries  1,938   (971)  (117)  (3,390)  1,938   (971)
Equity in earnings of unconsolidated companies, net  474   476   566   (9)  474   476 
Insurance premiums, income on private retirement plans and on capitalization plans  3,917   3,500   3,479 
Insurance premiums, income on private retirement plans and capitalization plans  8,132   3,917   3,500 
Other non-interest income  2,403   4,323   1,618   10,110   2,403   4,323 
NON-INTEREST EXPENSE  (24,011)  (21,027)  (18,061)  (42,294)  (24,011)  (21,027)
Salaries and employee benefits  (6,170)  (5,705)  (5,341)  (10,589)  (6,170)  (5,705)
Administrative expenses  (6,409)  (5,472)  (4,710)  (10,001)  (6,409)  (5,472)
Amortization of other intangible assets  (1,201)  (974)  (609)
Amortization of intangible assets  (3,663)  (1,201)  (974)
Insurance claims, changes in reserves for insurance operations, for private retirement plans and acquisition costs  (3,301)  (2,509)  (2,663)  (6,452)  (3,301)  (2,509)
Depreciation of premises and equipment  (756)  (675)  (605)  (1,250)  (756)  (675)
Other non-interest expense  (6,174)  (5,692)  (4,133)
NET INCOME BEFORE TAXES ON INCOME, MINORITY INTEREST AND EXTRAORDINARY INCOME  3,544   11,778   8,449 
Other non-interest expenses  (10,339)  (6,174)  (5,692)
            
NET INCOME BEFORE TAXES AND EXTRAORDINARY ITEM  23,461   3,544   11,778 
TAXES ON INCOME                        
Current  (1,681)  (2,587)  (1,866)  (5,477)  (1,681)  (2,587)
Deferred  3,015   (1,560)  (568)  (3,372)  3,015   (1,560)
TOTAL TAXES ON INCOME  1,334   (4,147)  (2,434)  (8,849)  1,334   (4,147)
                        
NET INCOME BEFORE MINORITY INTEREST AND EXTRAORDINARY ITEM  4,878   7,631   6,015 
NET INCOME BEFORE EXTRAORDINARY ITEM  14,612   4,878   7,631 
Extraordinary item (recognition in net income of excess of net assets acquired over purchase price), net of tax effect  -   -   29 
NET INCOME  14,612   4,878   7,660 
Less: Net Income attributable to noncontrolling interests  (527)  (29)  2 
NET INCOME ATTRIBUTABLE TO ITAÚ UNIBANCO  14,085   4,849   7,662 
                        
Minority interest  (29)  2   22 
            
NET INCOME BEFORE EXTRAORDINARY ITEM  4,849   7,633   6,037 
Extraordinary item (recognition in income of excess of net assets acquired over purchase price), net of tax effect  -   29   - 
NET INCOME  4,849   7,662   6,037 
EARNINGS PER SHARE - BASIC (*)            
EARNINGS PER SHARE – BASIC (*)            
Common  1.63   2.56   2.13   3.25   1.49   2.32 
Preferred  1.63   2.56   2.13   3.25   1.49   2.32 
EARNINGS PER SHARE - DILUTED (*)            
EARNINGS PER SHARE – DILUTED (*)            
Common  1.63   2.54   2.11   3.24   1.48   2.31 
Preferred  1.63   2.54   2.11   3.24   1.48   2.31 
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING – BASIC (*)                        
Common  1,553,418,582   1,553,451,604   1,503,722,701   2,192,530,134   1,708,760,440   1,708,796,764 
Preferred  1,413,491,898   1,444,978,181   1,336,680,540   2,143,753,894   1,554,841,088   1,589,475,999 
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING – DILUTED (*)                        
Common  1,553,418,582   1,553,451,604   1,503,722,701   2,192,530,134   1,708,760,440   1,708,796,764 
Preferred  1,426,435,707   1,463,454,608   1,352,323,239   2,149,890,063   1,569,079,278   1,609,800,069 
(*) After giving retroactive effect to the split of shares in October 2007 and bonus of shares in June 2008.(Note2008 and August 2009 (Note 19a)
The accompanying notes are an integral part of these consolidated financial statements.

 
F-5
 


ITAÚ UNIBANCO HOLDING S.A.
Consolidated Statement of Comprehensive Income
Year ended December 31
(In millions of Reais)

  2008  2007  2006 
             
Net income as reported in the statement of income  4,849   7,662   6,037 
Change in unrealized gains and losses on available-for-sale securities (net of tax effect of R$ 602, R$ (430) and R$ 77 for the years ended December 31, 2008, 2007 and 2006, respectively)  (408)  862   (406)
Cash flow hedge - effective portion (net of tax effect of R$ 1)  (4)  -   - 
Cumulative translation adjustment on foreign subsidiaries and equity investees (no tax effect)  737   (304)  (10)
Defined benefit pension plans and other post-retirement plans, net of taxes of R$ 865, R$ (368) and R$ (506) for the years ended December 31, 2008, 2007 and 2006 (1)  (1,297)  713   984 
             
Comprehensive income for the year  3,877   8,933   6,605 
  2009  2008  2007 
          
Net income  14,612   4,878   7,660 
Change in unrealized gains and losses on available-for-sale securities (net of tax effect of R$ (380), R$ 602 and R$ (430)  for the years ended December 31, 2009, 2008 and 2007, respectively)  98   (408)  862 
Cash flow hedge – effective portion (net of tax effect of R$ 1 for the year ended December 31, 2008)  -   (4)  - 
Cumulative translation adjustment on foreign subsidiaries and equity investees (no tax effect)  (1,067)  737   (304)
Defined benefit of pension plans and other post-retirement plans, net of taxes of R$ (257), R$ 865 and R$ (368) for the years ended December 31, 2009, 2008 and 2007, respectively.  386   (1,297)  713 
             
Total comprehensive income  14,029   3,906   8,931 
Comprehensive income attributable to noncontrolling interest  (527)  (29)  2 
Comprehensive income attributable to Itaú Unibanco  13,502   3,877   8,933 
(1) See Note 2s.      
The accompanying notes are an integral part of these consolidated financial statements.

 
F-6
 


ITAÚ UNIBANCO HOLDING S.A.
Consolidated Statement of Cash Flows
Year Endedended December 31
(In millions of Reais)

  2009  2008  2007 
Operating activities         
Net income  14,612   4,878   7,660 
Adjustment to reconcile net income to net cash provided by operating activities            
Provision for loan and lease losses  15,372   9,361   5,542 
Loss on sale of foreclosed assets, net  9   -   9 
Amortization of intangible assets  3,663   1,201   974 
Depreciation of premises and equipment  1,250   756   675 
Equity in earnings of unconsolidated companies, net  9   (474)  (476)
Gain on sale of Redecard shares (Note 24a)  -   -   (1,544)
Gain on sale of Serasa shares (Note 24a)  -   -   (743)
Gain on sale of Bolsa de Mercadorias & Futuros and Bovespa shares (Note 24a)  -   -   (475)
Gain on sale of VisaNet Inc. shares (Note 24a)  (345)  -   - 
Gain on sale of Allianz shares (Note 24a)  (25)  -   - 
Gain on exchange of equity interest in Psiupar (Note 3.1.c)  (936)  -   - 
Gain on remeasurement of interest in Redecard S.A. (Note 3.1.b)  (4,530)  -   - 
Bargain purchase gain (Note 3.1.a)  (830)   -   - 
Gain on sale of other unconsolidated companies  (69)  (279)  - 
Stock based compensation (reversal)  618   (181)  339 
Deferred tax  3,372   (3,015)  1,560 
Net (gain) loss on sale of available-for-sale securities  (211)  114   183 
Impairment on available-for-sale securities  56   53   4 
Other adjustments to net income  485   (136)  9 
Net (gain) loss on sale of premises and equipment  (4)  6   (92)
Dividends received from investments in unconsolidated companies  63   246   297 
Changes in assets and liabilities          - 
Trading account assets (increase) decrease  16,704   (24,446)  (11,110)
Other assets and liabilities (increase) decrease  7,589   (765)  (768)
Net cash provided by (used in) operating activities  56,783   (12,681)  2,044 
Investing activities            
Net (increase) decrease in Central Bank compulsory deposits  (462)  5,900   (2,141)
Net (increase) decrease in securities purchased under resale agreements which are not in cash and cash equivalents  (11,930)  (23,343)  (12,519)
Purchase of available-for-sale securities  (7,624)  (26,367)  (13,318)
Proceeds from sale and redemption of available-for-sale securities  13,905   19,728   11,176 
Purchase of held-to-maturity securities    (1,133)  -   - 
Proceeds from matured held-to-maturity securities  56   254   26 
Net increase in loans and leases  (13,832)  (54,791)  (31,502)
Acquisition of subsidiaries, net of cash and cash equivalents received  -   -   1,637 
Acquisition of controlling interest in Redecard S.A., net of cash and cash equivalents received (Note 3.1.b)  (415)  -   - 
Cash and cash equivalents received on acquisition of Unibanco and Unibanco Holdings (Note 3.1.a)  17,262   -   - 
Purchase of BBA HE Participações S.A. (Note 3.2.b)  -   (399)  - 
Cash used for acquisition of intangible assets  -   (352)  (488)
Cash payment for contractual rights to provide payroll and other services to government entities and other entities  (793)  (243)  (113)
Purchase of premises and equipment  (1,701)  (976)  (800)
Proceeds from sale of premises and equipment  187   181   399 
Proceeds from sale of foreclosed assets  302   69   52 
Purchase of unconsolidated companies  (5)  (301)  (354)
Purchase of other investments recorded at cost  -   (17)  (31)
Proceeds from sale of unconsolidated companies  642   329   2,572 
Net cash used in investing activities  (5,541)  (80,328)  (45,404)
Financing activities            
Net increase (decrease) in deposits  (13,339)  66,954   15,199 
Net increase in investment contracts  8,600   3,010   2,831 
Net increase (decrease) in securities sold under repurchase agreements  (16,848)  26,224   12,102 
Net increase in short-term borrowings  16,627   4,995   15,500 
Borrowings from long-term debt  11,623   13,045   18,718 
Repayment of long-term debt  (16,952)  (10,428)  (9,700)
Acquisition of Itaúsa Export S.A. (Note 3.2.a)  -   (587)  - 
Capital increase by the parent company in Itaúsa Export S.A. (Note 3.2.a)  -   -   122 
Acquisition of treasury stock  (7)  (1,618)  (261)
Proceeds from exercise of stock options by grantees  278   107   125 
Dividends and interest on stockholders' equity paid  (3,782)  (2,910)  (2,280)
Noncontrolling interest  (22)   44   (80)
Net cash provided by (used in) financing activities  (13,822)  98,836   52,276 
Net increase in cash and cash equivalents (*)  37,420   5,827   8,916 
Cash and cash equivalents            
At the beginning of the year  28,036   22,209   13,293 
At the end of the year  65,456   28,036   22,209 
Supplemental cash flow disclosure            
Cash paid for interest  (20,839)  (15,015)  (10,673)
Cash paid for taxes on income  (4,277)  (2,602)  (2,770)
Non-cash transactions            
Loans transferred to foreclosed assets  219   34   24 
Shares issued in connection with acquisition of BankBoston (Note 3.2.c and 3.2.d)  -   -   1,120 
Dividends and interest on stockholders' equity declared but not paid  2,539   2,399   2,124 
Shares and replacement awards issued in connection with acquisition of Unibanco and Unibanco Holdings (Note 3.1.a)  24,659   -   - 
Shares issued in connection with acquisition of Itaúsa Export S.A. (Note 3.2.a)  95   102   - 
Exchange of equity interest in Psiupar (Note 3.1.c)  1,886   -   - 
Available-for-sale securities transferred to trading assets  -   -   52 
  2008  
2007 (*)
Restated
  
2006 (*)
Restated
 
Operating activities         
Net income  4,849   7,662   6,037 
             
Adjustment to reconcile net income to net cash provided (used in) operating activities            
Provision for loan and lease losses  9,361   5,542   5,147 
Loss on sale of foreclosed assets, net  -   9   19 
Amortization of intangibles assets  1,201   974   609 
Depreciation of premises and equipment  756   675   605 
Equity in earnings of unconsolidated companies, net  (474)  (476)  (566)
Gain on sale of Redecard Shares (Note 24a)  -   (1,544)  - 
Gain on sale of Serasa Shares (Note 24a)  -   (743)  - 
Gain on sale of Bolsa de Mercadorias & Futuros and Bovespa (Note 24a)
  -   (475)  - 
Gain on sale of unconsolidated companies  (279)  -   (16)
Gain on sale of Credicard brand (Note 3h)  -   -   (158)
Gain on split-off of Credicard (Note 3h)  -   -   (433)
Stock based compensation (reversal of compensation)  (181)  339   717 
Deferred tax expense benefit  (3,015)  1,560   568 
Net (gain) loss on sale of available-for-sale securities  114   183   (283)
Impairment on available-for-sale securities  53   4   4 
Other adjustments to net income  (136)  9   (33)
Net (gain) loss on sale of premises and equipment  6   (92)  (9)
Minority interest  29   (2)  (22)
Dividends received from investments in companies recorded following the equity method  246   297   168 
Changes in assets and liabilities            
Trading account assets (increase) decrease  (24,446)  (11,110)  (8,858)
Other assets (increase)  (20,164)  (10,115)  (4,813)
Other liabilities increase  19,399   9,347   4,622 
             
Net cash provided by (used in) operating activities  (12,681)  2,044   3,306 
             
Investing activities            
Net increase (decrease) in Central Bank compulsory deposits  5,900   (2,141)  (548)
Net increase (decrease) in securities purchased under resale agreements which are not in cash and cash equivalents  (23,343)  (12,519)  (2,279)
Purchase of available-for-sale securities  (26,367)  (13,318)  (10,715)
Proceeds from sale and redemption of available-for-sale securities  19,728   11,176   9,239 
Purchase of held-to-maturity securities  -   -   (10)
Proceeds from matured held to maturity securities  254   26   244 
Net increase in loans and leases  (54,791)  (31,502)  (18,944)
Acquisition of subsidiaries, net of cash and cash equivalents received  -   1,637   3,293 
Consolidated cash in the split-off of Credicard (Note 3h)  -   -   948 
Consolidated cash in the split-off of Tulipa (Note 3h)  -   -   18 
Acquisition of BBA HE Participações S.A. (Note 3c)  (399)  -   - 
Cash used for acquisition of intangible assets  (352)  (488)  - 
Cash payments for contractual rights to provide payroll and other services to government entities and other entities  (243)  (113)  (168)
Purchase of premises and equipment  (976)  (800)  (593)
Proceeds from sale of premises and equipment  181   399   41 
Proceeds from sale of foreclosed assets  69   52   42 
Purchase of unconsolidated companies  (301)  (354)  (271)
Purchase of other investments recorded at cost  (17)  (31)  (44)
Proceeds from sale of unconsolidated companies  329   2,572   7 
             
Net cash used in investing activities  (80,328)  (45,404)  (19,740)
             
Financing activities            
Net increase  in deposits  66,954   15,199   4,813 
Net increase in investment contracts  3,010   2,831   2,701 
Net increase  in securities sold under repurchase agreements  26,224   12,102   3,123 
Net increase in short-term borrowings  4,995   15,500   8,285 
Borrowings from long-term debt  13,045   18,718   6,350 
Repayment of long-term debt  (10,428)  (9,700)  (4,829)
Cash paid on acquisition of interest in Itaúsa Export S.A. (Note 3b)  (587)  -   - 
Capital contribuition of controlling shareholder to Itaúsa Export S.A. (Note 3b)  -   122   - 
Purchase of treasury stock  (1,618)  (261)  (37)
Proceeds from exercise of stock options by grantees  107   125   129 
Dividends and interest on stockholders’ equity paid  (2,910)  (2,280)  (1,748)
Minority interest  44   (80)  35 
             
Net cash provided by financing activities  98,836   52,276   18,822 
             
Net increase in cash and cash equivalents (*)  5,827   8,916   2,388 
Cash and cash equivalents            
At the beginning of the year  22,209   13,293   10,905 
At the end of the year  28,036   22,209   13,293 
             
Supplemental cash flow disclosure            
Cash paid for interest  (15,015)  (10,673)  (7,694)
Cash paid for taxes on income  (2,602)  (2,770)  (1,337)
             
Non-cash transactions            
Loans transferred to foreclosed assets  34   24   85 
Shares issued in connection with acquisition of BankBoston  -   1,120   4,693 
Interest on stockholders’ equity declared but not paid  2,399   2,124   1,619 
Share sof subsidiary issued on acquisition of interest on Itaúsa Export S.A. (Note 3b)  96   -   - 
Acquisition of Credicard operations (Note 3h)  -   -   765 
Available-for-sale securities transferred to trading assets  -   52   292 
The accompanying notes are an integral part of these consolidated financial statements.
(*) The balances of December 31, 2007 and 2006 were restated in order to reflect the change in accounting policy to define cash and cash equivalents, as described in note 2c.

 
F-7
 


ITAÚ UNIBANCO HOLDING S.A
Consolidated Statement of Changes in Stockholders' Equity
Year ended December 31,
( in thousands of shares)
  12/31/2008  12/31/2007 (*)  12/31/2006 (*) 
  Preferred shares  Common shares  Preferred shares  Common shares  Preferred shares  Common shares 
Capital Stock                  
Balance at the beginning of the year  1,488,739,910   1,566,250,640   1,488,739,910   1,514,908,550   1,317,444,675   1,514,908,550 
Issuance of shares  -   -   -   51,342,090   171,295,235   - 
Cancellation of treasury stock (1)  (28,750,000)  (12,832,058)  -   -   -   - 
                         
Balance at the end of the year  (A)  1,459,989,910   1,553,418,582   1,488,739,910   1,566,250,640   1,488,739,910   1,514,908,550 
                         
Treasury stock                        
Balance at the beginning of the year  45,844,525   12,832,058   49,452,850   12,491,808   61,360,000   10,969,558 
Stock purchased by the grantees of our Stock Option Plan (Note 26)  (10,653,500)  -   (11,711,325)  -   (11,907,150)  - 
Acquisition of treasury stock  52,321,975   -   8,103,000   340,250   -   1,522,250 
Cancellation of treasury stock (1)  (28,750,000)  (12,832,058)  -   -   -   - 
                         
Balance at the end of the year  (B)  58,763,000   -   45,844,525   12,832,058   49,452,850   12,491,808 
                         
Outsanding capital at the end of the year - C = A - B  1,401,226,910   1,553,418,582   1,442,895,385   1,553,418,582   1,439,287,060   1,502,416,742 
(*) After giving retroactive effect to the split of shares in October 2007 and bonus of shares in June 2008 (Note 19a)
(1) See note 19a

F-8


ITAÚ UNIBANCO HOLDING S.A.
Consolidated Statement of Changes in Stockholders’ Equity
Year ended December 31
 (In millions(In thousands of Reais)shares)

  2008  2007  2006 
Common shares         
Balance at the beginning of the year  5,948   4,575   4,575 
Issuance of shares  -   1,373   - 
Capitalization of reserves and unappropriated retained earnings  1,424   -   - 
             
Balance at the end of the year  7,372   5,948   4,575 
             
Preferred shares            
Balance at the beginning of the year  8,560   8,560   3,979 
Issuance of shares  -   -   4,581 
Capitalization of reserves and unappropriated retained earnings  1,322   -   - 
             
Balance at the end of the year  9,882   8,560   8,560 
             
Treasury stock            
Balance at the beginning of the year  (1,173)  (1,123)  (1,296)
Stock purchased by the grantees of our stock option plan (Note 26)  254   211   210 
Cancellation of treasury stock  1,011   -   - 
Acquisition of treasury stock  (1,618)  (261)  (37)
             
Balance at the end of the year  (1,526)  (1,173)  (1,123)
             
Additional paid-in capital            
Balance at the beginning of the year  643   599   538 
Stock based compensation recognized for the year (Note 26)  248   262   29 
Difference between purchase price and average cost of treasury stock sold  (146)  (87)  (80)
Difference between the fair value of shares issued in business combination and statutory amount of corresponding increase in capital  -   (253)  112 
Capital contribution of controlling shareholder to Itausa Export S. A.  -   122   - 
Cash paid and shares of subsidiary issued on acquisition of interest in Itaúsa Export S.A.  (683)  -   - 
             
Balance at the end of the year  62   643   599 
             
Appropriated retained earnings            
Balance at the beginning of the year  19,183   13,639   9,131 
Transfer for increase in capital  through  reserves  (2,746)  -   - 
Cancellation of treasury stock  (1,011)  -   - 
Transfer of retained earnings to reserves  588   5,544   4,508 
             
Balance at the end of the year  16,014   19,183   13,639 
             
Net unrealized gains (losses) on available-for-sale securities            
Balance at the beginning of the year  611   (251)  155 
Change in net unrealized gains and losses during the year, net of taxes  (408)  862   (406)
             
Balance at the end of the year  203   611   (251)
             
Cash flow hedge effective portion            
Balance at the beginning of the year  -   -   - 
Change in effective portion of cash flow hedge during the year
  (4)  -   - 
             
Balance at the end of the year  (4)  -   - 
             
Cumulative translation adjustment            
Balance at the beginning of the year  184   488   498 
Translation adjustment arising during the year, without tax effect  737   (304)  (10)
             
Balance at the end of the year  921   184   488 
             
Defined benefit pension plans and other postretirement plans            
Balance at the beginning of the year  1,697   984   - 
Defined benefit pension plans and other postretirement plans, net of taxes  (1,297)  713   984 
             
Balance at the end of the year  400   1,697   984 
             
Unappropriated retained earnings (accumulated losses)            
Balance at the beginning of the year  602   719   1,405 
Net income for the year  4,849   7,662   6,037 
Distribution of dividends and interest on stockholders' equity  (3,800)  (2,235)  (2,215)
Transferred to appropriated retained earnings  (588)  (5,544)  (4,508)
           �� 
Balance at the end of the year  1,063   602   719 
             
Total stockholders’ equity  34,387   36,255   28,190 
Information in Reais per share (*)            
Distributed earnings (dividends and interest on stockholders' equity)            
Preferred shares  1.28   0.75   0.78 
Common shares  1.28   0.75   0.78 
  
2009
  
2008 (*)
  2007(*) 
  
Preferred shares
  
Common shares
  
Preferred shares
  
Common shares
  
Preferred shares
  
Common shares
 
Capital stock                    
Balance at the beginning of the year  1,605,988,901   1,708,760,440   1,637,613,901   1,722,875,704   1,637,613,901   1,666,399,405 
Issuance of shares (Note 3.2.c and 3.2.d)  -   -   -   -   -   56,476,299 
Issuance of shares of Itaú Unibanco for acquisition of Unibanco and Unibanco Holdings (1) (Note 3.1.a)  675,660,843   557,475,607   -   -   -   - 
Exchange of shares of Itaú Unibanco S.A held by Itaúsa for shares of Itaú Unibanco Holding (Note 3.2.a)  -   23,050,428   -   -   -   - 
Cancellation of treasury stock (1)  -   -   (31,625,000)  (14,115,264)  -   - 
Balance at the end of the year (A)  2,281,649,744   2,289,286,475   1,605,988,901   1,708,760,440   1,637,613,901   1,722,875,704 
Treasury stock                        
Balance at the beginning of the year  64,639,300   -   50,428,978   14,115,264   54,398,135   13,740,989 
Stock purchased by grantees of our Stock Option Plan (Note 26)  (21,236,440)  -   (11,718,850)  -   (12,882,458)  - 
Acquisition of treasury stock  185,447   2,202   57,554,172   -   8,913,300   374,275 
Cancellation of treasury stock (1)  -   -   (31,625,000)  (14,115,264)  -   - 
Balance at the end of the year (B)  43,588,307   2,202   64,639,300   -   50,428,978   14,115,264 
Outstanding capital at the end of the year – C = A - B    2,238,061,437   2,289,284,273   1,541,349,601   1,708,760,440   1,587,184,924   1,708,760,440 
(*) After giving retroactive effect to the split of shares in October 2007 and bonus of shares in June 2008 and August 2009 (Note 19a)
(1) See Note 19a

F-8

ITAÚ UNIBANCO HOLDING S.A.
Consolidated Statement of Changes in Stockholders’ Equity
Years ended December 31
(In millions of Reais)

  2009  2008  2007 
Common shares         
Balance at the beginning of the year  7,372   5,948   4,575 
Issuance of shares in connection with acquisition of Bank Boston operations in Uruguay  and Chile (Notes 3.2.c and 3.2.d)  -   -   1,373 
Issuance of  shares of Itaú Unibanco in connection with acquisition of Itaúsa Export S.A (Note 3.2.a)  95   -   - 
Issuance of shares of Itaú Unibanco for acquisition of Unibanco and Unibanco Holdings (Note 3.1.a)  5,451   -   - 
Capitalization of reserves  8,128   1,424   - 
Balance at the end of the year  21,046   7,372   5,948 
Preferred shares            
Balance at the beginning of the year  9,882   8,560   8,560 
Issuance of shares of Itaú Unibanco for acquisition of Unibanco and Unibanco Holdings (Note 3.1.a)  6,454   -   - 
Capitalization of reserves  7,872   1,322   - 
Balance at the end of the year  24,208   9,882   8,560 
Treasury stock            
Balance at the beginning of the year  (1,526)  (1,173)  (1,123)
Stock purchased by grantees of our Stock Option Plan (Note 26)  502   254   211 
Cancellation of treasury stock  -   1,011   - 
Acquisition of treasury stock  (7)  (1,618)  (261)
Balance at the end of the year  (1,031)  (1,526)  (1,173)
Additional paid-in capital            
Balance at the beginning of the year  62   643   599 
Stock based compensation recognized for the year (Note 26)  370   248   262 
Acquisition of stock options of the Unibanco  13   -   - 
Difference between purchase price and average cost of treasury stock sold  (224)  (146)  (87)
Capital increase by the parent company in Itaúsa Export S.A.  -   -   122 
Cash paid and shares of subsidiary issued in the acquisition of interest in Itaúsa Export S.A. (Note 3.2.d)  -   (683)  - 
Difference between fair value of shares issued in acquisitions statutory amount of increase in capital  12,711   -   (253)
Balance at the end of the year  12,932   62   643 
Appropriated retained earnings            
Balance at the beginning of the year  16,014   19,183   13,639 
Transfer for increase in capital stock through reserves  (16,000)  (2,746)  - 
Cancellation of treasury stock  -   (1,011)  - 
Transfer of retained earnings to reserves  5,940   588   5,544 
Balance at the end of the year  5,954   16,014   19,183 
Net unrealized gains (losses) on available-for-sale securities, net of taxes            
Balance at the beginning of the year  203   611   (251)
Change in net unrealized gains and losses during the year, net of taxes  98   (408)  862 
Balance at the end of the year  301   203   611 
Cash flow hedge – effective portion            
Balance at the beginning of the year  (4)  -   - 
Change in cash flow hedge during the year  -   (4)  - 
Balance at the end of the year  (4)  (4)  - 
Cumulative translation adjustment            
Balance at the beginning of the year  921   184   488 
Translation of adjustment during the year, without tax effect  (1,067)  737   (304)
Balance at the end of the year  (146)  921   184 
Defined benefit of pension plans and other post-retirement plans            
Balance at the beginning of the year  400   1,697   984 
Defined benefit of pension plans and other post-retirement plans, net of tax effect  386   (1,297)  713 
Balance at the end of the year  786   400   1,697 
Unappropriated retained earnings            
Balance at the beginning of the year  1,063   602   719 
Net income for the year attributable to Itaú Unibanco  14,085   4,849   7,662 
Distribution of dividends and interest on stockholders' equity  (3,977)  (3,800)  (2,235)
Transfer to appropriated retained earnings  (5,940)  (588)  (5,544)
Balance at the end of the year  5,231   1,063   602 
Total stockholders’ equity of Itaú Unibanco  69,277   34,387   36,255 
Noncontroling interest            
Balance at the beginning of the year  1,245   1,354   1,430 
Net income(loss) for the year  527   29   (2)
Acquisition of shares of non-controlling interest in Itaú BBA Participações (Note 3.2.b)  -   (307)  - 
Exchange of shares of Itaú Unibanco for shares of Itaú Unibanco Holding (Note 3.2.a)  (105)  102   - 
Acquisition of Shares of Redecard (Note 3.1.b)  9,590   -   - 
Noncontrolling interests on subsidiaries of Unibanco (Note 3.1.a)  1,503   -   - 
Constitution of RT Enterprise CP  425   -   - 
Distribution of dividends and interest on stockholders' equity of Redecard S.A.  (343)  -   - 
Other  (85)  67   (74)
Balance at the end of the year  12,757   1,245   1,354 
Total stockholders’ equity  82,034   35,632   37,609 
Per share information in Reais (*)            
Distributed earnings (interest on stockholders' equity)            
Preferred shares  0.92   1.16   0.68 
Common shares  0.92   1.16   0.68 
(*) After giving retroactive effect to the bonus shares carried out in June 2008 and August 2009 (Note 19a)
The accompanying notes are an integral part of these consolidated financial statements.

 
F-9
 


ITAÚ UNIBANCO HOLDING S.A.

Notes to Consolidated Financial Statements

December 31, 2009, 2008 2007 and 20062007

 (In(In millions of Reais,reais, except per share information or unless otherwise noted)

NOTE 1 – DESCRIPTION OF BUSINESS AND BASIS OF CONSOLIDATIONCONSOLIDATION.

a) Description of business

Itaú Unibanco Holding S.A. ("we" or "Itaú Unibanco Holding" refer to Itaú Unibanco Holding S.A. and our subsidiaries and affiliates) is a publicly-traded company, organized and existing under the laws of Brazil. The head office of Itaú Unibanco Holding is located in São Paulo, Brazil. Itaú Unibanco Holding S.A. is the current company name of Banco Itaú Holding Financeira S.A., which company name was initially changed to Itaú Unibanco Banco Múltiplo S.A., by decision at the Extraordinary Stockholders’ Meeting (ESM) of November 28, 2008, and then changed to the current company name, by decision at the ESM of April 24, 2009, which is currently awaiting approval by BACEN.

Itaú Unibanco Holding provides, directly or through its subsidiaries, a wide range of credit and other financial services to a diverse customer base of individuals and companies in Brazil and outside Brazil, Brazilian related and non-related customers, through our international branches, subsidiaries and affiliates. Such services are offered in Brazil to retail customers through the branch network of Banco Itaú Unibanco S.A. (current denomination of Banco Itaú S.A.) (“Itaú Unibanco”) and to wholesale customers through Banco Itaú BBA S.A. (“Itaú BBA”) and overseas through branches in New York, Grand Cayman, Japan, and Bahamas, and through subsidiaries in Argentina, Chile, Uruguay, Paraguay, Cayman Islands, and in Europe (Portugal and Luxembourg).

Itaú Unibanco Holding isWe are a subsidiaryfinancial holding company controlled by Itaú Unibanco Participações S.A. (“IUPAR”), a holding company that has 51% of the shares of our common stock and that is jointly controlled by (i) Itaúsa, which acts in the financial, insurance, industrial and real property holding businesses. As at December 31, 2008 the Itaúsa group comprised more than 200 companies, including Itaúsa - Investimentos Itaú S.A. (Itaúsa), theis a holding company forcontrolled by the members of the Egydio de Souza Aranha Family, and (ii) E. Johnston, a holding company controlled by the Moreira Salles Family.  Itaú Unibanco Holding.sa also owns directly 36.2% of the shares of our common stock.

As further described in Note 32 and as result of the business combination with Unibanco Holdings S.A. (“Unibanco Holdings”) and its subsidiary Unibanco – União de Bancos Brasileiros S.A. (“Unibanco”) we have modified our segments structure. Itaú Unibanco Holding’s operations can beare divided into eight main segments. Itaú Unibanco operates in four of them:segments: (1) banking,Commercial bank, which provides a broad range of banking services to individuals (retail, and under different distribution specialized areas and brands such Uniclass, Personnalité or, Private Bank) and to micro, small and medium-sized companies, (2)including services such as  asset management and investor services, (3) insurance, private retirement plans, and capitalization plans and (4) credit cards issued to accountholders. In addition,accountholders; (2) Itaú BBA, which provides wholesale banking services for large corporations as well as investment banking activities; (3) Consumer credit which basically offer products and Itaucred providesservices to non-accountholder clients, such vehicle financing and credit card transactions and consumer credit transactionsloans and (4) Corporate and Treasury which interest income associated with capital surplus, subordinated debt surplus and the results of certain corporate and treasury activities such as carryforwards of the net balance of tax credits and debits, as well as the net interest income from the trading of financial assets through proprietary positions (desks), management of currency gaps, rates and other risk factors, arbitration opportunities in the foreign and domestic markets, and mark to non-account holder clients through three segments: Taií (which comprises consumer credit transactions and payroll advance), Vehicle Financing and Credit Card transactions.market of financial assets.

As further described in Note 3a, in November 2008 an agreement was entered into between the controlling stockholders of Banco Itaú Holding Financeira S.A. and those of Unibanco Holdings S.A. (Unibanco Holdings) and of its subsidiary Unibanco – União de Bancos Brasileiros S.A. (Unibanco). As further described in Note 3.a, such transaction was consummated in February 2009 and resulted in Itaú Unibanco Holding acquiring control of Unibanco Holdings and of its subsidiary Unibanco. The financial statements of Itaú Unibanco Holding as of December 31, 2008 do not include any effect from such transaction.

 
F-10
 

b)  Consolidation

b)   Basis of Consolidation

The consolidated financial statements include the accounts ofcomprise Itaú Unibanco Holding (parent company) and its direct and indirect majority-owned subsidiaries, in which it has a controlling interest and in which it is the primary beneficiary of variable interest entities, on which we areafter the primary beneficiary, after elimination of all materialsignificant intercompany balances and transactions. UnlessExcept as otherwise indicated, the subsidiaries are consolidated atas of December 31, 20082009 and  20072008 and for the years ended December 31, 2009, 2008 and 2007, and 2006, and the percentagespercentage of voting interest is the onepercentage presented below. The date of the financial statementsstatement date of our subsidiaries used for consolidation purposes is the same as that of Itaú Unibanco  Holding. The followingOur main subsidiaries are presented in the table presents our main subsidiaries.below.

  
Country ofIncorporation
incorporationcountry
 
PercentageVoting interest % as ofvoting
interest at December12/31/2009
31, 2008
Afinco Américas Madeira, SGPS, Soc. Unipessoal Ltda. Portugal 100%100.00%
Banco Dibens S.A. (6)Brazil100.00%
Banco Fiat S.A. Brazil 99.99%99.99%
Banco Investcred Unibanco S.A. (6)Brazil50.00%
Banco Itaú Argentina  S.A. (1) Argentina 100%100.00%
Banco Itaú BBA S.A.  (2)(5) Brazil 99.99%99.99%
Banco Itaú Chile S.A. (3)(1) Chile 99.99%99.99%
Banco Itaú Europa Luxembourg S.A. (4)(2) Luxembourg 99.98%99.98%
Banco Itaú Europa  S.A. (4)(2) Portugal 99.99%99.99%
Banco Itaú Uruguay S.A. (3)(1) Uruguay 100%100.00%
Banco ItauBank S.A. (5) Brazil 100%100.00%
Banco Itaucard S.A. Brazil 99.99%99.99%
Banco Itaucred Financiamentos S.A. Brazil 99.99%99.99%
Banco  Itauleasing S.A. Brazil 100%99.99%
BIU Participações S.A. (3)Brazil66.15%
Cia Itaú de Capitalização Brazil 99.99%99.99%
Dibens Leasing S.A. - Arrendamento Mercantil (6)Brazil99.99%
FAI - Financeira Americanas Itaú S.A. Crédito, Financiamento e Investimento Brazil 50.00%50.00%
Fiat Administradora de Consórcios Ltda. Brazil 99.99%99.99%
Financeira Itaú CBD S.A. Crédito, Financiamento e Investimento Brazil 50.00%50.00%
Hipercard Banco Muíltiplo S.A. (6)Brazil99.99%
Interbanco S.A (6)Paraguay99.99%
Itaú Administradora de Consórcios Ltda. Brazil 99.99%99.99%
Itaú Bank, Ltd. Cayman Islands 100%100.00%
Itaú Corretora de Valores S.A. Brazil 99.99%99.99%
Itaú Seguros S.A. Brazil 100%100.00%
Itaú Unibanco S.A. (6) Brazil 98.67%100.00%
Itaú Vida e Previdência S.A. Brazil 99.99%100.00%
Itaubank LeasingItaúsa Export S.A. Arrendamento Mercantil(2) Brazil 99.99%100.00%
Itaúsa ExportLuizacred S.A. (4)Sociedade  Crédito, Financiamento e Investimento (6) Brazil 100%50.00%
Oca Casa Financiera S.A. (3) Uruguay 100%100.00%
Orbitall Serviços e Processamento de Informações Comerciais S.A. Brazil 99.99%99.99%
Ponto Frio Leasing S.A. Arrendamento Mercantil (6)Brazil50.00%
Redecard S.A.(4)Brazil50.01%
Unibanco - União de Banco Brasileiros S.A. (6)Brazil100.00%
Unibanco Holdings S.A. (6)Brazil100.00%
Unibanco Cayman Bank Ltd (6)Cayman Islands100.00%
Unibanco Participações Societárias S.A. (6) (8)Brazil99.99%
Unicard Banco Múltiplo S.A. (6)Brazil99.99%
(1) Current denomination of Banco Itaú Buen Ayre S.A..
(2) The interest changed as compared to December 31, 2007 and 2006 from 74.49% to 99.99%, as result of the purchase of all shares of HE Participações S.A. on December 2008, which held 50% of voting capital and 16,67% of total capital of Itaú BBA Participações S.A.. (See Note 3.c)
(3) Consolidated since its acquisition in April 2007. (See Note 3.d and 3.e)
(4)(2) On November 2008 Itaú Unibanco acquired from Itaúsa, its then controlling shareholder, a controlling interest in Itaúsa Export S.A. and its subsidiaries. As further described in Note 3.b3.2.a the transaction has been accounted for as a transaction between entities under common control resulting in Itaúsa Export S.A. and its subsidiaries being combined in these financial statements since January 1, 2006.2007.
(3) Company consolidated as from February 2009 as a result of the acquisition of  Unibanco, which held a 24.49% interest.
(4) Company consolidated as from March 2009, date of the acquisition of control as described in note 3.1.b.
(5) Consolidated since itsThe interest changed as compared as compared to December 31, 2007 from 74.49% to 99.99% as result of the purchase of all shares of HE Participações S.A. on December 2008, which held 50% of voting capital and 16.67% of total capital of Itaú BBA Participações S.A. (See Note 3.2.e)
(6) Company consolidated as from February 2009 as a result of the acquisition on August 30, 2006.of control in Unibanco and Unibanco Holdings.
(6)(7) Current denomination of Banco Itaú S.A. As further described in Note 3.b,3.2.d shares of Itaú Unibanco S.A. were issued to Itaúsa on November 2008 as part of the purchase price for acquisition of a controlling interest in Itaúsa Export S.A. and its subsidiaries. As a result voting interestas from November 28, 2008 Itaú Unibanco ceased to be a wholly-owned subsidiary of Itaú Unibanco Holding in Itaú Unibanco S.A. that was previously of 100%and the interest was reduced to 98.67%. Contemporaneously with the issuance of shares to the selling shareholders of Unibanco, Itaúsa exchanged such shares of Itaú Unibanco for shares of  Itaú Unibanco Holdings and Itaú Unibanco became again a wholly-owned subsidiary of Itaú Unibanco Holding.
(8) See note 3.1.a

F-11

According to ASC 820 (Formerly FIN 46R46(R) “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51”) of the Financial Accounting Standard Board, we consolidate variable interest entities on which we are the primary beneficiary.beneficiary as described below.

(i)    Itaú BBA Participações S.A. (“Itaú BBA Participações”) – We consolidated Itaú BBA Participações based on ASC 820 (Formerly FIN46(R)) until December 2008 when we acquired all the outstanding shares of BBA HE Participações S.A. which in turn held 16.67% and 50% of the total and voting shares of Itaú BBA Participações resulting in us obtaining control and Itaú BBA Participações becoming our wholly-own subsidiary.

Considering the disproportion between our voting interest (50%) and our economic interest (95.75%) in Itaú BBA Participações, the holding company for the controlling voting capital of Itaú BBA, we concluded that this company was a variable interest entity, as defined in ASC 820 (Formerly FIN 46(R)), and that we were the primary beneficiaries of such entity. As primary beneficiary of this entity, according to ASC 820 (Formerly FIN 46(R)), we were required to consolidate it and, as a result, we consolidated Itaú BBA Participações and its subsidiaries. As from December 2008 we continued to consolidate Itaú BBA Participações since we control it.

F-11


(ii)    Miravalles Empreendimentos e Participações S.A. (“Miravalles”) and Financeira Itaú CBD S.A. Crédito, Financiamento e Investimento (“FIC”) - We arewere the primary beneficiary of Miravalles. Miravalles was the holding company of Financeira Itaú CBD S.A. Crédito, Financiamento e Investimento (“FIC”), a financial institution that has the exclusive right to offer financial products and services to customers of Companhia Brasileira de Distribuição (“CBD”), a retail company.company until December 31, 2009. On December 31, 2009 Miravalles merged into FIC through a down-stream merger. We consolidateconsolidated Miravalles since we acquired an interest on it in August 2004.2004 and we consolidate FIC as from such date.

We have concluded to be the primary beneficiary of Miravalles and of FIC, since Itaú Unibanco Holding and CBD are the only shareholders with 50% of interest each and Itaú Unibanco Holding is disproportionally exposed to the entity’s losses greater than its 50% interest on it. That is due to the fact that Itaú Unibanco Holding is the entity that finances FIC operations, through debt issued by FIC. The down-stream merger did not affect the interest of Itaú Unibanco Holding and CBD in FIC which remained 50% for each.

Total consolidated assets of MiravallesFIC as of December 31, 20082009 amount to R$ 2,2483,387 (including intangible assets of R$ 551)507) and total consolidated liabilities amount to R$ 1,5102,370 and its assets would be available to its creditors to meet its obligations. Those creditors have no right over the assets of Itaú Unibanco Holding.

Itaú Unibanco Holding has financed, through investment in certificates of deposit issued by Miravalles and its subsidiaries,FIC the activities of Miravalles. There was not a contractual requirement to provide such financing.FIC. The balance of such certificates of deposits in the consolidated financial statements of FIC at December 31, 2009, and Miravalles at December 31, 2008 2007 and 20062007 was R$ 676, R$ 402 and R$ 446, and R$439, respectively. There was not a contractual requirement to provide such financing.

The controlling shareholders Itaú Unibanco Holding and CBD are committed to maintain, through capital contributions, the regulatory stockholders equity of MiravallesFIC at an amount, at least, 25% higher than the minimum regulatory equity that is required according to the regulations of Bacen.Banco Central do Brasil (Central Bank or BACEN).

(iii)    Vitória Participações S.A.S. A. (“Vitória”) - We are also the primary beneficiary of Vitória, the holding company of FAI, a financial institution that has the exclusive right to offer financial products and services to customers of Lojas Americanas S.A. (LASA). We consolidate Vitória since we acquired an interest on it in April 2005.

We also have concluded to be the primary beneficiary of Vitória, since Itaú Unibanco Holding and LASA are the only shareholders with 50% of interest each and Itaú Unibanco Holding is disproportionally exposed to the entity’s losses greater than its 50% interest on it. That is due to the fact that Itaú Unibanco Holding is the entity that finances FAI operations, through debt issued by FAI.

Total consolidated assets of Vitória Participações S.A. as of December 31, 20082009 amount to R$ 1,1091,209 (including intangible assets of R$ 314)291) and total consolidated liabilities amount to R$ 727870 and its assets would be available to its creditors to meet its obligations. Those creditors have no right over the assets of Itaú Unibanco Holding.

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Itaú Unibanco Holding has financed, through investment in certificates of deposits issued by Vitoria and its subsidiaries,FAI the activities of FAI. There was not a contractual requirement to provide such financing. The balance of such certificates of deposits in the consolidated financial statements of VitoriaVitória at December 31, 2009, 2008 2007 and 20062007 was R$ 424, R$ 576 R$ 274 and R$ 139,274, respectively.

The controlling shareholders (Itaú Unibanco Holding and LASA) are committed to maintain, through capital contributions, the regulatory stockholders equity of VitoriaVitória at an amount, at least, 25% higher than the minimum regulatory equity that is required according to the regulations of Bacen.BACEN.

(iv) Pandora Participaçõesão S.A. (“Pandora”) - We had a 50% interest in Pandora, an entity created as result of the partnership with Lojas Americanas described in Note 34.f, that we concluded was a VIE but to which we were not deemed to be the primary beneficiary. In 2008 Pandora was merged into FAI, a consolidated entity as described above. Pandora was created but never undertook any actual business activity.

(v) Luizacred S.A. SCFI (“Luizacred”) – We are also the primary beneficiary of Luizacred, financial institution, which holds the right to offer, distribute and commercialize financial product and services to the clients of Magazine Luiza S.A. (“Magazine Luiza”), a retail company. We have been consolidating Luizacred since February 2009, as a result of the agreement with Unibanco (see Note 3.1.a).

We have concluded to be the primary beneficiary of Luizacred, since Itaú Unibanco Holding and Magazine Luiza are the only shareholders with 50% of interest each and Itaú Unibanco Holding is disproportionally exposed to the entity’s losses greater than its 50% interest on it. That is due to the fact that Itaú Unibanco Holding is the entity that finances Luizacred operations, through debt issued by Luizacred.

Total  assets of Luizacred as of December 31, 2009 amount to R$ 1,577 (including intangible assets of R$ 14) and total  liabilities amount to R$ 1,494 and its assets would be available to its creditors to meet its obligations. Those creditors have no right over the assets of Itaú Unibanco Holding.

(vi) Banco Investcred Unibanco S.A. (“Investcred”) and Ponto Frio Leasing S.A. Arrendamento Mercantil (“Ponto Frio Leasing”) – We are also the primary beneficiary of Investcred, a financial institution which finances installment sales, through loan portfolios, conducted by Globex, a retail company, which control was acquired by CBD on July 2009. Investcred holds 100% of the voting capital of Ponto Frio Leasing, a leasing company.

We have been consolidating Investcred and Ponto Frio Leasing since February 2009, as a result of the agreement with Unibanco (see Note 3.1.a).

We have concluded to be the primary beneficiary of Investcred and Ponto Frio Leasing, since Itaú Unibanco Holding and Globex are the only shareholders with 50% of interest each and Itaú Unibanco Holding is disproportionally exposed to the entity’s losses greater than its 50% interest on it. That is due to the fact that Itaú Unibanco Holding is the entity that finances Investcred and Ponto Frio Leasing operations, through debt issued by them.

Total consolidated assets of Investcred and Ponto Frio Leasing as of December 31, 2009 amount to R$ 75 and total consolidated liabilities amount to R$ 41 and its assets would be available to its creditors to meet its obligations. Those creditors have no right over the assets of Itaú Unibanco Holding.

 
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NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES

The accounting and financial reporting policies of Itaú Unibanco Holding conformin accordance  with accounting principles generally accepted in the United States of America ("US GAAP") which differ in certain significant respects from the accounting principles we apply in the statutory financial statements of Itaú Unibanco Holding prepared in accordance with accounting practices adopted in Brazil that include, when applicable, the rules and regulations of the Banco Central do Brasil ("Central Bank"),BACEN, the Comissão de Valores Mobiliários ("CVM") - the Brazilian securities commission, the Superintendência de Seguros Privados ("SUSEP") - the Brazilian insurance regulator, and  the Agência Nacional de Saúde Suplementar (“ANS”) – the Brazilian health market regulator.

Financial information included in these financial statements including, but not limited to, stockholders'shareholders' equity and net income, differ from that included in the statutory accounting records and statutory financial statements as result of adjustments made to reflect the requirements of US GAAP.

The preparation of financial statements in conformity with US GAAP require management to make estimates and assumptions that affect the reported amounts of assets, liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting periods.

Actual results could differ from those estimates. The consolidated financial statements include various estimates and assumptions, including, but not limited to, the adequacy of the allowance for loan and lease losses, estimates of fair value of financial instruments, the amount of valuation allowances on deferred tax assets, the amount of insurance and private retirement plan reserves, the selection of useful lives of certain assets, the determination of the need for and the amount of impairment charges on long-lived assets and the determination of probability and the estimate of contingent losses, as well as the use of significant judgment and interpretation in the application of tax law when determining the amount of taxes payable, including the analysis of uncertain tax positions with respect to taxes on income.

The following is a description of the significant accounting policies applied.

a)   Constant currency restatement

Until 1995, the CVM required publicly traded companies subject to its reporting requirements to prepare and publish:

the statutory financial information prepared according to Brazilian corporate law (“Corporate Law”) and
as supplemental information, financial statements expressed in currency of constant purchasing power (prepared following the "constant currency method"). This requirement to present financial statements following the constant currency method was eliminated when indexation of financial statements for Brazilian statutory and tax purposes was discontinued on January 1 st , 1996.

Until June 30, 1997, Brazil was considered to be  a hyperinflationary economy and, accordingly, for purposes of the accompanying financial statements, all balances and transactions prior to that date have been remeasured at June 30, 1997 price-levels.

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The index selected for this remeasurement up to December 31, 1995 was the Fiscal Reference Unit (UFIR), which we consider the most appropriate index since it is the same index that has been established by the tax authorities for preparation of financial statements under Corporate Law as well as the index selected by the CVM for the preparation of the supplemental financial statements following the constant currency method. As from January 1 st , 1996, with the elimination of the requirement to present constant currency financial statements, no index has been established for this purpose. The index we selected for remeasurement as from January 1, 1996 to June 30, 1997, the date on which we discontinued the constant currency methodology, is the General Price Index-Market (IGP-M), an independent general price level index calculated by the Fundação Getulio Vargas.

As from July 1, 1997, the date on which we determined that Brazil was no longer a hyperinflationary economy, balances and transactions are expressed in nominal reais, as required by US GAAP and the United States Securities and Exchange Commission ("SEC") guidelines.

b)   Foreign currency translation into Brazilian Reais

Transactions in foreign currencies are recorded at the prevailing exchange rate at the date of the related transactions. Monetary Assets and liabilities denominated in foreign currencies are translated into Brazilian reais at year-end exchange rates. The related transaction gains and losses are recognized in the statement of operations as they occur.

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Financial statements of operations outside Brazil with a functional currency other than the Brazilian real have been translated on the following basis:

• assets and liabilities at the year-end exchange rate;
assets and liabilities at the year-end exchange rate;
• revenues and expenses at the average exchange rate for the year, and
revenues and expenses at the average exchange rate for the year, and
gains or losses arising from translation are included under Cumulative Translation Adjustment in stockholders'shareholders' equity.

Financial statements of operations outside Brazil that have the Brazilian real as the functional currency have been translated on the following basis:

assets and liabilities, substantially all of which are monetary in nature, at the year-end exchange rate;
revenues and expenses at the average exchange rate for the year, and
transactions gains and losses are reported in the income statement under Net gain (loss) on transaction of foreign subsidiaries.

c)   Cash and cash equivalents

For purposes of the consolidated statement of cash flows, until December 31, 2007 we defined cash and cash equivalents as cash and due from banks, interest-bearing deposits in other banks and securities purchased under agreements to resell with original maturities of 90 days or less. As from December 1, 2008, management of Itaú Unibanco Holding has decided to change its accounting policy with respect to the definition of cash and cash equivalents to better align the definition used in the financial statements with its cash management policies and systems. Cash and cash equivalents in these financial statements has been defined as cash and due from banks and interest-bearing deposits in other banks with original maturities of 90 days or less. As a result of this change, the consolidated statement of cash flows of December 31, 2007 and 2006 and the information in Note 4 are beinghas been retroactively restated to reflect the effect of such change.

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d)   Presentation of interest-earning assets and interest-bearing liabilities

Interest-earning assets and interest-bearing liabilities are presented in the consolidated balance sheet at the amortized cost using the effective yield interest method. Such presentation is required since accrued financial charges are added to the outstanding principal each period for substantially all those assets and liabilities. Total financial charges accrued on the outstanding principal of assets was R$ 16,87323,505 and R$ 12,21216,873 at December 31, 20082009 and 2007,2008, respectively. Total financial charges accrued on outstanding principal of liabilities was R$ 18,66429,701 and R$ 8,12318,664 at December 31, 2008,2009, and 20072008 respectively.

e)   Securities purchased under resale agreements and securities sold under repurchase agreements

We enter into purchases of securities under agreements to resell ("resale agreements") and sales of securities under agreements to repurchase ("repurchase agreements"). Resale agreements and repurchase agreements are accounted for as secured lending and secured borrowing transactions, respectively.

The carrying amount of Securities purchased under resale agreements was R$ 44,78356,714 and R$ 21,30944,783 at December 31, 20082009 and 2007,2008, respectively. The carrying amount of Securities sold under repurchase agreements was R$ 49,49266,174 and R$ 23,39949,492 at December 31, 20082009 and 2007,2008, respectively.

The amounts advanced under resale agreements and the amounts borrowed under repurchase agreements are carried on the balance sheet at the amount advanced or borrowed plus accrued interest. Interest earned on resale agreements and interest incurred on repurchase agreements are reported as Interest income and Interest expense.

The carrying amount and classification of financial assets transferred as collateral in resalerepurchase agreements (that are accounted for as secured borrowing transactions) as of December 31, 20082009 and 20072008 are as follows: Trading assets – R$ 2,7986,336 and R$ 1,173,2,798, Available-for-sale securities – R$ 8753,019 and R$ 693875 and Held-to-maturity securities – R$ 529124 and R$ 271,529, respectively.

Securities accepted as collateral in our resale agreements may be used, when permitted by the terms of the agreements, as collateral of our repurchase agreements or may be sold. Total amount of securities received as collateral in our resale agreements that were repledged or sold as of December 31, 20082009 and 20072008 amounts to R$ 59,32151,853 and R$ 28,364,45,873, respectively.

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In Brazil, custody control of local securities is centralized and the possession of securities purchased under resale agreements is temporarily transferred to the purchaser. We closely monitor the market value of the underlying securities collateralizing the resale agreements and adjust the amount of collateral as appropriate.

f)   Trading assets and liabilities, including derivatives

We classify debt and equity securities in accordance with FASB Accounting Standards Codification (ASC) 320, Investments – Debt and Equity Securities (formerly Statement of Financial Accounting Standards (SFAS) 115 "Accounting for Certain Investments in Debt and Equity Securities"). These classifications are determined based on our intent with respect to the securities on the date of purchase.

Trading assets include securities classified as trading, in accordance with ASC 320 (formerly SFAS 115115) and derivative financial instruments which have not been designated for hedge accounting.

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Trading securities are carried at estimated fair value. Gains and losses, both realized and unrealized, are included in Trading income (losses) in the consolidated statement of income.

Derivatives recorded in Trading assets and in liabilities, included within Other liabilities, are those entered into for trading purposes with our customers or which do not qualify as hedges (primarily derivatives used to manage our overall exposure to changes in interest rates and foreign currencies).hedges. They are carried at fair value with realized and unrealized gains (losses) recognized in Trading income (losses).

When determining the fair value of trading assets and liabilities we follow the criteria established by ASC 820, Fair Value Measurements and Disclosures (formerly SFAS 157 “Fair Value Measurements”), as further detailed in Note 28.

We account separately for the embedded derivatives included in hybrid financial instruments, when this segregation is required by ASC 815, Derivatives and Hedging (formerly SFAS 133, “Accounting for Derivative Instruments and Hedging Activities”). Upon entering into the hybrid instruments, we record the embedded derivative instrument at its fair value and subsequently remeasure it at fair value at each reporting date with gains and losses recognized in Trading income (losses) in the consolidated statement of income. Option-based embedded derivatives shall not be adjusted to result in the embedded derivative being at the money at inception and in separating the embedded derivative the strike price shall be based on the stated terms documented in the hybrid instrument.

As from January 1, 2007, we adopted ASC 815-15 Derivatives and Hedging - Embedded Derivatives (formerly SFAS 155, “Accounting for Certain Hybrid Financial Instruments”). According to this rule, hybrid financial instruments that contain an embedded derivative that had to be bifurcated according to ASC 815 (formerly SFAS 133133) can be recorded entirely at its fair value if there is an irrevocable option for this accounting treatment on an instrument-by-instrument basis. We had not elected the option not to bifurcate for any instrument.

When we have entered into a legally enforceable netting agreement with counterparties to derivatives, we report derivative assets and derivative liabilities separately under assets and in liabilities in the consolidated balance sheet without off-setting the different instruments under netting master agreements that is allowed under ASC 210-20, Balance Sheet – Offsetting  (formerly FIN 39 – “Offsetting Amounts Related to Certain Contracts”). We have not posted cash collateral at December 31, 2008. Our obligation to return cash collateral, not off-setted against the related derivatives, amounts to R$ 46 at December 31, 2009, and R$605 at December 31, 2008.

g)   Available-for-sale and held-to-maturity securities

Securities are classified as available-for-sale when, in management's judgment, they may be sold in response to or in anticipation of changes in market conditions. Available-for-sale securities are carried on the balance sheet at fair value. Unrealized gains and losses on these securities are reported, net of applicable taxes, as a separate component of stockholders’shareholders’ equity. Interest, including amortization of premiums and discounts, and dividend income on equity securities, are reported in the respective account in the consolidated statement of income. Average cost is used to determine realized gains and losses on sales of available-for-sale securities, which are recorded under Net gain (loss) on sale of available-for-sale securities in the consolidated statement of income.

Securities that Itaú Unibanco Holding has the positive intent and ability to hold to maturity are classified as held-to-maturity and are carried at amortized cost, adjusted for amortization of premiums or discounts. Interest, including amortization of premiums and discounts, is reported under Interest on held-to-maturity securities in the consolidated statement of income.

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Unrealized gains or losses on available-for-sale securities on the date when debt securities are transferred into the held-to-maturity category continue to be reported as a separate component of stockholders'shareholders' equity. The unrecognized gain or loss is amortized over the remaining period to maturity as an adjustment of yield and consistent with the amortization of the related premium or discount.

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When a decline in fair value of available-for-sale or held-to-maturity securities below its carrying amount is considered to be “other than temporary” we recognize an impairment loss in the consolidated statement of income for the difference between the carrying amount of the impaired security and its fair value as of the date of the impairment. Such fair value as of the date of the impairment becomes the new cost basis of the security.

In determining whether a decline in value is “other than temporary”, we use a combination of factors aimed at determining whether recovery of the value of a security is likely. These factors include, besides the duration and magnitude of the decline in value below its carrying amount, other factors, such as the likelihood, based on the historical behavior of the value of particular securities that a decline in value will be recovered, as well as, for debt securities the likelihood that we will be unable to collect either principal or interest.

h)   Derivatives other than trading

Certain derivatives used to hedge exposures or to modify the characteristics of financial assets and liabilities which meet the following criteria are accounted for as hedges in accordance with ASC 815, Derivatives and Hedging (formerly SFAS 133, “Accounting for Derivative Instruments and Hedging Activities”).

To qualify as a hedge, the derivative must be:

designated and qualifying as a hedge of a specific financial asset or liability at the inception of the contract,
highly effective at achieving offsetting the exposure to changes in its fair value in relation to the fair value of the item being hedged, or with respect to changes in the expected cash flow, if a clashcash flow hedge, both at inception and over the life of the contract, and
formally and contemporaneously documented as part of a hedging relationship including the risk management objective and strategy, identification of the hedging instrument and of the hedged item and the risk exposure, how effectiveness is to be assessed prospectively and retrospectively, and how ineffectiveness is to be measured.

The extent to which a hedging instrument has been and is expected to continue to be effective at achieving offsetting changes in fair value or cash flows must be assessed and documented at least quarterly. Any ineffectiveness must be reported in current-period earnings. If it is determined that a derivative is not highly effective at hedging the designated exposure, hedge accounting is discontinued.

According to the ASC 815 (formerly SFAS 133,133), there are three types of hedge strategies: (1) fair value hedge; (2) cash flow hedge; and (3) hedge of a net investment in a foreign operation.

We held no derivatives which qualified as hedges at December 31, 2007  and 2006 and all our derivatives as of such dates and during those periods were recorded at fair value with changes in fair value recognized in Trading income (losses) in the consolidated statement of income.

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During the year ended December 31, 2008 we have designated certain derivatives as the hedging instrument for cash flow hedges of the variability of interest rate payments associated with existing subordinated debt.

For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative is reported as a component of “Accumulated other comprehensive income - AOCI” and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. The portion of gains and losses on the derivatives representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings. All hedging derivative amounts affecting earnings are recognized consistent with the classification of the hedged item, in net interest income.

If the hedge relationship is terminated, as it was the case for certain of our hedge relationships in 2009 that did not longer meet the effectiveness requirement, the change in fair value of the derivative recorded in AOCI is recognized when the cash flows that were hedged occur, consistent with the original hedge strategy. If it is probable that the forecasted transaction will not occur according to the original strategy, any related derivative amounts recorded in AOCI would be immediately recognized in general earnings.

i)   Loans and leases
Loans and leases general
Loans and leases are stated at amortized cost using the effective yield interest method, including interest receivable and contractual indexation. Loan origination fees and certain direct origination costs are deferred and recognized as adjustments to interest income over the lives of the related loans. Interest income is recorded on the accrual basis and is added to the principal amount of the loans and leases each period. The accrual of interest is generally discontinued on all loans and leases that are not considered collectible as to principal or interest, unless the collection of both principal and interest is assured by collateral, guarantees or other securities and is in process of collection. Leases receivable are recorded at the aggregate of lease payments receivable plus the estimated residual value of the leased property, less unearned income. Loans acquired with evidence of deterioration of credit quality since its origination (such as those acquired in connection with a business combination).

 
Purchased impaired loans
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Purchased impaired loans are initially recognized at the purchased price or in the case of business combinations at the present value of amounts to be received. Subsequently the valuation allowance should only reflect losses incurred after acquisition. The excess of cash flows expected at acquisition over the initial investment should be recognized as interest income over the life of the loan when the timing and amount of cash flow expected to be collected can be made. If upon subsequent evaluation is concluded that is probable that not all the cash flows expected at acquisition will be collected the loan shall be considered impaired. If upon subsequent evaluation is probable that significant additional cash flows will be collected any valuation allowance should be reverted and the amount of the accretable-yield should be reviewed and the reviewed accreditable yield should be applied over the life of the loan.

j)   Non-accrual and impaired loans and leases

Loans and leases are considered impaired when in our judgment all amounts due, including accrued interest, are no longer considered collectible in accordance with ASC 310-10-35, Receivables – Subsequent Measurement (formerly SFAS 114 “Accounting by Creditors for Impairment of a Loan”), amended by ASC 310-10-50, Receivables – Disclosure (formerly SFAS 118, “Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosures”).

We consider impaired those loans and leases more than 90 days overdue, those that have already been renegotiated and in addition are over 60 days overdue and, for larger balances non-homogeneous loans, when they present certain deterioration indicators.

We measure loans and leases considered impaired based on estimates of cash flows expected to be collected discounted at the original effective rate of the loan.

We consider loans and leases more than 60 days overdue as non-accrual and we stop accruing interest on them. Loans and leases are charged off against the allowance when the loan is not collected or is considered permanently impaired. Charge-off normally occurs if no payment is received within 360 days except for loans with original maturities of more than 36 months that are charged-ff after 540 days overdue (see Note 9). Charge-offs may be recognized earlier than 360 days if it is concluded that the loan is not recoverable.

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k)   Allowance for loan and lease losses

The allowance for loan and lease losses is a valuation allowance that has been recorded for probable losses inherent in the portfolio at the balance sheet date. The determination of the level of the allowance rests upon various judgments and assumptions, including current economic conditions, loan portfolio composition, prior loan and lease loss experience and evaluation of credit risk related to individual loans. Our process for determining the appropriate allowance for loan and lease losses includes management's judgment and the use of estimates. The adequacy of the allowance is reviewed regularly by management.

Our entire allowance is available to cover credit losses inherent to our entire portfolio. In order to determine the amount of our allowance for loan and lease losses the portfolio is classified in two main categories for each of which a specific methodology is used to estimate the inherent losses. In the first category, "credits individually reviewed", we include large corporate non-homogenous loans representing significant credit exposures, which need to be individually reviewed for impairment. In the second category, "credits reviewed on a portfolio basis", are included small homogenous credit portfolios, which are comprised of commercial and consumer loans. To determine the amount of the allowance corresponding to the "credits individually reviewed", which are considered impaired, we use methodologies that consider both the quality of the customer and the nature of the transaction, including its collateral, in order to estimate the expected cash flows from these loans. For "credits individually reviewed" and not considered to be impaired, loans are classified on different rating categories using several qualitative and quantitative factors applied through internally developed models. Inherent losses for each rating are estimated considering our historical experience on this portfolio, which is a low-default portfolio, and we monitor our inherent losses estimate against market-wide loss experiences. To determine the amount of the allowance corresponding to "credits reviewed on a portfolio basis", loans that correspond to small homogenous loans are segregated into differentiated portfolios based on the underlying risks and characteristics of each group.  The allowance for loan losses is determined for each of those groups through a process that considers historical delinquency and credit loss experience over the most recent years, captured by transition matrices and applied to the current group of the portfolio. Adjustments to historical loss rates are introduced when necessary to reflect changes in the economic environment and current conditions such as the weakened economic environment observed during the last quarter of 2008 that continued to affect the portfolio of loans granted before the deterioration of the economic environment in late 2008.

The allowance is increased by provisions and recoveries of loans and leases, previously charged off, and is reduced by charged-off loans and leases deemed uncollectible.

l)   Investments in unconsolidated companies

Investments in unconsolidated companies, where we own between 20% and 50% of voting capital, are accounted for using the equity method of accounting. Under this method our share of the results of the companies, as measured under US GAAP, is recognized in the consolidated statement of income as Equity in earnings of unconsolidated companies, net, and dividends are credited when declared to the Investments in unconsolidated companies account in the consolidated balance sheet. The outstanding balance of the investment includes goodwill and intangible assets related to those investments, when applicable, which are included in the analysis of whether a decline in value of the investment is considered to be "other-than-temporary".

 
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Investments in companies of less than 20% of voting capital with no readily determinable market value under ASC 320 (formerly SFAS 115115) are recorded at cost (unless we have the ability to exercise significant influence over the operations of the company in which case we use the equity method) and dividends are recognized in income when received (see Note 11).

We recognize an impairment loss whenGoodwill and intangible assets related to affiliates are presented in these financial statements as part of the investment in the affiliate and included in the analysis of whether a lossdecline in value of anthe investment in a company accounted for following the equity method or recorded at cost is considered to be “other than temporary”.other-than-temporary. An impairment charge of goodwill related to our equity method investment in Banco BPI S.A. has been recorded through December 31, 2009. The total impairment amount was R$ 302 and was recorded as equity in earnings of unconsolidated companies, net. No goodwill impairment related to affiliates has been recorded through December 31, 2008 and 2007.

m)   Foreclosed assets, including real estate

Assets are classified as foreclosed properties and included in Other assets upon actual foreclosure.

Assets received upon foreclosure of loans, including real estate, are initially recorded at the lower of:

• fair value minus estimated costs to sell, or
the carrying value of the loan, with initial differences recorded as a charge to the allowance for loan losses.

Subsequent decreases in the fair value of the asset are recorded as a valuation allowance with a corresponding charge to Non-interest expense. Costs of maintaining such assets are expensed as incurred. In accordance with Brazilian banking regulations, we are required to dispose of such assets within one year of foreclosure.

n)   Premises and equipment

Premises and equipment, including leasehold improvements, are carried at cost which includes capitalized interest in accordance with ASC 835-20, Interest - Capitalization of Interest (formerly SFAS 34 "Capitalization of interest cost"), plus price level restatements up to June 30, 1997 (see Note 2a), less depreciation which is computed on the straight-line method using rates based on the estimated useful lives of such assets.  Leasehold improvements are amortized over the estimated economic life of the improvement.

Costs incurred in developing software or software obtained for internal use, except the costs related to the planning and production stage, have been capitalized in accordance with ASC 350-40, Intangible – Goodwill and Other – Internal-Use Software (formerly Statement of Position "SOP" 98-1 "Accounting for computer software developed or obtained for internal use") and are amortized using the straight-line method over no more than five years.

We assess impairment in accordance with the requirements of ASC 360-10-35, Property, Plant, and Equipment – Subsequent Measurement (formerly SFAS 144 "Accounting for the Impairment or Disposal of Long-Lived Assets") when events and circumstances indicate that such impairment may exist. No impairment charge has been recorded through December 31, 2008.2009.

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Premises and equipment no longer in use is classified as held for sale and carried at the lower of fair value minus estimated costs to sell, or cost. The analysis is made on an individual asset basis. If the fair value of the asset minus the estimated costs to sell the asset is less than the cost of the asset, the deficiency is recognized as a valuation allowance and a charge to the consolidated statement of income.

o)   Goodwill and other intangible assets

According to ASC 350, Intangibles – Goodwill and Other (formerly SFAS 142 “Goodwill and Other Intangible Assets”), goodwill is not amortized but is tested for impairment at least annually, using a two-step approach that involves the identification of “reporting units” and the estimation of its fair value.

Our reporting units are either one of our operating segments or one level below an operating segment. A "reporting unit" would be a component below an operating segment when discrete financial information is available for such component and management of the operating segment regularly reviews the result of the component. Our reporting units are either one of our reporting segments, as presented in Note 32, or one level below our operating segments except in the case of Banco Itaú BBA and Itaú Unibanco – Banking.

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which is a segment with no reporting units.

We determined June 30 of each year to be the date for performing such impairment test. In 2009, 2008 2007 and 2006,2007, goodwill was tested for impairment and it was determined that no impairment was needed. Therefore, no impairment charges were recorded.

Goodwill and intangible assets related to affiliates are presented in these financial statements as part of the investment in the affiliate and included in the analysis of whether a decline in value of the investment is considered to be other-than-temporary.

Intangible assets with finite lives are generally amortized on a straight-line basis over the estimated period benefited. Intangible assets are amortized over their expected useful lives which do not to exceed twenty years. We review our intangible assets for events or changes in circumstances that may indicate that the carrying amount of the assets may not be recoverable, in which case an impairment charge is recognized.

p)   Income taxes

There are two components of the income tax provision: current and deferred. Current income tax expense approximates taxes to be paid or refunded for the applicable period. We account for deferred income taxes by the asset and liability method, as specified in ASC 740, Income Taxes (formerly SFAS 109, "Accounting for Income Taxes"). Under such method, deferred tax assets or liabilities are recognized with a corresponding credit or charge to income for differences between the financial and tax basis of assets and liabilities at each year end. The tax benefit of net operating loss carry-forwards arising from tax losses are recognized as assets. A valuation allowance is recognized on deferred tax assets if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax asset will not be realized. Changes in tax law and rates are reflected in the statement of income in the period in which they are enacted. We treat interest and penalties on income taxes as a component of other non-interest expense.

We implemented FIN 48 - “Accounting for Uncertainty in Income Taxes” (now ASC 740-10-25 Income Tax – Recognition), on January 1, 2007, which sets out a consistent framework to determine the appropriate level of tax reserves to maintain for uncertain tax positions. This interpretation of ASC 740 (formerly FAS 109109) uses a two-step approach wherein a tax benefit is recognized if a position is more-likely-than-not to be sustained. The amount of the benefit is then measured to be the highest tax benefit that is greater than 50% likely to be realized. Interest and penalties on income taxes are treated as a component of other non-interest expense. ASC 740-10-25 (formerly FIN 4848) also sets out disclosure requirements to enhance transparency of an entity’s tax reserves. See Note 21 for additional information. The adoption of ASC 740-10-25 (formerly FIN 4848) did not result in any impact to our consolidated financial position as of January 1, 2007.

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q)   Insurance, private retirement plans and capitalization plans

We recognize revenue from our insurance operations, including our life insurance activities that consist exclusively of one-year term life insurance, as short-duration contracts over the period of insurance coverage. Reserves for insurance claims are established based on historical experience, claims in process of payment, estimated amounts of claims incurred but not yet reported, and other factors relevant to the levels of reserves required. In the normal course of business, we reinsure a portion of the risk underwritten, particularly property and casualty risks that exceed the maximum limits of responsibility that we understand as appropriate for each segment and product (after a study which considers size, experience, specificities and the necessary capital to support these limits). We reinsure our risks with local reinsurers according to the Resolution No. 168 of December 17, 2007, which assures to local reinsurers the preferential offer of each cession of reinsurance in a minimum amount of 60% of the assigned premiums, up to January 16, 2010, and of 40%, after that date. These reinsurance agreements permit recovery of a portion of losses from the reinsurer, although they do not discharge our primary liability as direct insurer of the risks reinsured. The following table presents the amounts of reinsurance receivables, earned premiums and recoveries:

  2008  2007  2006 
Reinsurance receivables at year-ear-end  59   45   47 
Earned premiums under reinsurance contracts during each year  340   348   346 
Recoveries recognized under reinsurance contracts during each year  317   179   375 
  2009  2008  2007 
Reinsurance Receivables at year end  1.147   59   45 
Earned premiuns under reinsurance contracts during each year  759   340   348 
Recoveries recognized under reinsurance contracts during each year  521   317   179 

A liability for premium deficiencies is recognized if the estimated amount of premium deficiencies exceeds deferred acquisition costs.

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We adopted Statement of Position (SOP)ASC 944-30, Financial Services – Insurance – Acquisition Costs (formerly SOP 05-1, “Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection with Modification or Exchanges of Insurance Contracts“). The adoption of this standard did not produce any impact on our financial statements.

The significant majority of our private retirement plans correspond to deferred annuities. On the plans currently offered by us, known as PGBL and VGBL, the investment risk during the accumulation phase of the plans is for the account of the holders of the policies and we account for them as investment contracts in accordance with the requirements of ASC 944-20, Financial Services – Insurance – Insurance Activities (formerly SFAS 97 “Accounting and Reporting by Insurance Enterprise for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments” (now incorporated into). During the accumulation phase of our PGBL and VGLB plans we recognize as a liability the amounts received from the customers that accumulate in their accounts and we recognize as revenue amounts deducted from their contributions as service fees. Customers of PGBL and VGBL plans may redeem the balance accrued in their favor at any moment, after a minimum holding period, and we recognize a liability for investment contracts equal to the balance of the account of the customer. The balance of the investment contract accounts increases as result of contributions made by customers and by interest credited to such accounts and reduces by withdrawals and service fees charged to the customers. Service fees charged to customers of PGBL and VGBL plans are recorded under “Insurance premiums, income on private retirement plans and of capitalization plans” and interest credited to balance accounts is presented under “Interest credited on investment contract accounts balance” in the consolidated statement of operations.

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At the end of a contractually stated term the amounts not redeemed by the customers are used to purchase an annuity, at terms contractually established at the date the customers entered into the plans. During the benefit’s pay-out phase, which is the period after the purchase of the annuity, we recognize a liability for future policy benefits.

We recognize an additional liability in accordance with Statement of Position (“SOP”)ASC 944-20 (formerly SOP 03-1 “Accounting and Reporting by Insurance Enterprises for Certain Non-traditional Long-Duration Contracts and for Separate Accounts”) during the accumulation phase if the present value of the expected benefit payments at the expected annuitization date exceeds the expected account balance at such annuitization date.

On the private retirement plans that are not considered investment contracts we recognize as revenue all amounts collected from customers and we recognize an expense for the constitution of a liability for future policy benefits.

Considering the reduced period since we have been offering retirement plans the amount of liabilities for future policy benefits for annuities in the pay-out phase are minimal.

Under our capitalization plans, our customers deposit with us specified amounts, depending on the plan, which are redeemable by the customers at their full amount with monetary indexation only at the end of the contractually agreed term of the specific plan, which generally exceeds one year. Customers enter, during the term of the plan, into periodic lotteries that present opportunities to win cash prizes. At any moment before the end of the contractually agreed term in which the customers redeem their funds we refund an amount which is only a percentage of the amount originally deposited.  We recognize as revenue over the contractual term the difference between the initial amount deposited with us and the amount to which we are liable as of such date. We recognize as a reduction in revenue the recording of an actuarially determined provision for future prizes.

r)   Deferred policy acquisition costs

The costs that vary with and are related to the production of new insurance business are deferred to the extent that such costs are deemed recoverable from future profits.  Such costs include commissions, costs of policy insurance and underwriting.  Deferred policy acquisition costs are subject to recoverability testing at the time of policy issue and loss recognition testing at the end of each accounting period.

Deferred policy acquisition costs related to insurance contracts are amortized over the expected lives of the contracts. Deferred policy acquisition costs are reduced, when applicable, by any premium deficiency.

s)   Employee benefits

Pension plans and other post-retirement benefits

We are required to make employer contributions to the government pension funds, welfare benefits and redundancy plans, as appropriate, in Brazil and other countries where we operate, which are expensed as incurred.  Such contributions totaled R$ 1,178, R$ 747 and R$ 652 and R$ 562 for the years ended December 31, 2009, 2008 and 2007, and 2006, respectively.

 
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We also sponsor defined benefit plans and defined contribution plans that are accounted for in accordance with ASC 715-30, Compensation – Retirement Benefits – Defined Benefit Plans - Pension (formerly SFAS 87, "Employers' Accounting for Pensions"). Accounting for defined benefits plans requires the use of an actuarial method for determining defined benefit pension costs and provides for the deferral of actuarial gains and losses (in excess of a specific corridor) that result from changes in assumptions or actual experience differing from that assumed. For defined contribution plans we recognize as an expense in the consolidated statement of income the contributions to the plan during the relevant period. Some of the business we acquired also sponsor health-care post-employment benefit plans and we are committed by the purchase agreements to maintain such benefits for a specified period of time. We account for such health-care post-retirement benefits in accordance with ASC 715-60, Compensation – Retirement Benefits – Other Postretirement (formerly SFAS 106 "Employers' Accounting for Postretirement Benefits Other than Pensions").

Effective from December 31, 2006, pursuantPursuant to  theASC 715-20, Compensation – Retirement Benefits – Defined Benefit Plans - General (formerly SFAS 158, “Employers’ Accounting for Defined Benefit Pension and Other Post-Retirement Plans”), Itaú Unibanco Holding started towe recognize deferred actuarial gains and losses and unrecognized prior service cost in the consolidated balance sheet, directly against stockholders’shareholders’ equity (“Other Accumulated Comprehensive Income – Defined Benefit Pension Plans and Other Post-Retirement Plans”).

At December 31, 2006, the effects of adopting the SFAS 158 on Itaú Holding’s balance sheet are shown below:

Effects of change - SFAS 158 
Before
application of
SFAS 158
  Adjustments  
After application
of SFAS 158
 
Other assets - prepaid pension plans  748   1,268   2,016 
Other assets - deferred tax assets  -   (506)  (506)
Total assets  748   762   1,510 
             
Other liabilities - pension plan benefits accrued  427   (222)  205 
Total liabilities  427   (222)  205 
Other accumulated comprehensive income, net of taxes  -   984   984 
Total stockholders' equity  321   984   1,305 
Total Liabilities + Stockholders' Equity  748   762   1,510 

Stock option plan

We adopted, effective January 1, 2005, applying the modified prospective method,account our stock options plans according to ASC 718 – Compensation – Stock Compensation (formerly SFAS 123 (Revised) - “Share-based Payment“). SFAS 123R addresses the accounting for employee stock options and eliminates the alternative use of the intrinsic value method of accounting that was provided in Statement 123 as originally issued. This statementrule requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments, based on the fair value of the award. That cost will be recognized over the period during which an employee is required to provide services in exchange for the award (vesting period). The fair value of employee share options and similar instruments is estimated using option-pricing models adjusted to the unique characteristics of those instruments.

During the year ended December 31, 2005 we have accounted for our stock option as an equity award under SFAS 123 (R). During the year ended December 31, 2006 we have concluded that sinceSince the exercise price of thesome of our stock options is adjusted based on changes in a general inflation index itthey should be accounted for as a liability award under ASC 718 (formerly SFAS 123 (R)). ConsideringOur stock options that the effect of havinghave no exercise price are accounted for stock options as an equity award during the year ended December 31, 2005 is not material to our consolidated financial statements we have modified our method of accounting as from January 1, 2006 without restating the financial statements for prior years. As from January 1, 2006 we account for our stock options as liability awards and, as such, compensation cost is computed based on the fair value of the instruments remeasured at each balance sheet date. During 2006 we recognized stock based compensation for R$ 291 that should have been recognized in 2005.under ASC 718.

t)   Guarantees granted

We adopt the ASC 460, Guarantees (formerly FASB Interpretation No. 45 (“FIN 45”) “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Includingincluding Indirect Guarantees of Indebtedness of Others”) to account for our agreements on guarantees granted.

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We recognize a liability, presented under “Other Liabilities”, for the fair value of guarantees granted at the date on which we issue the guarantee. Fair value is generally represented by the price we charge the customer to issue the guarantee. Subsequent to issuance of the guarantee we recognize a reduction in the amount of the fair value originally recorded over the period from issuance until the guarantee expires; we recognize the reduction in “Fee and Commission Income” in the consolidated statement of income. If we conclude that it is probable that we will incur a loss in relation to the guarantee issued, we recognize a provision for the estimated amount of the probable loss which is also presented under “Other liabilities” in the consolidated balance sheet.

u)Contingent gains and losses

Contingent gains and losses are assessed, recognized and disclosed according to the provisions set forth in ASC 450, Contingencies (formerly SFAS 5 – “Accounting for Contingencies”).

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Contingent gains and losses refer to potential rights or obligations arising from past events, the occurrence of which is dependent upon future events.

·Contingent gains: they are not recognized in our financial statements, except when we understand realization is certain, usually represented by favorable claims awarded to us in a final and unappealable judgment and the actual recovery of the claim through either the receipt or their legal offset against another liability.

·Contingent losses: basically arise from administrative proceedings and lawsuits, inherent in the normal course of business, filed by third parties, former employees and governmental bodies, in connection with civil, labor, tax (other than tax on income) and social security lawsuits. These contingencies are measured based on our best estimates, considering the opinion of legal advisors when considered probable that financial resources shall be required to settle the contingency and the amount may be reasonably estimated. Contingencies are classified either as probable, for which provisions are recognized; possible, which are disclosed but not recognized; or remote, for which recognition or disclosure are not required. Contingent amounts are measured through the use of models and criteria which allow reasonably estimates, in spite of the inherent uncertainty in their term and amounts.

Escrow deposits are adjusted in accordance with the terms of current legislation.

Contingent losses guaranteed by indemnity clauses provided by third parties, such as in business combinations consumated before January 1, 2009, are recognized when a claim is asserted with simultaneous recognition of the corresponding receivable, when its collectibilitycollectability is considered probable. For business combinations consummated after January 1, 2009 indemnification assets are recognized at the same time and measured on the same basis as the indemnified item, subject to collectibility or contractual limitations on the indemnified amount.

v)  Treasury stock

Common and preferred shares reacquired are recorded under “Treasury Stock” within stockholders’shareholders’ equity at their acquisition price.

Shares held in treasury that are subsequently sold, such as those sold to grantees under our Stock Option Plan, are recorded as a reduction in treasury stock at the average price of the shares in treasury held at such date. The difference between the sale price and the average price of the shares in treasury is recorded as a reduction or increase in additional paid-in capital.

Shares held in treasury that are cancelled are recorded as a reduction in treasury stock against appropriated retained earnings, at the average price of the shares held in treasury at the cancellation date.

w)   Interest on stockholders'shareholders' equity

As from January 1, 1996, Brazilian corporations are permitted to attribute a tax-deductible notional interest charge on stockholders'shareholders' equity. For US GAAP purposes, the notional interest charge is treated as a dividend and is, accordingly, shown as a direct reduction of stockholders'shareholders' equity in the financial statements. The related tax benefit is recorded in the consolidated statement of income.

x)   Earnings per share

Earnings per share are computed by dividing net income by the weighted average number of common and preferred shares outstanding for each year presented. Weighted average shares are computed based on the periods for which the shares are outstanding.

 
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Earnings per share are presented based on the two types of stock issued by Itaú Unibanco Holding. Both types, common and preferred, participate in dividends on substantially the same basis, except that preferred shares are entitled to a priority non-cumulative minimum annual dividend of R$ 0.022 per share. Earnings per share are computed based on the distributed earnings (dividends and interest on stockholders'shareholders' equity) and undistributed earnings of Itaú Unibanco Holding after giving effect to the preference indicated above, without regard to whether the earnings will ultimately be fully distributed. Earnings per share amounts have been determined as though all earnings will be distributed and computed following the “two class” method established by ASC 260, Earnings Per Share (formerly SFAS 128 “Earnings per Share”).

Itaú Unibanco Holding has issued stock options (Note 26) whose dilutive effects are reflected in diluted earnings per share by application of the “treasury stock method“. Under the treasury stock method, earnings per share are calculated as if options were exercised and as if the assumed proceeds (consisting of funds to be received upon exercise of the stock options and the amount of compensation cost attributed to future services and not yet recognized) were used to purchase our own stock.

y)   Fee and commission income

We earn fee income from investment management, credit card, investment banking and certain commercial banking services. Such fees are typically recognized when the service is performed (investment and commercial banking) or over the life of the contract (investment management and credit cards).

z)   Accounting standards applicable for the year ended December 31, 20082009

In JanuarySeptember, 2009, the FASB issued FSP FAS 99-20-1, “Amendments to the Impairment Guidance of EITF Issue 99-20,” which eliminates the requirement to the holder of a securitized debt security to estimateAccounting Standards Update (ASU) No. 2009-12, “Investments in Certain Entities that Calculate Net Asset Value per Share (or its cash flows based in market participants assumptions. Besides, the entity should recognize a non-temporary impairment when there has been an evidence of adverse change in cash flows comparing with the cash flows previously projected, consistent with the guidance in SFAS 115. The FSP is effective for annual and interim periods ended after December 15, 2008 and did not have any material impact those consolidated financial statements.

In December 2008, the FASB issued FSP FAS 140-4 and FIN 46(R)-8, “Disclosures by Public Entities Enterprises about Transfers of Financial Assets and Interests in Variable Interest Entities” which requires enhanced disclosures about transfers of financial assets and interests in variable interest entities. This FSP is effective for the first reporting period ended after December 15, 2008. The additional disclosures are included in the notes to these consolidated financial statements.

In October, 2008, the FASB issued FSP FAS 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active”Equivalent)”, which clarifies the application of SFAS 157 in periods of market distress, and the key considerations in calculatingprovides guidance on measuring the fair value of certain alternative investments. The ASU permits entities to use net asset value as a financial asset when there is not an active market for that financial asset. This FSP became effective immediately.practical expedient to measure the fair value of their investments in certain investment funds. The impactsASU also requires additional disclosures regarding the nature and risks of adopting thissuch investments and provides guidance are being considered in conjunction toon the initial applicationclassification of SFAS 157 in our December 31, 2008 consolidated financial statements.

In September, 2008, the FASB issued FSP FAS 133-1 and FIN 45-4, “Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45; and Clarificationsuch investments as Level 2 or Level 3 of the Effective Date of FASB Statement No. 161. This FSP requires new disclosures about potential effects of credit derivatives financial instruments sold in the financial position, performance and cash flows of the entity. The FSP is effective for financial statements issued for the fiscal years and interim periods ended after November 15, 2008. The additional disclosures are included in the notes to these consolidated financial statements.

In May 2008, the FASB issued SFAS 162, “The Hierarchy of Generally Accepted Accounting Principles”. This Statement identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements in conformity with generally accepted accounting principles.fair value hierarchy. The adoption of this statement did not have impact in our consolidated financial statements.

In November 2007,August, 2009, the SECFASB issued SAB 109, “Loan Commitments”,ASU No. 2009-05, “Measuring Liabilities at Fair Value”. This ASU provides clarification that in circumstances in which revises and amends portions of SAB 105, “Application of Accounting Principles to Loan Commitments”. SAB 109 establishes that expected future cash flows related toa quoted price in an active market for the associated servicing of the loan should be included in the measurement of all loan commitments that are accounted for at fair value through earnings. This standardidentical liability is not available, a reporting entity is required to be implementedmeasure fair value using one or more of the following techniques: A valuation technique that uses quoted prices for loan commitments issued or modifiedsimilar liabilities (or an identical liability) when traded as assets. Another valuation technique that is consistent with the principles of ASC 820. This ASU also clarifies that both a quoted price in fiscal years beginning after December 15, 2007.an active market for the identical liability at the measurement date and the quoted price for the identical liability when traded as an asset in an active market when no adjustments to the quoted price of the asset are required, are Level 1 fair value measurements. The adoption of this statement did not have impact in our consolidated financial statements.

In June, 2009, the FASB issued ASC 105, Generally Accepted Accounting Principles (formerly SFAS No. 168, “The FASB Accounting Standards Codification™ and the Hierarchy of Generally Accepted Accounting Principles   (now))”. The statement establishes the FASB Accounting Standards Codification™ (Codification or ASC) as the single source of authoritative U.S. generally accepted accounting principles (GAAP) recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the Securities and Exchange Commission (SEC) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. The Codification supersedes all existing non-SEC accounting and reporting standards. All other non-grandfathered, non-SEC accounting literature not included in the Codification has become non-authoritative. Following the Codification, the Board will not issue new standards in the form of Statements, FASB Staff Positions or Emerging Issues Task Force Abstracts. Instead, it will issue Accounting Standards Updates (ASU), which will serve to update the Codification, provide background information about the guidance and provide the basis for conclusions on the changes to the Codification. GAAP is not intended to be changed as a result of the FASB’s Codification project, but what does change is the way the guidance is organized and presented. As a result, these changes have a significant impact on how companies reference GAAP in their financial statements and in their accounting policies for financial statements issued for interim and annual periods ending after September 15, 2009. Itaú Unibanco is providing references to the Codification topics alongside references to the predecessor standards.

 
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In May 2009, the FASB issued ASC 855, Subsequent Events (formerly SFAS 165, “Subsequent Events”), which establishes principles and requirements for subsequent events. ASC 855 defines subsequent events as events or transactions that occur after the balance sheet date but before financial statements are issued or are available to be issued. Events that provide additional evidence about conditions that existed at the date of the balance sheet should be recognized in financial statements. On the other hand, events that provide additional evidence about conditions that did not exist at the date of the balance sheet should not be recognized in financial statements. This Statement is effective for interim or annual financial periods ending after June 15, 2009, and shall be applied prospectively. The effects of ASC 855 adoption and the disclosure required are presented in Note 36.

In April 2009, the FASB issued ASC 320-10-35-34, Investments – Debt and Equity Securities: Recognition of an Other-Than-Temporary Impairment (formerly FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments”). This FSP amends the other-than-temporary impairment guidance for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements.
Under the amended guidance other-than-temporary impairment of a debt security shall be considered to have occurred if either: (i) an entity has decided to sell a debt security, or (ii) it is more likely than not than the entity will be required to sell the security before the recovery of its amortized cost basis. If it is not expected that the security will recover to the entire amortized cost basis of the security, the entity would be unable to assert that it will recover its amortized cost basis even if it does not intend to sell the security. Therefore, in those situations, an other-than-temporary impairment shall be considered to have occurred.
In assessing whether the entire amortized cost basis of the security will be recovered, an entity shall compare the present value of cash flows expected to be collected from the security with the amortized cost basis of the security. If present value of cash flows expected to be collected is less than the amortized cost basis of the security, the entire amortized cost basis of the security will not be recovered (that is, a credit loss exists), and an other-than-temporary impairment shall be considered to have occurred.
If an entity intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss, the other-than-temporary impairment shall be recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date. If an entity does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss, the other-than-temporary impairment shall be separated into (a) the amount representing the credit loss and (b) the amount related to all other factors.
The amount of the total other-than-temporary impairment related to the credit loss shall be recognized in earnings. The amount of the total other-than-temporary impairment related to other factors shall be recognized in other comprehensive income, net of applicable taxes.
The FSP shall be effective for interim and annual reporting periods ending after June 15, 2009. See Notes 7 and 24b to the Consolidated Financial Statements for disclosures related to the Itaú Unibanco Holding’s investment securities and Other-Than-Temporary Impairment.

In April 2007,2009, the FASB issued ASC 825-10-50-10, Financial Instruments: Fair Value of Financial Instruments (formerly FSP FIN 39-1, “AmendmentFAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of FIN 39, OffsettingFinancial Instruments”). This FSP includes disclosures about the fair value of Amounts Relatedfinancial instruments in summarized financial information for interim reporting periods. The FSP shall be effective for interim and annual reporting periods ending after June 15, 2009. Since we do not present interim financial statements, this FSP does not impact Itaú Unibanco Holding.

In April 2009, the FASB issued ASC 820-10-35-51A, Fair Value Measurements and Disclosures: Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased (formerly FSP FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly”). This ASC provides additional guidance for estimating fair value in accordance with ASC 820 (formerly SFAS 157) when the volume and level of activity for the asset or liability have significantly decreased. This ASC also includes guidance on identifying circumstances that indicate a transaction is not orderly. The ASC shall be effective for interim and annual reporting periods ending after June 15, 2009. The effects of this ASC adoption were considered in the classification of our fair value measurements, which are presented in Note 27, but in general they did not bring significant impacts on our financial statements.

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In April 2009, the SEC issued SAB 111, “Other than Temporary Impairment of Certain Investments in Equity Securities”. This Staff Accounting Bulletin amends SAB Topic 5M to Certain Contracts”,addresses only available for sale equity securities, excluding debt securities from its scope. No other changes were made to the prior views contained in Topic 5M. The impact of adopting this SAB was not material.

In April 2009, the FASB issued ASC 805, Business Combinations (formerly FSP FAS 141(R)-1, “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination that Arises from Contingencies”) which permits offsetting receivables against payablesaddresses accounting for assets and liabilities arising from contingencies under ASC 805. Under this ASC, assets acquired and liabilities assumed in a business combination that arise from contingencies should be recognized at fair value on the acquisition date if fair value can be determined during the measurement period. This ASC is effective for the beginning of net derivative positions under certain circumstances.first quarter of 2009. The Company applied this pronouncement, when applicable and on a prospective basis for the business combination occurred during 2009.

In December 2008, FASB issued ASC 715-20-50, Compensation and Benefits – Disclosure (formerly FSP FAS 132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets”). This ASC requires disclosures about postretirement benefit plan assets, on annual basis, according to fair value disclosures required by ASC 820 (formerly SFAS 157). This FSP is effective for fiscal years ended after December 15, 2009. The effects of this FSP adoption are presented in Note 25.

In November 2008, the FASB issued ASC 815-10-65-4, Derivatives and Hedging: Transition and Open Effective Date Information (formerly EITF 08-8, “Accounting for an Instrument (or an Embedded Feature) with a Settlement Amount That Is Based on the Stock of an Entity’s Consolidated Subsidiary”). This standard establishes that freestanding financial instruments for which the payoff to the counterparty is requiredbased, in whole or in part, on the stock of a consolidated subsidiary are not precluded from being considered indexed to the entity's own stock in the consolidated financial statements of the parent if the subsidiary is a substantive entity. If the subsidiary is not a substantive entity, the instrument or embedded feature would not be implementedconsidered indexed to the entity's own stock. This ASC is effective for the fiscal years beginning on or after NovemberDecember 15, 2007.2008. The adoption of this FSPstatement did not have impact in our consolidated financial statements and we do not offset receivables against payables as allowed by this standard.statements.

In February 2007,May 2008, the FASB issued SFAS No. 159, “The Fair Value OptionASC 944, Financial Services – Insurance (formerly FAS 163, “Accounting for Financial AssetsGuarantee Insurance Contracts”). The new standard helps eliminate inconsistencies in the recognition and Financial Liabilities” (SFAS 159), whichmeasurement of claim liabilities and premium revenue and requires that an insurance enterprise recognize a claim liability prior to an event of default (insured event) when there is evidence that credit deterioration has occurred in an insured financial obligation. It also requires expanded disclosures about financial guarantee insurance contracts. This Statement is effective for financial statements issued for fiscal years beginning after December 15, 2008, and all interim periods within those fiscal years. The adoption of this statement did not have impact in our consolidated financial statements.

In March 2008, the FASB issued ASC 815-10-50, Derivatives and Hedging – Disclosure (formerly SFAS 161, “Disclosure about Derivatives Instruments and Hedging Activities, an amendment of SFAS 133” now incorporated into). This Statement requires enhanced disclosures about an entity’s derivative and hedging activities and is effective for fiscal years beginning after November 15, 2007,2008, with early adoption being permitted.encouraged. Under ASC 815-10-50 (formerly SFAS 159161) entities are required to provide enhanced disclosures about (a) how and why an entity uses derivatives instruments, (b) how derivatives instruments and related hedged items are accounted for under ASC 815 (formerly Statement 133) and its related interpretations, and (c) how derivatives instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. We have adopted in these financial statements the disclosure requirements of ASC 815-10-50 with respect to our derivative financial instruments designated and not designated for hedge accounting. The additional disclosures are included in the notes to these consolidated financial statements.

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In February 2008, the FASB issued ASC 860-10-40-42, Transfers and Servicing: Repurchase Financing (formerly FSP FAS 140-d, “Accounting for Transfers of Financial Assets and Repurchase Financing Transactions”)  which provides implementation guidance on whether the security transfer and contemporaneous repurchase financing involving the transferred financial asset must be evaluated as one linked transaction or two separate transactions. The ASC 860-10-40-42 is effective for financial statements issued in fiscal years beginning after November 15, 2008, with early adoption not allowed. The adoption of this statement did not have impact in our consolidated financial statements.

In December 2007, the FASB issued ASC 805 Business Combination (formerly SFAS 141(R) “Business Combinations”), which changes the accounting and reporting requirements for business combinations. ASC 805 is effective for business combinations occurred after January 1, 2009. This ASC 805 retains the fundamental requirements of previous GAAP that the acquisition method of accounting (or the purchase method as defined in ASC 805) be used for all business combinations and for an acquirer to be identified for each business combination. This statement defines the acquirer as the entity that obtains control of one or more businesses in the business combination and establishes an optionthe acquisition date as the date that the acquirer achieves control. ASC 805 did not define the acquirer, although it included guidance on identifying the acquirer, as does this statement. This statement's scope is broader than that of ASC 805, which will be applied to measure certain financialbusiness combinations in which control was obtained by transferring consideration. The result of applying ASC 805 guidance on recognizing and measuring assets and liabilities in a step acquisition was to measure them at a blend of historical costs and fair values, a practice that provided less relevant, representationally faithful, and comparable information than will result from applying this statement. In addition, this statement's requirement to measure the non-controlling interest in the acquirer at fair value. Untilvalue will result in recognizing the goodwill attributable to the non-controlling interest in addition to that attributable to the acquirer, which improves the completeness of the resulting information and makes it more comparable across entities. By applying the same method of accounting, the acquisition method, to all transactions and other events in which one entity obtains control over one or more other businesses, this statement improves the comparability of the information about business combinations provided in financial reports. This statement applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 31, 2008,15, 2008. An entity may not apply it before that date. The effective date of this Statement is the same as that of the related ASC 810-10-45-15, Consolidation – Non-controlling Interests in a Subsidiary (formerly SFAS 160, "Non-controlling Interests in Consolidated Financial Statements"). The Company applied this pronouncement on a prospective basis for the business combinations occurred in 2009 and has not adopted in these financial statements the fair value option for any instrument.disclosure requirements of ASC 805.

In September 2006,December 2007, the FASB issued ASC 810-10-45-15, Consolidation – Non-controlling Interests in a Subsidiary (formerly SFAS 157 “Fair Value Measurements”,160, “Non-controlling Interests in Consolidated Financial Statements”) which establishes standards for the accounting and reporting of non-controlling interests in subsidiaries in consolidated financial statements. ASC 810-10-45-15 (formerly SFAS 160) requires the non-controlling equity interests to be accounted for and presented in equity, separately from the parent shareholder’s equity and the amount of consolidated net income attributable to the parent and to the non-controlling interests be clearly identified and presented on the face of the consolidated statement of income. Further, ASC 810-10-45-15 (formerly SFAS 160) requires when a subsidiary is deconsolidated, any retained non-controlling equity investment in the former subsidiary be initially measured at fair value. ASC 810 is effective for fiscal years beginning after NovemberDecember 15, 2007. SFAS 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about assets and liabilities measured at fair value.2008, with early adoption not allowed. The new standard provides a consistent definitioneffective date of fair value which focuses on exit price and prioritizes, within a measurement of fair value,this statement is the use of market-based inputs over entity-specific inputs. The standard also establishes a three-level hierarchy for fair value measurements based on the transparency of inputs to the valuation of an asset or liabilitysame as that ASC 805 Business Combination. This statement shall be applied prospectively as of the measurement date. SFAS 157 nullifiesbeginning of the guidancefiscal year in EITF 02-3 which requiredthis Statement is initially applied, except for the deferralpresentation and disclosure requirements. The presentation and disclosure requirements shall be applied retrospectively for all periods presented. The impacts of profit at inception of a transaction involving a derivative financial instrumentthis statement are included in the absence of observable data supporting the valuation technique. The standard also eliminates large position discounts forconsolidated financial instruments quoted in active markets and requires consideration of nonperformance risk when valuing liabilities. The effects of SFAS 157 adoption and the disclosures required by SFAS 157 are presented in Note 28.statements.

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aa) Recently issued accounting standards applicable for future periods

In April 2010, the FASB issued ASU 2010-18, “Receivables (Topic 310), Effect of Loan Modification When the Loan Is Part of a Pool That Is Accounted for as a Single Asset”. As a result of the amendments in this Update, modifications of loans that are accounted for within a pool under Subtopic 310-30 do not result in the removal of those loans from the pool even if the modification of those loans would otherwise be considered a troubled debt restructuring. An entity will continue to be required to consider whether the pool of assets in which the loan is included is impaired if expected cash flows for the pool change. The ASU is effective in the first interim or annual period ending on or after July 15, 2010 and is to be prospectively applied. We are evaluating the potential impact of adopting this ASU.

In April 2010, the FASB issued ASU 2010-15, “How Investments Held through Separate Accounts Affect an Insurer’s Consolidation Analysis of Those Investments”. It clarifies that an insurance enterprise should not consider any separate account interests in an investment held for the benefit of policy holders to be the insurer’s own interests. Accordingly, the insurer should not combine those interests with its general account interest in the same investment when assessing the investment for consolidation. The ASU is effective for interim periods and fiscal years beginning after December 15, 2010 and is to be retrospectively applied. We are evaluating the potential impact of adopting this ASU.

In April 2010, the FASB issued ASU 2010-13, “Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades”. The ASU updates the guidance in ASC 718, Compensation—Stock Compensation, to clarify that share-based payment awards with an exercise price denominated in the currency of a market in which a substantial portion of the underlying equity security trades should not be considered to meet the criteria requiring classification as a liability. The updated guidance is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010. We are evaluating the potential impact of adopting this ASU.

In March 2010, the FASB issued ASU 2010-11, “Derivatives and Hedging (Topic 815): Scope Exception Related to Embedded Credit Derivatives”. The ASU clarifies and amends the accounting for credit derivatives embedded in beneficial interests in securitized financial assets. The new guidance is effective the first day of the first fiscal quarter beginning after June 15, 2010. We are evaluating the potential impact of adopting this ASU.

In February 2010, the FASB issued ASU 2010-10, “Consolidation (Topic 810): Amendments for Certain Investment Funds”. The ASU amends the requirements for evaluating whether a decision maker or service provider has a variable interest to clarify that a quantitative approach should not be the sole consideration in assessing the criteria and clarifies that related parties should be considered in applying all of the decision maker and service provider criteria. The effective date is the same as the effective date for FAS 167 (now ASC 810). We are evaluating the potential impact of adopting this ASU.

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In January 2010, the FASB issued ASU 2010-06,”Fair Value Measurements and Disclosures”. The ASU requires disclosing the amounts of significant transfers in and out of Level 1 and 2 fair value measurements and to describe the reasons for the transfers. The disclosures are effective for reporting periods beginning after December 15, 2009. Additionally, disclosures of the gross purchases, sales, issuances and settlements activity in Level 3 fair value measurements will be required for fiscal years beginning after December 15, 2010. We are evaluating the potential impact of adopting this ASU.

In October 2009, the FASB issued ASU 2009-15,”Accounting for Own-Share Lending Arrangements in Contemplation of Convertible Debt Issuance or Other Financing – a consensus of the FASB Emerging Issues Task Force”. The ASU provides share lenders with guidance on how to account for these arrangements (amortization of the debt issuance costs will increase the overall implied cost of the related convertible debt arrangement). Specifically, a share lender should record as debt issuance cost the fair value of a share lending arrangement. The guidance is effective for new share lending arrangements for interim and annual periods beginning on or after June 15, 2009. For existing arrangements, the guidance is effective for fiscal years beginning on or after December 15, 2009. We are evaluating the potential impact of adopting this ASU.

In October 2009, the FASB issued ASU 2009-14, “Certain Revenue Arrangements that include software elements” (Topic 985) and ASU 2009-13, “Revenue Recognition (Topic 605): Multiple Deliverable Revenue Arrangements”, addressing arrangements with multiple deliverables. ASU 2009-13 will allow companies to allocate arrangement consideration in multiple deliverable arrangements in a manner that better reflects the transaction´s economics and will often result in earlier revenue recognition. ASU 2009-14 removes non-software components of tangible and certain software components of tangible products from the scope of existing software revenue guidance. The ASUs are effective for fiscal years beginning on or after June 15, 2010. We are evaluating the potential impact of adopting this ASU.

In June 2009, the FASB issued an amendment to ASC 860, Transfers and Servicing, through the issuance of SFAS 166 “Accounting for Transfers of Financial Assets - an amendment of FASB Statement No. 140”. SFAS 166This amendment in ASC 860 removes the concept of a qualifying special-purpose entity from SFAS 140 and removes the exception from applying ASC 810 (formerly FIN 46 (R)) to qualifying special-purpose entities. SFAS 166 ChangesASC 860 changes the requirements for derecognizing financial assets modifying the financial-components approach used in SFAS 140 and limits the circumstances in which a financial asset, or portion of a financial asset, should be derecognized when the transferor has not transferred the entire original financial asset to an entity that is not consolidated with the transferor in the financial statements being presented and/or when the transferor has continuing involvement with the transferred financial asset.  SFAS 166This amendment in ASC 860 removes the special provisions in SFAS 140 and SFAS 65   for guaranteed mortgage securitizations and as a result requires those securitizations to be treated the same as any other transfer of financial assets within the scope of SFAS 140.ASC 860. Additional disclosures are required to provide financial statement users with greater transparency about transfers of financial assets and a transferor’s continuing involvement with transferred financial assets. This Statement shall be effective for the first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter with earlier application prohibited. We are evaluating the potential impact of adopting this FSP.amendment to ASC.

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Also in June 2009, the FASB issued an amendment to ASC 810, Consolidation, through the issuance of SFAS 167 “Amendments to FASB Interpretation No. 46(R)”. SFAS 167 amends FIN 46(R) to requireThis amendment in ASC 810 requires an enterprise to perform an analysis to determine whether the enterprise’s variable interest or interests give it a controlling financial interest in a variable interest entity. This analysis identifies the primary beneficiary of a variable interest entity as the enterprise that has both of the following characteristics: (i) the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance, and (ii) the obligation to absorb losses of the entity that could potentially be significant to the variable interest entity or the right to receive benefits from the entity that could potentially be significant to the variable interest entity.  Additionally, an enterprise is required to assess whether it has an implicit financial responsibility to ensure that a variable interest entity operates as designed when determining whether it has the power to direct the activities of the variable interest entity that most significantly impact the entity’s economic performance. SFAS 167ASC 810 also require ongoing reassessments of whether an enterprise is the primary beneficiary of a variable interest entity and eliminates the quantitative approach previously required for determining the primary beneficiary of a variable interest entity, which was based on determining which enterprise absorbs the majority of the entity’s expected losses, receives a majority of the entity’s expected residual returns, or both.  SFAS 167ASC 810 requires enhanced disclosures that will provide users of financial statements with more transparent information about an enterprise’s involvement in a variable interest entity. This Statement shall be effective for the first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter with earlier application prohibited. We are evaluating the potential impact of adopting this FSP.

 
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In May 2009, the FASB issued SFAS 165, “Subsequent Events”, which establishes principles and requirements for subsequent events. SFAS 165 defines subsequent events as events or transactions that occur after the balance sheet date but before financial statements are issued or are available to be issued. Events that provide additional evidence about conditions that existed at the date of the balance sheet should be recognized in financial statements. On the other hand, events that provide additional evidence about conditions that did not exist at the date of the balance sheet should not be recognized in financial statements. This Statement shall be effective for interim or annual financial periods ending after June 15, 2009, and shall be applied prospectively.

In April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments”. This FSP amends the other-than-temporary impairment guidance for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. The FSP shall be effective for interim and annual reporting periods ending after June 15, 2009. We are evaluating the potential impact of adopting this FSP.

In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments”. This FSP includes disclosures about the fair value of financial instruments in summarized financial information for interim reporting periods. The FSP shall be effective for interim and annual reporting periods ending after June 15, 2009. Since we do not present interim financial statements, this FSP will not impact Itaú Unibanco Holding.

In April 2009, the FASB issued FSP FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly”. This FSP provides additional guidance for estimating fair value in accordance with SFAS 157 when the volume and level of activity for the asset or liability have significantly decreased. This FSP also includes guidance on identifying circumstances that indicate a transaction is not orderly. The FSP shall be effective for interim and annual reporting periods ending after June 15, 2009. We are evaluating the potential impact of adopting this FSP.

In April 2009, the SEC issued SAB 111, “Other than Temporary Impairment of Certain Investments in Equity Securities”. This Staff Accounting Bulletin amends SAB Topic 5M to addresses only available for sale equity securities, excluding debt securities from its scope. No other changes were made to the prior views contained in Topic 5M. We are evaluating the potential impact of adopting this standard.

In April 2009, the FASB issued FSP FAS 141(R)-1, “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination that Arises from Contingencies”, which addresses accounting for assets and liabilities arising from contingencies under SFAS 141(R). Under this FSP, assets acquired and liabilities assumed in a business combination that arise from contingencies should be recognized at fair value on the acquisition date if fair value can be determined during the measurement period. This FSP is effective for the beginning of first quarter of 2009. The Company is currently assessing the impact of this statement on its consolidated financial statements and will apply such pronouncement on a prospective basis for each new business combination including our acquisition of Unibanco Holdings since the acquisition date is after January 1, 2009

In December 2008, the FASB issued FSP FAS 132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets”. This FSP requires disclosures about postretirement benefit plan assets, on annual basis, according to fair value disclosures required by SFAS 157. This FSP is effective for fiscal years ended after December 15, 2009. We are currently evaluating the potential impact of adopting this FSP in our consolidated financial statements.

In November 2008, the FASB’s Emerging Issue Task Force issued EITF 08-8, “Accounting for an Instrument (or an Embedded Feature) with a Settlement Amount That Is Based on the Stock of an Entity’s Consolidated Subsidiary.” This standard establishes that freestanding financial instruments for which the payoff to the counterparty is based, in whole or in part, on the stock of a consolidated subsidiary are not precluded from being considered indexed to the entity's own stock in the consolidated financial statements of the parent if the subsidiary is a substantive entity. If the subsidiary is not a substantive entity, the instrument or embedded feature would not be considered indexed to the entity's own stock. This EITF is effective for fiscal years beginning on or after December 15, 2008. We are currently evaluating the potential impact of adopting this FSP in our consolidated financial statements.

In May 2008, the FASB issued FAS 163, “Accounting for Financial Guarantee Insurance Contracts”. The new standard helps eliminate inconsistencies in the recognition and measurement of claim liabilities and premium revenue and requires that an insurance enterprise recognize a claim liability prior to an event of default (insured event) when there is evidence that credit deterioration has occurred in an insured financial obligation. It also requires expanded disclosures about financial guarantee insurance contracts. This Statement is effective for financial statements issued for fiscal years beginning after December 15, 2008, and all interim periods within those fiscal years. We are evaluating the potential impact of adopting this statement.

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In March 2008, the FASB issued SFAS 161, “Disclosure about Derivatives Instruments and Hedging Activities, an amendment of SFAS 133”. This Statement requires enhanced disclosures about an entity’s derivative and hedging activities and is effective for fiscal years beginning after November 15, 2008, with early adoption encouraged. Under SFAS 161 entities are required to provide enhanced disclosures about (a) how and why an entity uses derivatives instruments, (b) how derivatives instruments and related hedged items are accounted for under Statement 133 and its related interpretations, and (c) how derivatives instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. We are currently evaluating the potential impact of adopting this statement in our financial statement disclosures. We have adopted in these financial statements the disclosure requirements of SFAS 161 with respect to our derivative financial instruments designated for hedge accounting.

In February 2008, the FASB issued FSP FAS 140-d, “Accounting for Transfers of Financial Assets and Repurchase Financing Transactions.” FSP FAS 140-d provides implementation guidance on whether the security transfer and contemporaneous repurchase financing involving the transferred financial asset must be evaluated as one linked transaction or two separate transactions. FSP FAS 140-d is effective for financial statements issued in fiscal years beginning after November 15, 2008, with early adoption not allowed. We are evaluating the potential impact of adopting this statement.

In December 2007, the FASB issued SFAS 141(R) “Business Combinations”, which changes the accounting and reporting requirements for business combinations. SFAS 141(R) is effective for business combinations occurred after January 1, 2009. This Statement retains the fundamental requirements in SFAS 141 that the acquisition method of accounting (which SFAS 141 called the purchase method) be used for all business combinations and for an acquirer to be identified for each business combination. This statement defines the acquirer as the entity that obtains control of one or more businesses in the business combination and establishes the acquisition date as the date that the acquirer achieves control. SFAS 141 did not define the acquirer, although it included guidance on identifying the acquirer, as does this statement. This statement's scope is broader than that of SFAS 141, which will be applied to business combinations in which control was obtained by transferring consideration. The result of applying SFAS 141's guidance on recognizing and measuring assets and liabilities in a step acquisition was to measure them at a blend of historical costs and fair values, a practice that provided less relevant, representationally faithful, and comparable information than will result from applying this statement. In addition, this statement's requirement to measure the non-controlling interest in the acquiree at fair value will result in recognizing the goodwill attributable to the non-controlling interest in addition to that attributable to the acquirer, which improves the completeness of the resulting information and makes it more comparable across entities. By applying the same method of accounting, the acquisition method, to all transactions and other events in which one entity obtains control over one or more other businesses, this statement improves the comparability of the information about business combinations provided in financial reports. This statement applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. An entity may not apply it before that date. The effective date of this Statement is the same as that of the related SFAS 160, "Non-controlling Interests in Consolidated Financial Statements". The Company is currently assessing the impact of this statement on its consolidated financial statements and will apply such pronouncement on a prospective basis for each new business combination including our acquisition of Unibanco Holdings and Unibanco Holdings since the acquisition date is after January 1, 2009. We have adopted in these financial statements the disclosure requirements of SFAS 141 (R) with respect to our acquisition of Unibanco Holdings and Unibanco Holdings since the acquisition date is after January 1, 2009.

In December 2007, the FASB issued SFAS 160, “Non-controlling Interests in Consolidated Financial Statements” (SFAS 160), which establishes standards for the accounting and reporting of non-controlling interests in subsidiaries in consolidated financial statements. SFAS 160 requires the non-controlling equity interests to be accounted for and presented in equity, separately from the parent shareholder’s equity and the amount of consolidated net income attributable to the parent and to the non-controlling interests be clearly identified and presented on the face of the consolidated statement of income. Further, SFAS 160 requires when a subsidiary is deconsolidated, any retained non-controlling equity investment in the former subsidiary be initially measured at fair value. SFAS 160 is effective for fiscal years beginning after December 15, 2008, with early adoption not allowed. The effective date of this statement is the same as that of the related SFAS 141(R). This statement shall be applied prospectively as of the beginning of the fiscal year in which this Statement is initially applied, except for the presentation and disclosure requirements. The presentation and disclosure requirements shall be applied retrospectively for all periods presented. We are evaluating the potential impact of adopting this statement.

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NOTE 3 – BUSINESS DEVELOPMENTS

3.1 During the year ended December 31, 2008 and as subsequent events2009

a) Unibanco and Unibanco Holdings

On November 3, 2008, the controlling shareholders of Itaúsa and of Unibanco Holdings entered into an agreement (the “Association Agreement”) to combine the financial operations of Itaú Unibanco, S.A. (Itaú Unibanco), Unibanco Holdings and its subsidiary Unibanco, by which Unibanco Holdings and its subsidiary Unibanco would become wholly owned subsidiaries of Itaú Unibanco Holding, S.A. (Itaú Unibanco Holding), in order to establish a leading private financial conglomerate in the Southern Hemisphere. As of December 31, 2008, Unibanco Holdings wasis a holding company whose only relevant activity wasis to hold a controlling interest in Unibanco. As of December 31, 2008, Unibanco was until its acquisition a full-service financial institution providing, directly and indirectly through its subsidiaries, a wide variety of credit and non-credit products and services to all segments of the Brazilian domestic market and to a lesser extent to Brazilian customers for its operations outside Brazil through offices, branches and subsidiaries in Grand Cayman (Cayman Islands); New York (USA); Asunción (Paraguay); Luxembourg (Luxembourg); and Geneva (Switzerland). Both Unibanco and Unibanco Holdings were publicly listed companies in Brazil and in the United States and they were delisted on April 13, 2009 and April 27, 2009, respectively.

The transaction was consummated through the issuance by Itaú Unibanco Holding (at that time Banco Itaú Holding Financeira S.A.) of 506,796,006557,475,607 common shares and 614,237,130675,660,843 preferred shares to the former shareholders of Unibanco and Unibanco Holdings.Holdings (after giving retroactive effect to the bonus shares in August 2009). The exchange ratio for preferred shares was calculated based on the average quoted market price of the Units (share certificates representing one preferred shares of Unibanco and one preferred share of Unibanco Holdings) and the average quoted market price of the preferred shares of Itaú Unibanco Holding in the 45 sessions before November 3, 2008 of the Brazilian Stock Exchange – BM&F Bovespa. The exchange ratio to exchange common shares of Unibanco and Unibanco Holdings for shares of Itaú Unibanco Holding was determined as part of the Association Agreement. The exchange ratio was the same for the controlling and non-controlling shareholders that hold common shares. The exchange ratios are as follows:

Number of shares of Unibanco and of Unibanco Holdings exchanged for 1 share of Itaú Unibanco
Common1.1797 = 1
Preferred3.4782 = 1
Unit1.7391 = 1
Global Depositary Receipts0.17391 = 1

Consummation of the transaction was conditional to approval of the transaction by the BACEN, which was obtained on February 18, 2009. Shareholders meetings of Unibanco Holdings, Unibanco and Itaú Unibanco Holding took place during November 2008 where the transaction was approved and new members of the Board of Directors of Itaú Unibanco Holding were appointed. Those shareholders decisions were also conditional to approval of the transaction by the BACEN. Upon approval by the BACEN, the new members of the Board of Directors took office. We considered February 18, 2009 to be the acquisition date for accounting purposes.

The transaction will be accounted for as a purchase business combination with Itaú Unibanco Holding being the accounting acquirer and Unibanco Holdings and Unibanco being the entities acquired. The transaction will be accounted for in the 2009 financial statements following SFAS 141(R). The purchase price consideration of this transaction totaled R$ 24,612, which corresponds to the fair value of the common and preferred shares of Itaú Unibanco Holding issued computed based on the quoted market price of the common and preferred shares of Itaú Unibanco Holding on February 18, 2009. is comprised of:

a)R$ 24,612, which corresponds to the fair value of the shares issued, and it was based on the market price of Itaú Holding´s shares on the date the transaction was approved by the BACEN on February 18, 2009, and
b)R$ 46 which corresponds to replacement awards issued with respect to stock-based compensation plans of Unibanco and Unibanco Holdings. Itaú Unibanco Holding was obligated under Brazilian law to issue replacement awards for those plans and as a result a portion of the value of the replacement awards, attributed to the period prior to the business combination, has been allocated as consideration for the business acquired. Replacement awards issued are R$ 33 under the “Simple Option” plan and R$ 13 under the “Bonified Options” plan of Unibanco (see Note 26). Replacement awards have been measured at its fair value on the date of acquisition.

There are no contingent consideration agreements.

Upon consummation of The table below summarizes the transaction we began the process of identification of intangible assets acquired and its correspondingestimated fair value and the process of determining the fair value of other assets acquired and liabilities assumed. We expect the process to be developed throughassumed on the date of preparation of our financial statements for the year to end on December 31, 2009. As a result we have not yet finalized the initial accounting for this business combination.  Because of that, we had not yet determined if the fair value of the consideration given is lower or higher than the fair value of the assets acquired and the liabilities assumed.acquisition:

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Cash and cash equivalents
17,262
Interest - bearing deposits in other banks770
Securities purchased under resale agreements and federal funds sold26,922
Central bank compulsory deposits2,093
Trading assets, at fair value21,265
Available-for-sale securities, at fair value18,547
Held-to-maturity securities, at amortized cost836
Loans and leases69,644
Investments in unconsolidated companies - Redecard3,891
Investments in unconsolidated companies - Others1,166
Premises and equipment, net1,155
Intangible assets13,517
Deferred Tax Asset1,560
Deferred Tax Asset for excess tax-deductible Goodwill7,155
Other assets15,557
Total assets purchased201,340
Non-interest and interest bearing deposits56,762
Securities sold under repurchase agreements and federal funds purchased33,545
Short and Long-term borrowings38,813
Other liabilities45,228
Total liabilities assumed174,348
Net Asset at Fair Value26,992
Fair Value of non-controlling interests(1,503)
Shareholders Equity Attributable to Itaú Unibanco25,489
Purchase Price Consideration24,659
Bargain Purchase Gain830

Tax deductible goodwill according to the Brazilian tax legislation amounted to R$ 17,889. The purchase price allocation resulted in initial book goodwill of R$ 6,323. Since tax deductible goodwill exceeded the amount of initial book goodwill a deferred tax asset for excess of tax deductible goodwill has been recognized which resulted in a bargain purchase gain of R$ 830 which has been recorded in “Other non-interest income”.

The intangible assets purchased consist of trademarks, customer relationships including, amongst others core-deposits intangibles and contractual and non contractual relationships with customers for different products offered by Unibanco, business relationships including distribution channels and certain software intangibles. We have determined that trademarks have an indefinite life and we expect to amortize the intangible assets related to customer relationships over periods between 2 and 15 years, the intangibles related to business relationships over periods between 3 and 9 years, and software in approximately 5 years. These intangible assets were allocated in our Reporting Units as follows R$ 5,857 for Commercial Bank – Individuals, R$ 1,051 for Commercial Bank – Securities, R$ 585 for Commercial Banking – Wealth Management & Services, R$ 825 for Itaú BBA, R$ 500 for Consumer Credit – Vehicles, and R$ 4,699 for Consumer Credit – Cards and Financing.

The fair value of the amount presented as Fair Value of non-controlling interests corresponding to common shares of Unibanco Participações Societarias S.A. (“UPS”) was estimated by applying a market approach. This fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement as defined in ASC 820. The fair value estimates are based on the estimated fair value of the equity interests held by UPS.

Liabilities arising from contingencies of R$ 569 and R$ 64 have been recognized on the date of acquisition for labor claims and tax lawsuits, respectively. Both contingencies were classified as possible or remote and were reasonably estimable for future loss by the management.

In connection with the business combination with Unibanco we acquired certain loans that were deemed to be credit-impaired. See Note 9 for further details on this transaction.

Unaudited pro forma results for the years ended December 31, 2009 and 2008, as if the acquisition of Unibanco had occurred at the beginning of each of the periods presented, are shown below. The pro forma results of these operations include estimates and criteria considered by management to be reasonable. However, the pro forma results do not include any forecasts of cost savings and are  not necessarily indicative of the results that could have occurred if the acquisition had taken place on the dates indicated or at any other date or of the results in future periods.

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2009 (Unaudited)
Net interest income (before provision for loan losses)41,484
Net income13,794
Earnings per common and preferred shares
Basic3.18
Diluted3.18

2008 (Unaudited)
Net interest income (before provision for loan losses)33,153
Net income7,788
Earnings per common and preferred shares
Basic2.39
Diluted2.38

After the acquisition most of assets, liabilities and activities of Unibanco and its subsidiaries have been transferred to different existing subsidiaries of Itaú Unibanco Holding based on criteria such as similarity of activities. As a result revenue and net income of the activities formerly carried by Unibanco and its different subsidiaries are not separately recorded but rather are integrated within the results of other activities. For that reason we understand it is impracticable to present net interest income and net income of Unibanco from the date of acquisition to December 31, 2009.

b) Redecard S.A.

On February 20, 2009, we signed an agreement with Banco Citibank S.A. (“Citibank”), the controlling shareholders of Redecard S.A. (“Redecard”) in which: (i) Citibank was authorized to sell the Redecard shares through a public offer, and (ii) as stated by the shareholders’ agreement, Citibank granted to Itaú Unibanco Holding the preferred right to acquire 24.082.760 shares of Redecard. The preferred right was exercised in March 23, 2009 and we acquired those shares in March 30, 2009. Considering the prior holdings we had in Redecard that represented (after the business combination with Unibanco) 46.4% after the acquisition, we became the controlling shareholder of Redecard, with over 50.01% interest of the voting capital of Redecard.

Assets acquired, liabilities assumed and allocation of goodwill:

Under ASC 805, Itaú Unibanco is required to remeasure previously held equity interests to fair value at the date of the control acquisition (in this case, March 30, 2009), and record the gain or loss directly to the statement of income. The gain recognized as a result of remeasuring to fair value our original 46.4% interest in Redecard was recorded in “other non-interest income”, net as summarized below:

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Original Redecard common shares - in thousands of shares312,403
Quoted market price at date of acquisition – in R$28.50
Fair value of our initial investment in Redecard8,903
Less carrying amount4,373
Pre-tax gain4,530

The following table summarizes the consideration for the purchase of Redecard and the allocation of the assets acquired and liabilities assumed that were recognized at the acquisition date, the fair value at the acquisition date of the non-controlling interest and the determination of goodwill:

Identifiable assets acquired and liabilities assumed
Cash and cash equivalents175
Premises and equipment, net306
Intangible assets5,572
Receivables from banks issuers of credit cards12,103
Other assets249
Total assets acquired18,405
Deferred tax liability1,978
Payable to merchants10,933
Other liabilities787
Total liabilities assumed13,698
Total shareholders' equity - 100%4,707
Fair value of the non-controlling interest in Redecard(9,590)
Goodwill14,376
Total purchase price consideration9,493
Amount paid in cash590
Fair value of our original investment in Redecard8,903

Intangible assets acquired consist of: brand and customer relationships. We expect to amortize the intangible assets relates to customer relationship over a period between 5 and 40 years depending on the type of customer and we have considered the brand to currently have an indefinite life. Those intangible assets were allocated to the Consumer Credit segment.

The goodwill of R$ 14,376 was assigned to the Consumer Credit segment.

Tax deductible goodwill according to the Brazilian tax legislation amounted to R$ 557. As provided for this legislation, goodwill amortization is deductible only for purposes of social contribution on net income, being deductible for income tax purposes only upon the sale or transfer of the investment.

The fair value of the non-controlling interest in Redecard was determined by applying the market approach, based on the quoted price at March 30, 2009 and as a result the measurement is a Level 1 measurement under ASC 820.

The amounts of revenue and net income of Redecard since the acquisition date, included in the consolidated income statement as of December 31, 2009, are R$ 2,466 and R$ 839, respectively.

Unaudited proforma results of Itaú Unibanco Holding for the years ended December 31, 2009 and 2008, as if the acquisition of control of Redecard had occurred in the beginning of each of these years are shown below. The proforma results of these operations include estimates and criteria that management considers reasonable. However, proforma results do not include any forecasts about cost savings and are not necessarily indicative of results that could have been obtained had the purchase occurred on the indicated dates or on any other date of results in future periods.

 
F-27F-37
 


b) Itaúsa Export S.A. and its subsidiary Itaúsa Europa Investimentos SGPS Lda. – Transaction between entities under common control
2009 (unaudited)
Non- interest income40,875
Net income14,085
Earnings per common and preferred shares:
Basic3.25
Diluted3.24

2008 (unaudited)
Non- interest income17,044
Net income5,045
Earnings per common and preferred shares:
Basic1.55
Diluted1.54
F-38

c) Porto Seguro

On August 23, 2009 Itau Unibanco Holding and Porto Seguro S.A. (PSSA) signed an agreement to unify their residential and automobile insurance operations and also signed an operating agreement by which PSSA obtains the exclusive right to offer and distribute residential and automobile insurance products to clients of the Itau Unibanco Holding branch network in Brazil and Uruguay.

Consummation of the transaction was conditional to approval of the transaction by SUSEP, which was obtained on October 16, 2009.

In order to implement the agreement the assets and liabilities of Itau Seguros S.A related to the activities in residential and automobile insurance have been spun-off and transferred to a company denominated Itaú Seguros Veículo e Residência Holding S.A. (“ISAR Holding”) which at that time was a wholly subsidiary owned by Itau Unibanco. The net book assets transferred amounted to R$ 950.

The shares of ISAR Holding were contributed to PSSA in exchange for a direct 30% of interest in PSSA on November 30, 2009 which is the date of the transaction.

Also on November 2009, both Itaú Unibanco Holding and the controlling shareholders of PSSA contributed their shares to Porto Seguro Itaú Unibanco Participações S.A. (“PSIUPAR”), which after this transaction is the controlling shareholder of PSSA. PSIUPAR holds approximately 70% of the shareholders’ equity of PSSA. Itaú Unibanco Holding holds an interest of 43.9% in PSIUPAR.

As a result of this transaction, we have deconsolidated our previous subsidiary ISAR Holding and at the date of the recognition we recognized a gain before taxes of R$ 936 (recorded in “other non-interest income”). The gain recognized was based on the difference between the carrying value of the net assets of ISAR Holding transferred to PSSA and the fair value of the consideration received, which was an equity interest PSIUPAR. Considering that the only asset of PSIUPAR is the investment in PSSA the fair value of the consideration received amounted to R$ 1,886  and was based on the quoted market price of the common shares of PSSA at BM&F Bovespa.

PSIUPAR is accounted for as an equity method investee (as disclosed in Note 11) and the intercompany transactions between the parties are disclosed as related party transaction (as disclosed in Note 33)

During 2010, we will conclude the final allocation of the difference between the value of the interest that we held in PSIUPAR and the interest in the net assets of PSIUPAR.

F-39

3.2 Relevant business developments during the years presented

a)Itaúsa Export S.A. and its subsidiary Itaúsa Europa Investimentos SGPS Lda.  – Transaction between entities under common control

The Association Agreement entered into for the transaction of Unibanco and Unibanco Holdings described in Note 3.a.3.1.a. required as condition precedent for its consummation that Itaú Unibanco Holding should acquire all shares of Itaúsa Export S.A. (Itaúsa Export) and Itaúsa Europa Investimentos SGPS Lda (Itaúsa Europa) that were holdheld by Itaúsa, the then controlling shareholder of all of Itaú Unibanco Holding, Itaúsa Export and Itaúsa Europa. On November 12, 2008, Banco Itaú S.A., currently named Banco Itaú Unibanco, S.A., entered intosigned a contract with Itaúsa for the acquisition of a 77.77% total and 80.00% voting interest of Itaúsa Export and of a 12.13% total and voting interest of Itaúsa Europa (Itaúsa Europa, itself is a subsidiary of Itausa Export). Itaúsa Export is a private holding company domiciled in Brazil, which holds a controlling interest in Itaúsa Europa.  Itaúsa Europa is a private holding company domiciled in Portugal, which holds interests in:  (i) entities operating in the private banking and corporate banking business outside Brazil, including: Banco Itaú Europa S.A. (Itaú Europa), the main operating entity, domiciled in Portugal and its subsidiaries Banco Itaú Europa International (BBI), domiciled in Miami, and BIE Bank & Trust (BIE Lux), domiciled in Luxembourg, and (ii) a 51% interest in IPI – Itaúsa Portugal Investimentos, SGPS Lda. (IPI), an entity that holds a 19% total and voting interest in Banco BPI S.A., one of the largest banks in Portugal. Before this transaction, Itaú Unibanco Holding already held a 22.23% total and 20.00% voting interest in Itaúsa Export and a 49% total and voting interest in IPI that were accounted for followingunder the equity method.

The transaction was consummated with the payment of R$ 587 in cash to Itausa and the issuance of 20,954,93523,050,428 common shares of Itaú Unibanco.Unibanco (after giving retroactive effect to the bonus shares in April 2009). The cash was paid and the shares were delivered on November 27 and 28, 2008, respectively. As per the terms of the agreement, the price of this transaction is required to be adjusted, based on the difference of the quoted price of the shares of BPI between October 31, 2008 (the date used for setting the purchase price described above, or price 1) and November 3, 2010 (price 2). Such difference will be paid by Itaú Unibanco.Unibanco (if the difference between price 2 and price 1 is positive) or reimbursed by Itaúsa (if the difference between price 2 and price 1 is negative). The parties have established this purchase price mechanism because they understood that the quoted market price of BPI shares in October 2008 was depressed as result of the global economic crisis. The purchase price adjustment is being accounted for as a derivative financial instrument at fair value with gains and losses recognized in income. As of December 31, 2009, the difference between price 1 and price 2 amounted to R$ 73.

According to SFAS 141 –ASC 805 - Business Combinations, this transaction was considered a transaction between entities under common control resulting in a change in the reporting entity and the financial statements currently presented for all periods before the transaction consider the combined financial position, results of operations and cash flows of Itaú Unibanco Holding and of Itaúsa Export and its subsidiaries.  The assets and liabilities of Itaúsa Export and its subsidiaries are accounted for at their historical cost in the books of Itaúsa. The cash payment to Itaúsa of R$ 587 has been recorded as a reduction of stockholdersstockholders’ equity. The issuance of shares of Banco Itaú Unibanco S.A. to Itaúsa was recorded also as a reduction of stockholdersstockholders’ equity and as an increase in minority interest at their book value of R$ 102. The book value of the assets and liabilities received exceeded by R$ 370 the sum of the cash payment of R$ 587 and the credit to minority interest of R$ 96102 and has been recorded as a distribution to the controlling shareholder under “Additional paid-in capital – Cash paid and shares of subsidiary issued on acquisition of interest in Itaúsa Export S.A”.Export.”

The following table presents summarized balance sheets, statementsDuring 2009 and contemporaneously with the issuance of income and of changes in stockholders’ equityshares of Itaú Unibanco Holding as originally presentedto shareholders of Unibanco and Unibanco Holdings, Itaúsa exchanged the shares obtained during 2008 on its financial statementsItaú Unibanco (as described above) for shares of Itaú Unibanco Holding. After the exchange Itaú Unibanco became again a wholly-owned subsidiary of Itaú Unibanco Holding. The exchange was recorded at is carrying amount and resulted in the decrease of non-controlling interest by R$ 105, the increase in common shares of R$ 95 and the effect of changedifference has been recognized in reporting entity resulting from combining Itaúsa Export and its subsidiaries. The table presents separately the separate consolidated financial information of Itaúsa Export and the elimination on combination with Itaú Unibanco Holding:additional paid-in capital.

 
F-28F-40
 


  
Consolidated balance
sheet as originally
presented at
December 31, 2007
  Itaúsa Export S.A  
Elimination of 
investment in Itaúsa
Export and IPI
  
Combination
 adjustments
  
Consolidated balance
sheet as currently
 presented
 
ASSETS               
Cash and due from banks  3,098   -   -   -   3,098 
Interest - bearing deposits in other banks  33,133   5,321   -   (166)  38,288 
Securities purchased; trading assets; avaliable-for- sale and held-to-maturity securities  80,574   1,589   -   (77)  82,086 
Net loans and leases  106,057   3,367   -   (438)  108,986 
Investments in unconsolidated companies  1,499   1,189   (829)  -   1,859 
Investments IPI  574   -   (574)  -   - 
Investments Itaúsa Export  255   -   (255)  -   - 
Investments BPI  -   1,189   -   -   1,189 
Other investments  670   -   -   -   670 
Goodwill net  687   -   -   (52)  635 
Intangible assets net  6,770   58   -   120   6,948 
Other assets  37,712   314   -   (120)  37,906 
Total assets  269,530   11,838   (829)  (733)  279,806 
                     
LIABILITIES                    
Total deposits  75,474   6,155   -   (4)  81,625 
Securities sold; short term borrowings and long term debt  99,681   3,592   -   (669)  102,604 
Other liabilities  57,669   322   -   (23)  57,968 
Total liabilities  232,824   10,069   -   (696)  242,197 
                     
Minority interest in consolidated subsidiaries  1,354       -       1,354 
                     
Total stockholders' equity  35,352   1,769   (829)  (37)  36,255 
                     
Total liabilities and stocholder's equity  269,530   11,838   (829)  (733)  279,806 
  
Consolidated
statement of income
as originally
presented at
December 31, 2007
  Itaúsa Export S.A  
Elimination of
investment in Itaúsa
Export and IPI
  
Combination
adjustments
  
Consolidated
statement of income
as currently
presented
 
Total interest income  34,142   461   -   -   34,603 
Total interest expense  (12,966)  (304)  -   (1)  (13,271)
Provision for loan and lease losses  (5,535)  (7)  -   -   (5,542)
Total nom-interest income  16,753   366   (105)  2   17,015 
Equity in earning (losses) of unconsolidated companies, net  416   166   (105)  -   476 
IPI  74   -   (74)  -   - 
Itaúsa Export  31   -   (31)  -   - 
BPI  -   166   -   -   166 
Other  311   -   -       310 
Other non-interest income  16,337   200   -   2   16,539 
Total non-interest expense  (20,831)  (219)  -   23   (21,027)
Net income before taxes on income and minority interest  11,563   297   (105)  24   11,778 
Total taxes on income  (4,107)  (40)  -   -   (4,147)
Minority interest  2   -   -   -   2 
Net income before extraordinary  7,458   257   (105)  24   7,633 
Extraordinary item  29   -   -   -   29 
Net income  7,487   257   (105)  24   7,662 
                   - 
                   - 
  
Consolidated
statement of income
as originally
presented at
December 31, 2006
  Itaúsa Export S.A  
Elimination of
investment in Itaúsa
Export and IPI
  
Combination
adjustments
  
Consolidated
statement of income
as currently
presented
 
Total interest income  27,862   316   -   (31)  28,147 
Total interest expense  (10,939)  (196)  -   31   (11,104)
Provision for loan and lease losses  (5,148)  -   -   1   (5,147)
Total nom-interest income  14,443   264   (93)  -   14,614 
Equity in earning (losses) of unconsolidated companies, net  511   148   (93)  -   566 
IPI  71   -   (71)  -   - 
Itaúsa Export  22   -   (22)  -   - 
BPI      148   -   -   148 
Other  418   -   -   -   418 
Other non-interest income  13,932   116   -   -   14,048 
Total non-interest expense  (17,955)  (130)  -   24   (18,061)
Net income before taxes on income and minority interest  8,263   254   (93)  25   8,449 
Total taxes on income  (2,390)  (44)  -   -   (2,434)
Minority interest  23   -   -   (1)  22 
Net income  5,896   210   (93)  24   6,037 

  
Consolidated 
statement of change 
in stockholders' 
equity as originally 
presented
  Itaúsa Export S.A  
Consolidated 
statement of change 
in stockholders' 
equity as currently 
presented
 
Stockholders' equity at January 1, 2006  18,321   664   18,985 
Issuance of shares  4,581   -   4,581 
Treasury stock  173   -   173 
Change in additional paid-in capital, net  61   -   61 
Net unrealized gains (losses) on avaliable-for-sale securities, net of tax  (370)  (36)  (406)
Cumulative translation adjustment  (14)  4   (10)
Defined  benefit pension plans and other postretirement plans, net of tax  984   -   984 
Net income for the year  5,896   141   6,037 
Distribution of dividends and interest on stockholders' equity  (2,215)  -   (2,215)
Stockholders' equity at December 31,2006  27,417   773   28,190 
Issuance of shares  1,373   -   1,373 
Treasury stock  (50)  -   (50)
Change in additional paid-in capital, net (including R$ 122 of cash capital contribution of Itaúsa to Itaúsa Export S.A.)  (78)  122   44 
Net unrealized gains (losses) on avaliable-for-sale securities, net of tax  902   (40)  862 
Cumulative translation adjustment  (177)  (127)  (304)
Defined  benefit pension plans and other postretirement plans, net of tax  713   -   713 
Net income for the year  7,487   175   7,662 
Distribution of dividends and interest on stockholders' equity  (2,235)  -   (2,235)
Stockholders' equity at December 31,2007  35,352   903   36,255 
F-29


c)b) BBA HE Participações S.A.

In December 2008, Itaú Unibanco Holding through Itaú Unibanco acquired 100% of the shares of BBA HE Participações S.A (HE). HE has the sole purpose of investing in Itaú BBA Participações, which controls Itaú BBA. After that transaction, Itaú BBA Participações and Itaú BBA became wholly owned subsidiaries of Itaú Unibanco Holding.

The transaction has been accounted for as a step acquisition following the purchase method of accounting as required under SFAS 141 –ASC 805 - Business Combination.Combinations for transactions before January 1, 2009.

The purchase price was R$ 399 paid in cash. The only relevant asset of HE was the shares in BBA Participações whose only relevant asset was the shares in Itaú BBA representing a 4.25% total interest in Itaú BBA. According to the allocation of fair value of assets acquired and liabilities assumed, Itaú Unibanco Holding has determined that the fair value of consideration paid was lower than the fair value of assets acquired and liabilities assumed resulting in an excess of fair value over purchase price consideration (“negative goodwill”) in this acquisition. Such “negative goodwill” was allocated to long-lived assets acquired, reducing the amount of fair value originally allocated. The following table presents the estimated fair value of assets acquired and liabilities assumed, after the allocation of the negative goodwill, as of the date of acquisition:

Interest-bearing deposits in other banks  2,092 
Trading assets  576 
Available-for-sale securities  541 
Loans and leases  1,848 
Intangible assets  116 
Other assets  484 
Total assets purchased  5,657 
Liabilities assumed  5,258 
Purchase price  399 

Intangible assets purchased consist of customer relationships and we expect to amortize them over 10 years. Those intangible assets have been allocated to the Itaú BBA segment.

In connection with the acquisition of the shares of HE an amount of R$ 140 was paid to the selling shareholders which were also officers of Itaú BBA. In the acquisition of the initial interest in Itaú BBA in 2002, Itaú  Unibanco Holding committedundertook to pay a cash bonus to the directors and officers (all of whom were also selling shareholders of Itaú BBA) that remained in their capacity providing services to Itaú BBA over a certain period of time after the original acquisition date. The amount of R$ 140 that was paid in December 2008 has been accrued as compensation expense since the date on which the officers began to have right to such bonus through December 2008.

3.2 Relevant business developments during the years presented

d)c) Operations of BankBoston in Chile

In May 2006, Itaú Unibanco Holding and its controlling shareholder Itaúsa signed an agreement with Bank of America Corporation (BAC) for the exclusive right to purchase the BankBoston Chile operations and in August 2006 the parties signed a purchase agreement. Consummation of this transaction was awaiting the approval from the Central Bank of Brazil, given on February 2, 2007, and the Superintendency of Bank and Financial Institutions of Chile (SBIF), given on February 12, 2007. In exchange for these subsidiaries, Itaú Unibanco Holding issued 43,516,11047,867,721 (quantity of shares retroactively adjusted for the stock split in October 2007 and the bonus of shares in June 2008 toand in August 2009 described in Note 19a)19.a) common shares to BAC, whose issuance was approved on the EGM (“Extraordinary General Meeting”) of December 26, 2006 and which were delivered after the approval of Central Bank of Brazil and SBIF on February 12, 2007. On February 12, 2007, we obtained control over BankBoston Chile.

The purchase price of this transaction totaled R$ 948, which corresponds to the fair value of the issued shares and was based on the market price of common shares of Itaú Unibanco Holding on the date the transaction was announced in August 2006. According to the allocation of fair value of assets acquired and liabilities assumed, Itaú Unibanco Holding has determined the fair value of consideration was lower than the fair value of assets acquired and liabilities assumed resulting in an excess of fair value over purchase price consideration (“negative goodwill”) in this acquisition. Such “negative goodwill” was allocated to long-lived assets acquired, reducing the amount of fair value initially computed. The following table summarizes the estimated fair value of the assets purchased and liabilities assumed at the purchase date already considering the effect of reducing long-lived assets to the extent of the amount of “negative goodwill”:

 
F-30F-41
 


Cash and cash equivalents  689 
Compulsory deposits with Central Bank  47 
Trading assets  79 
Available-for-sale securities  864 
Loans and leases  5,016 
Fixed assets, net  53 
Intangible assets  195 
Other assets  186 
Total assets purchased  7,129 
Liabilities assumed  6,181 
Net assets at fair value  948 
Purchase price  948 

Intangible assets purchased consist of customer relationships and we expect to amortize them over 10 years. These intangible assets were allocated to the Itaú Unibanco – Banking segment. During 2009 we changed the segment reporting structure as described in Note 32 and we have reassigned assets and liabilities to the new reporting units.

Total and deductible goodwill according to the Brazilian tax legislation amounted to R$ 452. As provided for in this legislation, the goodwill amortization is deductible only for purposes of social contribution on net income, being deductible for income tax purposes only upon the sale or transfer of the investment purchased.

Unaudited proforma results of Itaú Unibanco Holding for the yearsyear ended December 31, 2007, and 2006, as if the acquisition of BankBoston Chile had occurred inat the beginning of each of these periods aresuch year is shown below. The proforma results of these operations include estimates and criteria that management considers reasonable. However, proforma results do not include any forecasts about cost savings and are not necessarily indicative of results that could have been obtained had the purchase occurred on the indicated dates or on any other date or of results in future periods.

  2007 (unaudited) 
    
Net interest income (before provision for loan losses)  21,396 
Net income  7,538 
Earnings per common and preferred shares:    
Basic  2.512.29 
DilutedDilluted  2.50
��2006 (unaudited)
Net interest income (before provision for loan losses)17,228
Net income6,078
Earnings per common and preferred shares:
Basic2.14
Diluted2.132.27 
F-42

e)d) Operations of BankBoston in Uruguay

In May 2006, Itaú Unibanco Holding and Itaúsa signed an agreement with BACBank of America Corporation (BAC) for the exclusive right to purchase the BankBoston’s operations in Uruguay and in August 2006 the parties signed a purchase agreement. Consummation of this transaction was awaiting the approval from the Central Bank of Brazil, given on February 2, 2007, and the Uruguayan authorities, given on March 16, 2007. On April 1, 2007, we obtained the control over these operations. In exchange for these subsidiaries, Itaú Unibanco Holding issued 7,825,9808,608,578 (quantity of shares retroactively adjusted for the stock split in October 2007 and the bonus of shares in June 2008 referred toand August 2009 described in Note 19a) common shares to BAC and paid in kind the amount of R$ 2.3 to BAC. The issuance of shares was approved on the EGM of December 26, 2006 and the shares were delivered after the approval of Central Bank of Brazil and the Uruguayan authorities on March 16, 2007. The payment in kind was made onin March 2007.

F-31


The purchase price of this transaction totaled R$ 172, which corresponds to the amount paid in kind and the fair value of the issued shares, based on the market price of common shares of Itaú Unibanco Holding on the date the transaction was announced in August 2006. According to the allocation of fair value of assets acquired and liabilities assumed, Itaú Unibanco Holding has determined the fair value of consideration was lower than the fair value of assets acquired and liabilities assumed resulting in an excess of fair value over purchase price consideration (“negative goodwill”) in this acquisition. Such “negative goodwill” was allocated to long-lived assets acquired, reducing the amount of fair value initially computed and since the amount of “negative goodwill” exceeded the fair value of those long-lived assets, the remaining amount was recorded as an extraordinary gain for R$ 29 million. The following table summarizes the estimated fair value of the assets purchased and liabilities assumed at the purchase date:

Cash and cash equivalents  984 
Interest-bearing deposits in other banks  3 
Available-for-sale securities  86 
Loans and leases  782 
Other assets  30 
Total assets purchased  1,885 
Liabilities assumed  1,684 
Net assets at fair value  201 
Excess of net assets purchased over purchase price  29 
Purchase price  172 

The unaudited proforma results of Itaú Unibanco Holding for the yearsyear ended December 31, 2007, and 2006, as if the purchase of BankBoston Uruguay had occurred inat the beginning of each of these periods aresuch year is shown below. The proforma results of these operations include estimates and criteria that management considers reasonable. However, proforma results do not include any forecasts about cost savings and are not necessarily indicative of results that could have been obtained had the purchase occurred on the indicated dates or on any other date or of results in future periods.

  2007 (unaudited)
 
Net interest income (before provision for loan losses)  21,346 
Net income  7,583 
Earnings per common and preferred shares:    
Basic  2.532.30 
DilutedDilluted  2.51
2006 (unaudited)
Net interest income (before provision for loan losses)17,152
Net income6,059
Earnings per common and preferred shares:
Basic2.13
Diluted2.122.29 

f)
F-43

e) Acquisitions by Banco Itaú Europa S.A. and its subsidiaries of BankBoston Trust Company Ltd (BBT), BankBoston International (BBI) and the Latin America private banking portfolio of ABN Amro Bank N.V.

During 2007, the subsidiaries of Itaú Unibanco Holding, Banco Itaú Europa Luxembourg S.A. (BIE Lux), Banco Itaú Europa S.A. (BIE) and Banco Itaú Europa International (BIEI), acquired three operations for a total of R$ 616, which was paid in cash:

F-32


(i)operations of BankBoston Trust Company Ltd (BBT), based on Nassau, Bahamas, comprised ofcomprising financial assets under management and private banking clients in Latin America;
(ii)operations of BankBoston International (BBI), based on Miami, United States of America, comprised ofcomprising financial assets under management and private banking clients in Latin America; and
(iii)Operationsoperations of private banking of ABN Amro Bank N.V., based on Miami, United States of America, and Montevideo, Uruguay, comprised ofcomprising assets under management of Latin America clients, booked in the United States of America, Switzerland and Luxembourg.

The following table summarizes the estimated fair value of assets purchased and liabilities assumed at the purchase date:

Cash and cash equivalentsdue from banks  64 
Securities  212 
Premises and equipment,Fixed assets, net  2 
Intangible assets  191 
Other assets, net of other liabilities  2 
Net assets at fair value  471 
Goodwill  145 
Purchase price  616 

Intangible assets purchased consist of customer relationships, core deposits and non-compete agreements with ABN and BAC. We expect to amortize intangible assets related to the acquisition of BBT and BBI over 10 years and intangible assets related to ABN over 4 years (for the operations of ABN in Luxembourg, Switzerland and Uruguay) and over 12 years (for the operations of ABN in Miami).

Unaudited proforma results of Itaú Unibanco Holding for the yearsyear ended December 31, 2007, and 2006, as if the acquisition of BBT, BBI and operations of ABN had occurred inat the beginning of each of these periods aresuch year is shown below. The proforma results of these operations include estimates and criteria that management considers reasonable. However, proforma results do not include any forecasts about cost savings and are not necessarily indicative of results that could have been obtained had the purchase occurred on the indicated dates or on any other date or of results in future periods.

  2007 (unaudited) 
    
Net interest income (before provision for loan losses)  21,358 
Net income  7,586 
Earnings per common and preferred shares:    
Basic  2.532.30 
DilutedDilluted  2.51
2006 (unaudited)
Net interest income (before provision for loan losses)17,123
Net income6,121
Earnings per common and preferred shares:
Basic2.15
Diluted2.142.29 

g) Operations of BankBoston in Brazil

In May 2006, Itaú Unibanco Holding and Itaúsa entered into an agreement with BAC for the acquisition of all shares of the capital stock of BankBoston Banco Múltiplo S.A., BancBoston Capital do Brasil S/C Ltda., Boston Comercial e Participações Ltda. and Libero Trading International Limited, the entities that carried out the BankBoston business in Brazil. The settlement of the operation was pending approval of the Central Bank of Brazil, which took place on August 22, 2006 and on September 1, 2006 we obtained control of those entities and issued the consideration for the acquisition. In exchange for these entities, Itaú Unibanco Holding issued 171,295,235 (quantity of shares retroactively adjusted for the stock split in October 2007 and the bonus of shares in June 2008 referred to in Note 19a) preferred shares to BAC that correspond to approximately 5.8% of the company’s capital.

 
F-33F-44
 


Also in May 2006, the same abovementioned parties signed the shareholders’ agreement in which: (a) BAC is entitled to appoint one member of the Board of Directors of Itaú Unibanco Holding, (b) Itaúsa (as the parent company of Itaú Unibanco Holding) may not vote for the dismissal of the board member appointed by BAC except if under very specific circumstances and with the previous written consent of BAC, (c) BAC is not allowed to transfer the shares of Itaú Unibanco Holding for a period of three years, and (d) BAC agrees not to hold more than 20% of Itaú Unibanco Holding’s capital stock.

The purchase price of this transaction was R$ 4,693, which corresponds to the fair value of the shares issued, and it was based on the market price of Itaú Unibanco Holding’s preferred shares on the date the transaction was announced in May 2006. The table below summarizes the estimated fair value of assets acquired and liabilities assumed on the date of acquisition:

Cash and cash equivalents3,293
Interest-bearing deposits in other banks1,962
Central Bank compulsory deposits1,252
Trading assets1,065
Available-for-sale securities1,146
Loans and Leases7,765
Premises and equipments, net309
Intangible assets2,261
Other assets1,783
Total assets purchased20,836
Liabilities assumed16,535
Net assets at fair value4,301
Goodwill on acquisition392
Purchase price4,693

The intangible assets purchased consist of customer relationships and we expect to amortize them over a period of 10 years. These intangible assets were allocated to our segments as follows: R$ 1,214 to  Itaú Unibanco – Banking, R$ 364 to Itaú BBA, R$ 403 to  Itaú Unibanco – Asset Management and Investment Services and R$ 280 to  Itaú Unibanco – Credit Cards – Accountholders.

The deductible goodwill pursuant to Brazilian tax regulations totaled R$ 2,598.The amortization of goodwill is deductible in accordance with Brazilian tax regulations for social contribution purposes only; for income tax purposes it can only be deductible if the investment is sold or transferred.

Unaudited pro forma results for the year ended December 31, 2006, as if the acquisition of BankBoston Brazil had occurred at the beginning of each of the periods presented, are shown below. The pro forma results of these operations include estimates and criteria considered by management to be reasonable. However, the pro forma results do not include any forecasts of cost savings and are  not necessarily indicative of the results that could have occurred if the acquisition had taken place on the dates indicated or at any other date or of the results in future periods.

2006 (Unaudited)
Net interest income (before provision for loan losses)18,216
Net income6,027
Earnings per common and preferred shares
Basic2.12
Diluted2.11

h) Our Credicard Operations

On April 30, 2006 we terminated the joint-venture we had with Citigroup in Credicard Banco S.A. (“Credicard”).  Assets and liabilities of Credicard (including the credit card customers) were distributed to us in an amount equal to 50% of the fair value of Credicard and, as a result, we received a controlled group of net assets that we have concluded constitutes a business and that we refer to as “Our Credicard Operations”. We have accounted for the transaction as a business combination by which we acquired a controlling financial interest in a business in exchange for a portion of the Credicard net assets we previously held through our interest in Credicard.

F-34


We held 33.33% of our direct interest in Credicard through wholly-owned subsidiaries and the remaining 16.67% indirect interest through a 50% interest in Tulipa Administração e Participações Ltda. (“Tulipa”), a holding company owned 50% by each of us and Citigroup and whose only relevant assets were 33.33% of the shares of Credicard and cash and cash equivalents that amounted to R$ 1,896 on March 31, 2006. On March 31, 2006, on preparation for the termination, 50% of the assets and liabilities of Tulipa were transferred by Tulipa to Citigroup and we became the only shareholder of Tulipa.

Also on preparation for the termination, on March 31, 2006, the brand “Credicard” was transferred by Credicard to a special purpose company, Credicard Administração Ltda., which was also owned 50% by each of us and Citigroup. As result of that, we have transferred to Credicard Administração Ltda. the amount of R$ 114, which corresponds to the carrying amount of the intangible asset for the “Credicard” brand name that we had originally recorded in 2004 (when we acquired an additional 16.67% interest in Credicard).

With the split-off of the joint-venture, 50% of the net assets of Credicard, which constituted “Our Credicard Operations”, were transferred to us and all of our shares in Credicard were cancelled. Consequently, Citigroup became the only shareholder of Credicard, which maintained the remaining 50% of the net assets of the company. “Our Credicard Operations” were transferred to one of our wholly-owned subsidiaries and are being consolidated since the date of the transaction.

We determined the consideration given to acquire “Our Credicard Operations” to amount to R$ 765 based on the estimated fair value of Credicard, which was calculated based on discounted cash flows, since Credicard is not a public company and its shares are not quoted. Until the date of the termination of the joint-venture, our investment in Credicard was accounted for following the equity method and its carrying amount, directly and through Tulipa, as of the date of the transaction was R$ 664. We recognized a pre-tax gain of R$ 433 for the difference between the estimated fair value of R$ 765 and 50% of the carrying amount of our investment in Credicard of R$ 332. As a consequence, the fair value of the consideration given of R$ 765 became the new cost of “Our Credicard Operations”.

For the portion of “Our Credicard Operations” acquired upon termination of Credicard, we have considered this to be a step acquisition and have recorded the net assets at fair value to the extent of the percentage acquired (50%) as the result of the transaction, and we have maintained the carrying amount for the 50% percentage previously owned through our interest in Credicard. The following table presents the assets and liabilities of “Our Credicard Operations” as of the date of the transaction at its estimated fair value to the extent of the percentage acquired as described above:

Cash and cash equivalents18
Loans and leases, net2,869
Premises and equipments, net6
Intangible assets701
Other assets161
Total assets purchased3,755
Liabilities assumed2,907
Net assets at fair value848
Existing carrying amount through the investment in Credicard332
Consideration given765
Goodwill on transaction249

Intangible assets acquired consist of credit card customer relationships that we expect to amortize over a period of ten years and are allocated to our segment Itaucred – Credit Card to Non-Accountholder Clients.  No tax deductible goodwill resulted from this transaction.

Subsequently, on December 5, 2006, Citigroup acquired the “Credicard” brand name for R$ 278. Under the terms of our agreement with Citigroup we had the right to use the brand until December 31, 2008. We recognized a gain of R$ 158 for the sale.

F-35


NOTE 4 - CASH AND CASH EQUIVALENTS

For purposes of our consolidated statement of cash flows, Cash and Cash Equivalents is comprised as follows:comprises the following:

  12/31/2008  
12/31/2007
Restated (*)
 
Cash and due from banks  3,408   3,098 
Interest-bearing deposits in other banks  24,628   19,111 
TOTAL  28,036   22,209 
(*)The balance of December 31, 2007 was restated to reflect the change in accounting policy to define cash and cash equivalents as described in Note 2c.
  12/31/2009  12/31/2008 
Cash and due from banks  5,355   3,408 
Interest-bearing deposits in other banks  60,101   24,628 
TOTAL  65,456   28,036 

NOTE 5 – CENTRAL BANK COMPULSORY DEPOSITS

The central banks of the countries where Itaú Unibanco Holding operates require financial institutions, including Itaú Unibanco Holding, to deposit certain funds with the central bankCentral Bank or, in case of Brazil, to purchase and hold Brazilian federal government securities. The following table presents a summary of the compulsory deposits maintained by type and the amounts of such deposits.

 2008  2007  2009  2008 
Non-interest bearing  6,743   6,294   4,042   6,743 
Interest-bearing  4,571   10,920   9,827   4,571 
TOTAL  11,314   17,214   13,869   11,314 

 
F-36F-45
 


NOTE 6 – TRADING ASSETS

Trading assets, stated at fair value, are presented in the following table:

 12/31/2008  12/31/2007  12/31/2009  12/31/2008 
Investment funds(1)  24,458   20,321   39,347   24,458 
Brazilian federal government securities  27,145   10,222   23,985   27,145 
Brazilian government external debt securities  383   240   222   383 
Government debt securities – other countries  1,988   3,365 
Government debt securities – Other countries  1,058   1,988 
Argentina  64   37   179   64 
United States  1,038   286   748   1,038 
Mexico  6   69   10   6 
Russia  -   275 
Denmark  -   196 
Spain  418   847   -   418 
Korea  291   1,582   -   291 
Chile  164   71   77   164 
Uruguay  6   -   30   6 
Other  1   2   14   1 
Corporate debt securities  2,030   2,110   2,226   2,030 
Marketable equity securities  456   393   1,142   456 
Derivative financial instruments  10,023   3,873   5,549   10,023 
Options  2,154   270   1,819   2,154 
Forwards  3,406   1,774   378   3,406 
Swaps  4,021   1,829 
Credit derivative  26     
Swaps - differential receivable  2,900   4,021 
Credit derivatives  15   26 
Futures  386   -   -   386 
Others  30     
Other derivatives  437   30 
TOTAL  66,483   40,524   73,529   66,483 
(1) Includes investment funds with respect to investment contracts (see Note 2 q).

Net unrealized gains included in trading assets at December 31, 2009, 2008 2007 and 20062007 amounted to R$ 559, R$ 1,414 and R$ 261, and R$ 778, respectively.

The net change in the unrealized gain or loss on trading assets held in the years ended December 31, 2009, 2008 2007 and 2006,2007, included in trading income gains/(losses), were of R$ (855), R$ 1,153, and R$ (517) and R$ 371,, respectively.

 
F-37F-46
 


NOTE 7 - AVAILABLE-FOR SALE-SECURITIES

The fair values and corresponding amortized cost of available-for-sale securities at December 31 were:

  2008  2007 
     Unrealized gross        Unrealized gross    
  
Amortized 
cost
  Gains  Losses  Fair value  
Amortized
cost
  Gains  Losses  Fair value 
Investment funds  971   21   -   992   960   13   -   973 
Brazilian federal government securities  5,545   53   (19)  5,579   2,095   61   (11)  2,145 
Brazilian government external debt securities  748   217   -   1,009   476   6   (204)  278 
Government debt securities – other countries  8,684   110   (61)  8,733   7,716   11   (30)  7,697 
Portugal  297   4   -   301   239   1   -   240 
Argentina  1   -   -   1   53   -   -   53 
United States  18   7   -   25   -   -   -   - 
Norway  347   -   (2)  345   191   -   (2)  189 
Italy  -   -   -   -   71   -   (1)  70 
Austria  1,470   -   (10)  1,460   2,116   4   (12)  2,108 
Denmark  2,092   95   6   2,193   176   -   (2)  174 
Spain  2,866   -   (36)  2,830   2,295   -   (11)  2,284 
Korea  1,020   4   (3)  1,021   2,155   5   (1)  2,159 
Chile  492   -   (9)  483   356   -   (1)  355 
Uruguay  81   -   (7)  74   64   1   -   65 
Corporate debt securities (1)  11,365   329   (204)  11,446   5,411   225   (342)  5,294 
Marketable equity securities (1)  852   8   (174)  686   1,021   1,417   -   2,438 
TOTAL  28,165   738   (458)  28,445   17,679   1,733   (587)  18,825 
(1) Securities with a cost of R$ 1,410 have been previously presented in the original financial statements within "Marketable equity securities" and have been reclassified to "Corporate debt securities". Those securities are preferred shares that are mandatorily redeemable by the issuer and should have been originally presented as "Corporate debt securities".
  
12/31/2009
  
12/31/2008
 
     
Unrealized
        
Unrealized
    
  
Amortized
cost
  
Gains
  
Losses
  
Fair
value
  
Amortized
cost
  
Gains
  
Losses
  
Fair value
 
Investment funds  1,247   13   (1)  1,259   971   21   -   992 
Brazilian federal government securities  14,324   140   (21)  14,443   5,545   53   (19)  5,579 
Brazilian government external debt securities  2,060   197   (277)  1,980   748   217   -   965 
Government debt securities – Other countries  7,261   25   (43)  7,243   8,684   110   (61)  8,733 
Portugal  26   -   -   26   297   4   -   301 
Argentina  -   -   -   -   1   -   -   1 
United States  17   -   -   17   18   7   -   25 
Norway  -   -   -   -   347   -   (2)  345 
Austria  212   1   -   213   1,470   -   (10)  1,460 
Denmark  1,995   6   (30)  1,971   2,092   95   6   2,193 
Spain  1,090   3   -   1,093   2,866   -   (36)  2,830 
Korea  1,750   12   (5)  1,757   1,020   4   (3)  1,021 
Chile  1,278   3   (7)  1,274   492   -   (9)  483 
Paraguay  417   -   -   417   -   -   -   - 
Uruguay  476   -   (1)  475   81   -   (7)  74 
Corporate debt securities  14,852   251   (137)  14,966   11,365   329   (204)  11,490 
Marketable equity securities  893   869   (390)  1,372   852   8   (174)  686 
TOTAL  40,637   1,495   (869)  41,263   28,165   738   (458)  28,445 

The amounts reclassified from Accumulated Other Comprehensive Income correspond to the following amounts:

 2008  2007  2006  2009  2008  2007 
Gross realized gains during the year upon sale of the security  131   231   559   384   131   231 
Gross realized losses during the year upon sale of the security  (245)  (414)  (276)  (173)  (245)  (414)
Other-than temporary impairment losses (Note 24 b)  (53)  (4)  (4)
Realized gain upon exchange of shares of Bovespa Holding S.A. - Note 24.a.  424   -   - 
Other-than temporary impairment losses (Note 24b)  (56)  (53)  (4)
Realized gain upon exchange of shares of Bovespa Holding S.A. (Note 24a)  -   424   - 
Total  257   (187)  279   155   257   (187)

The amortized cost and fair value of available-for-sale securities, by maturity, were as follows:

 2008  2009 
 Amortized cost  Fair value  Amortized cost  Fair value 
Due within one year  12,712   12,753   15,011   15,013 
From 1 to 5 years  10,014   10,061   13,565   13,638 
From 5 to 10 years  2,067   2,418   2,623   2,706 
After 10 years  1,549   1,535   4,656   4,596 
No stated maturity  1,823   1,678   4,782   5,310 
TOTAL  28,165   28,445   40,637   41,263 

During the years ended December 31, 2009, 2008 2007 and 2006,2007, we recognized losses of R$ 53,56, R$ 453 and R$ 4, respectively, for impairment of available-for-sale securities presented under "Other“Other non-interest expenses" in the consolidated statement of income.

At the year ended December 31, 2007, and 2006, we reclassified securities from available-for-sale securities to trading assets, resulting in recognition of R$ 52 and 292, respectively, in net income, that were previously recorded in Other Comprehensive Income.

We have no available-for-sale securities that have been in a continuous unrealized loss position for over 12 months at December 31, 20082009 and 20072008.

 
F-38F-47
 


NOTE 8 – HELD-TO-MATURITY SECURITIES

The amortized cost and corresponding fair value of held-to-maturity securities were as follows:

 2008  2007  
2009
  
2008
 
 Amortized  Unrealized gross  Fair  Amortized  Unrealized gross  Fair  
Amortized
  
Unrealized
     
Amortized
  
Unrealized
    
 cost  Gains  Losses  value  cost  Gains  Losses  value  
Cost
  
Gains
  
Losses
  
Fair value
  
cost
  
Gains
  
Losses
  
Fair value
 
Brazilian federal government securities  637   124   -   761   822   142   -   964   1,273   299   -   1,572   637   124   -   761 
Brazilian government external debt securities  321   54   -   375   307   44   -   351   238   42   -   280   321   54   -   375 
Government debt securities – other countries  22   -   -   22   19   -   -   19   17   -   -   17   22   -   -   22 
Corporate debt securities  345   15   (2)  358   280   20   -   300   234   21   -   255   345   15   (2)  358 
TOTAL  1,325   193   (2)  1,516   1,428   206   -   1,634   1,762   362   -   2,124   1,325   193   (2)  1,516 

The amortized cost and fair value of held-to-maturity securities, by maturity, were as follows:

 2008  2009 
 Amortized cost  Fair value  Amortized cost  Fair value 
Due within one year  67   12   41   51 
From 1 to 5 years  757   390 
from 1 to 5 years  614   682 
From 5 to 10 years  115   142   63   132 
After 10 years  386   972   1,044   1,259 
TOTAL  1,325   1,516   1,762   2,124 

We have no held-to-maturity securities that have been in a continuous unrealized loss position for over 12 months as of December 31, 2008 and 2007.

 
F-39F-48
 


NOTE 9 - LOANS AND LEASES

 2008  2007  2009  2008 
Commercial  78,341   45,535   113,223   78,341 
Industrial and others  64,952   40,991   104,505   64,952 
Import financing  3,643   1,287   1,895   3,643 
Export financing  9,746   3,257   6,823   9,746 
Real estate loans, primarily residential housing loans  6,469   4,732   10,939   6,469 
Lease  41,663   29,531 
Leases  47,230   41,663 
Public sector  759   827   1,611   759 
Individuals  38,104   32,182   67,601   38,104 
Overdraft  3,544   2,768   4,119   3,544 
Financing  20,272   18,023   32,701   20,272 
Credit card  14,288   11,391   30,781   14,288 
Agricultural  4,364   3,652   5,132   4,364 
TOTAL  169,700   116,459   245,736   169,700 

At December 31, 20082009 and 2007,2008, our recorded investment in impaired loans was R$ 7,62414,165 and R$ 3,8867,624 and our non-accrual loans and leases amounted to R$ 7,57915,499 and R$ 4,777,7,579, respectively.

The average recorded investment in impaired loans for 2008, 20072009 and 20062008 was approximately R$ 5,755, R$ 3,60610,895 and R$ 2,586,5,755, respectively. At December 31, 20082009 and 2007,2008, the recorded investment in impaired loans requiring an allowance for loan and lease losses based on individual analysis, per ASC 310-10-50 (Formerly SFAS 114114) guidelines, was R$ 1,7741,845 and R$ 140,1,774, and the related allowance for loan and lease losses was R$ 138737 and R$ 126,138, respectively. In 2008, 20072009 and 2006,2008, interest income recognized on impaired loans totaled R$ 556, R$ 469560 and R$ 220, respectively.556, respectively, and the loans without provision totaled R$ 426 in 2009.

We do not recognize interest income during the period the loans are considered non-accrual. The interest income forgone on our non-accrual loans for 20082009 and 20072008 is R$ 1,2651,564 and R$ 939,1,265, respectively.

Purchased credit-impaired loans

In connection with the business combination with Unibanco we acquired certain loans that were deemed to be credit-impaired.

Purchased loans corresponding to homogeneous credit portfolios were determined to be credit-impaired based on specific risk characteristics of the loan, including product type, internal scoring, and past due status. We have aggregated those loans into pools with common risk characteristics. A pool is accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows.

The table below sets forth information about these purchased credit-impaired loans at the acquisition date on February 18, 2009:

February 18, 2009
Contractually required payments receivable (including interest)4,116
Less: Non-accretable difference(2,882)
Cash flows expected to be collected representing undiscounted principal and interest at acquisition1,234
Less: Accretable yield(144)
Fair value of loans acquired1,090

We determined the fair value of the purchased credit-impaired loans at the acquisition date by discounting the cash flows expected to be collected at a market observable discount rates.  In determining the cash flows expected to be collected, we used assumptions regarding default rates and loss severities. The accretable yield represents the excess of cash flows expected to be collected over the carrying value of the purchased credit-impaired loans. This amount is accreted into interest income over the expected lives of the pool of loans. The table below sets forth the accretable yield activity for these loans for the year ended December 31, 2009:

F-49

Balance at January 1, 2009
-
Acquisition of Unibanco144
Accretion into interest income(80)
Balance at December 31, 200964

After the original acquisition we update the amount of loan principal and interest cash flows expected to be collected, incorporating assumptions regarding default rates, loss severities  and other factors that are reflective of current market conditions. Probable decreases in expected loan principal cash flows trigger the recognition of impairment, which is measured as the present value of the expected principal loss plus any related foregone interest cash flows discounted at the pool interest rate. Impairments that occur after the acquisition date are recognized through the provision and allowance for loan losses. Probable and significant increases in expected principal cash flows would first reverse any previously recorded allowance for loan losses; any remaining increases are recognized prospectively as interest income. Other changes in the timing of expected cash flows are recognized prospectively as adjustments to interest income. Since the timing and amounts of expected cash flows for these purchased credit-impaired loans are reasonably estimable, interest is being accreted and the loans are being reported as performing loans.

Charge-offs are not recorded on purchased credit-impaired loans until actual losses exceed the estimated losses that were recorded as purchase accounting adjustments at acquisition date. To date, no charge-offs have been recorded for these loans.

NOTE 10 - ALLOWANCE FOR LOAN AND LEASE LOSSES

The table below summarizes the changes in the allowance for loan and lease losses:

 2008  2007  2009  2008 
Balance at the beginning of the year  7,473   6,426   12,202   7,473 
Allowance for loan and lease losses  9,361   5,542   15,372   9,361 
Credits charged off  (5,904)  (5,566)  (9,490)  (5,904)
Recoveries  1,272   1,071   1,884   1,272 
Balance at the end of the year  12,202   7,473   19,968   12,202 

 
F-40F-50
 

NOTE 11 - INVESTMENTS IN UNCONSOLIDATED COMPANIES

a) Composition

  
Ownership % as of 
12/31/2008
  12/31/2008 (a)  12/31/2007 (a)  
12/31/2006 (a)
 
  
Total
  
Voting
  
Stockholders’ 
equity
  
Net income 
(loss)
  
Investment
  
Equity in 
earnings 
(losses)
  
Investment
  
Equity in 
earnings 
(losses)
  
Equity in earnings 
(losses)
 
Investments accounted for by the equity method                           
Allianz Seguros S.A.  27.52   27.52   514   61   142   16   130   20   17 
Banco BPI S.A. (b)  19.01   19.01   6,192   776   1,569   148   1,189   166   148 
Credicard Banco S.A. ( c)  -   -   -   -   -   -   -   -   60 
Itaú XL Seguros Corporativos S.A.  50.00   50.00   213   13   107   7   102   13   11 
Redecard S.A.  23.21   23.21   1,186   1,199   275   278   120   256   275 
Tulipa Administração e Participações Ltda ( c)  -   -   -   -   -   -   -   -   18 
Other (d)  -   -   -   -   105   25   135   21   37 
Subtotal                  2,198   474   1,676   476   566 
Other investments recorded at cost  -   -   -   -   200   -   183   -   - 
                                     
Total                  2,398   474   1,859   476   566 
  
Ownership % at
12/31/2009
  
12/31/2009 (a)
  
12/31/2008 (a)
  
12/31/2007 (a)
 
  
Total
  
Voting
  
Stockholders’
equity
  
Net income
(loss)
  
Investment
  
Equity in earnings
(losses)
  
Investment
  
Equity in earnings
(losses)
  
Investment
  
Equity in earnings
(losses)
 
Investments accounted for under the equity method                              
Banco BPI S.A.  (b)  19.03   19.03   5,352   117   1,018   (280)  1,569   148   1,189   166 
Porto Seguro Itaú Unibanco Participações S.A. (c)  42.93   42.93   2,202   67   1,909   36   -   -   -   - 
Itaú XL Seguros Corporativos S.A. (g)  50.00   50.00   246   44   123   22   107   7   102   13 
Maxfácil Participações S.A. (d)  49.99   49.99   192   26   96   13   -   -   -   - 
Redecard S.A. (e)  -   -   -   -   -   147   275   278   120   256 
Other  (f)  -   -   -   -   370   53   247   41   265   41 
Subtotal                  3,516   (9)  2,198   474   1,676   476 
Other investments recorded at cost  -   -   -   -   805   -   200   -   183   - 
                                         
Total                  4,321   (9)  2,398   474   1,859   476 
(a) Amounts derived from the financial statements prepared in accordance with accounting practices adopted in Brazil in each case adjusted to US GAAP, when applicable. There are no significant restrictions to remit funds to the Bank.
(b) Banco BPI S.A. is an equity investee of IPI – Itausa Investimentos Ltda (“IPI”). The shares of IPI are owned 51.00% by Itaúsa Export S.A. and 49.00% by other subsidiaries of Itaú Unibanco Holding. Before the acquisition of shares of Itaúsa Export S.A. described in Note 3.b we did not consolidated Itaúsa Export S.A. and in prior periods we recorded equity investments in IPI for the 49.00% owned through our subsidiaries and equity investment in Itaúsa Export. As result of the retroactive restatement described in Note 3.b we consolidatedconsolidate in this financial statements Itaúsa Export S.A. and IPI and, as a result, we present an equity investment directly in Banco BPI S.A.TheS.A. The amount of investment includes the amount of R$ 392 and R$ 297 at December 31, 2008 and 2007 which corresponds to the difference between the interest in net assets of Banco BPI S.A. and the cost of the investment comprising, differences between the carrying amount of net assets and their estimated fair value and goodwill.
During the year ended December 31, 2009 we recorded an impairment charge with respect to this investment of R$ 302.
(c ) During 2006, the joint-venture in Credicard was terminated and 50%(c) See Note 3.1.c. The amount of the investment includes the amount of R$ 936 at December 31, 2009 which corresponds to the difference between the interest in net assets of Porto Seguro Itaú Unibanco Participações S.A. and liabilitiesthe cost of Tulipa and Credicard were transferredinvestment. Net equity in earnings corresponds to us and are being consolidated since then.(see note 3h)
the period from December 1, 2009 to December 31, 2009.
(d) Investment acquired due to the acquisition of Unibanco.
(e) See Note 3.1.b. The amount presented as equity in earnings for 2009 corresponds to equity in earnings from January 1, 2009 to March 30, 2009.
(f) Other includes interests in the total and voting stock of the following companies: BIU Participações S.A (41.66% of total and voting stock), Bracor Investimentos Imobiliários S.A. ( 17.72%(17.72% of total capital and voting stock),  Companhia Hipotecária Unibanco - Rodobens (49.99% of total capital and Olimpiavoting stock), Estrutura Brasileira de Projetos S.A. (11.11% of total capital and voting stock), Latosol Empreendimentos e Participação Ltda (32.11% of total capital and voting stock), Olímpia Promoção e Serviços S.A. (50% of total capital and voting stock), Rosefiled Finance Ltd (50% of total capital and voting stock), Tecnologia Bancária S.A. (14.86% of total capital and 24.81% of voting stock) and Unibanco Rodobens Administradora e Consórcios S.A. (49.99% of total capital and voting stock).
(g) See Note 36a.

 
F-41F-51
 

b) Summarized financial information

Information about the financial position and results of Redecard S.A., the investment that most contributed to our equity in earnings of unconsolidated companies as of December 31, 2008 and 2007 and for the years ended December 31, 2008 2007 and 2006,2007, is as follows:follows (as from March 2009, Redecard started to be fully consolidated (Note 3.1.b)):

Balance Sheet - Unaudited  12.31.2008   12.31.2007    
Blance sheet - unaudited 12/31/2008    
                 
Total assets  14,645   13,334      14,645    
Total liabilities  13,459   12,818      13,459    
Stockholders’ equity  1,186   516      1,186    
Investment  275   120      275    
                  
Income Statement - Unaudited 
01.01.2008 to
12.31.2008
  
01.01.2007 to
12.31.2007
  
01.01.2006 to
12.31.2006
 
Statement of income - unaudited 
01/01/2008 to
12/31/2008
  
01/01/2007 to
12/31/2007
 
                  
Operating revenues  2,900   2,531   3,082   2,900   2,531 
Operating expenses  1,109   1,208   2,072   1,109   1,208 
Income before income tax  1,791   1,323   1,010   1,791   1,323 
Income tax  592   329   150   592   329 
Net income  1,199   994   860   1,199   994 
Equity in income  278   256   275 
Equity in earnings  278   256 

c) Other information

Dividends, including interest on stockholders' equity, received from the investments accounted for byunder the equity method were R$ 63, R$ 246 and R$ 297 and R$ 168 in the years ended December 31, 2009, 2008 and 2007, and 2006, respectively.

 
F-42F-52
 


NOTE 12 – PREMISES AND EQUIPMENT

 2008  2007  
Annual
depreciation
rates (%)
  2009  2008  
Annual
depreciation
rates (%)
 
Gross                  
Land  724   711      959   724    
Buildings used in operations  1,936   1,850      2,647   1,936    
Installations, furnishings, equipment and security and communication systems  1,019   919    
Installations, furniture, equipment and security and communication systems  1,915   1,019    
Data processing equipment  2,585   2,433      3,918   2,585    
Cost of software developed or obtained for internal use  805   647      1,298   805    
Transportation system  31   30      16   31    
Assets held for sale  16   25      23   16    
Other  669   885       349   669    
TOTAL  7,785   7,500      11,125   7,785    
Accumulated depreciation                      
Buildings used in operations  (1,374)  (1,287)  4   (1,718)  (1,374)  4 
Installations, furnishings, equipment and security and communication systems  (573)  (550) 10 to 25 
Installations, furniture, equipment and security and communication systems  (925)  (573) 10 to 25 
Data processing equipment  (2,147)  (2,016) 20 to 50   (3,073)  (2,147) 20 to 50 
Cost of software developed or obtained for internal use  (401)  (311) 20 to 33   (630)  (401) 20 to 33 
Transportation system  (13)  (15)  20   (11)  (13)  20 
Other  (312)  (566)  20   (196)  (312)  20 
TOTAL  (4,820)  (4,745)      (6,553)  (4,820)    
NET BOOK VALUE  2,965   2,755       4,572   2,965     

Depreciation expense was R$ 1,250, R$ 756 and R$ 675 and R$ 605 in the years ended December 31, 2009, 2008 2007 and 2006,2007, respectively, including expenses of R$ 145, R$ 109 and R$ 91 and R$ 90 for depreciation of cost of software developed or obtained for internal use.

Capitalized interest and accumulated depreciation of capitalized interest amount to R$ 23 and R$ 18,19, respectively, in 2009 (R$ 23 and R$ 18 in 2008, (R$and R$ 23 and R$ 17 in 2007, and R$ 23 and R$ 16 in 2006)2007).

Accumulated depreciation of leases amount to R$ 84, R$ 72 and R$ 60 and R$ 45 as of December 31, 2009, 2008 2007 and 2006,2007, respectively. The only asset class recorded under leases is buildings used in operations.

 
F-43F-53
 


NOTE 13 – GOODWILL AND INTANGIBLE ASSETS

In accordance with ASC 350 (Formerly SFAS No. 142,142), no goodwill amortization was recorded in 2009, 2008 2007 and 2006.2007. The following table presents the movement of aggregate goodwill for the years ended December 31:

  2008  2007 
Opening balance sheet  635   676 
Addition as a result of acquisition of Delle Holdings  2   29 
Addition as a result of acquisition of BBI  -   19 
Addition as a result of acquisition of BBT  -   13 
Addition as a result of acquisition of private banking portfolio of ABN AMRO Bank N.V.  -   113 
Tax benefit on the realization for tax purposes of tax deductible goodwill  (257)  (215)
Effect of exchange rate on goodwill on entities outside Brazil   43   - 
Closing balance sheet  423   635 
The total amount of goodwill as of December 31, 2008 and 2007 was allocated to the Itaú Unibanco – Banking segment, the amount of R$ 38 e R$ 178, Itaú BBA segment, the amount of R$ 37 and R$ 76 , Itaú Unibanco – Credit Cards – Account Holders segment the amount of R$ 163 and R$ 207 and Itaú Unibanco – Asset Management and Investor Services segment the amount of R$ 185 e R$ 174.

F-44


The change in intangible assets for the years ended December 31 is presented below:
  2009  2008 
Commercial Bank Segment      
Opening balance - Gross Amount  224   392 
Accumulated impairment losses  -   - 
Net opening balance  224   392 
Effect of exchange rate on goodwill on entities outside Brazil  (47)  43 
Tax benefit on the realization for tax purposes of tax deductible goodwill
  -   (211)
Closing balance sheet  177   224 
Accumulated impairment losses  -   - 
Net closing balance  177   224 
         
Itaú BBA Segment        
Opening balance - Gross Amount
  36   36 
Accumulated impairment losses  -   - 
Net opening balance  36   36 
Addition as a result of acquisition  -   2 
Tax benefit on the realization for tax purposes of tax deductible goodwill  -   (2)
Closing balance sheet  36   36 
Accumulated impairment losses  -   - 
Net closing balance  36   36 
         
Consumer Credit Segment        
Opening balance - Gross Amount  163   207 
Accumulated impairment losses  -   - 
Net opening balance  163   207 
Addition as a result of acquisitions  14,376   - 
Tax benefit on the realization for tax purposes of tax deductible goodwill  (41)  (44)
Closing balance sheet  14,498   163 
Accumulated impairment losses  -   - 
Net closing balance  14,498   163 
         
Total        
Opening balance - Gross Amount  423   635 
Accumulated impairment losses  -   - 
Net opening balance  423   635 
Addition as a result of acquisitions  14,376   2 
Effect of exchange rate on goodwill on entities outside Brazil
  (47)  43 
Tax benefit on the realization for tax purposes of tax deductible goodwill
  (41)  (257)
Closing balance sheet  14,711   423 
Accumulated impairment losses  -   - 
Net closing balance  14,711   423 
 
  
2008
  
2007
 
  
Orbitall - Credit 
card processing
contracts
  
SFR and Previtec -
Service agreements
for private pension
processing
  
Exclusive Access to
customers of
retailers and real
estate brokers
  
Customer
Relationships
  
Distribution
network FIAT
  
Total
  
Orbitall -  Credit
card processing
contracts
  
SFR and Previtec -
Service agreements
for private pension
processing
  
Exclusive access to
customers of
retailers and real 
estate brokers
  
Customer
Relationships
  
Distribution
network FIAT
  
Total
 
Opening balance  120   29   1,230   5,530   39   6,948   165   -   1,006   4,470   46   5,687 
Additions as a result of the transactions during the year:                                                
Strategic agreement with Dafra  -   -   20   -   -   20   -   -   -   -   -   - 
Strategic agreement with Coelho da Fonseca  -   -   94   -   -   94   -   -   -   -   -   - 
Strategic agreement with Blockbuster  -   -   51   -   -   51   -   -   -   -   -   - 
Strategic agreement with Canal Shop Time  -   -   12   -   -   12   -   -   -   -   -   - 
Strategic agreement with TAM  -   -   7   -   -   7   -   -   -   -   -   - 
Strategic agreement with Marisa  -   -   120   -   -   120   -   -   -   -   -   - 
Strategic agreement with ABRACAF  -   -   6   -   -   6   -   -   -   -   -   - 
BBA H.E. Participações S.A. (Note 3c)  -   -   -   116   -   116   -   -   -   -   -   - 
Governo do Estado de Goiás  -   -   -   150   -   150   -   -   -   -   -   - 
Unión Capital  -   -   -   10   -   10   -   -   -   -   -   - 
Pandora  -   -   -   32   -   32   -   -   -   -   -   - 
Strategic agreement with SFR and Previtec  -   -   -   -   -   -   -   32   -   -   -   32 
Strategic agreement with Lopes  -   -   -   -   -   -   -   -   290   -   -   290 
Itaubank Chile and Urugauy (Note 3d and 3e)  -   -   -   -   -   -   -   -   -   195   -   195 
BBI and BBT (Note 3f)  -   -   -   -   -   -   -   -   -   62   -   62 
ABN (Note 3f)  -   -   -   -   -   -   -   -   -   129   -   129 
Other acquisitions (1)  -   -   -   359   -   359   -   -   -   1,639   -   1,639 
Amortization for the year  (20)  (3)  (88)  (1,082)  (8)  (1,201)  (28)  (3)  (60)  (876)  (7)  (974)
Effect of exchange rate on intangible assets on entities outside Brazil  -   -   -   57   -   57   -   -   -   (12)  -   (12)
Rescission of agreement (2)  -   -   -   (12)  -   (12)  -   -   -   (53)  -   (53)
Tax benefit in the realization of deductible goodwill arising from acquisitions
   (15)   -   (19)   (59)   -   (93)  (17)   -   (6)   (24)  -   (47)
Closing balance
  85   26   1,433   5,101   31   6,676   120   29   1,230   5,530   39   6,948 
Gross balance  234   32   1,778   9,491   103   11,638   234   32   1,468   8,825   103   10,662 
Accumulated amortization
   (149)   (6)   (345)  (4,390)  (72)  (4,962)  (114)  (3)  (238)  (3,295)  (64)  (3,714)
Balance at the closing of the balance sheet, net
  85   26   1,433   5,101   31   6,676   120   29   1,230   5,530   39   6,948 
Weighted average useful life (in years)
  5.9   9.8   15.4   5.9   4.3   7.9   6.9   10.8   17.2   6.5   5.3   8.4 
The changes in intangible assets for the years ended December 31 are presented below:

  
2009
  
2008
 
  
Exclusive access to
customers of
retailers and real
estate brokers
  
Customer
reationships
(including Core
Deposits)
  
Brand Mark
  
Others
  
Total
  
Exclusive access to
customers of
retailers and real
estate brokers
  
Customer
relationships
  
Others
  
Total
 
Opening balance  1,433   5,101   -   142   6,676   1,230   5,530   188   6,948 
Additions as a result of the transactions during the year:  4,270   14,144   1,394   114   19,922   -   -   -   - 
Unibanco (Note 3a)  3,600   8,765   1,039   113   13,517   -   -   -   - 
Redecard (Note 3b)  -   5,216   355   1   5,572   -   -   -   - 
Other  670   163   -   -   833   -   -   -   - 
Additions as a result of the transactions during 2008:  -   -   -   -   -   310   667   -   977 
Strategic agreement with Marisa  -   -   -   -   -   120   -   -   120 
Strategic agreement with Coelho da Fonseca  -   -   -   -   -   94   -   -   94 
BBA H.E. Participações S.A (Note 3.2.b)  -   -   -   -   -   -   116   -   116 
Governo do Estado de Goiás  -   -   -   -   -   -   150   -   150 
Unión Capital  -   -   -   -   -   -   10   -   10 
Pandora  -   -   -   -   -   -   32   -   32 
Other acquisitions  -   -   -   -   -   96   359   -   455 
Amortization for the year  (520)  (3,096)  -   (47)  (3,663)  (88)  (1,082)  (31)  (1,201)
                                     
Effect of exchange variation on intangible assets of entities outside Brazil  -   (58)  -   -   (58)  -   57   -   57 
Rescissions  -   (39)  -       (39)  -   (12)  -   (12)
Impairment loss  -   (10)  -   -   (10)  -   -   -   - 
Tax benefit in the realization of deductible goodwill arising from acquisitions  (9)  (235)  -   (15)  (259)  (19)  (59)  (15)  (93)
Closing balance  5,174   15,807   1,394   194   22,569   1,433   5,101   142   6,676 
Gross balance  6,048   23,635   1,394   369   31,446   1,778   9,491   369   11,638 
Accumulated amortization  (874)  (7,828)  -   (175)  (8,877)  (345)  (4,390)  (227)  (4,962)
                                     
Balance at the balance sheet date, net  5,174   15,807   1,394   194   22,569   1,433   5,101   142   6,676 
Weighted average useful life (in years)  12.3   4.1   0.0   5.4   5.5   15.4   5.9   6.7   7.9 
(1) Basically refers to the amounts spent to acquire rights to credit payrolls and perfomperform tax collections for Municipal and State Governments.  During 2009 and 2008, transactions comprisescomprise several small agreements. During  2007, transactions basically comprises agreements entered into with the: State Governments of Rio de Janeiro in the amount R$ 750 and Goiás in the amount R$ 178, the Court of Justice of Minas Gerais in the amount R$ 150,  the Municipal Government of Macaé in the amount R$ 53 and others in the amount R$ 508.
(2) On October 17, 2007, the State Government of Minas Gerais and Banco Itaú signed an instrument for the rescission of the service agreement for the management of payroll of State of Minas Gerais' civil servants. Based on the rescission, the State Government of Minas Gerais paid an indemnity to Banco Itau amounting to R$ 129, which resulted in income of R$ 76, to recorded in "Other non-interest income".

Estimated amortization expenses for defined life intangible assets over the next five years are as follows:

 
Estimated
amortization
expenses
(unaudited)
  
Estimated
amortization
expense (unaudited)
 
2009 1,222 
2010 1,166  3,878 
2011 1,028  3,493 
2012 755  2,934 
2013 554  2,598 
2014 1,651 

 
F-45F-55
 


NOTE 14 – OTHER ASSETS

 
2008
  2007  2009  2008 
Net deferred assets, net of valuation allowance (Note 21)  4,614   - 
Deferred tax assets (Note 21)  7,092   4,614 
Escrow deposits for provision for contingent liabilities classified as probable (Note 30b)  3,721   3,009   3,219   2,286 
Prepaid taxes  3,438   2,582   5,404   3,438 
        
Escrow deposits for taxes payable and challenged in court (Note 30b)  2,286   1,615   4,127   3,721 
Pension plan prepaid assets (Note 25)  1,903   3,248   2,743   1,903 
Escrow deposits for provision for contingent liabilities classified as possible (Note 30b)  1,666   1,117   3,234   1,666 
Service fees and commissions receivable  1,619   1,367   3,000   1,619 
Redecard - receivables from issuers of credit cards  9,521   - 
Prepaid expenses  1,075   438   2,003   1,075 
Receivables from reimbursement of contingent liabilities (Note 30b)  940   814   1,114   940 
Other escrow deposits  807   366   423   807 
Receivable from the government administered fund – Fundo para Compensação da Variações Salariais (FCVS)  585   396   533   585 
Receivables related to the sale of Credicard brand  304   230 
Receivables related to the sale of the Credicard brand  -   304 
Foreclosed assets, net  211   235   218   211 
Receivables related to acquisitions  163   165   192   163 
Escrow account related to strategic partnerships with CBD and LASA  148   155   109   148 
Deferred policy acquisition costs  133   123   299   133 
Other  2,283   1,988   2,339   2,283 
TOTAL  25,896   17,848   45,570   25,896 

NOTE 15 –- DEPOSITS

 2008  2007  2009  2008 
Non-interest bearing deposits  24,106   28,134   25,884   24,106 
Demand deposits  23,041   26,729   24,887   23,041 
Other deposits  1,065   1,405   997   1,065 
Interest-bearing deposits  126,696   53,491   165,024   126,696 
Savings deposits  31,896   27,990   48,222   31,896 
Time deposits  92,758   23,885   114,810   92,758 
Deposits from banks   2,042   1,616   1,992   2,042 
TOTAL  150,802   81,625   190,908   150,802 

Time deposits with balance in excess of the equivalent to US$ 100,000.00 amount to R$ 86,815 as of December 31, 2009 (R$ 72,733 as of December 31, 2008 (R$ 16,469 as of December 31, 2007)2008).

 
F-46F-56
 


NOTE 16 - SHORT-TERM BORROWINGS

  2008  2007 
Trade financing borrowings  9,166   5,805 
Local onlendings  122   70 
Euronotes  576   186 
Commercial Paper  60   3 
Fixed-rate notes  133   - 
Mortgage notes  3,035   282 
Securities issued and sold to customers under repurchase agreements  40,977   41,174 
Other short-term borrowings  208   658 
TOTAL  54,277   48,178 
  2009  2008 
Trade financing borrowings  6,093   9,166 
Local onlendings  215   122 
Euronotes  414   576 
Commercial Paper  -   60 
Fixed-rate notes  408   133 
Mortgage notes  7,854   3,035 
Securities issued and sold to customers under repurchase agreements  65,520   40,977 
Other short-term borrowings  221   208 
TOTAL  80,725   54,277 

Trade finance borrowings represent credit lines available to finance imports and exports by Brazilian companies, typicallyusually denominated in foreign currency. The following table presents the interest rates in each type of borrowings (p.a.):

 
2008
  2007  2009  2008 
Trade financing borrowings  0.42% a 13.70%  0.95% a 16.50% 1.00% to 13.28%  0.42% to 13.70% 
Local onlendings  2.30% a 13.67%  1.00% a 10.00% 1.50% to 11.50%  2.30% to 13.67% 
Euronotes  0.40% a 13.62%  5.10% a 11.39% 0.23% to 10.91%  0.40% to 13.62% 
Commercial Paper  3.73%  5.67%  -   3,73% 
Fixed-rate notes  3.61% a 12.94%  -  0.95% to 8.93%  3.61% to 12.94% 
Mortgage notes  6.89% a 12.88%  9.90% a 11.12% 1.28% to 8.55%  6.89% to 12.88% 

Under "Securities issued and sold to customers under repurchase agreements" we present our liabilities for transactions in which we sell for cash to customers debt securities issued by our consolidated subsidiaries previously held in treasury and where we commit to repurchase them at any moment after sold to the customer and through a final repurchase date on which they are mandatorily repurchased by us. The repurchase price is computed as the price paid on the date of sale plus interest at rates varying between 70%65% and 109%111% of the CDI (Interbank Certificate of Deposits) rate. The final repurchase dates extends through June 2027.

 
F-47F-57
 


NOTE 17 - LONG-TERM DEBT

 
2008
  2007  2009  2008 
Local onlendings  7,271   5,403   21,867   7,271 
Euronotes  2,209   1,758   1,534   2,209 
Fixed-rate notes  278   193   148   278 
Commercial Paper  -   15 
Mortgage notes  669   907   971   669 
Trade finance borrowings  7,361   5,184   5,907   7,361 
Debentures  2,093   3,488   2,764   2,093 
Subordinated debt  15,030   11,934   22,725   15,030 
Debt under securitization of diversified payment rights  1,424   1,110   -   1,424 
Other long-term debt (1)   1,337   1,035   3,060   1,337 
TOTAL  37,672   31,027   58,976   37,672 

(1) Including lease obligations in the amounts of R$  3827 and R$ 5038  as of December 31, 20082009 and 2007,2008, respectively.

a)   Local onlendings

Local onlendings represent amounts borrowed from Brazilian agencies for lending to Brazilian entities principally to finance purchases of premises and equipment. Such amounts are due in monthly installments through 2029 and bear fixed interest rates up to 15.35% per annum, plus variable interest based on the Taxa de Juros de Longo Prazo (federal government long-term interest rate determined on a quarterly basis, or "TJLP"), on the U.S. dollar exchange variation, or on the BNDES basket of currencies. These borrowings are primarily from Banco Nacional de Desenvolvimento Econômico e Social - BNDES (National Economic and Social Development Bank) and Fundo de Financiamento para Aquisição de Máquinas e Equipamentos Industriais - FINAME (National Industrial Finance Authority) in the form of credit lines that are directed by such government agencies through private banks to specific targeted sectors for economic development.  Under this arrangement, Itaú Unibanco Holding borrows funds from BNDES or FINAME and passes the funds at a spread determined by the Government to the targeted sector of the economy. Onlending is at the risk of Itaú Unibanco Holding, and it is generally secured.

 
F-48F-58
 

b)   Euronotes

b)   Euronotes
         
Carrying amount (net of
repurchases)
 
Maturity date 
Original term in
years
 Currency Coupon - %  2008  2007 
01/31/2008  3 US$  4.38   -   208 
05/18/2009  5 US$  5.00   16   13 
02/7/2009  1 US$  12.68   3   - 
12/21/2009  1 US$  6.28   164   - 
12/21/2009  1 US$  6.40   28   - 
12/21/2009  1 US$  5.92   6   - 
12/21/2009  1 US$  6.15   7   - 
12/21/2009  1 US$  6.00   1   - 
09/2/2010  2 US$  11.41   2   - 
06/21/2010  2 US$  6.25   4   - 
06/21/2010  2 US$  6.20   7   - 
06/22/2010  5 €  3.50   516   422 
08/20/2010  5 US$  6.39   5   4 
10/20/2010  5 US$  7.03   9   7 
10/20/2010  5 US$  7.08   5   4 
10/20/2010  5 US$  7.29   5   4 
10/20/2010  5 US$  8.00   2   2 
10/20/2010  5 US$  6.98   12   9 
10/20/2010  5 US$  7.03   12   9 
01/20/2011  3 US$  4.28   24   - 
02/22/2011  5 US$  5.14   6   5 
02/22/2011  5 US$  5.29   11   8 
02/22/2011  5 US$  5.23   36   27 
04/3/2011  3 US$  3.45   7   - 
04/20/2011  5 US$  5.98   5   4 
06/30/2011  3 US$  8.00   39   - 
06/30/2011  3 US$  8.50   7   - 
06/30/2011  3 US$  8.00   23   - 
06/30/2011  3 US$  7.00   23   - 
07/27/2011  5 €   5.24   725   594 
02/17/2012  7 €  5.63   27   21 
05/21/2012  5 US$  6.00   12   9 
05/30/2012  5 R$  9.21   398   408 
02/20/2013  5 US$  5.14   59   - 
04/22/2013  5 €   7.38   3   - 
TOTAL           2,209   1,758 
  
Original term in
        
Carrying amount (net of
repurchases)
 
Maturity date
 
years
  
Currency
  
Coupon - %
  2009  
2008
 
05/18/2009 5  US$   5.00   -   16 
07/02/2009 1  US$   12.68   -   3 
12/21/2009 1  US$   6.28   -   164 
12/21/2009 1  US$   6.40   -   28 
12/21/2009 1  US$   5.92   -   6 
12/21/2009 1  US$   6.15   -   7 
12/21/2009 1  US$   6.00   -   1 
02/09/2010 2  US$   11.41   3   2 
02/10/2010 1  US$   3.12   2   - 
02/22/2010 1  US$   4.50   2   - 
06/21/2010 2  US$   6.25   3   4 
06/21/2010 2  US$   6.20   6   7 
06/22/2010 5  €   3.50   327   516 
07/20/2010 2  US$   1.55   2   - 
08/20/2010 5  US$   6.39   4   5 
10/20/2010 5  US$   7.08   3   5 
10/20/2010 5  US$   7.29   4   5 
10/20/2010 5  US$   8.00   2   2 
10/20/2010 5  US$   6.98   9   12 
10/20/2010 5  US$   7.03   15   21 
01/20/2011 3  US$   4.28   18   24 
02/22/2011 5  US$   5.14   4   6 
02/22/2011 5  US$   5.29   8   11 
02/22/2011 5  US$   5.23   26   36 
03/04/2011 3  US$   3.45   5   7 
04/20/2011 5  US$   5.98   3   5 
05/17/2011 2  US$   2.49   1   - 
05/19/2011 2  US$   9.73   2   - 
05/27/2011 1  US$   1.70   2   - 
6/30//2011 (1) 3  US$   8.00   -   39 
6/30//2011 (1) 3  US$   8.50   -   7 
6/30//2011 (1) 3  US$   8.00   -   23 
6/30//2011 (1) 3  US$   7.00   -   23 
07/27/2011 5  €   5.24   538   725 
12/27/2011 5  US$   3.17   14   - 
02/17/2012 7  €   5.63   20   27 
05/21/2012 5  US$   6.00   9   12 
05/30/2012 5  R$   9.21   404   398 
07/06/2012 3  US$   5.00   2   - 
07/09/2012 3  US$   5.00   12   - 
02/20/2013 5  US$   5.14   44   59 
04/22/2013 5  €   7.38   2   3 
05/20/2013 4  US$   5.75   8   - 
05/02/2014 5  US$   5.00   13   - 
06/20/2014 5  US$   4.10   10   - 
05/29/2018 
9
  
US$
   8.00   7   - 
TOTAL             1,534   2,209 
(1) Operations recognized in advance in 2009.

 
F-49F-59
 
 

c)   Fixed Rate Notes

         
Carrying amount (net of
repurchases)
 
Maturity date 
Original term in
years
 Currency Coupon - %  
2008
  2007 
Payment suspended (1)  - US$  7.01   3   2 
03/17/2009  5 US$  6.00   24   18 
03/30/2009  5 US$  6.00   2   2 
04/06/2009  5 US$  6.00   9   7 
04/16/2009  5 US$  6.00   9   7 
04/20/2009  5 US$  6.00   57   43 
04/22/2009  5 US$  6.00   5   4 
04/27/2009  5 US$  6.00   4   3 
05/06/2009  5 US$  6.00   12   9 
05/11/2009  5 US$  6.00   6   4 
05/14/2009  5 US$  6.00   12   9 
05/26/2009  5 US$  6.00   5   4 
05/28/2009  5 US$  6.00   12   9 
06/01/2009  5 US$  6.00   11   9 
06/15/2009  5 US$  6.00   12   9 
06/29/2009  5 US$  6.00   5   4 
07/13/2009  5 US$  6.00   26   20 
07/15/2009  5 US$  6.00   7   5 
08/10/2009  5 US$  6.00   8   6 
08/17/2009  5 US$  6.00   12   9 
08/24/2009  5 US$  6.00   9   7 
10/27/2009  2 US$  4.82   4   - 
12/08/2009  3 US$  7.00   4   3 
04/18/2011  4 US$  10.37   20    - 
TOTAL           278   193 

   
Original term in
      
Carrying amount (net of
repurchases)
 
Maturity date
 
 years
 
Currency
 
Coupon - %
  
2009
  
2008
 
Other - US$ 7.01   -   3 
3/17/2009 5 US$ 6.00   -   24 
3/30/2009 5 US$ 6.00   -   2 
4/6/2009 5 US$ 6.00   -   9 
4/16/2009 5 US$ 6.00   -   9 
4/20/2009 5 US$ 6.00   -   57 
4/22/2009 5 US$ 6.00   -   5 
4/27/2009 5 US$ 6.00   -   4 
5/6/2009 5 US$ 6.00   -   12 
5/11/2009 5 US$ 6.00   -   6 
5/14/2009 5 US$ 6.00   -   12 
5/26/2009 5 US$ 6.00   -   5 
5/28/2009 5 US$ 6.00   -   12 
6/1/2009 5 US$ 6.00   -   11 
6/15/2009 5 US$ 6.00   -   12 
6/29/2009 5 US$ 6.00   -   5 
7/13/2009 5 US$ 6.00   -   26 
7/15/2009 5 US$ 6.00   -   7 
8/10/2009 5 US$ 6.00   -   8 
8/17/2009 5 US$ 6.00   -   12 
8/24/2009 5 US$ 6.00   -   9 
10/27/2009 2 US$ 4.82   -   4 
12/8/2009 3 US$ 7.00   -   4 
4/18/2011 (1) 4 US$ 10.37   -   20 
3/21/2012 8
 
US$ 3.10   73   - 
3/21/2012 8 US$ 3.50   7   - 
4/30/2012 8 US$ 3.20   22   - 
4/30/2012 5 US$ 3.40   12   - 
5/16/2012 8 US$ 3.70   9   - 
7/10/2012 
8
 
US$
 
3.80
   25   - 
TOTAL         148   278 
(1) These operations are in renegotiation withSecurities bought by legal vehicle but eliminated at the creditor and had their payment suspended.consolidated

d) Mortgage Notes

Mortgage notes were issued with maturities exceeding one year, falling due monthly up to December 1, 2035,April 30, 2033, and paying interest of up to 10.12%10% p.a.. These instruments are fully backed by housing loans.

 
F-50F-60
 


e) Trade finance borrowings

Maturity Currency  
2008
  2007  Currency 2009  2008 
2008 CHF (1)   -   2 
2008 €    -   10 
2008 US$   -   992 
2008 ¥   -   1,271 
2009 UYU (3)   -   6 
2009 €    94   9  €  -   94 
2009 CHF (1)   -   18  CHF (1)  -   - 
2009 US$   2,572   898  US$  -   2,572 
2009 ¥    793   481  ¥  -   793 
2009 R$   433   -  R$  -   433 
2010 €    183   401  €  24   183 
2010 CLP (2)   1   -  CHF (1)  5   - 
2010 CHF (1)   -   1  CLP (2)  -   1 
2010 US$   905   207  US$  1,975   905 
2010 ¥  50   - 
2010 R$  3   - 
2011 €  146   20 
2011 €    20   6  CHF (1)  2   - 
2011 US$   1,165   30  US$  2,077   1,165 
2012 CHF (1)   1   2  CHF (1)  2   1 
2012 CLP (2)   1   -  CLP (2)  1   1 
2012 US$   153   141  US$  616   153 
2012 €   768   610  €  586   768 
After 2012 CHF (1)   -   2 
After 2012 CLP (2)   2   - 
After 2012 US$   264   96 
After 2012 €   6   1 
2013 CHF (1)  2   - 
2013 €  68   - 
2013 US$  257   264 
2014 CHF (1)  2   - 
2014 CLP (2)  1   - 
2014 US$  54   - 
After 2014 CHF (1)  9   - 
After 2014 CLP (2)  2   2 
After 2014 US$  24   - 
After 2014 €  1   6 
TOTAL      7,361   5,184     5,907   7,361 
(1) CHF - Swiss Franc; (2) Chilean Peso (3) UYU - Uruguayan Peso

Foreign currency borrowings are mainly directed to fund our trade financing and credit extended to customers isand are generally matched by specific funding from the foreign bank. The following table shows the interest rates on foreign currency denominated balances (p.a.):

 2008  
2007
  2009 2008 
US$ 1.01% to 13.09%   0.99% to 17.20%   0.45% to 11.75% 1.01% to .3,0% 
¥ 1.30% to 1.48%  0.77% to 1.36%   0.75% to 3.15% 1.30% to 1.48% 
€ 2.50% to 5.93%  3.50% to 7.59%   1.12% to 7.38% 2.50% to 5.93% 
UYU -  9.25% to 13.50%  
R$ 13.09%  -  1.12% to 7.00% 13.09% 
CLP 3.15% to 6.60%   -  2.20% to 6.30% 3.15% to 6.60% 
CHF 2.78% to 5.75%   2.00% to 9.50%  0.8% to 5.75% 2.78% to 5.75% 

 
F-51F-61
 


f )  Debentures

  Original term in     Coupon - %  
Carrying amount (excluding
debentures in treasury)
 
Maturity date years  Currency  2009  2008  2009  2008 
10/1/2010 3  R$  CDI + 0,29  CDI + 0,29   1,035   1,048 
10/1/2012 5  R$  CDI + 0,35  CDI + 0,35   1,033   1,045 
Other    R$   -   -   696   - 
TOTAL                2,764   2,093 

F-62

g)   Subordinated debt
  Original term in     Coupon - % 
Carrying amount (excluding
debentures in treasury)
 
Maturity years  Currency  
2008
 2007 2008  2007 
02/01/2008  3
 
  R$  
 
  -     102.4% of CDI  -   1,409 
10/01/2010  3   R$    CDI + 0.29  CDI + 0.29  1,048   1,041 
10/01/2012  5   R$    CDI + 0.35  CDI + 0.35  1,045   1,038 
TOTAL               2,093   3,488 

g)   Subordinated debt

     Coupon - %  Carrying amount 
Maturity Currency  2008  2007  2008  2007 
Notes               
08/15/2011 US$   10.00   10.00   408   309 
08/15/2011 ¥   4.25   4.25   786   482 
Debentures                   
09/01/2008 R$   -  CDI + 0,75   -   630 
Bonus                    
04/01/2033 CLP   3.50   -   73   - 
10/01/2033 CLP   4.5   -   75   - 
Certificate of deposit                    
02/26/2008 R$   -  CDI   -   1,428 
12/23/2009 R$  CDI + 0.87  CDI + 0.87   852   852 
04/02/2012 R$  CDI + 3.50  CDI + 3.50   6,150   5,449 
11/01/2012 R$  CDI + 0.35  CDI + 0.35   344   305 
02/01/2013 R$  CDI + 0.50   -   2,042   - 
02/07/2013 R$
 
 CDI + 0.50   -   265   - 
02/08/2013 R$  CDI + 0.50   -   13   - 
02/25/2013 R$  CDI + 0.50   -   69   - 
05/22/2014 R$  CDI + 0.35  CDI + 0.35   2,187   1,932 
10/14/2014 R$  CDI + 12.00   -   1,018   - 
Redeemable preferred shares                    
03/31/2015 US$   5.13   6.39   748   547 
TOTAL              15,030   11,934 
    
Coupon - %
  
Carrying amount
 
Maturity date
 
Currency
 
2009
  
2008
  
2009
  
2008
 
Notes              
8/15/2011 US$ 10.00  10.00   303   408 
8/15/2011 ¥ 4.25  4.25   572   786 
7/29/2049 US$ 8.70  -   867   - 
Bonds                
4/1/2033 CLP 3.50  3.50   67   73 
10/1/2033 CLP 4.50  4.50   69   75 
Time Deposit                
12/23/2009 R$ -  CDI + 0,87   -   852 
4/2/2012 R$ CDI + 3,50  CDI + 3,50   6,781   6,150 
5/15/2012 R$ CDI + 4,00  -   267   - 
5/17/2012 R$ CDI + 3,80  -   809   - 
5/21/2012 R$ CDI + 3,90  -   800   - 
7/11/2012 R$ CDI + 0,38  -   553   - 
8/3/2012 R$ CDI + 0,38  -   260   - 
10/4/2012 R$ CDI + 7,35  -   171   - 
10/8/2012 R$ CDI + 3,80  -   119   - 
10/8/2012 R$ IGPM + 7,31  -   211   - 
10/11/2012 R$ CDI + 0,45  -   574   - 
11/1/2012 R$ CDI + 0,35  CDI + 0,35   379   344 
12/17/2012 R$ CDI + 2,50  -   559   - 
12/27/2012 R$ CDI + 2,50  -   56   - 
1/24/2013 R$ CDI + 0,60  -   310   - 
1/30/2013 R$ CDI + 0,60  -   309   - 
2/1/2013 R$ CDI + 0,50  CDI + 0,50   2,255   2,042 
2/1/2013 R$ CDI + 0,60  -   186   - 
2/7/2013 R$ CDI + 0,50  CDI + 0,50   293   265 
2/8/2013 R$ CDI + 0,50  CDI + 0,50   14   13 
2/8/2013 R$ CDI + 0,60  -   14   - 
2/13/2013 R$ CDI + 0,60  -   123   - 
2/18/2013 R$ CDI + 0,60  -   10   - 
2/21/2013 R$ CDI + 0,60  -   12   - 
2/22/2013 R$ CDI + 0,60
 
 -   34   - 
2/25/2013 R$ CDI + 0,50
 
 CDI + 0,50   76   69 
3/4/2013 R$ CDI + 0,60
 
 -   6   - 
3/11/2013 R$ CDI + 0,60
 
 -   6   - 
4/5/2013 R$ CDI + 6,00
 
 -   12   - 
4/15/2013 R$ CDI + 6,00
 
 -   11   - 
4/29/2013 R$ CDI + 7,00
 
 -   3   - 
5/6/2013 R$ CDI + 7,00
 
 -   8   - 
5/9/2013 R$ CDI + 6,00
 
 -   12   - 
6/24/2013 R$ CDI + 7,00
 
 -   12   - 
11/27/2013 R$ CDI + 2,00  -   91   - 
5/22/2014 R$ CDI + 0,35  CDI + 0,35   2,516   2,187 
8/4/2014 R$ CDI + 0,46
 
 -   65   - 
10/8/2014 R$ IGPM + 7,35  -   44   - 
10/14/2014 R$ CDI + 12,00  CDI + 12,00   1,131   1,018 
12/4/2014 R$ CDI + 0,60  -   13   - 
9/21/2015 R$ CDI + 19,80  -   468   - 
12/27/2016 R$ CDI + 0,47  -   701   - 
Redeemable Preferred Shares                
3/31/2015 US$ 1.89  5.13   573   748 
TOTAL          22,725   15,030 

During the last few years we issued debt which is subordinated in right of payment to all indebtedness of the issuing entity. Such debt is considered Tier II regulatory capital for purposes of computing the minimum capital requirementscapitalrequirements established by the Central Bank (see Note 31).
 
Under the terms of the debt, in order to qualify as Tier II regulatory capital, payment of principal and interest will be deferred if we are not in compliance with the operational limits established by the Central Bank or if such payment would determine that we are no longer in compliance with such limits. Payment will be deferred until we are in compliance with such limits.

F-63

h) Debt under securitization of diversified payments rights

Diversified payment rights are payment orders in U.S. dollars received by Itaú Unibanco Holding from non-Braziliannon- Brazilian entities to make a payment in Brazilian reais to a beneficiary customer residing in Brazil. As part of the ordinary business activities of Itaú Unibanco Holding it provides to its customers in Brazil the service of receiving from entities outside Brazil and through different means (such as electronic messages through different systems such as SWIFT, Fedwire or CHIPS) orders to make payments to the customer.

On March 20, 2002 we sold present and future rights to such payment orders to “Brazilian Diversified Payment Rights Finance Company”, a consolidated special purpose entity (SPE) incorporated in the Cayman Islands. On June 30, 2005, December 23, 2005 and September 20, 2006, the SPE issued Floating Rate Notes to third-party investors secured by the diversified payment rights that the SPE acquired from Itaú Unibanco Holding which is classified as long-term debt and presented below.

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The main characteristics of the notes are as follows:

            Carrying amount 
Series 
Amount issued
(in millions
of US$)
 Currency 
Coupon
%
 
Interest only
period
 Scheduled amortization 2008  2007 
2003-3 (1)  105 US$ 5.01% November 25, 2003 to September 20, 2010 Semi-annual as from March 20, 2007 to September 19, 2010  -   141 
2004-1 (1)  81 US$ 2.73% July 7, 2004 to March 21, 2011 Semi-annual as from September 21, 2009 to March 21, 2011  -   185 
2005-1  178 US$ Libor + 0.20% June 30, 2005 to September 20, 2012 Semi-annual as from September 20, 2009 to September 20, 2012  419   359 
2005-2  36 US$ Libor + 0.30% June 30, 2005 to September 20, 2008 Semi-annual as from September 20, 2005 to September 20, 2008  -   65 
2005-3 VF (2)  225 US$ Libor + 1.50% Semi-annual Semi-annual as from September  20, 2009 to September 20, 2013  472   - 
2006-1  200 US$ Libor + 0.50% Semi-annual Semi-annual as from  March 20, 2010 to September 20,  2013  533   360 
Total  825           1,424   1,110 
  Amount issued           
  (in millions of     Interest only   Carrying amount 
Series
 
US$)
 
Currency
 
Coupon - %
 
Period
 
Scheduled amortization
 
2009
  
2008
 
2005-1 (2)  178 US$ Libor + 0,20% June, 30 2005 until September, 20 2012 Half year, after September, 20 2009 until September, 20 2012  -   419 
2005-3 VF (1)  225 US$ Libor + 1,50% Half Year Half year, after September, 20 2009 until September, 20 2013  -   472 
2006-1 (2)  200 
US$
 
Libor + 0,50%
 
Half Year
 
Half year, after March, 20 2009 until September, 20 2013
  -   533 
TOTAL  603          -   1,424 
(1) These series were prepaid on 12/12/2008.
(2) The serie 2005-3 VF was issued on September 2008.
(2) Those series were prepaid in 2009.

The Notes issued by the SPE are expected to be repaid through the flow of funds provided by the payment orders sold by Itaú Unibanco Holding to the SPE. If the SPE, as issuer of the Floating Rate Notes, fails to make a timely payment of accrued interest and of scheduled principal, investors have the benefit of a financial guaranty insurance policy provided by an unrelated insurance company.

Itaú Unibanco Holding has the right to make an early redemption of the Notes by paying total outstanding principal and accrued interest of the Notes. Itaú Unibanco Holding will be obligated to redeem the Notes if certain specified events of default or early termination occur. Considering the terms of the agreements entered into in relation to the issuance of the Notes we have consolidated the SPE in our consolidated financial statements.

Cash received by the SPE for the payment orders sold by Itaú Unibanco Holding ismay be required to be maintained in specified bank accounts of the SPE  until certain minimum level is achieved. Such balances are subject to withdrawal and usage restrictions and are presented as Restricted Cash in the consolidated balance sheet. RestrictedAs of December 31, 2009,  there is no outstanding balance in restricted cash amounted to R$(R$ 84 and R$ 89, as of December 31, 2008 and 2007.
2008).

i) Long-term debt maturity

The following table presents long-term debt by its remaining maturity period:

 
2008
  2007  2009  2008 
Due within one year  7,745   8,263   7,827   7,745 
From 1 to 2 years  4,988   4,208   8,463   4,988 
From 2 to 3 years  4,897   3,453   18,495   4,897 
From 3 to 4 years  10,139   2,337   7,114   10,139 
From 4 to 5 years  4,154   8,469   7,957   4,154 
After 5 years   5,749   4,297   9,120   5,749 
TOTAL  37,672   31,027   58,976   37,672 

 
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NOTE 18 -– OTHER LIABILITIES

 
2008
  2007  2009  2008 
Payable to merchants for credit card transactions  9,583   8,427   26,181   9,583 
Taxes payable and challenged in court (Note 30b)  6,155   5,433   6,337   6,155 
Derivative liabilities:                
Swaps  3,075   1,824   2,344   3,075 
Options  3,405   477   2,720   3,405 
Forward  1,328   1,452   547   1,328 
Credit derivatives  201   -   106   201 
Futures  -   82   25   - 
Other  539   - 
Contingent liabilities (Note 30b)  5,219   3,551   7,651   5,219 
Interest on stockholders' equity payable  2,401   1,533   2,517   2,401 
Collection of third-party taxes, social contributions and other  2,646   2,072   3,563   2,646 
Payable for securities purchased (trade date)  2,638   2,234   1,720   2,638 
Labor related liabilities  1,727   1,317 
Labor liabilities  2,776   1,727 
Taxes other than income  939   581   3,701   939 
Taxes on income  726   823   1,467   726 
Payable related to acquisitions  426   455   548   426 
Stock-based compensation (Note 26)  334   764   618   334 
Accrued pension plan benefits (Note 25)  324   31   196   324 
Foreign exchange portfolio, net  173   6   164   173 
Deferred credits related to strategic partnership with CBD and LASA  148   155   109   148 
Fair value of guarantees granted (Note 29e)   37   16   68   37 
Other  2,927   2,711   4,824   2,927 
TOTAL  44,412   33,944 
  68,721   44,412 
 
 
F-54F-65
 


NOTE 19 - STOCKHOLDERS'– STOCKHOLDERS’ EQUITY

a) Capital and stockholders' rights

I) Capital

 Quantity of shares issued  Quantity of shares issued 
 
2008
   2007(*)  2009  2008 (*) 
Common shares  1,553,418,582  1,566,250,640   2,289,286,475   1,708,760,440 
Preferred shares   1,459,989,910   1,488,739,910   2,281,649,744   1,605,988,901 
TOTAL  3,013,408,492   3,054,990,550   4,570,936,219   3,314,749,341 

(*) After giving retroactive effect to the bonus of shares in June 2008.August 2009

At the Extraordinary Stockholders' Meeting held on August 25, 2006, the shareholders resolved to acquire the totality of the shares of BKB Brasil and Libero Trading International Ltd, effective on September 1, 2006. As a result, capital was increased by R$ 4,581 by way of the issuance of 171,295,235 (*) book entry shares with no par value (Note 3g).

At the Extraordinary Stockholders' Meeting held on December 26, 2006, the stockholders resolved to acquire all shares of BankBoston operations in Chile and Uruguay, which was approved by BACEN on February 1, 2007. Accordingly capital stock was increased by R$ 1,373 and 51,342,090 (*) book-entry common shares were issued (Notes 3b and 3e)
At the Annual and Extraordinary Stockholders' Meeting held on August 27, 2007, stockholders  approved the split of 100% of capital stock by issuing one additional share per each share previously ouned.owned. This split was carried out in the Stock Exchanges on October 1, 2007.

At the Annual and Extraordinary Stockholders' Meeting held on April 23, 2008, stockholders approved the cancellation of 12,832,05814,115,264 (*) common shares and 18,750,00020,625,000 (*) preferred shares held in treasury, and a bonus of 25% over shares by issuing one additional share per each four shares previously owned. Bonus shares were issued on June 2, 2008.

At the Annual and  Extraordinary Stockholders' Meeting held on November 28, 2008 stockholders approved the cancellation of 10,000,00011,000,000 (*) preferred shares held in treasury.

Also at the Extraordinary Stockholders' Meeting held on November 28, 2008, stockholders approved the merger of all shares of Itaú Unibanco, after the latter had acquired the shares of Itaúsa Export, E. Johnston, Unibanco Holdings e Unibanco, for the purpose of turning it into a wholly-owned subsidiary of Itaú Unibanco Holding again.  As a result, capital was increased by R$ 12,000 by way of the issuance of 1,256,186,878 (*) book entry shares with no par value: 580,526,035 (*) ordinary shares and 675,660,843 (*) preferred shares. BACEN approved the transaction on February 28, 2009.

At the Annual and Extraordinary Stockholders' Meeting held on April 24, 2009, stockholders approved a bonus of 10% over shares by issuing one additional share per each four shares previously owned. Bonus shares will be traded after the approval of the related process by BACEN. As a result, capital was increased by 415,539,656 shares.

Preferred shares carry no voting rights, but are entitled to a priority minimum non-cumulative annual dividend. Both types of shares participate equally in the distribution of dividends after the common shares have received payments equal to the minimum preferential payment to the preferred shares (R$ 0.022 per share at December 31, 2009, 2008 2007 and 2006)2007). All stockholders are entitled to receive, in total, a minimum mandatory dividend of at least 25% of Itaú Unibanco Holding's annual net income as stated in the statutory accounting records adjusted for transfers to and from reserves as required by Brazilian corporate law.

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II) Treasury stock

Pursuant to decisions of the Board of Directors, Itaú Unibanco Holding repurchases its own shares to hold in treasury, to issue to grantees under the stock option plan (Note 26), to cancel, or to resell at a later date. Minimum cost, weighted average cost, maximum cost, and quoted market cost (per share after giving effect to the bonus of shares in June, 2008) at December 31, 20082009 and 2007,2008, are presented below:

  
2008
  
2007
 
  
Common
Shares
  
Preferred
Shares
  
Common
 Shares
  
Preferred
Shares
 
Acquisitions in the period            
Minimum Cost  -   22.91   25.40   29.40 
Weighted Average Cost  -   30.93   25.92   31.07 
Maximum Cost  -   35.87   25.97   33.25 
Balance of treasury stock                
Average Cost  -   25.96   20.34   19.88 
Quoted Market Value of shares in BOVESPA (Sao Paulo Stock Exchange) at December 31  21.50   26.10   34.40   36.40 
  2009  2008 
  Common shares  Preferred shares  Common shares  Preferred shares 
Acquisition in the period            
Minimum cost  9.65   37.52   -   22.91 
Weighted average cost  9.65   37.52   -   30.93 
Maximum cost  9.65   37.52   -   35.87 
Balance of treasury stock                
Average cost  9.65   23.66   -   25.96 
Quoted Market Value of shares in BOVESPA (Sao PauloStock Exchange) at December 31  30.00   38.69   21.50   26.10 

F-66

III) Additional paid-in capital

Additional paid-in capital corresponds to: (i) the difference between the selling price of treasury stock and the average cost of such stock, (ii) to compensation expense recognized under the stock option plan (Notes 2s and 26), (iii) to the difference between the fair value of the stock issued in relation to the acquisitions of Itaú BBA and Bank Boston and to the amount of increase in capital stock related to such issuance as per the financial statements for statutory and regulatory purposes and (iv) to the purchase price paid for the acquisition of shares of Itaúsa Export (Note 3.b)3.2.a) and to a capital contribution made by Itaúsa in Itaúsa Export during 2007.

b) Appropriated retained earnings

Appropriated retained earnings include the following reserves recorded in accordance with Brazilian corporate law, our By-Laws or by stockholders’ decision:decision.

I) Revenue reserve:

Legal Reserves2,740
Statutory Reserves:
Dividends equalization5,964
Increase in working capital3,864
Increase in interest in investees5,845
Unrealized Profit Reserve358
Total reserves in parent company  financial statements18,771
Elimination of reserves on consolidation(12,817)
Total reserves in consolidated financial statements5,954

II)   Legal reserve

Under Brazilian corporate law, Itaú Unibanco Holding is required to appropriate 5% of its net income per its statutory financial statements, after absorbing accumulated deficit, to a legal reserve, which is restricted as to distribution. The reserve may be used to increase capital or absorb losses, but may not be distributed as dividends.

II)III)   Statutory reserves

The three statutory reserves are the following:

·Dividend Equalization Reserve - The reserve has the purpose of paying dividends, including interest on stockholders'onstockholders' equity, with the objective of maintaining a payment flow to stockholders.
The reserve is composed of:

(a) up to 50% of net income for the fiscal year;
(b) up to 100% of revaluation reserves in the statutory books that have been realized; and
(c) up to 100% of the amount of prior years’ adjustments recorded directly in stockholders' equity in the statutory books, and is reduced by the amounts of anticipated dividends.

The reserve is limited to 40% of capital stock in the statutory books.

·Reserve for Increase in Working Capital - This reserve has the purpose of accruing funds for Itaú Unibanco Holding’s operations. It is composed of up to 20% of net income for the fiscal year and is limited to 30% of capital stock in the statutory books.

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·Reserve for Increasing Interest in Companiesinvestees - The purpose of the reserve is to accrue funds to exercise the right of first refusal in capital increases in companies we have an interest in. IsIt is composed of up to 50% of net income for the fiscal year and is limited to 30% of capital stock in the statutory books.

III)   Capital reserve – Premium on subscription of shares

F-67
This reserve was recognized in the corporate restructuring process by which Itaú Unibanco became an Itaú Unibanco Holding’s wholly-owned subsidiary. The reserve was set up upon restructuring for an amount equal to the difference between the increase in Itaú Unibanco Holding’s capital stock resulting from the restructuring and  Itaú Unibanco’s stockholders´ equity (according to the financial statements prepared pursuant to Brazilian Corporate Law) at the moment of the restructuring.

IV) Tax incentive reserve

This reserve arises from the option made by Itaú Unibanco Holding to apply a portion of income tax and social contribution on net income, otherwise payable to tax authorities, for investing in government approved development funds or equity of companies undertaking specific government-approved projects in certain areas of Brazil. The amount so applied is credited at the payment date to income tax and subsequently appropriated from retained earnings to this reserve.
V)   Unrealized incomeProfits

This reserve represents income recorded for accounting purposes in Itaú Unibanco Holding’s statutory individual financial statements, as equity in the earnings of unconsolidated investments, which has not yet been received in cash.

This reserve will be realized upon sale of such investments and through receipt of dividends. When realized, amounts are transferred to unappropriated retained earnings and included in the calculation basis of the minimum mandatory dividend, in accordance with Brazilian corporate law and CVM rules.

c) Unappropriated retained earnings

The balance of net income remaining after the distribution of dividends and appropriations to statutory reserves in Itaú Unibanco Holding’s statutory records is transferred to the reserves described above.

Retained earnings available for distribution in Itaú Unibanco Holding’s statutory records correspond to the Dividend Equalization Reserve mentioned above which amounts to R$ 11,487 and R$ 5,156 at December 31, 2008 and 2007, respectively.

 
F-57F-68
 


NOTE 20 -– EARNINGS PER SHARE

Basic and diluted earnings per share were computed as follows for the years indicated. All information in this note has been retroactively restated to give effect to the split of shares in October 2007June 2008 and the bonus of shares in June 2008August 2009

 2008  2007  2006  2009  2008  2007 
Earnings per share - Basic                  
                  
Net income attributable to common and preferred stockholders         
Net income attributable to common and preferred stockholders of Itaú Unibanco         
                  
Net income  4,849   7,662   6,037 
Net income attributable to Itaú Unibanco  14,085   4,849   7,662 
            
Minimum non-cumulative dividend on preferred shares in accordance with our by-laws  (31)  (32)  (29)  (48)  (31)  (32)
Sub-total  4,818   7,630   6,008 
Subtotal  14,037   4,818   7,630 
            
Undistributed retained earnings to be distributed to common stockholders in an amount per share equal to the minimum dividend payable to preferred stockholders  (34)  (34)  (33)  (47)  (34)  (34)
Sub-total  4,784   7,596   5,975 
Subtotal  13,990   4,784   7,596 
                        
Undistributed retained earnings to be distributed to common and preferred stockholders on a pro-rata basis:                        
To common stockholders  2,505   3,935   3,162   7,074   2,505   3,935 
To preferred stockholders  2,279   3,661   2,813   6,916   2,279   3,661 
                        
Total net income available to common stockholders  2,539   3,969   3,195   7,121   2,539   3,969 
Total net income available to preferred stockholders  2,310   3,693   2,842   6,964   2,310   3,693 
                        
Weighted average outstanding shares                        
Common shares  1,553,418,582   1,553,451,604   1,503,722,701   2,192,530,134   1,708,760,440   1,708,796,764 
Preferred shares  1,413,491,898   1,444,978,181   1,336,680,540   2,143,753,894   1,554,841,088   1,589,475,999 
                        
Earnings per share - in R$                        
Common shares  1.63   2.56   2.13   3.25   1.49   2.32 
Preferred shares  1.63   2.56   2.13   3.25   1.49   2.32 

 2008  2007  2006  2009  2008  2007 
Earnings per share - Diluted                  
                  
Net income attributable to common and preferred stockholders         
Net income attributable to common and preferred stockholders of Itaú Unibanco         
                  
Net income available to preferred stockholders  2,310   3,693   2,842   6,964   2,310   3,693 
Dividend on incremental preferred shares  9   24   17   9   9   24 
            
Net income available to preferred stockholders considering incremental preferred shares  2,319   3,717   2,859   6,973   2,319   3,717 
                        
Net income available to common stockholders  2,539   3,969   3,195   7,121   2,539   3,969 
Dividend on incremental preferred shares  (9)  (24)  (17)  (9)  (9)  (24)
            
Net income available to common stockholders considering incremental preferred shares  2,530   3,945   3,178   7,112   2,530   3,945 
                        
Adjusted weighted average shares                        
Common shares  1,553,418,582   1,553,451,604   1,503,722,701   2,192,530,134   1,708,760,440   1,708,796,764 
Preferred shares - Diluted  1,426,435,707   1,463,454,608   1,352,323,239 
Preferred shares - Basic  1,413,491,898   1,444,978,181   1,336,680,540 
            
Preferred shares  2,149,890,063   1,569,079,278   1,609,800,069 
Preferred shares  2,143,753,894   1,554,841,088   1,589,475,999 
Incremental shares from stock options granted under our Stock Option Plan (Note 26)  12,943,809   18,476,427   15,642,699   6,136,169   14,238,190   20,324,070 
                        
Diluted earnings per share - in R$                        
Common shares 1.63  2.54  2.11   3.24   1.48   2.31 
Preferred shares 1.63  2.54  2.11   3.24   1.48   2.31 

Potentially anti-dilutive shares, which have been excluded from the diluted earnings per share calculation totaled 3,500,98011,521,337 preferred shares at December 31, 2008; 1,961,2042009; 3,851,078 preferred shares in December 20072008 and 2,273,6072,157,324 preferred shares in December 2006.2007

 
F-58F-69
 


The following table presents the amounts per share of extraordinary item:

 2008  
2007
  
2006
  2009  2008  2007 
Earnings per share - Basic (common and preferred shares)                  
                  
Net income before extraordinary item  1.63   2.55   2.13   3.25   1.49   2.31 
Extraordinary item  -   0.01   -   -   -   0.01 
Net income  1.63   2.56   2.13   3.25   1.49   2.32 
                        
Earnings per share - Diluted (common and preferred shares)                        
                        
Net income before extraordinary item  1.63   2.53   2.11   3.24   1.48   2.30 
Extraordinary item  -   0.01   -   -   -   0.01 
Net income  1.63   2.54   2.11   3.24   1.48   2.31 

 
F-59F-70
 


NOTE 21 -– TAXES ON INCOME

Itaú Unibanco and each of its subsidiaries file separate corporate income tax returns for each fiscal year. Income taxes in Brazil comprise federal income tax and social contribution on net income, which  is an addition on federal tax. The tax rates applicable to financial institutions in each year were as follows:

 2008  2007  2006  2009  2008  2007 
Federal income tax  25   25   25   25   25   25 
Social contribution on net income(*)   15   9   9 
Social contribution on net income (*)  15   15   9 
Composite rate  40   34   34   40   40   34 
(*)The ProvisonalProvisional Measure 413 of January 3,20083, 2008 and the subsequent Law 11,727, of June 23, 2008 increased the rate for social contruibution on net income from 9% to 15% for financial and financial-equivalent companies effective as from May 1, 2008.

The amounts recorded as income tax expense in the consolidated financial statements are reconciled to the statutory rates as follows:

  
2008
  2007  2006 
Income before taxes  3,544   11,778   8,449 
Equity in earnings of unconsolidated companies, net  (474)  (476)  (566)
Calculation basis  3,070   11,302   7,883 
Tax expense at statutory rates  (1,228)  (3,843)  (2,680)
Nontaxable (deductible) exchange gains (losses) on foreign subsidiaries  775   (330)  (40)
Nondeductible expenses  (112)  (74)  (83)
Nontaxable dividends on companies recorded at cost  67   11   10 
Net tax benefit on interest on stockholders' equity  660   82   661 
Nondeductible/taxable stock based compensation  105   (115)  (244)
Nontaxable interest on foreign government debt securities  381   297   7 
Reversal/(Constitution) of the valuation allowance
  131   (51)   (15) 
Effect of increase in social contribution rate  336   -   - 
Other differences   219   (124)  (50)
Income tax income (expense)  1,334   (4,147)  (2,434)

The major components of the deferred tax accounts in the consolidated balance sheet are as follows:

  
2008
  2007 
Deferred tax assets  12,441   5,448 
Provisions not currently deductible:        
Allowance for loan and lease losses  5,050   2,609 
Other provisions  2,548   1,713 
Tax loss carryforwards  3,606   488 
Other temporary differences  1,237   769 
Valuation allowance (1)  -   (131)
         
Deferred tax liabilities  7,827   5,740 
Temporary differences related to leases  6,312   3,555 
Pension plan prepaid assets  891   1,104 
Other temporary differences   624   1,081 
Deferred tax liabilities/assets, included in Other Liabilities/Assets  4,614   (292)
  2009  2008  2007 
Income before taxes  23,461   3,544   11,778 
Equity in earnings of unconsolidated companies, net  (9)  (474)  (476)
Calculation basis  23,452   3,070   11,302 
Tax expense at statutory rates  (9,381)  (1,228)  (3,843)
Nontaxable (deductible) exchange gains (losses) on foreign subsidiaries  (1,356)  775   (330)
Nondeductible expenses  (86)  (112)  (74)
Nontaxable dividends on companies recorded at cost  101   67   11 
Net tax benefit on interest on shareholders' equity  1,474   660   82 
(Nondeductible) / taxable stock based compensation  (164)  105   (115)
Nontaxable interest on foreign government debt securities  295   381   297 
Constitution /(Reversal) of the valuation allowance (1)  -   131   (51)
Effect of increase in social contribution rate  -   336   - 
Other differences  268   219   (124)
Income tax income (expense)  (8,849)  1,334   (4,147)
(1) During the year 2008 we revertedreleased the valuation allowance corresponding to tax loss carryforwards of one of our insurance subsidiaries as result of tax planning strategies that allow realization of those tax loss carryforwardscarryforwards.

The major components of the deferred tax accounts in the consolidated balance sheet are as follows:

  2009  2008 
Deferred tax assets  26,162   12,441 
Provisions not currently deductible:        
Allowance for loan and lease losses  10,086   5,050 
Taxes and social securities  1,875   881 
Other provisions  2,249   1,667 
Tax loss carryforwards  3,284   3,606 
Deferred Tax Asset for excess tax - deductible Goodwill  6,269   - 
Other temporary differences  2,399   1,237 
         
Deferred tax liabilities  19,070   7,827 
Temporary differences related to leases  7,568   6,312 
Pension plan prepaid assets  1,097   891 
Gain on Redecard Transaction  1,812   - 
Other temporary differences that included intangble obtained in business combination  8,593   624 
Deferred tax liabilities/assets, included in Other Liabilities/Assets  7,092   4,614 

 
F-60F-71
 

This is a roll-forward ofThe table below presents changes in our FIN 48 unrecognized tax benefits in accordance to ASC 740-10-25  (formerly FIN 48-“Accounting for the years ended onUncertainty in Income Taxes”) from January 1 to December 31:31, 2009 and 2008, respectively:

   2008    2007   2009  2008 
At the beginning of the year  2,098   1,877   2,281   2,098 
Balance of Unibanco's acquisition  1,248   - 
Gross amount of increases for prior year's tax positions  192   233   619   192 
Gross amount of decreases for prior year's tax positions  -   (8)
Amounts of decreases relating to settlements  (9)  (4)
Amounts of decreases relating to settlements (*)  (1,834)  (9)
At the end of the year  2,281   2,098   2,314   2,281 

(*) As described in Note 30.b Itau Unibanco Holding entered in the REFIS Program.
Total amount of unrecognized tax benefits at December 31, 20082009 would affect the effective tax rate if recognized in 2009.2010.

The following table presents the change in interest and penalties included in unrecognized tax benefits:

 
2008
  2007  2009  2008 
At the beginning of the year
  976   863   1,086   976 
Total interest and penalties in the statement of operations  110   113 
Balance of Unibanco's acquisition  562   - 
Total interest and penalties recognized during the year  200   119 
Total interest and penalties reverted by payments  (564)  (9)
Total interest and penalties reverted by REFIS (*)  (441)  - 
At the end of the year  1,086   976   843   1,086 

(*) As described in Note 30.b Itau Unibanco Holding entered in the REFIS Program.
We do not expect significant changes in the gross balance of unrecognized tax benefits within the next 12 months.

The earliest fiscal year subject to examination by Brazilian tax authorities is 2003.2004.

 
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NOTE 22 - FEE AND COMMISSION INCOME

 
2008
  2007  2006  2009  2008  2007 
Fees charged on checking accounts services  3,219   2,551   2,370   4,456   3,219   2,551 
Credit card fees  2,072   1,826   1,484   4,370   2,072   1,826 
Asset management fees  1,867   1,971   1,807   2,188   1,867   1,971 
Collection fees  597   454   407   904   597   454 
Income from brokerage including underwriting commissions  376   385   251 
Brokerage commissions  393   376   385 
Fees for guarantees provided  204   136   117   507   204   136 
Other   606   509   352   661   606   509 
TOTAL  8,941   7,832   6,788   13,479   8,941   7,832 

NOTE 23 - ADMINISTRATIVE EXPENSES

 
2008
  2007  2006  2009  2008  2007 
External administrative services  1,185   1,006   941   2,571   1,185   1,006 
Communication expenses  821   675   524   1,278   821   675 
Technology expenses  764   688   544   992   764   688 
Banking and brokerage fees  593   552   424   563   593   552 
Maintenance and security expenses  569   486   405   951   569   486 
Rent expenses  394   350   300   795   394   350 
Advertising expenses  373   276   294   514   373   276 
Transportation costs  282   249   227   385   282   249 
Other marketing expenses  259   194   133   324   259   194 
Office and technology supplies  231   186   189   299   231   186 
Utilities  175   174   157   266   175   174 
Credit card outsourced processing fees  162   114   129 
Credit card outsourcing processing fees  307   162   114 
Traveling expenses  97   72   61   120   97   72 
Other  504   450   382   636   504   450 
TOTAL  6,409   5,472   4,710   10,001   6,409   5,472 

 
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NOTE 24 - OTHER NON INTERESTNON-INTEREST INCOME AND EXPENSES

a) Other non-interest income

  2008  2007  2006 
Indexation charges of other assets, except prepaid taxes   567   402   393 
Gains and losses on sale of foreclosed assets, premises and equipment and investments in unconsolidated companies   343   2,891    40 
     Gains on sale of unconsolidated companies  (1) (2)  279   2,762   - 
     Gain on sale of BKB real estate  -   92   - 
     Other  64   37   40 
Gain on exchange of shares of Bovespa Holding S.A (3)  424   -   - 
Recovery of expenses  174   98   70 
Indexation charges of prepaid taxes  161   99   112 
Gains on sale  of Credicard brand  -   -   158 
Commitments related to acquisitions  1   198   3 
Recission of the service agreement of  payroll of States of Minas Gerais civil servants (Note 13)  -   76   - 
Gains on split-off of Credicard (Note 3h)  -   -   433 
Revenue from our agreement with Telefónica  -   -   92 
Other  733   559   317 
TOTAL  2,403   4,323   1,618 
  2009  2008  2007 
Indexation charges of other assets  1,272   728   501 
Gains and losses on sale of foreclosed assets, premises and equipment and investments in unconsolidated companies  476   343   2,891 
Gains on sale of unconsolidated companies (1) (2) (3)  370   279   2,762 
Gain on sale of BKB real estate  -   -   92 
Others  106   64   37 
Gain on exchange of shares of Bovespa Holding S.A (4)  124   424   - 
Recovery of expenses  334   174   98 
Deposits related to comissions  30   1   198 
Recission of the service agreement of payroll of States of Minas Gerais civil servants (Note 13)  -   -   76 
Discounts obtained from suppliers  344   1   4 
Gain on early payment to merchants - credit cards  525   62   9 
Remeasurement of equity interest held in Redecard S.A (Note 3.1.b)  4,530   -   - 
Gain on exchange of equity interest in PSIUPAR (Note 3.1.c)  936   -   - 
Bargain purchase gain on acquisition of Unibanco and Unibanco Holdings (Note 3.1.a)  830   -   - 
Others  833   670   546 
TOTAL  10,110   2,403   4,323 
(1) Gains on sale of investments in Visa in the amount of R$ 345, and gains on sale of investments in Allianz in the amount of R$25, during 2009.
(2) Gains on sale of investments in Mastercard and Visa, during 2008;

(2)(3) In 2007, a primary and secondary offering of shares of Redecard S.A and secondary offerings of shares of Bovespa Holding S.A and Bolsa de Mercadorias & Futuros  - BM&F S.A, were carried out , in which Itaú Unibanco sold a portion of its interest held in their capital. It also sold to ExperianExpirian Brasil Aquisições Ltda., a portion of its interest held in Serasa S.A. The effects of such sales are shown below:

Company 
Date of
transaction
 
Number of
shares sold
 
Sales price
 
Carrying
amount of
investment
sold
 Profit 
Redecard S.A (2a) 
7.11 and 
7.31.2007
  53,798,700  1,555  11  1,544 
Serasa S.A (2a) 28.6.2007  832,176  778  35  743 
Bolsa de Mercadorias & Futuros - BM&F S.A (2b) 12.3.2007  13,856,195  262  35  227 
Bovespa Holding S.A (2b) 10.26.2007  11,422,427  263  15  248 
Total       2,858  96  2,762 
Company 
Date of
transaction
  
Number of
shares sold
  Sales price  Cost  Profit 
Redecard S.A (3a) 11 and 31.7.2007   53,798,700   1,555   11   1,544 
Serasa S.A (3a) 28.6.2007   832,176   778   35   743 
Bolsa de Mercadorias & Futuros - BM&F S.A (3b) 3.12.2007   13,856,195   262   35   227 
Bovespa Holding S.A (3b) 26.10.2007   11,422,427   263   15   248 
Total         2,858   96   2,762 
(2a)(3a) The remaining participation is recorded in investments in unconsolidated companies. The increase in the carrying amount of our investment in the unsold shares of Redecard S.A. amounting to R$ 101, and was recognized in Gainsgains on sale of investments.investments in 2008;
(2b)(3b) The remaining participation is recorded in available-for-sale securities at fair value. (see note(Note 3);

(3)(4) During 2008, Bovespa Holding S.A (Bovespa Holding) and Bolsa de Mercadorias & Futuros - BM&F S.A (BM&F) entered into a business combination in which BM&F was considered the accounting acquirer. In accordance with ETTFEITF 91-5 (now ASC 325-20-30) upon the exchange of our shares of Bovespa Holding, that were classified as avaliable-for-sale, for shares of the combined entity we recognized a gain of R$ 424 corresponding to the difference betwweenbetween the cost and the fair value of the shares of Bovespa Holding as of the date of the exchange and such fair value as of the date of exchange became our new cost basis for the shares received.

 
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b) Other non-interest expenses

 2008  2007  2006  2009  2008  2007 
Contingent liabilities (Note 30b)  2,440   1,434   704   2,535   2,440   1,434 
Taxes on services, revenue and other taxes  2,166   2,855   2,282   4,066   2,166   2,855 
Credit card related expenses  553   405   262   1,136   553   405 
Monetary and exchange (gains) losses on non-interest bearing assets and liabilities  -   24   1 
Losses from third-party frauds  345   210   160   622   345   210 
Reimbursement in connection with acquisitions  190   162   249   -   190   162 
Contributions to the Credit Guarantee Fund  122   83   117   266   122   83 
Other than temporary impairment on available for sale securities  53   4   4 
Other than temporary impairment on available-for-sale securities  56   53   4 
Loss on sale of foreclosed assets, premises and equipment and investments in unconsolidated companies  37   28   35   42   37   28 
            
Monetary and exchange (gains) losses of non-interest bearing assets and liabilities  24   1   - 
Other  245   510   320 
Payment related to exclusivity obligation -CBD (Note 34)  550   -   - 
Others  1,066   245   510 
TOTAL  6,174   5,692   4,133   10,339   6,174   5,692 

Some of our assets and liabilities recorded in Other assets and Other liabilities are subject to monetary correction based on specific inflation indexes.  We recognize in Other Non-Interest Income or Other Non-Interest Expense, as appropriate, the effect of the monetary correction necessary to present such assets and liabilities as of each balance sheet date at its monetary corrected amount.

 
F-64F-75
 


NOTE 25 – PENSION PLANS AND OTHER POST-RETIREMENT BENEFITS

Itaú Unibanco Holding and certain of its subsidiaries sponsor sevenseveral defined-benefit and variable-contribution plans all of which provide additional pension payments for life to those provided by the government social security plans, based on salaries of the participants when active and years of service.

The plans cover substantially all full-time employees hired up to July 31, 2002 of Itaú Unibanco Holding in Brazil and a small number of employees of its subsidiaries and affiliates abroad, as well as qualified employees of certain subsidiaries we acquired. As regards to new employees hired after August 1, 2002, they have the option to voluntarily participate in a defined contribution plan (PGBL), managed by Itaú Vida e Previdência S.A. Contributions to this defined contribution plan were R$ 9, R$ 10 and R$ 8 and R$ 6 for the years ended December 31,  2009, 2008 2007 and 2006,2007, respectively. We also have three defined contribution plans for employees of subsidiaries acquired and we contributed with less than R$ 1 in 2009, 2008 and 2007, and R$ 4 in 2006.2007.

The assets of the plans are invested in separate funds restricted to the only purpose of providing benefits to eligible employees, and held independently from Itaú Unibanco Holding. Such funds are held by independent legal entities as detailed below:

Benefit plan Independent holder of the plan assets
Plano de Aposentadoria Complementar - PAC Fundação Itaubanco
Plano de Benefício Franprev – PBF Fundação Itaubanco
Plano de Benefício 002 – PB.002PB 002 Fundação Itaubanco
Plano Básico Itaulam - PBI Fundação Itaubanco
Plano Suplementar Itaulam - PSI (*) Fundação Itaubanco
Plano de Aposentadoria Complementar Móvel Vitalícia - ACMV Fundação Bemgeprev
Plano de Benefícios Funbep I Funbep Fundo de Pensão Multipatrocinado
Plano de Benefícios Funbep II (*) Funbep Fundo de Pensão Multipatrocinado
Plano de Benefícios Prebeg Caixa de Previdência dos Funcionários do BEG
Plano de Aposentadoria ItauBank (**) ItauBank Sociedade de Previdência
Plano Itaú BD ItaúItaú Fundo Multipatrocinado
Plano Itaú CD Itaú (*)Itaú Fundo Multipatrocinado
Plano de Aposentadoria Redecard Básico (***)Citiprev – Entidade Fechada de Previdência Complementar
Plano de Aposentadoria Redecard Suplementar (*)Citiprev – Entidade Fechada de Previdência Complementar
Plano de Previdência Unibanco  (**) (***)UBB PREV – Previdência Complementar
Plano Básico (***)UBB PREV – Previdência Complementar
Plano IJMS (***)UBB PREV – Previdência Complementar
Plano de Benefícios II (***)Banorte Fundação Manoel Baptista da Silva de Seguridade Social (“Banorte”)
(*) Defined ContributionVariable contribution benefit plans.
(**) Variable ContributionDefined contribution benefit plans.
(***) Plans for post-retirement benefits of companies acquired.

Contributions are made by Itaú Unibanco Holding and its subsidiaries and by the participants based on actuarial studies prepared by independent actuaries, except in the case of "PAC", “ACMV” and “PBI” plans which are funded exclusively by Itaú Unibanco Holding and certain of its subsidiaries. At December 31, 2008,2009, contributions by Itaú Unibanco Holding and its subsidiaries to the different plans range from 0.11%0.12% to 17.06%14.54% of the payroll related to the participants, and participant employees contribute amounts of up to 9.21%9.89% of their salaries.

Management of the allocation the different type of assets among fixed-income, variable-income, real estate and loansegments has the general objective of searching for long-term equilibrium between the assets and obligations of the plansPlan by exceeding actuarial targets. The manager may be authorized to make tactical allocations with the purpose of overcoming the benchmarks set.

In relation to the funds guaranteeing mathematical provisions, the management shall guarantee to beneficiaries the adjustment of their funds using actuarial targets, such as the cash-flow matching or immunization procedure.

Regarding the remaining funds not related to the obligations above, the funds shall be allocated in order to maximize the risk-return ration through the average optimization versus variance models.

Currently, allocation decisions are made on a bi-monthly basis by a Committee composed of the Investments Officers of the different entities and specialists from the main sponsors in a three-stage process:

In the first stage, the macro-economic scenarios and the expected evolution of some basic economic variables, such as spot interest, foreign exchange and inflation rates and Brazil risk rating are projected. Alternative (optimistic and pessimistic) scenarios are also determined in addition to the basic scenario.

In the second stage, based on the basic scenario, individual amounts are projected for different risk factors (fixed interest rates, interest rates based on IGP-M, US dollar-based interest rates, BOVESPA index, yieldsdiscounts or premiums on LFTs,Financial Treasury Bills, etc). These amounts are then used to estimate the expected prices of assets for a certain investment period. The expected return for each asset is calculated based on these prices.
F-76
Currently, the investment period is a quarter, but there are estimates for longer periods (1 and 2 years). These periods are reviewed according to the volatility expected for the macro-economic scenario.

F-65


In the third and last phase, the average optimization versus variance model is processed (to deal with the uncertainty of expectations), obtaining the efficient limits for the plan.Plan. Based on these limits and on the current composition of the portfolio,  the new allocations to the planPlan assets are then determined.  In this process. investment restrictions specific of each portfolio are considered.  In addition, movement decisions are made so as to minimize the direct  (brokerage, fees, etc.) and indirect  (market impact on prices) transaction costs.

The pension plan asset allocation at December 31, 2008 and 2007 and target allocation for 2009, by asset category and risk level, are as follows:

     Market Prices for Assets       
Categories
 Total 2009  
Identical in
Active Markets
  Similars  
Internal
Informations of the
Company
  Total 2008 
Fixed-income securities  12,725   10,519   2,179   27   10,853 
Federal government securities  9,859   9,854   5   -   8,185 
Private securities  2,866   665   2,174   27   2,668 
Real estate receivable certificate  19   -   -   19   23 
Other securities  2,847   665   2,174   8   2,645 
Other types of investments  12   -   -   12   8 
Mezanino Fund  12   -   -   12   8 
Variable-income securities  1,490   1,490   -   -   1,481 
Shares  436   436   -   -   648 
Group shares  1,054   1,054   -   -   833 
Real estate  310   -   -   310   315 
Total  14,537   12,009   2,179   349   12,657 

See below the changes in the level 3 plan assets:

  
Target allocation for
  
Percentage of plan assets
 
Asset category
 
2009
  
2008
  
2007
 
Debt securities  52.00% -100.00%   85.48%  77.46%
Equity securities  0.00% - 35.00%   11.9%  19.63%
Real estate  0.00% - 8.00%   2.43%  2.71%
Other  0.00% - 5.00%   0.19%  0.2%
At the year end      100.00%  100.00%

No curtailment, settlement or termination of the plans benefits has occurred during the years ended December 31, 2008, 2007 and 2006.
  
Real estate
receivable
certificate
  Other  Mezanino Fund  Real estate  Total 
Balance at December 31, 2008  23   22   8   315   368 
Returns                    
Earnings  (4)  (16)  1   (6)  (25)
Purchase / (sale)  -   2   3   -   5 
Transfers to level 3  -       -   1   1 
Balance at December 31, 2009  19   8   12   310   349 

 
F-66F-77
 


Based on the reports prepared by independent actuaries, the changes in the projected benefit obligation and in the plan assets, and the amounts recognized in Itaú Unibanco Holding balance sheet, in compliance, as from December 31, 2006,2009, 2008 and 2007, in compliance with the provisions of ASC 715-20 (Formerly SFAS 158158) are as follows. The measurement date is December 31 for all years presented.follows:

Pension Plans 2008  2007  2006 
Pension plans 2009  2008  2007 
(I) Projected benefit obligation                  
At the beginning of the year 9,368  8,445  7,678   11,078   9,368   8,445 
ACMV Plan -  257  -   -   -   257 
UBB Prev and Banorte Plans  186   -   - 
Basic Redecard Plan  43   -   - 
Service cost 209  216  201   240   209   216 
Benefits paid (466) (417) (328)  (539)  (466)  (417)
Interest cost 937  873  769   1,133   937   873 
Actuarial loss (gain) 1,029  (6) 125   (151)  1,029   (6)
At the end of the year 11,078  9,368  8,445   11,990   11,078   9,368 
                        
(II) Plan assets at market value                        
At the beginning of the year 12,585  10,325  8,944   12,657   12,585   10,325 
ACMV Plan -  242  -   -   -   242 
UBB Prev and Banorte Plans  191   -   - 
Basic Redecard Plan  45   -   - 
Contributions received                        
Employer 24  22  23   35   24   22 
Employees 32  8  9   34   32   8 
Return on plan assets 482  2,405  1,677   2,113   482   2,405 
Benefits paid (466) (417) (328)  (538)  (466)  (417)
At the end of the year 12,657  12,585  10,325   14,537   12,657   12,585 
                        
(III) Funded status (II - I) 1,579  3,217  1,880   2,547   1,579   3,217 
                        
(Prepaid pension benefit) Accrued pension benefit, net  1,579   3,217   1,880 
            
Prepaid pension benefit (Accrued pension benefit), net  2,547   1,579   3,217 
Prepaid pension plan assets 1,903  3,248  2,016   2,743   1,903   3,248 
Accrued pension benefits  (324)  (31)  (136)
Accrued pension benefits (Note 18)  (196)  (324)  (31)

In 2009,2010, amortization of actuarial gains (losses) is expected to amount to R$ (1).( 1 ).

Itaú Unibanco Holding and its subsidiaries do not sponsor other post-employment benefits, except in those cases arising from maintenance of obligations according to the acquisition agreements signed by Itaú Unibanco Holding, under the terms and conditions established, in which health plans are totally or partially sponsored for former employees and beneficiaries. The accrued projected accumulated benefit liabilities reachedamounted to R$ 100, R$ 92, R$ 74 and R$ 6974 at December 31, 2009, 2008 2007 and 2006,2007, respectively.

 
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The net periodic pension plan cost, as defined under ASC 715-20 (Formerly SFAS 158,158), includes the following elements:

 2008  2007  2006  2009  2008  2007 
Service cost  209   216   201   240   209   216 
Interest cost  937   873   769   1,133   937   873 
Expected return on plan assets  (1,524)  (1,281)  (1,081)  (1,558)  (1,524)  (1,281)
Actuarial (gain) loss  (113)  (45)  (29)
Actuarial (gains) losses  1   (113)  (45)
Employee contributions  (9)  (8)  (9)  (9)  (9)  (8)
Net periodic pension benefit  (500)  (245)  (149)
Net pension cost (benefit)  (193)  (500)  (245)

The accumulated benefit obligation of the plans under the ASC 715-20 (Formerly SFAS 158158) were R$ 10,897, R$ 9,718 and R$ 8,174 and R$ 7,561 for the years ended December 31, 2009, 2008 2007 and 2006,2007, respectively.

We expect to contribute R$ 2527 to the pension plans sponsored by us in 2009.2010.

The following table shows the estimated annually estimated benefit payments from 20092010 to 20132014 and the estimated payments on an aggregated basis from 20142015 to 2018.2019.

Period 
Estimated 
Payment
  
Estimated
payment
 
2009  466 
2010  506   477 
2011  547   513 
2012  596   554 
2013  652   598 
2014 to 2018  4,331 
2014  648 
2015 to 2019  4,229 

The actuarial assumptions used were as follows and include an expected level of inflation of 4% p.a.p.a..

 2008  2007  2006  2009  2008  2007 
Discount rate for determining projected benefit obligations  10.2%  10.2%  10.2% 10.2% 10.2% 10.2%
Rate of increase in compensation levels (depending on the specific group of employees) 4% to 7.1%  4% to 7.1%  4% to 7.1%  4% to 7.1%  4% to 7.1%  4% to 7.1% 
Expected long-term rate of return on plan assets  12.3%  12.3%  12.3% 12.3% 12.3% 12.3%

Securities of Itaú Unibanco Holding and its subsidiaries included in plan assets amounted to R$ 150, R$ 171 and R$ 352 and R$ 342 as of December 31, 2009, 2008 2007 and 2006,2007, respectively.

 
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NOTE 26 - STOCK-BASED COMPENSATION

The Extraordinary General Meeting,We have been issuing stock options as compensation since 1995. Accordingly, part of our management’s variable compensation is in the form of stock options, which we believe reinforces their commitment to our performance. Our shareholders, at the general extraordinary meeting held on April 24, 1995, approved2009, included members of Board of Directors among the Planpotential beneficiaries of the plan. We believe that this will allow them to benefit from the additional value that their work created for Granting Stock Options ("Stockthe shares of Itaú Unibanco Holding. Our stock option plan is designed to retain the services of members of management and our Board of Directors and to recruit and retain qualified employees.

On April 24, 2009, a new program was launched for Itaú Unibanco, called “Stock Option Plan")Plan”. From then on, no stock options will be granted in the prior programs.

Also on April 24, 2009 awards that were issued to officers of Unibanco and Unibanco Holdings before the business combination completed in 2009 were exchanged for new awards. Under the terms of the Stock Option Plan grantees have the rightapplicable legislation we were legally required to exchange those awards for options to acquire one preferred shareor receive shares of Itaú Unibanco Holding. The awards issued as replacement awards maintained all the original terms of the original awards except that the awards give the beneficiary to acquire or receive shares of Itaú Unibanco Holding per option grantedinstead of shares of Unibanco and Unibanco Holdings. The exchange ratio used to exchange original awards for replacement awards was the same exchange ration used to issue shares of Itaú Unibanco to selling shareholders of Unibanco and Unibanco Holdings described in Note 3.1.a. All other remaining terms including, among others, exercise price, index to be used to adjust the exercise price, vesting and exercise periods and vesting conditions were maintained unchanged with respect to the original awards.

I - - Stock Option Plan – New Itau Unibanco Holding Plan

This program aims at a price established atinvolving the dateofficers in the option is granted, which is subsequently adjusted in accordance with a pre-defined formula based on the change in consumer inflation index. Upon exercise, the plan provides formedium and long-term corporate development process. The options are personal and not transferable, and entitle to the subscription by the beneficiary of one share of authorized capital or, at the discretion of management, the purchase of one treasury share.share acquired for replacement purposes. Such options may only be granted in years in which there are sufficient profits to distribute mandatory dividends to stockholdersshareholders and at a quantity that does not exceed the limit of 0.5% of the total shares held by the stockholdersshareholders at year-end. The Itau Unibanco Holding’s Personnel Committee is responsible for defining the balance sheet date. total number of shares to be granted, the eligible officers, the number granted to each officer, the exercise period of the option series, and the “vesting” and “blackout” periods for exercising the options.

Options granted may be exercised after a vesting period of between onegranted to executive officers and five years, and up to ten years after granted, with the Options Committee of the Board of Directors determining the specific conditions for each seriesmembers (“officers”) of options granted. Up to December 31, 2008, all options issued were granted to management members ItaúItau Unibanco Holding and, in exceptional circumstances, to management of subsidiaries or outstanding employees of Itau Unibanco Holding or the aforementioned subsidiaries, and also upon hiring highly qualified individuals.

The exercise price of each series is fixed taking into consideration the average stock price at the São Paulo Stock Exchange over the period from one to three months prior to the issuance of options - subject to a positive or negative adjustment of up to 20% - at the option granting date and restated by IGP-M until the month prior to the option exercise date. Alternatively, at the Committee’s discretion and by using performance and leadership evaluation tools, for those officers who have potential for outstanding performance, the Committee may grant options which vesting depends on the beneficiary’s obligation to invest, in Itau Unibanco Holding’s shares, the amount of 20% of the participation in profits and results received with respect to the prior year, keep ownership of the shares acquired unchanged and without any type of liens from the date options were granted until its subsidiaries.exercise.

This plan has not had any option granted so far.

II - - Stock Option Plan – Itaú Plan

Itau’s original plan, called “Stock Option Plan”, has characteristics similar to the current plan, except that the original plan did not allow issuance of options whose vesting was dependant on acquiring and maintaining shares.

As of December 31, 2008,2009, changes in options relating to Itau’s original plan, are summarized in the following table:

F-80

 
Quantity of
options (*)
  
Weighted
 average exercise
price
  
Quantity of
options (*)
  
Wheighted
average
exercise price
 
Options outstanding at the beginning of the year  53,607,213   11.90   58,888,291   22.99 
Options granted  10,598,125   39.58   18,050,550   23.43 
Options exercised (1)  (10,653,500)  10.08   (18,100,640)  13.33 
Options cancelled (2)  (17,000)  36.39 
Options forfeited (1)  (29,370)  23.45 
Options outstanding at the end of the year  53,534,838   25.29   58,808,831   25.75 
Options exercisable as of year-end (3)(2)  5,780,025   9.87   9,584,536   14.77 
(*) After giving retroactive effect to the bonus of shares in June, 2008 (Note 19a).
(1) During 2008, the total cash received due to exercised options was  R$ 107.
(2) During the year ended December 31, 2008,2009, there were no cancelled options due to expiration of the exercise period.
(3)(2) As of December 31, 2008,2009, the aggregate intrinsic value of exercisable options was R$ 94229 and its weighted average remaining contractual term was approximately 2032 months.

All options under the plan are liability-classified awards that were remeasured at thetheir fair value as of December 31, 2009 and 2008, and 2007total liability amounted to R$ 334559 and R$ 764,334, respectively.

Compensation expenses related to the Stock Option Plan amounted to R$ (181),525, R$ 339(181) and R$ 717339 (see Note 2s) for the years ended December 31, 2009, 2008 2007 and 2006,2007, respectively. As of December 31, 2008,2009, the compensation cost to be allocated in future periods is R$ 103468 and its weighted average allocation period is approximately 3 years.

The total intrinsic values of the options exercised during the years ended December 31, 2009, 2008 and 2007 were R$ 301, R$ 248 and R$ 262, respectively.

The weighted average fair value at grant-date was estimated for the shares granted in the years ended December 31, 2009, 2008 2007 and 20062007 at R$ 18.63, R$ 10.40 and R$ 24.11 and R$ 28.23 per share, respectively, by using the binomial option-pricing model. The total intrinsic values of the options exercised during the years ended December 31, 2008, 2007 and 2006 were R$ 248, R$ 262 and R$ 181, respectively.

In 2008, the options were issued with an eight-year term and a five-year vesting period. The grant-date fair value of the options is calculated based on a binominal option-pricing model, which takes into consideration the vesting periods for each different stock option. As the exercise price is adjusted for inflation rates, we adopted the real market interest rate as the risk-free interest rate assumption. Finally, dividends are based on historic payment of dividends in recent periods.

The weighted average assumptions adopted for December 31, 2009, 2008 and 2007, and 2006 areis shown below:

•           
weighted historical volatility of 24.67%30.52%, 22.4%24.67% and 22.2%22.4%;

•           
expected dividend yield of 3.5%3.02%, 3.5% and 3.5%;

•           
annual risk-free interest rate of 6.78%6.40%, 6.55%6.78% and 8.5%6.55%;

•           
expected total average lives of seven, eight and seven years.
F-81

III - - Stock Option Plan – Unibanco Plan

This plan, originally from Unibanco, aimed at aligning the commitment of officers with long-term results and eightto reward high performance, in addition to being an instrument to attract, retain and motivate talents, upon the granting of stock options (“Simple Options”). Unibanco also established a program called Program for Partners, according to which the executives selected to participate in such program could invest a percentage of their bonus in the acquisition of Unit, which should be held by them for a term from 3 to 5 years. Depending on the percentage of the bonus invested for acquisition of Units, a certain number of Unit options were granted (“Bonus Options”) with no exercise price. The original exercise periods of these Bonus Options were from 3 to 5 years.

The Extraordinary Shareholders’ meeting of Itau Unibanco Holding held in April 2009 approved the exchange of the original awards for replacement awards as described above.

As of December 31, 2009, changes in Simple Options initially issued by Unibanco and replaced by Itau Unibanco Holding, are summarized in the following table:

  
Quantity of
options (*)
  
Wheigted
average
exercise price
 
Original awards under Simple Options  9,154,693   9.41 
Effect in quantity of options of issuing replacement awards  (3,890,703)  - 
Options granted  -   - 
Options exercised  (2,855,650)  12.95 
Options forfeited (1)  (71,680)  15.46 
Options outstanding at the end of the year  2,336,660   18.39 
Options exercisable as of year-end (2)  702,721   12.25 
(*) After giving retroactive effect to the bonus of shares in June, 2008 (Note 19a).
(1) During the year ended December 31, 2009, there were no cancelled options due to expiration of the exercise period.
(2) As of December 31, 2009, the aggregate intrinsic value of exercisable options was R$ 19 and its weighted average remaining contractual term was approximately 11 months.

As of December 31, 2009, changes in Bonus Options initially issued by Unibanco and replaced by Itau Unibanco Holding, are summarized in the following table:

Quantity of
options (*)
Original awards under Bonus Options4,902,284
Effect in quantity of options of issuing replacement awards(2,083,547)
Options granted1,856,427
Options exercised(280,150)
Options forfeited (1)(93,801)
Options outstanding at the end of the year4,301,212
Options exercisable as of year-end-
(*) After giving retroactive effect to the bonus of shares in June, 2008 (Note 19a).
(1) During the year ended December 31, 2009, there were no cancelled options due to expiration of the exercise period.

 
F-69F-82
 

Considering that the exercise price of the Simple Options is restated using IPCA, an inflation indexed such awards are recorded as liability-classified awards that were remeasured at fair value as of December 31, 2009 and amounted to R$ 59.

Compensation expenses related to the Simple Options and Bonus Options amounted to R$ 93 for the year ended December 31, 2009 and the compensation cost to be allocated in future periods is R$ 67 and its weighted average allocation period is approximately 3 years.

The total intrinsic values of the options exercised during the year ended December 31, 2009 were R$ 43.

The weighted average fair value of the replacement awards at the date of business combination was estimated at R$ 21.00 per share for Bonus Option Plan and at R$ 5.53 for the simple option plan.

The fair value of these programs is calculated through the Binomial method for Simple Options and the Black Scholes method for the Bonus Options.

The weighted average assumptions adopted for replacement options granted during 2009, calculated through the Black Scholes method, is shown below:

weighted historical volatility of 24.61%;
expected dividend yield of 3.50%;
annual risk-free interest rate of 6.83%;
expected total average life of three years.

During 2009, the total cash received from exercised options was R$ 278, for all plans of Itau Unibanco Holding.

 
F-83


NOTE 27 – DISCLOSURE OF FAIR VALUE OF FINANCIAL INSTRUMENTS

SFAS 107,ASC 825-10-50-10 "Disclosures about Fair Value of Financial Instruments" (Formerly SFAS 107), requires disclosure of fair value information of financial instruments, whether or not recognized in the consolidated balance sheet, for which it is practicable to estimate such fair value. SFAS 107value and defines a financial instrument as cash, evidence of ownership interest in an entity or a contractual obligation or right that will be settled with another financial instrument. SFAS 157 added(new ASC 820) sets out additional disclosure requirements thatwhich are presented in Note 28.

ASC 825-10-50-10 (Formerly SFAS 107107) excludes certain financial instruments and all non-financial instruments, including intangible assets, from its disclosure requirements.

The following table summarizes the carrying and estimated fair values for financial instruments:

 Carrying value  Estimated fair value  Carrying value  Estimated fair value 
 2008  2007  2008  2007  2009  2008  2009  2008 
Financial assets                        
Assets for which fair value approximates carrying value  126,072   82,234   126,072   82,234   149,467   126,072   149,467   126,072 
Interest-bearing deposits in other banks  49,677   38,288   49,698   38,293   89,085   49,677   89,128   49,698 
Available-for-sale securities  28,445   18,825   28,445   18,825   41,263   28,445   41,263   28,445 
Held-to-maturity securities  1,325   1,428   1,516   1,634   1,762   1,325   2,124   1,516 
Loans and leases, net of allowance for loan and lease losses  157,498   108,986   157,149   109,168   225,768   157,498   226,135   157,149 
                
Financial liabilities                                
Liabilities for which fair value approximates carrying value  152,198   118,341   152,198   118,341   214,126   152,198   214,126   152,198 
Interest-bearing deposits  126,696   53,491   126,708   53,495   165,024   126,696   164,983   126,708 
Long-term debt  37,672   31,027   37,678   30,974   58,976   37,672   58,812   37,678 
Off-balance sheet financial instruments                                
Standby letters of credit  659   1,114   266   252 
Guarantees  12,854   10,927   37   16 
Commitments to extend credit  1,207   659   349   266 
Standby letters of credit card guarantees  31,234   12,854   68   37 

The methods and assumptions to estimate the fair value are set forth below:

a)  Cash and due from banks, including restricted cash, securities purchased under resale agreements and Central Bank compulsory deposits -The carrying amount reported in the consolidated balance sheet for these instruments approximates their fair value.

b) Interest-bearing deposits in other banks - We estimated the fair value of interest-bearing deposits in other banks by discounting estimated cash flows using as input interest market rates.

c) Trading assets, including derivatives, Available-for-sale securities and Held-to- maturityHeld-to-maturity securities – See Note 28 for aThe description of the method and criteria used to determinecriterion adopted for determining the fair valuevalues of these securities and derivatives.derivatives is included in Note 28.

 
F-70F-84
 


d) Loans and leases - Fair values are estimated for groups of loans with similar financial and risk characteristics using valuation models. The fair value of fixed-rate loans was determined by discounting estimated cash flows using interest rates approximating our current rates for similar loans which we believe are representative of rates generally applied for similar loans by other market participants.loans. For most variable-rate loans, the carrying amounts were considered to approximate fair value. The fair value for performing loans was calculated by discounting the scheduled principal and interest cash flows through maturity at the rates indicated above. The fair value for impaired loans was based on discounting estimated cash flows using a rate commensurate with the risk associated with the estimated cash flows, or the underlying collateral value. Assumptions regarding cash flows and discount rates are determined using available market information and specific borrower information.

e) Non-interest bearing deposits, Securities sold under repurchase agreements, Short-term borrowings and Investment Contracts - The fair value disclosed for demand deposits is, by SFAS 107 (now ASC 825-10-50-10) definition, equal to the amount payable on demand at the reporting date which equals its carrying value as well as for investment contracts. The carrying values of securities sold under repurchase agreements, trade lines and other short-term borrowings approximate fair value of such instruments.

f)  Interest-bearing deposits - Fair value for time deposits with variable rates was considered to approximate carrying value. Fair value for time deposits with fixed rates was estimated using a discounted cash flow calculation that applies interest rates offered by us at the respective balance sheet date.

g) Long-term debt - Their fair value is estimated using discounted cash flows through interest rates offered in the market for similar instruments. These interest rates are obtained from different feeders (usually Bloomberg) from which are derived the risk free yield curve and the spread over the risk free curve observed for similar instruments.

h)  Off-balance sheet financial instruments and derivatives  - The fair value of commitments to extend credit was estimated based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the credit quality to the counterparts. The fair value of standby and commercial letters of credit and guarantees was based on fees currently charged for similar agreements or on the estimated cost to terminate the agreements or otherwise settle the obligations with counterparties. The fair value of derivatives not designated as hedging instrumentshedge is included in trading assets or other liabilities as described in Note 2.f, . Theand the fair value of derivatives designated as hedging instrumentshedge is recordedincluded in other assets. See Note 2829 for the notional value and estimated fair value of our derivative financial instruments.

 
F-71F-85
 


NOTE 28 – FAIR VALUE MEASUREMENTS AND ADDITIONAL DISCLOSURES ON FAIR VALUE HIERARQUYHIERARCHY

In September 2006, the FASB issued ASC - 820 (formerly SFAS 157,157) “Fair Value Measurements”, which is effective for fiscal years beginning after November 15, 2007, with early adoption permitted. Itaú Unibanco Holding did not choose to early adoption for SFAS 157,adopt ASC – 820, therefore the effective date for its application iswas January 1,st January, 2008.  SFAS 157ASC - 820 defines fair value, establishes a three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date, eliminates large position discounts for financial instruments quoted in active markets and expands disclosures about instruments measured at fair value.

As described in Note 2.aa ammendments and interpretations of ACS 820 were issued for application as from January 1, 2009 including requirements for additional disclosures and interpretation on certain specific valuation topics.

In accordance with SFAS 157,ASC - 820, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date and could be measured for a particular asset or liability and, thus, should incorporate its specific characteristics, such as condition, location, and restrictions, if any. In some cases, the fair value measurement will be applied to a stand-alonestandalone asset or liability or a group of related assets and/or liabilities.

Itaú Unibanco Holding established and documented the process for determining fair values. There is an independent group responsible for approving methodologies and pricing models. The fair value is calculated by two independent areas, one responsible for the valuation of Itaú BBABBA’s products and the other responsible for the valuation of all other products of the group. Monthly, an independent model review group reviews valuation models and approves them for use for specific products.

Fair value is based upon quoted market prices, where available. If listed prices or quotes are not available, fair value is based upon valuation methodologies generally accepted in the financial services markets and in certain circumstances, internally developed models.  The valuation methodologies and internally developed models prioritize the use, as inputs, of market-based or independently sourced market parameters, including yield curves, interest rates, volatilities,volatility, and foreign exchange rates. We further describe the methodologies used for our securities and derivatives classified as Level 2 or Level 3 subsequently in this footnote.

Additionally, valuation adjustments may be required to ensure that financial instruments are recorded at fair value, with these potential adjustments related to counterparty credit quality and Itaú Unibanco Holding’s own creditworthiness.

·Valuation adjustments are necessary when the market value does not incorporate the quality of the counterparty credit risk.

·
In the case of financial derivatives a significant portion of Itaú Unibanco HoldingHolding’s derivatives are traded inat the BM&F and another smaller portion in foreign stock exchanges, and for these derivatives there is no need for valuation adjustments. Other derivatives are registered in the Câmara de Custódia e Liquidação(CETIP) for OTC contracts in Brazil. Usual market practices in valuation of OTC derivatives are to use inputs assuming the same credit risk of the counterparties. After considering guarantees, collaterals, rights to offset and other credit factors, we identifiedidentify and incorporatedincorporate credit risk adjustment when determining fair value.

Fair Value Hierarchy

To increase consistency and comparability in fair value measurements, Itaú Unibanco Holding established a fair value hierarchy to prioritize theprioritizes market inputs used in valuation techniques. There are three broad levels to the fair value hierarchy of inputs to fair value (Level 1 being the highest priority and Level 3 being the lowest priority) as defined by SFAS 157:ASC - 820:

Level 1: Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets. An active market is a market in which transactions for the asset or liability being measured occur often enough and with sufficient volume to provide pricing information on an ongoing basis.

Level 2: Inputs other than quoted prices included in Level 1 that are observable for the asset or liability either directly or indirectly. Level 2 includes generally:generally includes: (i) quoted prices for similar assets or liabilities in active markets; (ii) quoted prices for identical or similar assets or liabilities in markets that are not active, that is, markets in which there are few transactions for the asset or liability, the prices are not current, or price quotations vary substantially either over time or among market makers, or in which little information is released publicly; (iii) inputs other than quoted prices that are observable for the asset or liability (for example, interest rates and yield curves observable at commonly quoted intervals, volatilities, etc)etc.); (iv) inputs that are derived principally from or corroborated by observable market data through correlation or by other means.

 
F-72F-86
 


Level 3: Inputs are unobservable inputs for the asset or liability. Unobservable inputs shall be used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date.

Below is presentedWe present below a description of Itaú Unibanco HoldingHolding’s pricing methodologies related to the financial instruments measured at fair value, including the classification in the three levels described above:

Securities:

Level 1: Highly liquid securities with prices available in an active market are classified in level 1 of the fair value hierarchy.  In this level were classified the vast majority of Brazilian Governments Securities (mainly LTN, LFT, NTN-B, NTN-C and NTN-F), other foreigns government securities, stocks and debentures publicly traded, and other securities traded in an active market.

Level 2: Where pricing information is not available for a specific security, the valuation is generally based upon quoted market prices of similar instruments, pricing information using pricing services, such as Bloomberg, Reuters and brokers (only when they represent an effective transaction)transactions) or discounted cash flows, that usesuse as inputs information derived from assets actively traded in an active market.  These securities are classified in level 2 of the fair value hierarchy and are composed byof certain Brazilian government securities, debentures and some government securities quoted in a less liquid market than those classified in level 1 and some prices for shares in investment funds. Itaú Unibanco Holding does not hold positions in alternative investment funds or in private equity funds.

Level 3: When there is no pricing information in an active market, Itaú Unibanco Holding uses internally developed models.models, based in curves derived from proprietary model. In level 3 are classified some Brazilian government securities (mainly NTN-I, NTN-A1, TDA and CVS), securities usually not traded in an active market, CRI’s, foreign governments bonds not traded in an active market or with restrictions on transferability, and shares in receivable investment funds and other funds with restrictions.where a sufficient level of observable activity (purchases and sales) is not observed.

Derivatives:

Level 1:1 : Derivatives traded in stock exchanges wereare classified in level 1 of the hierarchy. ForwardsInterest rate forwards, and traded derivatives on interest rates, currencies and WTI have been classified in level 1.

Level 2:2 : For derivatives not traded in stock exchanges, Itaú Unibanco Holding estimates the fair value using a series of techniques such as Black&Scholes, Garman & Kohlhagen, Monte Carlo or even discounted cash flow models commonly used in the financial market. Derivatives included in level 2 are credit default swaps, cross currency swaps, interest rate swaps, plain vanilla options, some forwards and generally all swaps. All models used by Itaú Unibanco Holding are widely accepted in the financial services industry and reflect the contractual terms of the derivative. Considering that many of these models do not contain a high level of subjectivity, since the methodologies used in the models do not require significant judgment, and inputs to the model are readily observable from actively quoted markets, these products were classified within level 2 of the valuation hierarchy.

Level 3: Derivatives with fair values based on non observablenon-observable inputs in an active market were classified in level 3 of the fair value hierarchy and are composed byof exotic options, some forwards, swaps indexed with non observablenon-observable inputs and swaps with other products such as swaptions and target forwards. These products have their valuation derived from historical volatility.

All methodologies described above for valuation may result in a fair value that may not be indicative of the net realizable value or of future fair values. However, Itaú Unibanco Holding believes that all methodologies used are appropriate and consistent with other market participants.players.  Nevertheless, the use other methodologies or the use of different assumptions for determining fair value may result in different estimates of the fair values at the reporting date.

The following table presents the financial instruments carried at fair value as of December 31, 2009 and 2008 by caption on the consolidated balance sheet and classified in the SFAS 157ASC – 820 valuation hierarchy categories (as described above):

 
F-73F-87
 

  Level 1  Level 2  Level 3  Total 
Financial Assets            
Trading assets, at fair value  29,938   26,078   443   56,459 
Available-for-sale securities, at fair value  8,271   13,249   6,925   28,445 
Derivatives  57   7,715   2,252   10,024 
Financial Liabilities                
Derivatives  -   6,759   1,248   8,007 

Changes in Level 3 recurring fair value measurementsdistribution

The tables below includes a rollforwardfollowing table sets forth the Levels of the balance sheet amounts for the year endedRisk as of December 31, 2009 and 2008 (including the change in fair value), for financial instruments classified by Itau Unibanco Holding within level 3 of the valuation hierarchy. Accordingly, the gainsour trading assets and losses in the table below include changes in fair value due in part to observable factors that are part of the valuation methodology.securities available for sale.

  
Trading
Securities
  
Available for Sale
Securities
  
Derivatives (Net)
 
Fair value at 01/01/2008   874   2,795   (215) 
Total gains or losses (realized/unrealized)  233   162   2,928 
Purchases, issuances and settlements  (664)   3,985   (1,709) 
Transfers in and/or out of Level 3   -   (17)   - 
Fair value at 12/31/2008   443    6,925   1,004 
Total gains or (losses) relating to assets and liabilities still held at reporting date   60    126   1,037 
              (in millions of R$, except percentages) 
  
12/31/2009
  
12/31/2008
 
  
Level 1
  
Level 2
  
Level 3
  
Total
  
Level 1
  
Level 2
  
Level 3
  
Total
 
Trading assets  26,685   46,325   519   73,529   29,991   33,798   2,694   66,483 
Investment funds  -   39,347   -   39,347   -  ��24,257   201   24,458 
Brazilian federal government securities  23,572   413   -   23,985   27,044   -   101   27,145 
Brazilian government external debt securities  222   -   -   222   383   -   -   383 
Government debt securities – Other countries  937   121   -   1,058   1,072   886   30   1,988 
Argentina  179   -   -   179   28   6   30   64 
United States  748   -   -   748   1,038   -   -   1,038 
Mexico  10   -   -   10   6   -   -   6 
Spain  -   -   -   -   -   418   -   418 
Korea  -   -   -   -   -   291   -   291 
Chile  -   77   -   77   -   164   -   164 
Uruguay  -   30   -   30   -   6   -   6 
Other  -   14   -   14   -   1   -   1 
Corporate debt securities  815   1,320   91   2,226   994   927   109   2,030 
Marketable equity securities  1,139   3   -   1,142   444   10   2   456 
Derivative financial instruments - assets  -   5,121   428   5,549   54   7,718   2,251   10,023 
Options  -   1,641   178   1,819   -   1,711   443   2,154 
Forwards  -   378   -   378   -   3,406   -   3,406 
Swaps - Differential receivable  -   2,665   235   2,900   -   2,422   1,599   4,021 
Credit derivatives  -   -   15   15   26   -   -   26 
Futures  -   -   -   -   28   151   207   386 
Other derivatives  -   437   -   437   -   28   2   30 
Available-for-sale securities  17,162   22,030   2,071   41,263   8,272   13,248   6,925   28,445 
Investment funds  -   1,259   -   1,259   -   207   785   992 
Brazilian federal government securities  14,098   11   334   14,443   5,350   -   229   5,579 
Brazilian government external debt securities  1,980   -   -   1,980   957   8   -   965 
Government debt securities – Other countries  -   7,243   -   7,243   326   8,406   1   8,733 
Portugal  -   26   -   26   301   -   -   301 
Argentina  -   -   -   -   -   -   1   1 
United States  -   17   -   17   25   -   -   25 
Norway  -   -   -   -   -   345   -   345 
Austria  -   213   -   213   -   1,460   -   1,460 
Denmark  -   1,971   -   1,971   -   2,193   -   2,193 
Spain  -   1,093   -   1,093   -   2,830   -   2,830 
Korea  -   1,757   -   1,757   -   1,021   -   1,021 
Chile  -   1,274   -   1,274   -   483   -   483 
Paraguay  -   417   -   417   -   -   -   - 
Uruguay  -   475   -   475   -   74   -   74 
Corporate debt securities  804   12,425   1,737   14,966   1,178   4,415   5,897   11,490 
Marketable equity securities  280   1,092   -   1,372   461   212   13   686 

Derivative financial instruments classified as Level 3The following table sets forth the Levels of Risk as of January 1,December 31, 2009 and 2008 corresponds to a reduced volume of exotic options and of illiquid plain-vanilla swaps. During the year 2008 we began to trade on foreign-exchange swaps with additional features such as leverage, knock-outs and others. Since the end of the third quarter, as result of the significant devaluation of the Real against the major foreign currencies the market for those swaps has become very illiquid resulting in those instruments being classified as Level 3. Fair value of swaps with additional features amount to R$ 1,561 (asset) and R$ 602 (liability). In measuring the fair value of those swaps on an asset position we have measured and recognized a valuation adjustment with respect to counterparty credit risk of R$ 349.our derivative liabilities.

   
(in millions of R$, except percentages)
 
  
12/31/2009
  
12/31/2008
 
  
Level 1
  
Level 2
  
Level 3
  
Total
  
Level 1
  
Level 2
  
Level 3
  
Total
 
Derivative financial instruments – liabilities  (25)  (4,896)  (1,360)  (6,281)  -   (6,762)  (1,247)  (8,009)
Options  -   (1,733)  (987)  (2,720)  -   (2,829)  (576)  (3,405)
Forwards  -   (547)  -   (547)  -   (1,328)  -   (1,328)
Swaps - Differential receivable  -   (2,108)  (236)  (2,344)  -   (2,404)  (671)  (3,075)
Credit derivatives  -   -   (106)  (106)  -   (201)  -   (201)
Futures  (25)  -   -   (25)  -   -   -   - 
Other derivatives
  -   (508)  (31)  (539)  -   -   -   - 

Other matters

SFAS 157ASC - 820 also nullified the guidance of EITF 02-03, which required the deferral of profit at inception of a transaction involving a derivative financial instrument in the absence of observable data supporting the valuation technique. EITF 02-03 precluded the recognition of an initial gain or loss in the absence of: (a) quoted market price, (b) observable prices of other current market transactions, or (c) other observable datedata supporting a valuation technique. Management has concluded that the nullification of this provision of EITF 02-03 did not have any significant impact to be recognized as a cumulative effect as of January 1, 2008.

In relation to the initial application of SFAS 159 “The Fair Value Option for Financial Assets and Financial Liabilities Including an amendment of FASB Statement No. 115” as of January 1, 2008, Itaú Unibanco Holding did not select the fair value option for any asset or liability.

 
F-74F-88
 

Changes in Level 3 recurring fair value measurements

The tables below includes a rollforward of the balance sheet amounts for the years ended December 31, 2009 and 2008 (including the change in fair value), for financial instruments classified by Itaú Unibanco Holding within level 3 of the valuation hierarchy. Accordingly, the gains and losses in the table below include changes in fair value due in part to observable factors that are part of the valuation methodology.

  
Fair value at
01/01/2009
  Obtained on
Unibanco
Acquisition		  
Total gains or losses
(realized/unrealized)
  
Purchases, 
issuances and
settlements
  
Transfers in
and/or out of
Level 3
  
Fair value at
31/12/2009
  
Total gains or (losses)
relating to assets and
liabilities still held at
reporting date
 
Trading assets (1)  443      4   (31)  (325)  91   - 
Investment funds  201      -   -   (201)  -   - 
Brazilian federal government securities  101      4   (14)  (91)  -   - 
Government debt securities – Other countries                           
Argentina  30      -   -   (30)  -   - 
Corporate debt securities  109      -   (17)  (1)  91   - 
Marketable equity securities  2      -   -   (2)  -   - 
Derivative financial instruments (1)  1,004  132   113   (1,977)  (204)  (932)  (624)
Options  (133) 5   407   (1,088)  -   (809)  (702)
Swaps - Differential receivable  928  109   (390)  (700)  52   (1)  91 
Credit derivatives  -  18   116   (176)  (49)  (91)  (13)
Futures  207      -   -   (207)  -   - 
Other derivatives  2      (20)  (13)  -   (31)  - 
Available-for-sale securities (2)  6,925  302   6   (536)  (4,626)  2,071   (24)
Investment funds  785      -   -   (785)  -   - 
Brazilian federal government securities  229      (63)  182   (14)  334   (18)
Government debt securities – Other countries                           
Argentina  1      -   -   (1)  -   - 
Corporate debt securities  5,897  302   (14)  (718)  (3,730)  1,737   (6)
Marketable equity securities  13      83   -   (96)  -   - 
(1) Realized and unrealized gains are recordered in the statement of income, in "Trading Income (losses)".
(2) Realized gains are recordered in the statment of income, in "Net gain(loss) on available-for-sale securities", and unrealized gains are recordered in "Net unrealized gains (losses) on available-for-sale securities, net of taxes", in a separate account of Stockholder's Equity".
 


NOTE
  
Fair value at 
01/01/2008
  
Total gains or losses
(realized/unrealized)
  
Purchases,
issuances and
settlements
  
Transfers in
and/or out of
Level 3
  
Fair value at
31/12/2008
  
Total gains or (losses)
relating to assets and
liabilities still held at
reporting date
 
Trading assets  874   233   (664)  -   443   60 
Derivative financial instruments, net  (215)  2,928   (1,709)  -   1,004   1,037 
Available-for-sale securities  2,795   162   3,985   (17)  6,925   126 
In 2009, there were no reclassifications from Level 1 or 2 to Level 3. However certain instruments were reclassified from Level 3 to Level 2 due to: (i) the existence of yield curves for longer periods observable in the market and (ii) our reassessment of credit risk not observable in the market and our conclusion that the impact of such non observable input is not relevant to the overall fair value of certain instruments.
F-89

NOTA 29 – DERIVATIVE FINANCIAL INSTRUMENTS AND CREDIT –FINANCIAL INSTRUMENTS RELATED FINANCIAL INSTRUMENTSTO CREDIT

a) Derivatives –Derivative - General

We enter into financial derivative instruments with various counterparts to manage our overall exposures and to assist our customers in managing their own exposures.

Futures - Interest rate and foreign currency futures contracts are commitments to buy or sell a financial instrument at a future date, at a contracted price or yield and may be settled in cash or through delivery.  The notional amount represents the face value of the underlying instrument. Commodity future contracts are commitments to buy or sell commodities (mainly gold, coffee and orange juice), at a future date, at a contracted price, which are settled in cash. The notional amount represents the quantity of such commodities multiplied by the future price at the date of the agreement. Daily cash settlements of price movements are made for all instruments.

Forwards -Forward - Interest forward agreements are contracts to exchange payments on a specified future date, based on a market change in interest rates from trade date to contract settlement date. Foreign exchange forward contracts represent agreements to exchange the currency of one country for the currency of another country at an agreed price, on an agreed settlement date. Forwards contracts are commitments to buy or sell a financial instrument on a future date at an agreed-upon price and are settled in cash.

Swaps - Interest rate and foreign exchange swap contracts are commitments to settle in cash at a future date or dates, based on differentials between specified financial indices (either two different interest rates in a single currency or two different rates each in a different currency), as applied to a notional principal amount. Swap agreements presented in Other in the table below correspond substantially to inflation rate swap contracts.

Options - Option contracts give the purchaser, for a fee, the right, but not the obligation, to buy or sell within a limited time a financial instrument including a flow of interests, foreign currencies, commodities, or equity instruments at a contracted price that may also be settled in cash, based on differentials between specific indices.

Credit Derivatives – Credit derivatives are financial instruments whosewhich value derives fromresults to the credit risk associated withto the debt issued by a third party (the reference entity) and which allowpermits that one party (the protection purchaser) topurchaser of hedge) transfer thatthe risk to the counterparty (the protection seller)seller of hedge). The protection seller is required toof hedge should make payments as providedset forth in the contract when the reference entity experiencesundergoes a credit event, such as bankruptcy, default or debt restructuring. The protection seller of hedge receives a premium for providing protection,the hedge, but, on the other hand, it bearsassumes the risk thatof the underlying instrumentasset referenced in the contract goes throughundergoes a credit event, and  it might be requiredthe seller would have to make athe payment to the protection purchaser of hedge, which maycould be up to thea notional amount of the credit derivative.

The market and credit risksrisk associated withto these products, as well as the operating risks, are similar to those relatingrelated to other types of financial instruments. Market risk is the exposure created by potential fluctuationsfluctuation in interest rates, foreign exchange rates, commodity quotations,commodities quotation, prices quoted in securities market prices of equity instruments, or other values,amounts, and is a function ofit  depends on the type of product, the volume of transactions, the tenoroperations, term and termsconditions of the agreementcontract and the underlying volatility.

Credit risk is the exposure to loss in the event of non-performance by the counterparty to the transaction.  The credit risk exposure to future contracts is minimized due to daily cash settlements. Swap contracts expose us to credit risk in the event of potential inability or unwillingness of the counterparty to perform according to the contractual terms. Our total credit exposure with respect to swaps is R$ 1,7371,674 and R$ 1,1171,737 at December 31, 20082009 and 2007,2008, respectively. We are exposed to credit risk to the extent of fair valuepremiums paid on purchased options. The total credit exposure associated with purchase options totaled R$ 448975 and R$ 261448 at December 31, 20082009 and 2007,2008, respectively. The recognition in earnings of unrealized gains on these transactions is dependent on management's assessment as to collectability.collectibility.

See Note 28 for a description of the criteria used to determine the fair value forof derivatives.

 
F-75F-90
 


COMPARISON - - OFF-BALANCE SHEET FINANCIAL INSTRUMENTS (NOTE 29a)

  Memorandum accounts  Balance sheet accounts 
  
Notional
amounts
  Notional amounts  Carrying value  Carrying value 
  12/31/2009  12/31/2008  12/31/2009  12/31/2008 
Interest rate products  1,888,447   249,538   476   91 
Futures contracts  182,997   99,670   (4)  294 
Purchase commitments  88,852   23,197   19   (135)
Sale commitments  94,145   76,473   (23)  429 
Swap agreements  119,978   91,899   680   (66)
Asset position  62,528   91,899   2,519   1,190 
Liability position  57,450   -   (1,839)  (1,256)
Options  1,579,785   51,183   (91)  33 
Purchase commitments  850,060   27,865   1,206   376 
Sale commitments  729,725   23,318   (1,297)  (343)
Forward contracts  1,294   1,311   11   5 
Purchase commitments  839   839   92   9 
Sale commitments  455   472   (81)  (4)
Credit derivatives  4,363   5,475   (90)  (175)
Purchase commitments  1,617   3,411   12   26 
Sale commitments  2,746   2,064   (102)  (201)
Other  30   -   (30)  - 
Sale commitments  30   -   (30)  - 
Foreign exchange products  209,408   147,500   (607)  1,168 
Futures contracts  22,099   38,529   (4)  96 
Purchase commitments  3,160   15,356   22   (291)
Sale commitments  18,939   23,173   (26)  387 
Swap agreements  22,492   41,123   (196)  976 
Asset position  9,820   41,123   295   2,698 
Liability position  12,672   -   (491)  (1,722)
Options  145,350   39,144   (137)  (1,287)
Purchase commitments  80,571   13,005   527   1,700 
Sale commitments  64,779   26,139   (664)  (2,987)
Forward contracts  11,809   28,704   (190)  1,383 
Purchase commitments  5,150   17,604   276   2,498 
Sale commitments  6,659   11,100   (466)  (1,115)
Credit derivatives  137   -   (1)  - 
Purchase commitments  137   -   1   - 
Sale commitments  -   -   (2)  - 
Other  7,521   -   (79)  - 
Purchase commitments  3,234   -   420   - 
Sale commitments  4,287   -   (499)  - 
Commodities  7,690   856   19   6 
Futures contracts  6,403   101   (17)  (2)
Purchase commitments  64   1   (12)  (33)
Sale commitments  6,339   100   (5)  31 
Swap agreements  195   431   (9)  - 
Asset position  89   431   5   97 
Liability position  106   -   (14)  (97)
Options  612   225   27   14 
Purchase commitments  371   143   38   31 
Sale commitments  241   82   (11)  (17)
Forward contracts  254   99   10   (6)
Purchase commitments  254   8   10   4 
Sale commitments  -   91   -   (10)
Other  226   -   8   - 
Purchase commitments  155   -   17   - 
Sale commitments  71   -   (9)  - 
Other  91   31   -   31 
Futures contracts  11   -   -   - 
Purchase commitments  2   -   -   - 
Sale commitments  9   -   -   - 
Swap agreements  58   24   -   30 
Asset position  1   24   -   30 
Liability position  57   -   -   - 
Options  -   7   -   1 
Purchase commitments  -   7   -   1 
Credit derivatives  22   -   -   - 
Purchase commitments  22   -   1   - 
Sale commitments  -   -   (1)  - 
Equity products  7,999   2,251   (619)  718 
Futures contracts  5,276   767   -   (2)
Purchase commitments  2,132   294   -   - 
Sale commitments  3,144   473   -   (2)
Swap agreements  138   33   81   6 
Asset position  131   33   81   6 
Liability position  7   -   -   - 
Options  2,575   514   (700)  (11)
Purchase commitments  1,812   259   48   47 
Sale commitments  763   255   (748)  (58)
Forward contracts  -   937   -   695 
Purchase commitments  -   937   -   894 
Sale commitments  -   -   -   (199)
Credit derivatives  10   -   -   - 
Purchase commitments  10   -   1   - 
Sale commitments  -   -   (1)  - 
Other  -   -   -   30 
Purchase commitments  -   -   -   30 
Assets          5,549   10,023 
Liabilities          (6,281)  (8,009)
Total          (732)  2,014 
  Memorandum Accounts  Balance Sheet Accounts 
  
Notional
amounts
  
Notional
amounts
  
Carrying value
asset (liability)
  
Carrying value
asset (liability)
 
  12/31/2008  12/31/2007  12/31/2008  12/31/2007 
Interest rate products  246,160   268,865   91   (54)
Futures contracts  99,670   85,421   294   (69)
Purchase commitments  23,197   37,863   (135)  (409)
Sale commitments  76,473   47,558   429   340 
Swap agreements  91,899   74,853   (66)  85 
Credit Derivatives  5,475   -   (175)  - 
Purchase commitments  3,411   -   26   - 
Sale commitments  2,064   -   (201)  - 
Options  51,183   108,591   33   (70)
Purchased  27,865   54,618   376   213 
Written  23,318   53,973   (343)  (283)
Forward contracts  1,311   -   5   - 
Purchase commitments  839   -   9   - 
Sale commitments  472   -   (4)  - 
Foreign exchange products  147,565   85,126   1,168   (880)
Futures contracts  38,529   13,509   96   (13)
Purchase commitments  15,356   2,857   (291)  3 
Sale commitments  23,173   10,651   387   (16)
Swap agreements  41,123   19,608   976   (122)
Options  39,144   19,494   (1,288)  (113)
Purchased  13,005   5,177   1,700   41 
Written  26,139   14,317   (2,987)  (154)
Forward contracts  28,704   32,515   1,384   (632)
Purchase commitments  17,604   18,110   2,498   671 
Sale commitments  11,100   14,405   (1,115)  (1,303)
Commodities  855   72   7   (0)
Futures contracts  101   -   (2)  - 
Purchase commitments  1   -   (33)  - 
Sale commitments  100   -   31   - 
Swap agreements  431   72   -   (0)
Options  224   -   14   - 
Purchased  143   -   31   - 
Written  82   -   (17)  - 
Forward contracts  99   -   (6)  - 
Purchase commitments  8   -   4   - 
Sale commitments  91   -   (10)  - 
Equity products  2,251   7,291   718   967 
Futures contracts  767   2,940   (2)  - 
Purchased  294   560   -   - 
Written  473   2,379   (2)  - 
Swap agreements  33   97   6   36 
Options  515   4,105   (11)  (23)
Purchased  259   2,411   47   15 
Written  255   1,694   (58)  (38)
Forward contracts  937   149   695   954 
Purchase commitments  937   116   894   1,103 
Sale commitments  -   33   (199)  (149)
Other  -   -   30   - 
Other  31   1,070   31   4 
Futures contracts  -   971   -   - 
Purchase commitments  -   861   -   - 
Sale commitments  -   110   -   - 
Swap agreements  24   19   30   6 
Credit Derivatives  -   -   -   - 
Purchased  -   -   -   - 
Options  7   81   1   (1)
Purchased  7   37   1   1 
Written  -   44   -   (3)
Derivatives qualifying for hedge accounting  98   -   -   - 
Futures - Interest Rate  98   -   -   - 
Total Assets  170,750   169,843   10,023   3,873 
Total Liabilities  226,112   192,582   8,009   (3,836)
 
F-76F-91
 


b) Derivatives used for accounting hedge accounting

We useduse certain exchange-traded futurederivative futures contracts traded in stock exchange as hedginghedge instruments in a strategy of cash flow hedge strategy. Thehedge. All hedge relationships were all designated in the last quarter of 2008, with2009, and maturities of the hedged item and the derivatives at dateswill occur between 2012 and 2014.

This hedge strategy aims at protecting changes in cash flow at a variable rate of interest payment of  Subordinated CDBs attributable to protect changes in the interest cash flows100% of certain variable-interest rate subordinated certificates of deposit, attributable to changes in CDI rate. CDI rate is considered the benchmark interestreference rate forin the Brazilian Reais - denominated financial market and it is set daily.on a daily basis. The hedge strategy results in fixingmakes the cash flows associated withflow constant regarding the variability of the CDI rate. In order to hedgeTo protect the variability in theof future cash flowsflow of payment of interest, payments, Itaú Unibanco Holding uses DI Futures contracts traded onat BM&F BOVESPA. UnderIn the DI Futures contractscontract, a net payment is made for the difference between anthe amount computed asin the notional amount multiplied by theand CDI rate is made, and the notional amount multiplied by a fixed rate.

To assessevaluate the effectiveness and to measure the ineffectiveness of such strategy,  Itaú Unibanco Holding uses the dollar-offset method for making settlement in dollar on a cumulative basis. InBy using the dollar-offsetthis method, Itaú Unibanco Holding usesadopts the hypothetical derivative method established by DIG G 7 “Cash"Cash Flow Hedges: Measuring theHedges".  Measurement of Ineffectiveness of a Cash Flow Hedge underpursuant to Paragraph 30(b) when the Short-Cut Method is Not Applied”.not Applied. The hypothetical derivative method is based on a comparison of the change in the fair value of a hypothetical derivative with terms that identically matchidentical to the critical terms of the floating-ratevariable-rate liability, and this change in the fair value is considered a proxy forrepresentation of the present value of the cumulative change in expectedthe future cash flows offlow expected for the hedged liability. The method to releaseof transferring deferred gains and losses from AOCI to retained earnings is thean effective interest rate method.

The carrying amount atAt December 31, 20082009, the accounting balance of subordinated certificates of deposits whoseCDBs which future interest cash flows are designated inbeing protected by this hedge strategy amounts tois R$ 9813 and the notional amount of the DI Futures of the designated hedginghedge instruments is R$ 98.13.

The amounts in the following table below are presented in thousandthousands of Reais:reais:

Derivatives in Cash
Flow Hedging
relationships
 
Amount of gain or 
(loss) recognized in
AOCI on the
derivatives
(Effective portion) - 
In R$ thousand
 
Location of gain or 
(loss) reclassified
from AOCI into
income (Effective
Portion)
 
Amonunt of gain or 
(loss) reclassified
from AOCI into
income (Effective
Portion) - in R$
Thousand
 
Location of gain or 
(loss) recognized in
income on
derivatives
(Ineffective portion)
 
Amount of gain or
(loss) recognized in 
income of derivatives
(Ineffective portion) -
 In R$ thousand
 
Interest rate futures  (3,794)  Trading Income (Losses)     (50)   Trading Income (Losses)     - 
Derivatives in
relationships of cash
flow hedges
 
Amount of gain or
(loss) recognized in
AOCI in derivatives
(effective portion) –
in thousands of R$
 
Place of gain or
(loss) reclassified
from AOCI to
results (effective
portion)
 
Amount of gain or
(loss) reclassified
from AOCI to result
(effective portion) –
in thousands of R$
 
Place of gain or
(loss) recognized in
result in derivatives
(ineffective portion)
 
Amount of gain or
(loss) recognized in
result of derivatives
(ineffective portion) –
in thousands of R$
 
Futures of interest rate  (1,669)  Income (loss)  from negotiation  (718)  Income (loss) from negotiation  - 

As of December 31, 20082009, gain or lossesloss related to the cash flow hedge expected to be reclassified from AOCI to incomeresults in the nextfollowing 12 months amounts tois R$ 1.

No hedge relationship has beenwas discontinued in 2008.2009.

No ineffectiveness has beenlack of effectiveness was recognized as ofat December 31, 20082009, since the cumulativeaccumulated loss on thein Futures DI Futures used as hedginghedge instruments did not exceed the cumulative change in the expected future cash flows expected of the hedged certificates of deposit.protected deposits.

c) Information abouton credit derivatives

Credit derivatives are financial instruments whose valueamount derives from the credit risk associated with the debt issued by a third party (the reference(reference entity) and which allow one party (the protection purchaser)an entity (protection buyer) to transfer thatthis risk to thea counterparty (the protection(protection seller). The protection seller is requiredhas to make payments as provided inpursuant to the contract when the reference entity experiencesundergoes a credit event, such as bankruptcy, default or debt restructuring.composition with creditors.   The protection seller receives a premium for providingthe protection but, on the other hand, it bearsreceives the risk that the underlying instrument referencedreferred to in the contract goes throughmay undergo a credit event and it might be requiredmay have to make a payment to the protection purchaser which maybuyer that can be up toas high as the notional amountreference value of the credit derivative.

Itaú Unibanco Holding buys and sells credit protection predominantlymainly related to public securities of the Brazilian federal government bonds and private securities of Brazilian corporate debt securities, for meetingcompanies in order to meet the needs of its clients. When we sell credit protection, the exposure to thefor a given reference entity may be partially or fullytotally offset by a contract to purchase credit protection frompurchase contract of another counterparty onfor the same reference entity or similar reference entity. CreditThe credit derivatives infor which we are the credit protection sellersellers are credit default swaps, total return swaps and credit-linked notes. As ofAt December 31, 20082009 and 20072008, Itaú Unibanco Holding has sold nodid not sell credit protection underin the form of credit-linked notes.

 
F-77F-92
 


Credit Default Swaps – CDS

CDS are credit derivatives that, whenin which, upon a credit event occurs with respectrelated to the reference entity as provided for inpursuant to the terms of the contract, the protection purchaserbuyer is entitled to receive, from the protection seller, anthe amount equivalent to the difference between the face value of the CDS notional amountcontract and the fair value of the obligation ofliability on the reference entity atdate the contract’s settlement date,contract was settled, also known as recoverablethe recovered value. The protection purchaser isbuyer does not requiredneed to hold the debt instrument of the reference entity in orderfor it to receive the amounts receivable accordingdue pursuant to the CDS contract provisionsterms when a credit event occurs.

Total Return Swap – TRS

TRS is a transaction in which onea party swaps the total return onof a reference entity or of a basket of assets for periodicalregular cash flows, generally interestsusually interest and a guarantee against capital loss. In a TRS contract, the parties do not transfer the ownership of the assets.

The following table showsbelow presents the portfolio of credit derivative portfolio onderivatives in which we have soldsell protection to third parties, byper maturity, and presents the maximum potential of gross future payments, and thegross of any guarantees, as well as its classification byper instrument, risk rating and by type of reference entity.

 
Maximum
potential of
gross future
payments
  
Up to
1 year
  
From 1 to
3 years
  
From 3 to
5 years
  
Over 5
years
  
Fair value
as of
December
31, 2008
  
Maximum
potential of
future
payments,
gross
  
Before 1
year
  
From 1 to 3
years
  
From 3 to 5
years
  
Above 5
years
  
Far value as
of
December
31, 2009
 
By instrument                                    
CDS  1,617   54   11   27   6   98   2,925   984   730   706   505   (103)
TRS  447   103   -   -   -   103   -   -   -   -   -   - 
Total by instrument  2,064   157   11   27   6   201   2,925   984   730   706   505   (103)
By risk rating                                                
Investment grade  2,059   156   11   27   6   200   2,925   984   730   706   505   (103)
Below investment grade  5   1   -   -   -   1   -   -   -   -   -   - 
Total by risk  2,064   157   11   27   6   201   2,925   984   730   706   505   (103)
Total per entity                        
By reference entity                        
Brazilian government  1,655   126   11   27   6   170   -   -   -   -   -   - 
Government - other countries  70   1   -   -   -   1 
Private companies   339   30   -   -   -   30 
Total per entity  2,064   157   11   27   6   201 
Government – other countries  -   -   -   -   -   - 
Private entities  2,925   984   730   706   505   (103)
Total by entity  2,925   984   730   706   505   (103)

We assessevaluated the risk of the credit derivative based on the credit ratings ofattributed to the reference entity, given by independent risk-ratingcredit rating agencies. ThoseInvestment grade are those entities which credit risk rating is rated as Baa3 or higher, as rated by Moody’s,Moody's and BBB- or higher, byaccording to the ratings of Standard & PoorPoor’s and Fitch Ratings are considered investment grade for purpose of the classification above.Ratings. The maximum potential loss that canmay be incurred with the credit derivative is based on the contractual valuenotional amount of the derivative (notional). Basedderivative. We believe, based on theour historical experience, we believe that the amount of the maximum potential loss does not represent the actual loss level of loss. This is so because ifshould there be an event of loss, occurs, the amount of maximum potential loss willshould be reduced from the notional amount by the recoverable value.amount.

CreditThe credit derivatives which are sold are not covered by guarantees, butand during thethis period, we did not incur any event of loss related to any credit derivative contracts.

The following table presents the notional amount of purchased credit derivatives purchased that havewhich underlying amounts are identical underlyings thanto those for which Itaú Unibanco Holding isoperates as seller of the protection seller:hedge.

 
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 12/31/2009  12/31/2008 
 
Notional amount
 of protection 
sold
  
Notional amount of
protection purchased
 with identical underlyings
  
Net position
  
Notional amount
of hedge sold
  
Notional amount of hedge
purchased with identical
underlying amount
  Net position  
Net
position
 
CDS  1,617   (3,411)  (1,794)  2,925   (1,605)  1,320   (30)
TRS  447   -   447   -   (2)  -   - 
Total  2,064   (3,411)  (1,347)  2,925   (1,607)  1,320   (30)

d) Credit-related financialFinancial instruments related to credit

Itaú Unibanco Holding utilizes credit-relateduses financial instruments in orderrelated to credit to meet the financingfinancial needs of its customers.clients. Itaú Unibanco Holding issues credit granting commitments, to extendstandby letters of credit standby and other letters forof credit and guarantees.

The following table summarizes the contract amounts to credit-relatedof financial instruments related to credit at December 31:

  2008  2007 
Commitments to extend credit  93,462   70,830 
Standby letters of credit  659   1,114 
Garantees  12,854   10,927 
  2009  2008 
Credit concession commitments  157,443   93,462 
Standby letters of credit  1,207   659 
Guarantees  31,234   12,854 

The contractual amount of the financial instruments represents the maximum potential of credit risk ifin the event the counterparty does not perform according tomeet the terms of the contract. A largeagreement. The vast majority of these commitments expiremature without being drawn upon.withdrawn. As a result, the total contractual amounts areamount does not representative ofrepresent our actualeffective future exposure to credit exposurerisk or the liquidity requirements for theseneeds arising from such commitments.

e)   Financial guarantees

The following is a summary of the instruments that are considered to be financial guarantees in accordance with FIN No. 45 (new ASC 460), at December 31:

 2008  
2007
  2009  2008 
 
Contract
amount
  
Fair
value
  
Contract
amount
  
Fair
value
  
Contract
Amount
  
Fair
value
  
Contract
amount
  
Fair
value
 
Standby letters of credit(1)  659   -   1,114   -   1,207   349   659   - 
Guarantees (1)  12,854   37   10,927   16   31,234   68   12,854   37 
(1) Include guarantees with a contract amount of R$ 8 at December 31, 2009 (R$ 284 at December 31, 2008) issued in favor of clients that we have classified as perclients under monitoring, in accordance with our internal rating as clients in monitoring statusclassification.

Standby letters of credit and guarantees are conditional lending commitments issued by us to guarantee the performance of a customer to a third party.  Itaú Unibanco Holding typically has recourse to recover from the customer any amounts paid under these guarantees.  In addition, Itaú Unibanco Holding may hold cash or other highly liquid collateral to support these guarantees. The carrying value includes amounts deferred and recognized in income over the life of the contract and amounts accrued for inherent losses in accordance with SFAS 5,  “Accounting for Contingencies” (new ASC 450).

In connection with issuing securities to investors, Itaú Unibanco Holding may enter into contractual arrangements with third parties that may require it to make a payment to them in the event of a change in tax law or an adverse interpretation of tax law. Itaú Unibanco Holding may also enter into indemnification clauses when it sells a business or assets to a third party pursuant to which it indemnifies that third party for losses they may incur due to actions taken by Itaú Unibanco Holding prior to the sale.sale It is difficult to estimate the maximum exposure under these indemnification arrangements since this would require an assessment of future changes in tax laws and future claims that may be made against Itaú Unibanco Holding that have not yet occurred.

In the ordinary course of its business, Itaú Unibanco Holding enters into contracts that contain indemnification provisions. These provisions require Itaú Unibanco Holding to make payments to another party in the event that certain events occur. Many of these provisions call for Itaú Unibanco Holding to indemnify the other party against loss in the event that Itaú Unibanco Holding fails to perform its own obligations under the contract. These performance guarantees are not subject to disclosure.

 
F-79F-94
 


NOTE 30 – COMMITMENTS AND CONTINGENT LIABILITIES

a) Assets Under Management

Itaú Unibanco Holding offers, manages and administers a broad range of investment funds and provides portfolio management services for pension funds, corporations, private banking customers and foreign investors. These assets are not included in our consolidated balance sheet.

The investment policy for each fund domiciled in Brazil must be submitted to the Central Bank and to CVM for approval and each fund is regulated as to the type of investments it may make.

Portfolio management carried out by Itaú Unibanco Holding on behalf of pension plans, corporations, private banking customers and foreign investors is done on the basis of negotiated fees and investment parameters.
 Fees are generally charged as a percentage of assets under management and vary depending upon the debt/equity composition of the particular portfolio. In addition to the fees earned by Itaú Unibanco Holding as manager of the relevant investment fund or portfolio, we earn brokerage fees for transactions carried out in respect of the fund and portfolio assets.

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b)   Contingent gains and losses

Itaú Unibanco Holding and its subsidiaries are involved in contingencies in the ordinary course of their businesses, as follows:

a)
Contingent Assets: a)            Contingent Assets: there are no contingent assets recorded.

b)
b)            Contingent Liabilities: these are estimated and classified as follows:

            .  Calculation criteria:
-Calculation criteria:

Civil lawsuits: quantified upon judicial notification, and adjusted monthly:

 ·Collective (lawsuits related to claims considered similar and usual and the amounts of which are not considered individually significant): according to the statistical references per group of lawsuits, type of legal body (Small Claims Court or Regular Court) and claimant; or

 ·Individual (lawsuits related to claims considered unusual and the amounts of which are considered individually significant): at the amount estimated as probable losses,loss, based on the available informationevidence presented and on the evaluation of legal advisors – which considers case law, legal opinions raised, evidence produced in the records and the judicial decisions already issued – relating to the risk level of loss of lawsuits.

These are adjusted to the amounts deposited as guarantee for their execution or to the finald judgeddefinitive execution amount for  execution (indisputable amount) when the claim is awarded a final and unappealable judgment.

Labor claims: these are calculated upon judicial notification and adjusted to the moving average of payment in lawsuits closed in the last 12 months plus the average cost of fees paid for lawsuits related to claims considered similar and usual and adjusted to the execution amount (final unappealable(indisputable amount) when it is in the stage of being a final and unappealable decision.

Tax and social security lawsuits: calculated upon judicial notification of administrative proceedings based on their monthly adjusted amounts.

-
-            Contingencies classified as probable:are recognized in the financial statements and comprise civil lawsuitscomprise:

-Civil Lawsuits: demanding compensation for property damage and pain and suffering, such as protest of bills, return of checks, and inclusion of information in the credit protection registry, most of these actions being filed in the Small Claims Court and therefore limited to 40 minimum monthly wages; labor claims

-Labor Claims: seeking the recovery of alleged labor rights based on labor legislation specific to the related profession, such as overtime, salary equalization, reinstatement, transfer allowance, pension plan supplement and other; tax

-Tax and social securitySocial Security: represented mainly by lawsuits and administrative proceedings involving federal and municipal taxes.

 
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The table below shows the changes in the respective provisions for contingent liabilities and the respective escrow deposits balances:

 2008  2007  2009  2008 
At the beginning of the year (Note 18)  3,551  2,763  5,219  3,551 
Balance arising from business combinations 2,989  - 
(+) Reclassification 111  - 
(-) Contingencies guaranteed by indemnity clauses (Note 2u)  (656) (578) (692) (656)
Subtotal  2,895  2,185  7,627  2,895 
Changes in the period reflected in income (Note 24b)  2,440   1,434   2,535   2,440 
Interest and monetary corrections  387  168 
Interest and monetary correction 433  387 
Increase  2,343  1,483  2,505  2,343 
Reversal  (290) (217) (403) (290)
Payments  (808) (686) (3,218) (808)
Subtotal  4,527  2,933  6,944  4,527 
(+) Contingencies guaranteed by indemnity clauses (Note 2u)   692   618   707   692 
At the end of the year (Note 18)  5,219   3,551   7,651   5,219 
Escrow deposits (Note 14)  2,286   1,615   3,219   2,286 

-
Contingencies classified as possible: No provision is recordedthey are not recognized in the financial statements and comprise civil lwsuitsCivil Lawsuits amounting at December 31,2009 to R$ 378 and Tax and Social Security Lawsuits amounting to R$ 205 and tax and social security awsuits amounting to R$ 293.1,113, The principal characteristics of thesethe most significant lawsuits are described below:

Civil Lawsuits

·Life insurance – R$ 98: Payment for loss of profit and property damage arising from the refusal to indemnify the policyholder;
·Summer Plan – R$ 88: Savings account holders claim the payment of alleged remuneration differences in the balances of savings accounts existing in January and February 89, which would have been underpaid as a result of the full compliance with Law No. 7,730/89 (Summer Plan) by the Bank;

·Claims – R$ 67: Claiming the review of the amount of claims paid in insurance operations;

·Legal Fees due to Former Lawyers – R$ 41: Lawyers who provided legal services to the Group alleged that they have not received all legal fees they were entitled to after the termination of the legal agreements;

·In connection with several economic stabilization plans that the Brazilian Federal Government has imposed during the decades of 1980 and 1990 saving account holders have initiated lawsuits against Itaú Unibanco Holding and against several financial institutions in Brazil. We have provided for those lawsuits where we estimate the probability of loss is probable and when it can be reasonably estimated and we disclose above the amounts of those lawsuits initiated against Itaú Unibanco Holding for which probability of loss is possible. However, saving account holders may initiate lawsuits in the future with respect to these economic stabilization plans under the Brazilian statute of limitation and we are unable to predict whether further lawsuits will be initiated or not and the amounts that might be claim.

Tax and Social Security other than taxes on income

 ·ISS – Banking Institutions – R$ 151418: refers to tax assessments notices issued by municipalities for collection of ISS (tax on services) on amounts recorded in several accounts, on the grounds of being service revenue. An administrative final decision or tax foreclosure is pending.pending;

·Levy of ISS on Leasing Operations – R$ 142: Tax assessment notices and/or tax foreclosures filed by municipalities alleging the ISS levy on leasing operations carried out in their territories;

·Levy of social security contributions on non-compensatory amounts – R$ 135: Administrative and judicial disputes on the portions, which, on the Company’s view, are not part of salary for purposes of social security contributions;

F-97
·ITR (Rural Land Tax) - R$ 64: refers to payment of ITR amounts related to farms, which were received as foreclosed assets with arbitrage of calculation basis due to failure to evidence that the portion of the land is a legal reserve;

·Requests for Offset of Debit and Credit Amounts not Granted – R$ 64: Requests to offset debit and credit amounts that were not granted due to formal issues or alleged lack of evidence of the net  credits. This issue is under discussions on the administrative level, and the Company has filed for defense and documents supporting the net credits;

·Required PIS and COFINS (taxes on revenues), as tax authorities understand the Company has omitted operating revenue from the assignment of usufruct of shares and units, recorded with respect to  the investments in permanent assets – R$ 32;

·Divergences Found in DCTFs (Declaration of Federal Contributions and Taxes) – R$ 12:  Required withholding income tax, arising from challenges, by Federal Revenue Service, related to divergences found in DCTF and allegedly missing payments.

Securities amounting to R$ 1,3891,061 (R$ 1,1261,389 at 12/31/2007)2008), escrow depositsEscrow Deposits amounting to R$ 1,6663,234 (R$ 1,1171,666 at 12/31/2007)2008) (Note 14), and property, plant and equipment with a carrying amount of R$ 794769 (R$ 976794 at 12/31/2007)2008), according to article 32 of Law No. 10,522/02 are pledged in guarantee of voluntary  appeals related to lawsuits with respect to contingent liabilities. As a result of the unconstitutionality lawsuit 1976, the Federal Supreme Court ruled unconstitutional the requirement of guarantees for voluntary appeals on April 10, 2007. The Bank is requesting to the Federal Revenue Service tothe release of those pledges.

The balance of amounts receivables arising from reimbursements of contingencies totals R$ 9401,114 (R$ 814940 at 12/31/2007)2008) (Note 14), basically represented by the guarantee in the Banerj privatization process occurred in 1997, in which the State of Rio de Janeiro created a escrow account to guarantee the potential payments under of civil, labor and tax contingencies.

 ·
Taxes payable and challenged in court by Itaú Unibanco Holding:: We filed lawsuits related to taxes in which we challenge the position of federal, state or municipal governments based on grounds of illegality and / or unconstitutionality. We recognized arecognize liability for the amounts due under the terms of the current law with respect to these lawsuits. The table below shows the changes in this provision and the respective escrow deposits:
F-98

Change in provision 2008  2007  2009  2008 
At the beginning of the year (Note 18)  5,433   3,824   6,155   5,433 
Balance arising from business combination  3,003     
Reclassification  (111)  - 
Changes in the period reflected in income  781   1,610   2,100   781 
Interest and monetary correction
  453   309   849   453 
Net increase  1,048   1,316   2,182   1,048 
Reversal  (720)  (15)  (931)  (720)
Payments  (59)  (1)  (4,810)  (59)
At the end of the year (Note 18)   6,155    5,433   6,337   6,155 
Escrow deposits (Note 14)  3,721   3,009   4,127   3,721 

In November 2009, Itaú Unibanco Holding and its subsidiaries applied to the Fiscal Recovery Program (REFIS), established by Law n° 11,941/09 and Provisional Measure, N° 449/2009. REFIS has the purpose of allowing to settle tax debt through an special mechanism for paying and refinancing tax and social security liabilities. The general conditions of the effects of applying to REFIS include the possibility to pay amounts under REFIS in 180 monthly installments or in one single installment as well as reductions in the amounts of penalties and late payment interest. The application has resulted in a efect of R$ 291 in net income recognized during 2009.

Out of total payments of taxes payable and challenged in courts and Tax and Social Security contingencies of R$ 6,547 made during 2009 the amount of R$ 6,330 corresponds to payments made under the REFIS program. Additionally out of the reversal of R$ 941 during 2009 the amount of R$ 802 corresponds to reversal of penalties and interest of taxes payable for which we applied to the REFIS program (including those related to income tax and social contribution).
 
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The main natures of processes are described as follows:

·PIS and COFINS X Law No. 9,718/98 – R$ 3,228 – Assert3,972, asserting the right of paying contributions to PIS and COFINS on revenue, not adopting the provisions of Article 3, paragraph 1, of Law No. 9,718/98, which established the inappropriate extension of the calculation bases of these contributions. The corresponding escrow deposit totals R$ 586.872;

·IRPJ and CSLL – R$ 436, aimed at rejecting the requirement included in Regulatory Instruction No. 213, of October 7, 2002, in view of its illegality, since it determined the inclusion of equity in earnings of subsidiaries upon determination of taxable income and CSLL calculation basis, including the disposal of foreign investments. The corresponding escrow deposit totals R$ 389;

·CSLL – R$ 441, ensuring the right to pay CSLL at the rate of 9%, levied on legal entities in general, thereby rejecting the application of article 41 of Law No. 11,727, of June 24, 2008, which provides for a different rate (15%) for financial institutions and insurance companies, in view of the infraction to the principle of equality. The corresponding escrow deposit totals R$ 183;

·
PIS X Constitutional Amendments No. 10/96 and 17/97 – R$ 285, aimed at rejecting the levy of PIS, base don the principles of anteriority, anteriority over 90 days and non-retroactivity of Constitutional Amendments Nos. 10/96 and 17/97 and nonexistence of legislation for this period. Successively, aimed at paying PIS over the mentioned period based on Supplementary Law No. 7/70. The corresponding escrow deposit totals R$ 68;

·INSS X Supplementary Law 84/96 and Additional rate of 2.5% – R$ 226 – Aimed255, aimed at rejecting the levy of social security contribution at 15%, as well as an additional rate of 2.5%, on compensation paid to service providers that are individuals and managers, set forth by Supplementary Law No. 84/96, in view of its unconstitutionality, as this contribution has the same taxable year and income tax calculation basis, going against the provisions of Articles 153, item III, 154, item I, 156, item III and 195, paragraph 4, of Federal Constitution. The corresponding escrow deposit totals R$ 181.280;

·PIS X Constitutional Amendments Nos. 10/96 (January 1996 to June 1996) and 17/97 (July 1997 to February 1998) – R$ 336 – Aimed at rejecting the levy of PIS, based on principles of anteriority over 90 days and not retroactive of Constitutional Amendments Nos. 10/96 and 17/97 and nonexistence of legislation for this period. Successively, aimed at paying PIS over the mentioned period based on Supplementary Law No. 7/70. The corresponding escrow deposit totals R$ 32.
F-99

According to the opinion of the legal advisors, Itaú Unibanco Holding is not involved in any other administrative proceedings or lawsuits that may significantly affect its consolidated financial position.

c)  Other commitments

Itaú Unibanco Holding leases many properties, for use in its operations, under standard real estate leases that normally can be cancelled at its option and include renewal options and escalations clauses. No lease agreement imposes any restriction on our ability to pay dividends, engage in debt or equity financing transactions, or enter into further lease agreements.

Minimum payments of services provided by third parties and rents according to operating and capital lease agreements which initial and remaining lease terms cannot be cancelled for one year as of December 31, 20082009 are as follows:

2009 934 
2010 828   752 
2011 757   632 
2012 723   535 
2013  401 
2014  327 
Thereafter  2,541   745 
Total minimum payments required  5,783   3,392 

Total rental expense was R$ 795, R$ 394 and R$ 350 and R$ 300 for the years ended December 31, 2009, 2008 2007 and 2006.2007.

 
F-82F-100
 


NOTE 31 – REGULATORY MATTERS

Itaú Unibanco Holding is subject to regulation by the Central Bank which issues directions and instructions regarding currency and credit policies for financial institutions operating in Brazil. The Central Bank also determines minimum capital requirements, fixed assets limits, lending limits, accounting practices and compulsory deposit requirements, and requires banks to comply with regulation based on the Basel Accord as regards to capital adequacy. Furthermore, the SUSEP issues regulations which affect our insurance, private retirement plans and capitalization operations.

The Basel Accord requires banks to have a ratio of capital to risk-weighted assets of a minimum of 8%. At least half of total capital must consist of Tier I Capital. Tier I, or core capital, includes equity capital less certain intangibles. Tier II Capital includes, subject to certain limitations, asset revaluation reserves, general loan loss reserves and subordinated debt, and is limited to the amount of Tier I Capital. However, Brazilian banking regulations (a) require a minimum capital ratio of 11%, (b) as from  December 2008, permit  to be considered as Tier I Capitalthe accretion of the amountan additional allowance for loan and lease losses that exceedsto the mandatory allowance computed based on minimum percentages establishedset forth by the Central Bank of Brazil ,  and that is considered as Tier I Capital, (c)specify different risk-weighted categories,   (d)   impose the following deductions from  Tier I Capital:  (i) deferred permanent assets, less goodwill paid on acquisition of investments, (ii) balance of unrealized gains and losses arising from adjustment to market value of securities classified as "available-for-sale securities" and derivative financial instruments used to hedge cash flow, which are considered as Tier II Capital, and (iii) deferred tax assets, which expected realization is after five years from the evaluation date, and the exclusion was progressive, i.e. 20% in January 2004 to 100% in January 2008, and (e) they also determined the following deductions from Capital: (i) investments in financial instruments which are part of the Regulatory Capital of other institutions authorized to operate by the Central Bank, (ii) the amount corresponding to offices or interests in a foreign financial institution in relation to which the Central Bank does not have access to information, data and documents sufficient for consolidated supervision purposes, and (iii) possible surplus in fixed assets over the limits imposed by the Central Bank.  As from January 2008, the other deferred tax assets cannot represent more than 40% of the Tier I Capital, and this percentage will be gradually reduced until 10% as from January 2011. The surplus shall also be deducted from the Tier I Capital.

In December 2009 the Central Bank revoked, as from April 2010, the permission for accretion of the additional allowance for loan losses mentioned in item (b) of the foregoing paragraph.

In accordance with Central Bank rules, banks couldcan calculate compliance with the minimum requirement on the financial institutions on a consolidated basis (considering only the institutions regulated by the Central Bank, including branches and investments abroad). Brazilian banks are also required to calculate compliance with the minimum requirement on a full consolidated basis (considering all entities owned by Itaú Unibanco, Holding, regardless of whether they are regulated by the Central Bank or not). We currently measure compliance on both a financial institution consolidation basis (partial) and on a full consolidation basis.

ConsideringBased on the business combination with Unibanco, as described in Note 3.a as from November 2008, we submitpresent the information on minimum capital requirements for Itaú and Unibanco, on a combined basis for Itaú and Unibanco. For that reason, we have discontinued to present to the Central Bank information on minimum regulatory requirements only for  Itaú Unibanco Holding S.A. and the information below is presented on a combined basis for Itaú and Unibanco.basis.

The following table presents, as of December 31, 20082009 and 2007, as reported to the Central Bank2008, the minimum capital required in accordance with Central Bank rules, the regulatory capital for purposes of computing the capital to risk-weighted assets, the capital to risk-weighted assets ratio, and the excess of our regulatory capital as compared to the minimum required, both on a financial institution consolidation basis and on a full consolidation basis. The capital to risk-weighted assets ratio below takes into accountalready reflects the effects of the acquisition of Unibancomerger agreement with UNIBANCO as if it would havehad occurred as ofon December 31, 2008. The comparative information for 2007 corresponds to Itaú Unibanco Holding and, as a result, it may not be directly comparable with the information in 2008.
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  Not audited 
  
Financial institutions
(partial consolidation)
  Full consolidation 
  2009  2008  2009  2008 
Regulatory capital            
Tier 1  55,624   50,926   57,706   52,156 
Tier 2  12,837   15,916   12,837   15,926 
Other deductions required by Central Bank  (28)  (76)  (28)  (87)
Total  68,433   66,766   70,515   67,995 
Minimum regulatory capital required  44,299   45,519   46,513   45,820 
Capital to risk-weighted assets ratio - %  17.0   16.1   16.7   16.3 
Excess of regulatory capital over minimum regulatory capital required  24,134   21,247   24,002   22,175 

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Unaudited
 
  
Financial institution (partial
consolidation)
  
Full consolidation
 
    
2008
  
2007
  
2008
  
2007
 
Regulatory capital            
Tier I  50,926   29,455   52,156   29,611 
Tier II  15,916   7,720   15,926   7,721 
Other deductions required by Central Bank  (76)  (237)  (87)  (237)
Total  66,766   36,938   67,995   37,095 
Minimum regulatory capital required  45,519   21,685   45,820   22,850 
Capital to risk-weighted assets ratio - %  16.1   18.7   16.3   17.9 
Excess of regulatory capital over minimum regulatory capital required  21,247   15,253   22,175   14,245 

The Central Bank also limits the amount of investments in unconsolidated companies, premises and equipment and intangible assets maintained by Itaú Unibanco to 50% of the stockholders' equity on both a financial institution consolidation and a full consolidation basis. At December 31, 20082009 and 2007,2008, our indices and the excess of capital in relation to the maximum fixed assets ratio were as follows:

 Unaudited  
Not audite d
 
 
Financial institution (partial
consolidation)
  Full consolidation  
Financial institutions
(partial consolidation)
  Full consolidation 
 2008  2007  2008  2007  2009  2008  2009  2008 
Our fixed assets ratio - %  39.6   23.8   14.4   13.8   32.9   39.6   15.4   14.4 
Capital excess in relation to fixed assets ratio  6,942   9,674   24,170   13,408   11,711   6,942   24,397   24,170 

 
F-84F-102
 


NOTE 32 – BUSINESS SEGMENT INFORMATION

In the first quarter 2009, after the acquisition of Unibanco, the segmentation of Itaú Unibanco net income was presented using a new model, arising from the restructuring of operating processes in our organization. We now disclose four operational segments: Commercial Bank, Itaú BBA, Consumer Credit, and Corporation and Treasury.

For comparison purposes, we have also presented all segment financial information for the years ended December 31, 2008 and 2007 based on the current segments basis.

We are a banking institution that offers its clients a wide range of financial products and services. Our current business segments are described below.below:

Itaú Unibanco – Commercial Bank

Our Commercial Bank segment provides a broad range of banking services to a diversified client base of individuals and companies, among which are the following: retail clients (individuals and very small companies), high net worth clients, private banking clients, and small and middle-sized companies.
The products and services provided by the Commercial Bank include insurance, private retirement and capitalization plans, credit cards, asset management, loans, among others. The segment provides solutions specifically developed to meet the demand of clients, devising marketing strategies appropriate to each of the different profiles and using the most convenient distribution channels. Accordingly, we are constantly seeking to increase the number of products used by clients, diversifying our sources of income. The segment is an important source of funding to our operations and provide significant interest income and banking services.

Itaú Unibanco - Banking
Itaú BBA

Our Banking segment providesresponsible for banking operations of large companies and investment banking services to individuals and micro, small and medium-sized companies. Under the segment we provideis named Itaú BBA. Itaú BBA offers a wide range of products and services through multiple delivery channels, including specialized operational structures that operate across legal entities. The operations of this segment are mostly performed in Brazil and correspond to the most significant sourcemajor economic groups of Brazil. The management model of Itaú BBA is focused on the development of close relationships with its clients, gaining a deep knowledge of their needs and providing customized solutions. The investment banking activities comprise the provision of funds to the corporate segment that are raised through fixed and variable income for Itaú Unibanco Holding. Moreover, the segment’s net income is also impacted by a significant contributioninstruments. In addition, it performs activities of gainsmergers and losses of Banco Itaú Europa.
acquisitions.

Itaú Unibanco - Insurance, private retirement plans and capitalization plans
– Consumer Credit

We provideThe Consumer Credit segment is responsible for the development of our strategy of increasing the range of financial products and services in thisbeyond the universe of clients who are account holders. Thus the consumer credit segment through specialized companiescomprises vehicle financing services provided by units other than the branch network, credit cards to clients who are account holders, and credit to the low income population. The business structure of the vehicle financing operation is supported by : new, used, heavy vehicles and motorcycles. The merger of the operations of Itaú and Unibanco showed a strong complementarity of businesses, a competitive advantage that include Itausegwe are increasing by intensifying the combined operations, exchanging expertise between teams and otherseeking a higher operational efficiency. The credit approval process of vehicle operations is based on scoring models that provides the quick approval for credit proposals from our consolidated subsidiaries which are managed on an integrated basis by Itauseg.clients, using the Internet to process these proposals with security and efficiency.

Itaú Unibanco – Corporate and Treasury

Our productsCorporate and services are focused on automobile, life,Treasury segment basically shows the interest income associated with our capital surplus, subordinated debt surplus and propertycarryforwards of the net balance of tax credits and casualty insurance. Within this segment, we also provide private retirement plans,debits, as well as capitalization plans, a popular investment instrumentthe net interest income from the trading of financial assets through proprietary positions (desks), management of currency gaps, rates and other risk factors, arbitration opportunities in Brazil by which a customer depositing a fixed sumthe foreign and domestic markets, and mart to market of money is eligible to take part in a periodic draw for cash prizes and has the right to redeem the invested amount plus accrued financial charges at maturity. We provide such services mainly through Itaú Vida and Cia Itaú de Capitalização, respectively. We also provide management services to private retirement plan companies, including for the development, maintenance, control and processing of managerial accounting systems.assets.

Itaú Unibanco - Credit Cards (account holders)
Considering the specific characteristics of credit cards, we manage this business as a specific segment.

We provide traditional credit card services to our customers through our consolidated subsidiary, Banco Itaucard S.A..

 
F-85F-103
 


Itaú Unibanco - Asset Management and Investment Services
 
We consider the following services and products as part of our asset management segment: fund management, portfolio management, brokerage services and custody services.

Services are provided by branches and other channels of the Banking segment and certain specialized companies, mainly Itaú Corretora de Valores S.A..

Banco Itaú BBA

Our Itaú BBA segment is responsible for serving corporate customers and manages most of the corporate loan portfolio of Itaú Unibanco Holding. Itaú BBA has a specialized structure focused on serving critical needs of big corporations. This segment also provides services outside Brazil, mostly limited to serve needs of our Brazilian clients with operations abroad.

Itaucred

Our Itaucred business unit is responsible for serving non-account holder clients who carry out consumer credit transactions. This business unit is basically composed of three segments: Taií (which comprises consumer credit transactions and payroll advance loans), Vehicle Financing and Credit Card transactions.

The creation of these segments is linked to the recent investments and to the new strategic initiatives undertaken by us, represented by Taií, the partnership with CBD and LASA, investments in Banco Fiat and Intercap, increase in the interest in Banco Credicard S.A. and payroll advance loans, among others.

F-86


2008
 
2009
2009
 
 
Itaú
Unibanco
 
Itaú BBA
 
Itaucred
 
Corporation
 
Consolidated
segments
on a management
reporting basis (*)
 
Adjustments and
reclassifications
 
Consolidated
US GAAP
  
Commercial
Bank
  
Itaú BBA
  
Consumer
Credit
  
Corporation
and Treasury
  
Consolidated
segments
on a management
reporting basis (*)
  
Adjustments and
reclassifications (****)
  
Consolidated
US GAAP
 
• Net interest income with clients  13,141 2,311 5,819 768 22,043 (22,043)- 
• Net interest income with the market  1,628 840 - - 2,468 (2,468)- 
• Net interest income  14,769 3,151 5,819 768 24,511 (3,370)21,141 
Net interest income with clients  22,316   4,075   10,767   -   37,158   (37,158)  - 
Net interest income with corporation  1,934   -   -   (1,934)  -   -   - 
Net interest income with the market  -   -   -   5,621   5,621   (5,621)  - 
Net interest income  24,250   4,075   10,767   3,687   42,779   (2,088)  40,691 
Allowance for loan and lease losses  (4,091)(454)(2,696)- (7,241)(2,120)(9,361)  (8,856)  (1,150)  (5,786)  1,627   (14,165)  (1,207)  (15,372)
Income from insurance premiums, income on private retirement plans and on capitalization plans, net  1,260 - 77 - 1,338 (722)616   2,238   1   82   111   2,432   (752)  1,680 
Fee and commission income  8,059 640 1,586 - 10,295 (1,354)8,941   8,219   1,491   5,557   (40)  15,227   (1,748)  13,479 
Non-interest expenses (**)  (12,410)(962)(2,519)(76)(15,965)(4,745)(20,710)  (17,089)  (1,474)  (6,456)  (787)  (25,806)  (10,036)  (35,842)
Equity in earnings (losses) of unconsolidated companies, net and net gain on transactions of foreign subsidiaries  - 13 - 169 181 2,231 2,412 
Equity in earnings (losses) of unconsolidated companies, and net gain on transactions of foreign subsidiaries  -   2   -   176   178   (3,577)  (3,399)
Trading income (losses)  - - - - - (2,843)(2,843)  -   -   -   -   -   9,284   9,284 
Net gain (loss) on sale of available-for-sale securities  - - - - - (114)(114)  -   -   -   -   -   211   211 
Net gain (loss) on foreign currency transactions  - - - - - 1,059 1,059 
Net gain on foreign currency transactions  -   -   -   -   -   2,619   2,619 
Tax expenses for ISS, PIS and COFINS  (1,269)(204)(500)(196)(2,169)2,169 -   (1,954)  (287)  (1,014)  (212)  (3,467)  3,467   - 
Other non-interest income  606 (48)116 33 692 1,711 2,403   717   (129)  122   12   722   9,388   10,110 
Income before taxes and minority interest  6,925 2,136 1,884 697 11,642 (8,098)3,544 
Income before taxes and noncontrolling interest  7,525   2,529   3,272   4,574   17,900   5,561   23,461 
Taxes on income  (1,876)(582)(559)17 (3,000)4,334 1,334   (2,067)  (527)  (921)  (1,335)  (4,850)  (3,999)  (8,849)
Profit sharing  (527)(164)(59)- (750)750 -   (1,079)  (289)  (146)  (181)  (1,695)  1,695   - 
Minority interest  - - - (174)(174)145 (29)
Net income  4,522 1,390 1,266 541 7,718 (2,869)4,849   4,379   1,713   2,205   3,058   11,355   3,257   14,612 
Noncontrolling interest  -   -   -   (864)  (864)  337   (527)
Net income attributable to Itaú Unibanco  4,379   1,713   2,205   2,194   10,491   3,594   14,085 
Identifiable assets (***)  358,158 139,007 52,315 11,110 450,693 (49,318)401,375   424,079   153,086   74,538   56,121   608,273   (9,185)  599,088 
(*) The results byresult per segment disclosedshown above is presented following our manageraialon managerial basis for the disclosure of reporting.this report. Such information excludesexclude certain results consideredwhich are considering non-recurring by our management that, whilealthough excluded for managerial purposes, they have beenwere recognized in our financial statements prepared in accordance withaccording to the accounting practicespractice adopted in Brazil. The amounts of thosethese results nowhich were not considered in the segment information above are as follows:are: (i) recognitionsetting-up of allowancea provision for loans losses in excess of the minimum amount recquired by BACEN (R$ 3,089 milion), (ii) recognition of provision forloan losses arising from the economic plans establishedthat were in effect during the 1980's (R$ 174 milion), (iii)R$ (191) million; (ii) gain on salesales of interests in unconsolidated companies (R$233 milion), (iv) effect in equity in income on our investment in BPI of the sale of interest and impairment of investment by BPI on Banco Comercial Português (R$ 29 milion), (v)R$ (228) million; (iii) amortization of goodwill  (R$ 223 milion), (vi) gain recognized under accounting practices adoptedR$ (390) million; (iv) recognition of the impact arising from the amendment in Brazilthe strategic partnership between Itau Unibanco and Companhia Brasileira de Distribuição R$ (363) million; (v) provision for expenses for the transaction with Unibanco (R$ 5,183 milion), (vii) recognitionprogram on cash or installment payment of integration and reestructuring provisions and other effects related with the transaction with Unibanco (R$ 2,302 milion), (viii) net income of Unibanco for the fourth quarter of 2008 (R$ 652 milion), and (ix) other non-recourring events (federal taxes R$ 166 milion).(292) million.
 
(**) Includes salaries and employee benefits, administrative expenses, depreciation of premises and equipment, amortization of intangible assets and other non-interest expenses, except for taxes on services (ISS) and certain taxes on revenue (PIS and COFINS).
 
(***) The balance of identifiable assets corresponds to the balance of the segment total assets (Current assets, Long-term assets and Permanent assets). The consolidated segment does not represent the total amount of each segment due to the intercompany transactions which were eliminated in the financial statements.
(****) Information on managerial basis differs with respect to the information in the consolidated statement of income as follows: (i) line items are different between the two sets of information, and (ii) results are measured on different basis. As explained above managerial basis of information is the information under accounting practices adopted in Brazil except for the exclusion of certain items described in (*). The most significant differences in the measurement of net income between the managerial basis and US GAAP corresponds to the following items which are presented net of tax effect:
(a) reversal of allowance for loan losses as compared to the amount recognized under BR GAAP for R$ 468 million, (b) under BR GAAP goodwill has been amortized for the amount of R$ 543 million, (c) under US GAAP a remeasurement gain has been recognized for the equity interest in Redecard of R$ 2,717 million and a gain on exchange of insurance operations in the amount of R$ 562 million, (d) a bargain purchase gain has been recognized amounting to R$ 830 million under US GAAP, (e) under US GAAP intangible assets corresponding to business acquired are amortized for an amount of R$ (1,611) million, (f) foreign exchange loss on available for sale securities and translation of subsidiaries abroad is not recognized in income for US GAAP and amounted to R$ 1,583 million, (g) stock option expense under US GAAP is higher than under BR GAAP for R$ (502) million, and (h) other difference in measurement criteria amounting to R$ (996) million.

 
F-87F-104
 

2008 
Itaú Unibanco 
  Banking  
Credit Cards –
Account Holders
  
Insurance, Private
Retirement and
Capitalization
Plans
  
Asset Management
and Investment
Services
  Total 
• Net interest income with clients  11,391   1,438   312   -   13,141 
• Net interest income with the market  1,544   -   84   -   1,628 
Net interest income  12,935   1,438   396   -   14,769 
Allowance for loan and lease losses  (3,604)  (487)  -   -   (4,091)
Income from insurance premiums, income on private retirement plans and on capitalization plans, net  70   40   1,150   -   1,260 
Fee and commission income  3,974   1,700   374   2,010   8,059 
Transfer to Banking – revenues for branches selling mutual funds  707   -   -   (707)  - 
Non-interest expenses  (9,194)  (1,679)  (785)  (752)  (12,410)
Tax expenses for ISS, PIS and COFINS  (823)  (212)  (107)  (128)  (1,269)
Other non-interest income  466   96   44   -   606 
Income before taxes and minority interest  4,530   898   1,073   424   6,925 
Taxes on income  (1,115)  (290)  (326)  (144)  (1,876)
Profit sharing  (336)  (36)  (15)  (140)  (527)
Net income  3,078   571   732   140   4,522 
Identifiable assets  313,728   11,296   33,134   -   358,158 
F-88


2008 
Itaucred 
  Vehicles Financing  
Credit Cards – Non-
Account Holders
Clients
  Taií  Total 
• Net interest income with clients  3,388   1,527   904   5,819 
Net interest income  3,388   1,527   904   5,819 
Allowance for loan and lease losses  (1,501)  (691)  (503)  (2,696)
Income from insurance premiums, income on private retirement plans and on capitalization plans, net  29   45   3   77 
Fee and commission income  711   643   232   1,586 
Non-interest expenses  (971)  (925)  (623)  (2,519)
Tax expenses for ISS, PIS and COFINS  (288)  (118)  (94)  (500)
Other non-interest income  63   7   46   116 
Income before taxes and minority interest  1,431   487   (34)  1,884 
Taxes on income  (429)  (154)  24   (559)
Profit sharing  (26)  (17)  (16)  (59)
Net income  975   316   (26)  1,266 
Identifiable assets  43,227   4,840   4,247   52,315 
F-89


2008
 
  
Commercial
Bank
  
Itaú BBA
  
Consumer
Credit
  
Corporation  + Treasury
  
Consolidated
segments
on a management
reporting basis (*)
  
Adjustments and
reclassifications
  
Consolidated
US GAAP
 
Net interest income with clients  14,023   2,694   5,819   772   23,308   (23,308)  - 
Net interest income with the market  -   -   -   1,203   1,203   (1,203)  - 
Net interest income  14,023   2,694   5,819   1,975   24,511   (3,370)  21,141 
Allowance for loan and lease losses  (4,091)  (454)  (2,696)  -   (7,241)  (2,120)  (9,361)
Income from insurance premiums, income on private retirement plans and on capitalization plans, net  1,260   -   78   -   1,338   (722)  616 
Fee and commission income  8,069   640   1,586   -   10,295   (1,354)  8,941 
Non-interest expenses (**)  (12,410)  (962)  (2,519)  (74)  (15,965)  (4,745)  (20,710)
Equity in earnings (losses) of unconsolidated companies, and net gain on transactions of foreign subsidiaries  -   13   -   168   181   2,231   2,412 
Trading income (losses)  -   -   -   -   -   (2,843)  (2,843)
Net gain (loss) on sale of available-for-sale securities  -   -   -   -   -   (114)  (114)
Net gain on foreign currency transactions  -   -   -   -   -   1,059   1,059 
Tax expenses for ISS, PIS and COFINS  (1,269)  (204)  (500)  (196)  (2,169)  2,169   - 
Other non-interest income  591   (48)  116   33   692   1,711   2,403 
Income before taxes and noncontrolling interest  6,173   1,679   1,884   1,906   11,642   (8,098)  3,544 
Taxes on income  (1,623)  (426)  (559)  (392)  (3,000)  4,334   1,334 
Profit sharing  (527)  (164)  (59)  -   (750)  750   - 
Net income  4,023   1,089   1,266   1,514   7,892   (3,014)  4,878 
Noncontrolling interest  -   -   -   (174)  (174)  145   (29)
Net income attributable to Itaú Unibanco  4,023   1,089   1,266   1,340   7,718   (2,869)  4,849 
Identifiable assets (***)
  358,158   139,007   52,315   11,110   450,693   (49,318)  401,375 
2007
 
  
Itaú
Unibanco
  
Itaú BBA
  
Itaucred
  
Corporation
  
Consolidated
segments
on a management
reporting basis (*)
  
Adjustments and
reclassifications
  
Consolidated
US GAAP
 
• Net interest income with clients  11,285   1,286   4,905   675   18,152   (18,152)  - 
• Net interest income with the market  1,551   654   -   -   2,204   (2,204)    
Net interest income  12,836   1,940   4,905   675   20,356   976   21,332 
Allowance for loan and lease losses  (3,191)  47   (1,963)  -   (5,108)  (434)  (5,542)
Income from insurance premiums, income on private retirement plans and on capitalization plans, net  1,148   -   71   -   1,219   (228)  991 
Fee and commission income  7,900   670   1,681   (78)  10,173   (2,341)  7,832 
Non-interest expenses (**)  (10,664)  (845)  (2,344)  (141)  (13,994)  (4,524)  (18,518)
Equity in earnings (losses) of unconsolidated companies, net and net gain on transactions of foreign subsidiaries  -   5   -   266   272   (767)  (495)
Trading income (losses)  -   -   -   -   -   1,955   1,955 
Net gain (loss) on sale of available-for-sale securities  -   -   -   -   -   (183)  (183)
Net gain (loss) on foreign currency transactions  -   -   -   -   -   83   83 
Tax expenses for ISS, PIS and COFINS  (1,245)  (160)  (421)  (145)  (1,971)  1,971   - 
Other non-interest income  336   (5)  58   131   521   3,802   4,323 
Income before taxes and minority interest  7,120   1,652   1,987   711   11,469   309   11,778 
Taxes on Income  (2,156)  (391)  (667)  (155)  (3,368)  (779)  (4,147)
Profit sharing  (581)  (123)  (33)  (6)  (744)  744   - 
Minority interest  -   -   -   (178)  (178)  180   2 
Extraordinary item  -   -   -   -   -   29   29 
Net income  4,383   1,138   1,287   372   7,179   483   7,662 
Identifiable assets (***)
  242,545   108,652   40,584   12,519   294,876   (15,070)  279,806 

(*) The results byresult per segment disclosedshown above is presented following ouron managerial basis for the disclosure of reporting.this report. Such information excludesexclude certain results consideredwhich are considering non-recurring by our management that, whilealthough excluded for managerial purposes, they have beenwere recognized in our financial statements prepared in accordance withaccording to the accounting practicespractice adopted in Brazil. The amounts of thosethese results nowhich were not considered in the segment information above are as follows: are:
(i) salerecognition of some of our interest held in Serasa, Redecard, Bovespa and BM&F (R$ 2,763 million); (ii) set-up of an allowance for loan an leaseloans losses in excess of the minimum requiredamount recquired by BACEN (R$ 400 million); (iii) adjustments provided for by the agreement for the acquisition of Itaú BBA made with its former controlling shareholders (R$ 124 million); (iv) gains on the saleR$(3,089) million, (ii) recognition of the former headquarters of  BankBoston (R$ 114 million); (v) set-up of a provision for losses arising from the economic plans that wereestablished in 1980's of R$(174) million, (iii) gain on sale of interests in unconsolidated companies of R$233 million, (iv) effect duringin equity in income on our investment in BPI of the 80’s (R$ 312 million);sale of interest and (vi) expenseimpairment of investment by BPI on the fullBanco Comercial Português of R$(29) million, (v) amortization of goodwill paidof R$(223) million, (vi) Effects of the adoption of Law No. 11,638 of R$(136) million, (vii) gain recognized under accounting practices adopted in Brazil for the acquisitionstransaction with Unibanco of BankBoston InternationalR$5,183 million, (viii) recognition of integration and BankBoston Trust Company Limited – byreestructuring provisions of R$(888) million, (ix) Equalization of accounting criteria related with the subsidiaries Banco Itaú Europa and Banco Itaú Europa Luxembourg –transaction with Unibanco of R$(1,414) million, (x) net income of Unibanco for the sharesfourth quarter of Banco BPI2008 of R$652 million, and Delle Holding  (R$ 86 million).(xi) other non-recurring events of R$(30) million.

(**) Includes salaries and employee benefits, administrative expenses, depreciation of premises and equipment, amortization of intangible assets and other non-interest expenses, except for taxes on services (ISS) and certain taxes on revenue (PIS and COFINS).

(***) The balance of identifiable assets corresponds to the balance of the segment total assets (Current assets, Long-term assets and Permanent assets). The consolidated segment does not represent the total amount of each segment due to the intercompany transactions which were eliminated in the financial statements.

 
F-90F-105
 


20072007 
2007
 
Itaú Unibanco 
 Banking  
Credit Cards –
Account Holders
  
Insurance, Private
Retirement and
Capitalization
Plans
  
Asset Management
and Investment 
Services
  Total  
Commercial Bank
  
Itaú BBA
  
Consumer
Credit
  
Corporation
and Treasury
  
Consolidated
segments
on a management
reporting basis (*)
  
Adjustments and
reclassifications
  
Consolidated
US GAAP
 
• Net interest income with clients  9,569   1,203   513   -   11,285 
• Net interest income with the market  1,551   -   -   -   1,551 
Net interest income with clients  11,998   1,590   4,905   676   19,169   (19,169)  - 
Net interest income with the market  -   -   -   1,187   1,187   (1,187)  - 
Net interest income  11,120   1,203   513   -   12,836   11,998   1,590   4,905   1,863   20,356   976   21,332 
Allowance for loan and lease losses  (2,824)  (367)  -   -   (3,191)  (3,191)  46   (1,963)  -   (5,108)  (434)  (5,542)
Income from insurance premiums, income on private retirement plans and on capitalization plans, net  59   43   1,046   -   1,148   1,148   -   71   -   1,219   (228)  991 
Fee and commission income  3,858   1,585   303   2,154   7,900   7,900   670   1,681   (78)  10,173   (2,341)  7,832 
Transfer to Banking – revenues for branches selling mutual funds  835   -   -   (835)  - 
Non-interest expenses  (7,926)  (1,398)  (677)  (664)  (10,664)
Non-interest expenses (**)  (10,664)  (845)  (2,344)  (141)  (13,994)  (4,524)  (18,518)
Equity in earnings (losses) of unconsolidated companies, and net gain on transactions of foreign subsidiaries  -   5   -   267   272   (767)  (495)
Trading income (losses)  -   -   -   -   -   1,955   1,955 
Net gain (loss) on sale of available-for-sale securities  -   -   -   -   -   (183)  (183)
Net gain on foreign currency transactions  -   -   -   -   -   83   83 
Tax expenses for ISS, PIS and COFINS  (824)  (187)  (111)  (123)  (1,245)  (1,245)  (160)  (421)  (145)  (1,971)  1,971   - 
Other non-interest income  243   61   33   -   336   338   (5)  58   131   522   3,801   4,323 
Income before taxes and minority interest  4,540   940   1,107   533   7,120 
Income before taxes and noncontrolling interest  6,284   1,301   1,987   1,897   11,469   309   11,778 
Taxes on income  (1,263)  (315)  (373)  (205)  (2,156)  (1,871)  (272)  (667)  (558)  (3,368)  (779)  (4,147)
Profit sharing  (407)  (35)  (15)  (124)  (581)  (581)  (123)  (33)  (7)  (744)  744   - 
Excess of net assets purchased over purchase price  -   -   -   -   -   29   29 
Net income  2,870   590   719   204   4,383   3,832   906   1,287   1,332   7,357   305   7,662 
Identifiable assets  205,892   9,109   27,543   205,892   242,545 
Noncontrolling interest  -   -   -   (178)  (178)  180   2 
Net income attributable to Itaú Unibanco  3,832   906   1,287   1,154   7,179   485   7,664 
Identifiable assets (***)
  242,545   108,652   40,584   12,519   294,876  (15,070)  279,806 
F-91


2007 
Itaucred 
  Vehicles Financing  
Credit Cards – Non-
Account Holders
Clients
  Taií  Total 
• Net interest income with clients  2,731   1,296   878   4,905 
Net interest income  2,731   1,296   878   4,905 
Allowance for loan and lease losses  (938)  (568)  (457)  (1,963)
Income from insurance premiums, income on private retirement plans and on capitalization plans, net  9   57   4   71 
Fee and commission income  869   598   214   1,681 
Non-interest expenses  (832)  (852)  (659)  (2,344)
Tax expenses for ISS, PIS and COFINS  (237)  (95)  (90)  (421)
Other non-interest income  30   15   14   58 
Income before taxes and minority interest  1,632   451   (96)  1,987 
Taxes on income  (549)  (152)  34   (667)
Profit sharing  (22)  (4)  (7)  (33)
Net income  1,060   295   (68)  1,287 
Identifiable assets  32,336   4,115   4,132   40,584 


F-92


2006
 
  
Itaú
Unibanco
  
Itaú BBA
  
Itaucred
  
Corporation
  
Consolidated
segments 
on a management
reporting basis (*)
  
Adjustments and
reclassifications
  
Consolidated
US GAAP
 
                      
• Net interest income with clients  10,273   1,228   3,440   413   15,354   (15,354)  - 
• Net interest income with the market  749   855   -   -   1,605   (1,605)  - 
Net interest income  11,022   2,082   3,440   413   16,959   85   17,043 
Allowance for loan and lease losses  (3,850)  79   (1,508)  (23)  (5,302)  155   (5,147)
Income from insurance premiums, income on private retirement plans and on capitalization plans, net  1,126   1   -   -   1,127   (311)  816 
Fee and commission income  7,271   529   1,305   (6)  9,099   (2,311)  6,788 
Non-interest expenses (**)  (9,249)  (774)  (2,095)  (235)  (12,353)  (3,045)  (15,398)
Equity in earnings (losses) of unconsolidated companies, net and net gain on transaction of foreign subsidiaries  -   -   -   183   183   266   449 
Trading income (losses)  -   -   -   -   -   2,136   2,136 
Net gain (loss) on sale of available-for-sale securities  -   -   -   -   -   283   283 
Net gain on foreign currency transactions  -   -   -   -   -   (139)  (139)
Tax expenses for ISS, PIS and COFINS  (1,239)  (131)  (322)  (92)  (1,784)  1,784   - 
Other non-interest income  344   112   76   93   625   993   1,618 
Income before taxes and minority interest  5,425   1,898   896   333   8,554   (104)  8,449 
Taxes on income  (1,261)  (426)  (232)  315   (1,604)  (830)  (2,434)
Profit sharing  (510)  (137)  (17)  (6)  (670)  670   - 
Minority interest  -   -   -   (85)  (85)  107   22 
Net income  3,654   1,335   647   557   6,195   (157)  6,037 
Identifiable assets (***)
  159,178   61,869   25,844   6,253   209,691   (9,521)  200,170 
(*) ResultsThe result per segment shown above is presented on managerial basis for the disclosure of this report. Such information exclude certain results which are considering non-recurring by segments reportedour management that, although excluded for managementmanagerial purposes, excludes non-recurring events relatedwere recognized in our financial statements prepared in according to the accounting practice adopted in Brazil. The amounts of these results which were not considered in the segment information above are:
(i) sale of some of our interest held in Serasa, Redecard, Bovespa and BM&F of R$ 2,763 million; (ii) set-up of an allowance for loan an lease losses in excess of the minimum required by BACEN to absorb delinquency levels increase due to an eventual financial stress scenario of R$(400) million); (iii) adjustments provided for by the agreement for the acquisition of BankBoston for a totalItaú BBA made with its former controlling shareholders of R$ 2,171 million, which are recognized(124) million; (iv) gains on the sale of the former headquarters of BankBoston of R$114 million; (v) set-up of a provision for losses arising from the economic plans that were in our statutory statementeffect during the 80’s R$(312) million); and (vi) expense on the full amortization of income.goodwill paid for the acquisitions of BankBoston International and BankBoston Trust Company Limited – by the subsidiaries Banco Itaú Europa and Banco Itaú Europa Luxembourg – for the shares of Banco BPI and Delle Holding R$(86) million.

(**) Includes salaries and employee benefits, administrative expenses, depreciation of premises and equipment, amortization of intangible assets and other non-interest expenses, except for taxes on services (ISS) and certain taxes on revenue (PIS and COFINS)Cofins).

(***) The balance of identifiable assets corresponds to the balance of the segment total assets (Current assets, Long-term assets and Permanent assets). The consolidated segment does not represent the total amount of each segment due to the intercompany transactions which were eliminated in the financial statements.



2006 
Itaú Unibanco 
  Banking  
Credit Cards -
Account Holders
  
Insurance, Private
Retirement and
Capitalization
Plans
  
Asset Management
and Investment
Services
  Total 
• Net interest income with clients  8,406   1,173   694   -   10,273 
• Net interest income with the market  749   -   -   -   749 
Net interest income  9,155   1,173   694   -   11,022 
Allowance for loan and lease losses  (3,418)  (432)  -   -   (3,850)
Income from insurance premiums, income on private retirement plans and on capitalization plans, net  209   -   917   -   1,126 
Fee and commission income  3,594   1,460   228   1,989   7,271 
Transfer to Banking - revenues for branches selling mutual funds  840   -   -   (840)  - 
Non-interest expenses  (6,839)  (1,184)  (662)  (564)  (9,249)
Tax expenses for ISS, PIS and COFINS  (833)  (189)  (114)  (103)  (1,239)
Other non-interest income  143   85   116   -   344 
Income before taxes and minority interest  2,851   913   1,179   482   5,425 
Taxes on income  (431)  (296)  (323)  (211)  (1,261)
Profit sharing  (359)  (46)  (13)  (92)  (510)
Net income  2,061   571   843   179   3,654 
Identifiable assets  130,733   6,393   22,052   -   159,178 
F-94


2006 
Itaucred 
  Vehicles Financing  
Credit Cards – Non-
Account Holders
Clients
  Taií  Total 
• Net interest income with clients  1,564   1,286   590   3,440 
Net interest income  1,564   1,286   590   3,440 
Allowance for loan and lease losses  (632)  (530)  (346)  (1,508)
Fee and commission income  582   593   130   1,305 
Non-interest expenses  (670)  (894)  (531)  (2,095)
Tax expenses for ISS, PIS and COFINS  (141)  (116)  (65)  (322)
Other non-interest income  29   36   11   76 
Income before taxes and minority interest  732   375   (211)  896 
Taxes on income  (208)  (109)  85   (232)
Profit sharing  (8)  (9)  -   (17)
Net income  516   257   (126)  647 
Identifiable assets  18,621   (4,191)  3,032   25,844 
F-95


Basis of presentation of business segment information

Business segment information is prepared based on the reports used by top management to assess the segments' performance and to make decisions regarding the allocation of funds for investment and other purposes.

OurThe top management of Itaú Unibanco Holding uses a variety of information for such purposes including financial and non-financial information and financial information measured on different bases including information prepared following accounting practices adopted in Brazil.

The segment information has been prepared based on information following accounting practices adopted in Brazil modified for the adjustments described below. Financial statements by segment differs from accounting practices adopted in Brazil because: (i) it includes recognition of the impact related to allocated capital using a proprietary model; (ii) it presents net interest income using a management criteria, and (iii) in 2006, 2007, 2008 and 2008,2009, it excludes non-recurring items which are recognized under accounting principles adopted in Brazil. The main impacts are:

Allocated Capital to each segment

Book value of stockholders' equity and subordinated debt were replaced by funding at estimated market price, and interest income and expense were allocated to different segments, based on Tier I Capital, following a proprietary model, the excess of capital and subordinated debt being allocated to the "Corporation" segment. The tax effects of interest on stockholders' equity payments of each segment have been subsequently reversed and reallocated to the segments in amounts proportional to the amount of the Tier I capital. Equity in earnings (losses) of unconsolidated companies which are not related to each segment, the results of minority interest and extraordinary results were allocated to the "Corporation" segment. Finally, revenues from Asset Management and Investment Services segment were adjusted according to the market's specific criteria and based on the type of customer service provided by the branches of the banking segment.

Net Interest Income

We adopt a strategy to manage the foreign exchange risk from investments abroad in order to economically hedge against impacts on results of operations arising from exchange variation. In order to achieve this objective, we used derivative instruments to hedge against foreign currency risk. We do not account for those derivatives under hedge accounting but we record them at fair value with gains and losses in income.

Our economic hedging strategy considers all tax effects: non taxation when the Real appreciates or deductibility when the Real devaluates, or the taxation or deductibility based on the derivative financial instruments. When the parity of the Real against foreign currencies is considerable, there is a significant impact on several financial statements items, particularly interest income and expense.

As result of the above, we adopt a managerial statement of income to prepare segment information, which highlights the impact of the exchange variation on investments abroad and the effects arising from hedging.information. The managerial statement of income is prepared by making reclassifications to the financial statements according to the accounting practices adopted in Brazil, mainly: (i) total exchange gains and losses on investments abroad, which are presented in several lines inBrazil. We reclassified the statement of income in Brazilian GAAP, are reclassified to interest income, and (ii) tax effects of the economic hedge of these investments, which are presented in tax expenses (PIS and COFINS) and Income Tax and Social Contribution on net income, are reclassified in the statement of income.

In addition, in 2009 the net interest income is divided into twothree categories as follows: (i) net interest income on banking operations – associated with commercial activities of clients – (ii) net interest income onwith the market, operations which includes the treasury – on which each operation includes the related cost of opportunity – and (iii) net interest income onwith the management of foreign exchange risks from investmentscorporation and treasury operations – in subsidiaries abroad – which corresponds toeach operations includes the CDI interest rate applied to the capital allocated to such investments.opportunity cost.

 
F-96F-107
 


In the Adjustments and Reclassifications column, we present the effect of not consolidating Redecard S.A.,. Moreover, this column shows the effects of differences between the accounting principles followed for the presentation of segment information, which are followssubstantially in line with the accounting practices adopted in Brazil, except as described above, and except for the non-recognition of items considered by management to be non-recurrent and excluded from managerial information, and the policies used in the preparation of these consolidated financial statements according to USGAAP. In this column we also present the effect of non-recurring items that are not considered in the managerial statement of income.

As described above,previously, our operations are primarily carried out in Brazil. However, we have some offices abroad, of which we highlight our operations in Europe, Argentina, Chile, Uruguay and Uruguay.Paraguay. The revenue from operations outside Brazil is presented below (after eliminations on consolidation).:

  2008  2007  2006 
Interest income  6,138   3,255   1,581 
Service fees and commission income  604   347   156 
Total revenue from external customers  6,742   3,602   1,737 
Investments in unconsolidated companies and premises and equipment, net  1,599   1,220   765 

F-97

  2009  2008  2007 
Net interest income  3,320    5,403    3,255 
Fee and commission income  627   604   347 
Total revenue from external customers  3,947   6,008   3,602 
Investments in unconsolidated companies and premises and equipment, net  1,420   1,601   1,220 

NOTE 33 - RELATED PARTIES

Our transactions with companies within the consolidation group are mainly carried out on market terms and completely eliminated on consolidation.

a) Transactions with unconsolidated entities

We present below the operations between Itaú Unibanco Holding and its consolidated subsidiaries with the entities accounted for following the equity method. The transactions between Itaú Unibanco Holding and its consolidated subsidiaries and the equity investees are mainly banking transactions carried out at the terms summarized below.below:

  2008  2007  2006 
ASSETS         
Dividends receivable         
Serasa S.A.  -   -   17 
Redecard S.A.  -   -   37 
LIABILITIES            
Non-interest bearing deposits            
Itaú XL  129   -   - 
Redecard S.A.  -   -   192 
Deposits received under securities repurchase agreements            
Olimpia  28   -   - 
  2009  2008  2007 
ASSETS         
Dividends receivable         
Unibanco Rodobens Administradora de Consórcios Ltda  15   -   - 
LIABILITIES            
Demand deposits            
Itaú XL Seguros Corporativos S.A.  54   129   - 
Tecnologia Bancária S.A.  3   -   - 
Unibanco Rodobens Administradora de Consórcios Ltda  43   -   - 
Time deposits            
Unibanco Rodobens Administradora de Consórcios Ltda  16   -   - 
CNF - Administradora de Consórcios Nacional Ltda  57   -   - 
Deposits received under securities repurchase agreements            
Olimpia Promoção e Serviços S.A.  26   28   - 
 
F-98F-108


b)   Transactions with other entities of the Itaúsa Group of companies

The table below presents balances and transactions between Itaú Unibanco Holding and other entities of the Itaúsa Group.

LIABILITIES 2009  2008  2007 
 2008  2007  2006          
LIABILITIES         
Demand deposits                  
ITH Zux Cayman Company Ltd.  55   -   -  41  55  - 
Duratex S.A.  32   -   -  18  32  - 
Interest-bearing deposits                        
Elekeiroz S.A.  38   22   -  11  38  22 
Annual interest (%) 101.50% of CDI  101.50% of CDI   -  100,00% of CDI  101,50% of CDI  101,50% of CDI 
Elekeiroz S.A.  21   -   -  -  21  - 
Annual interest (%) 101.50% of CDI   -   -  -  102% of CDI  - 
Itaúsa Empreendimentos S.A.  28   -   -  31  28  - 
Annual interest (%) 102.30% of CDI   -   -  101,10% of CDI  102,30% of CDI  - 
Itaúsa Empreendimentos S.A.  16   -   -  17  16  - 
Annual interest (%) 102% of CDI   -   -  100,80% of CDI  102% of CDI  - 
Duratex S.A.  39   10   -  -  39  10 
Annual interest (%) 102.37% of CDI  104.45 of CDI   -  -  102,37% of CDI  104,45% of CDI 
Securities purchased under resale agreements            
Itaúsa Empreendimentos S.A. 48   -   - 
Itaú Gestão de Ativos S.A. 1   -   - 
Trade notes payable                        
Itautec S.A.  7   8   16 
Itautec S.A. (1) 10  7  8 
Itaúsa Investimentos S.A. 73  -  - 
Other Liabilities - Payable to merchants for credit card transactions Redecard S.A. (2) ____________________________________
 -  4,564  4,159 
TRANSACTIONS (other than interest income and interest expense recognized in the financial transactions above)                     
Equipment and software purchase            
Service fees and commission income            
Itaúsa Investimentos S.A. 2  -  - 
Rent expenses            
Itaúsa Investimentos S.A. 1  -  - 
Equipment and software purchased            
Itautec S.A. (1)  324   125   112  396  324  125 
(1) Maintenance and services related to electronic equipment and software.

(2) Company consolidated as from March 2009, date of acquisition or control as described in Note 3.7..
F-109
c)   Other transactions with related parties

We have made no loans to our executive officers or directors because this practice is prohibited for all Brazilian banks by the Central Bank.Bank

ItaúItau Unibanco has made donations regularly to Fundação Itaú Social, a charitable foundation whose objectives are:

·Toto create the “Programa Itaú Social” (Itaú Social Program), aimed at coordinating activities of interest to the community, supporting and developing social, scientific and cultural projects, mainly in the elementary education and health care areas;areas
·Toto support ongoing projects or initiatives, sustained or sponsored by entities qualified under "Programa Itaú Social";
·Toto act as a supplier of ancillary services to the group companies.

In addition we rent buildings from Itaúsa, Fundação Itaubanco, FUNBEP and PREBEG.

Itaú Unibanco is the founding partner and maintainer of Instituto Itaú Cultural - IIC, an entity whose purpose is the promotion and preservation of the Brazilian cultural heritage.

F-99


The donations to both entities and services received from Fundação Itaú Social are presented below:

 2008  2007  2006  2009  2008  2007 
Donations by Itaú Unibanco to         
Donations by Itaú to         
Fundação Itaú Social  -   2   2   -   -   2 
Instituto Itaú Cultural  36   4   27   39   36   4 
Instituto Unibanco de Cinema  10   -   - 
Associação Clube "A"  1   -   - 
Rent expenses                        
Fundação Itaubanco  23   -   -   24   23   - 
FUNBEP - Fundo de Pensão Multipatrocinado  6   -   - 
Itautec S.A  1   -   - 
Service fees and commission income                        
Fundação Itaubanco  6   -   -   9   6   - 
FUNBEP - Fundo de Pensão Multipatrocinado  2   -   - 

F-100F-110


NOTENOTA 34 – STRATEGIC PARTNERSHIPSPARTNERSHIP

34.1 During the year ended December 31, 200831,2009

a)
a)Magazine Luiza S.A. (“Magazine Luiza”)

In November 2009, Itaú Unibanco Holding S.A. (“Itaú Unibanco”) signed an agreement with Magazine Luiza related to Luizacred S.A. Sociedade de Crédito, Financiamento e Investimento (“Luizacred”), a financial institution, which offers consumer’s finance and credit cards to the clients of Magazine Luiza.

Itaú Unibanco and Magazine Luiza hold 50% interest each in the total and voting capital of Luizacred.

Itaú Unibanco and Magazine Luiza agreed to extend the period of exclusivity, granted by Magazine Luiza to Luizacred, to December 31, 2029, pursuant to a payment of R$ 250.

The amount of R$ 250 paid to Magazine Luiza was recorded in Intangible Assets and will be amortized over the estimated useful life of 20 years, the term of the agreement.

b)Companhia Brasileira de Distribuição (“CBD”)

In August 2009, Itaú Unibanco Holding S.A. (“Itaú Unibanco”) signed an agreement with CBD related to Financeira Itaú CBD S.A. – Crédito, Financiamento e Investimento (“FIC”), a financial institution which holds the exclusive right to offer financial products and service to clients of CBD.

Itaú Unibanco and CBD hold 50% interest each in the total and voting capital of FIC.

Itaú Unibanco and CBD resolved to amend the FIC agreement, releasing Itaú Unibanco from the exclusivity obligation, pursuant to a payment of R$ 550.

The amount of R$ 550 was recorded in the consolidated income statement as Other Non-Interest Expenses.

Itaú Unibanco and CBD also agreed to extend the exclusivity term granted by CBD to FIC, to exploit the right granted by the FIC agreement terms for 5 years up to August 28, 2029, pursuant to a payment of R$ 50.

The amount of R$ 50 paid to CBD was recorded in Intangible Assets and will be amortized over the estimated useful life of 20 years, the term of the agreement.
F-111
34.2 Significant strategic partnerships occurred in prior years

c)Marisa S.A. (Marisa)

In October 2008, Itaú Unibanco Holding signed the “Partnership Agreement” (“agreement”a "partnership agreement" ("agreement") with Marisa, a retail store chain store specializingspecialized in women’swoman’s fashion goods,, for the acquisition of the exclusive right to offer, distribute, and market financial products and services to the clients of Marisa.

The investment of Itaú Unibanco Holding amounted tototaled R$ 120 whichand refers to the acquisition of suchsaid exclusive right for a term of 120 months.120-month period. We recorded the amount of R$ 120, paid to Marisa, as an intangible asset to be amortized over its estimated useful life of 120 months, i.e., for the term of the agreement. We allocated this intangible asset to the Banking Services segment of Banco Itaú Unibanco – Banking segment.Unibanco.

b) Lojas Americanas S.A. and BWU Comércio e Entretenimento S.A. (altogether referred as LASA) in relation to Blockbuster stores
d)Lojas Americanas S.A. and BWU Comércio e Entretenimento S.A. (jointly referred to as LASA) in relation to Lojas Blockbuster

In June 2008, Itaú Unibanco Holding signed the “Partnership Agreement”a “partnership agreement" (“agreement”agreement“) with LASA, for the acquisition, through FAI, of the exclusive right to offer, distribute, and market financial products and services to the clients of the Blockbuster stores,Lojas Brockbuster, which are wholly-ownedfully held by LASA.

The investment of Itaú Unibanco Holding amounted tototaled R$ 51 whichand it refers to the acquisition of thesaid exclusive right for a term of 240 months.240-month period. We recorded the amount of R$ 51, paid to LASA, as an intangible asset to be amortized over the term of the agreement. We allocated this intangible asset to the ItaucredNon-Accounting Holders – Credit cards – non-accountholder clients segment.Cards segment of Itaucred.

c)
e)Coelho da Fonseca Empreendimentos Imobiliários Ltda. (Coelho da Fonseca)

In April 2008, Itaú Unibanco Holding signed the “Partnership Agreement”a partnership agreement (“agreement”) with Coelho da Fonseca Empreendimentos Ltda., a real estate broker that provides real estate consulting and brokerage services, for the acquisition of the exclusive right to offer, distribute and market real estate financial products and services to the clients of Coelho da Fonseca, in the market of new and used real estate market for newly constructed and used properties.

The investment of Itaú Unibanco Holding amounts tototaled R$ 124, of which R$ 94 refers to the acquisition of the exclusive right to offer and promotepromotion of real estate financial products and services to the clients of Coelho da Fonseca for a term of 124 months124-month period, and R$ 30 refers to marketingadvertising expenses, which willshall be paid and expensedrecorded as expense over the term of the agreement, as well as the marketingadvertising expenses to be incurred by Coelho da Fonseca.

We recorded the amount of R$ 94, paid to Coelho da Fonseca, as an intangible asset to be amortized over the 124 months, i.e., the term of the agreement. We allocated this intangible asset to the Banking Services segment of Banco Itaú Unibanco – Banking segment.
Unibanco.

d)
f)Dafra da Amazônia Indústria e Comércio Ltda. (Dafra)

In March 2008, Itaú Unibanco Holding signed the “Partnership Agreement” (“agreement”a “partnership agreement“ ("agreement“) with Dafra, a motorcycles manufacturer,assembling company for the acquisition of the exclusive right to: (i) offer, distribute and market financial products and services to the clients of Dafra, and (ii) offer working capital loans to the Dafra dealers for the financing of motorcycles purchases.

The investment of Itaú Unibanco Holding amounted tototaled R$ 20 whichand it refers to the acquisition of suchsaid exclusive right for a term of 120 months.120-month period.

The amount of R$ 20, paid to Dafra, was recorded as an intangible asset which willto be amortized over the term of the agreement. We allocated this intangible asset to the Banking Services segment of Banco Itaú Unibanco – Banking segment.
Unibanco.

34.2 Relevant strategic partnerships entered into during prior years presented

e) LPS Brasil – Consultoria de Imóveis S.A. (“Lopes”)
g)LPS Brasil – Consultoria de Imóveis S.A. (Lopes)

In December 2007, Itaú Unibanco Holding signed the following agreements with Lopes, a real estate brokercompany that provides real estate consulting and brokeragesales services, aimed at establishing a partnership for incorporating a real estate sales promotion company, (the “Promotion Company”), which main activity will be tothe promotion of sales of real estate items (Promotion Company), which will operate in the market and offer of real estate financial products and services to the clients of Lopes:

F-101


I. “Partnership“Partnership Agreement”, signed by Itaú Unibanco Holding and Lopes (each of which will(which directly holdholds 50% of interest in the Promotion Company’spromotion company’s capital stock), the parties of which are Banco Itaú S.A., SATI – Assessoria Imobiliária Ltda. and OS Brasil – Consultoria de Imóveis S.A. (collectively, Lopes); and (the two latter subsidiaries of Lopes which we collectively referjointly referred to as “Lopes”)Lopes); and

F-112
II.Stockholders’ agreement regarding the shares of the Promotion Company,promotion company, involving the same parties mentioned in the prior item.

Itaú Unibanco Holding invested, in thisthe partnership the amount ofagreement, R$ 304, as follows: R$ 290 were paid to SATI for the acquisitionpurchase of 50% of the exclusive right toin the offer and promote real estateof financial products and services to the clients of Lopes for a term of 20 years20-year period and R$ 14 as a capital contribution of 50% to be made for the 50% of the capital ofin the Promotion Company. Lopes also committedundertook to contribute with R$ 14 for the remainingother 50% of the capital of the Promotion Company.Company's capital.

As mentioned, above, Itaú Unibanco Holding and Lopes will haveshall hold 50% each 50% of interest in the Promotion CompanyCompany’s capital, as soon as the companyit is incorporated.organized. SATI and Itaú Unibanco Holding granted the rights toon the offer of real estate financial products and services to theof Lopes’ clients of Lopes to the Promotion Company.

We recordedaccounted for the amount of R$ 290, paid to Lopes, as an intangible asset which corresponds to 50% of the right to offer and promotepromoter real estate financial products and services to the clients of Lopes. We estimated the useful life of this intangible asset to beat 20 years, term of the agreements mentioned above and, therefore, theamortization period of amortization through which we will amortize it. We allocated thisthese intangible assets to the Banking Services segment of Banco Itaú Unibanco - Banking segment.
Unibanco.

f) Lojas Americanas S.A. (LASA)
h)Strategic Partnership between Itaú Unibanco Holding and LASA (Lojas Americanas S.A.)

In December 2006, Itaú Unibanco Holding signed the following agreements with LASA, a retail company that operates in Brazil, aimed at establishing a partnership for incorporating thea new company, Pandora Participações S.A., which main activity will be tothe exclusive offer on an exclusive basisof financial products and services to the clients of the Sky Shop S.A.’s television channel (Shoptime):

I. “Partnership“Partnership Agreement”, signed by Itaú Unibanco Holding and LASA (each of which(which directly holds as result of this transaction a 50% of interest in the capital stock of Pandora Participações S.A.,– “Pandora”), the intervening parties of which are Banco Itaú Unibanco S.A..S.A., o Banco Itaucard S.A. (company(a company controlled by Itaú Unibanco Holding and which directly holds 50% of interest in Pandora’sthe capital stock)of Pandora), Pandora and Shoptime (a subsidiary of LASA); and

II.Stockholders’ agreement regarding the shares of Pandora, involving the same parties mentioned in the prior item.

As mentioned above, Itaú Unibanco Holding and LASA have each 50% of interest in Pandora. LASA granted to Pandoragrants exclusive rights over the exclusive right to offer, distributedistribution and marketmarketing of financial products and services to the clients of Shoptime to Pandora for a term of 20 years.20-year term. Pandora has that rightholds and is granting thisassigns such right to Itaú Unibanco Holding.

The investment of Itaú Unibanco Holding amounted towas R$ 69, made through athe capital increase inof Pandora, and as a result of which Itaú Unibanco Holding obtained 2,000 new common shares issued by Pandora, representing 50% of the company’s capital stock. LASA will refundindemnify us, up to the amount of R$ 27, if certain performance targets are not metachieved in the initialfirst eight years of the partnership.agreement.

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NOTE 35 – COMMITMENTS RELATED TO ITAÚ BBA ACQUISITION

Itaú Unibanco Holding and the individual selling shareholders of Itaú BBA assumed certain commitments under the terms of the sale term of the sale and purchase agreement of the Itaú BBA group. The key commitments, the amounts involvedrelate to: (i) a minimum spread over loans transferred at acquisition date in January 2004 and how each commitment has beenreimbursement of losses on those loans, (ii) an additional payment if treasury results exceed a target amount, (iii) a cash bonus to directors and officers accounted for are described below:a compensation if they continue employment for a minimum period and (iv) the selling shareholders committed to reimburse for pre-acquisition contingencies.

a)Upon the transfer, on January 2004, to Itaú BBA of loans made to corporate customers by Itaú Unibanco, we have committed with the individual selling shareholders that such transferred loans will generate a minimum spread to Itaú BBA and that we will reimburse them for losses incurred for up to a five-year period on such loans. We have recognized upon transfer on January 2004 a liability and an expense (under Other non-interest expense) for the estimated fair value of such guarantee in accordance with FIN 45. The estimated fair value of such guarantee is reviewed at each period-end with changes in the amount recorded recognized as other non-interest expense. Settlement of the amount payable to the individual shareholders of Itaú BBA, if any, was expected to be made at the end of the five-year period, but as of December 31, 2008, the parties are still discussing the terms of the payment.

b)Itaú Unibanco Holding committed to make an additional payment to the individual selling shareholders if the results from treasury activities of Itaú BBA over a five-year period exceed a target amount. Conversely, if such results are below a minimum amount, we have the right to be reimbursed by the individual selling shareholders up to a ceiling. Settlement was expected to be made at the end of the five years unless it reaches the ceiling or other specified events occur, but as of December 31, 2008, the parties are still discussing the terms of the payment. Income and expense, as appropriate, are being recognized in Other non-interest income and Other non-interest expense, respectively, in the consolidated statement of income.

c)We have committed to pay a cash bonus to the directors and officers (all of whom are also selling shareholders of Itaú BBA) that remain in its capacity providing services to Itaú BBA over at least two years as from the date of the transaction (which has been achieved on December 31, 2004). Directors and officers have the right to receive the full amount of the bonus if they remain in its capacity for eight years and the benefit accrues to the benefit of the directors and officers’ pro-rata as from the second year, that is, as from December 31, 2004. The expense related to this bonus has been recognized in Other non-interest expenses since January 1, 2005 and the amount accrued up the transaction date was paid to its beneficiaries upon the consummation of the purchase of shares of BBA HE Participações S.A. discussed in Note 3.1.b. As from such date we accrue, over the service period, provision for bonus for the remainder period for those directors and officers that continue to provide services to Itaú BBA.

d)The individual selling shareholders have also committed to reimburse us for pre-acquisition contingencies and losses on specifically identified loans. We recognize a receivable when the conditions for reimbursement are met. Income is being recognized in Other non-interest income, in the consolidated statement of income. Settlement of the amount payable by the individual shareholders of Itaú BBA will be made at the end of the five-year period.

As of December 31, 2009 and 2008, and 2007,net assets and liabilities related to the above-mentioned commitments amounted to R$ 263356 and (290),263, respectively, which are presented in Other assets or Other liabilities, as appropriate.

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NOTENOTA 36 – SUBSEQUENT EVENTS
 
On February 20, 2009, we
a)Itaú XL

Itaú Unibanco and XL Swiss Holdings Ltd. (XL Swiss) entered into an agreement with Banco Citibank S.A. (“Citibank”) as controlling shareholders of Redecard S.A. (“Redecard) pursuant to which: (i) Citibank was authorized to sellon November 12, 2009 for the shares held in Redecard through a public offering, and (ii) Citibank granted toacquisition by Itaú Unibanco the option to privately acquire 24,082,760 shares of Redecard at the price per share of the public offering. The option was exercised on March 23, 2009 and we acquired the shares on March 30, 2009.interest in Itaú XL Seguros Corporativos S.A. (Itaú XL) held by XL Swiss. After the exerciseconsummation of the option, we becametransaction, Itaú XL will be a wholly owned subsidiary of Itaú Unibanco.

The consummation of the controlling shareholdertransaction is subject to the approval of Redecard holding 50% plus one sharethe Brazilian Insurance Regulator (SUSEP).

b)Itaubanco Defined Contribution Plan

During 2010, Itaú Unibanco initiated a process to offer to the participants of Redecard’s capital stock.Plano de Aposentadoria Complementar – PAC (a defined benefit plan) to migrate their participation to Itaubanco Defined Contribution Plan. Upon the finalization of this process, the assets and liabilities related to participants that accepted the migration offer will be transferred to the new plan.
 
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ITEM 19               EXHIBITS
 
Exhibit    
     
Number Description  
     
1.1 Bylaws of Itaú Unibanco Holding S.A. (unofficial English translation) *
     
2.(a) Form of Amended and Restated Deposit Agreement among the Registrant, The Bank of New York, as depositary, and the Holders from time to time of American Depositary Shares issued thereunder, including the form of American Depositary Receipts.Receipts (1)
     
4.(a)1 Share Purchase and Sale Agreement of BBA**BBA (2)
     
4.(a)2 Stockholders’Shareholders’ Agreement dated as of February 15, 2001,January 27, 2009, between Itaúsa — Investimentos Itaú S.A. and Caixa Holding S.A., together with anthe Moreira Salles family (unofficial English translation.translation). (1)*
     
6 See note 20 to our consolidated financial statements explaining how earnings per share information was calculated under U.S. GAAP.  See “Item 3A. Selected Financial Data – Earnings and Dividend per Share Information” for information explaining how earnings per share information was calculated under Brazilian Corporate Law.  
     
8.1 List of subsidiaries.subsidiaries *
     
11.1 Code of Ethics (unofficial English translation) *
     
11.2 Corporate Governance Policy (unofficial English translation) *
     
12.1 Chief Executive Officer Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.2002 *
     
12.2 Chief Risk Officer and Chief Financial Officer Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *
     
13 Chief Executive Officer, Chief Risk Officer and Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350 as Enacted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *

(1)Incorporated herein by reference to our registration statement on Form 20-F filed with the Commission on February 20, 2002.
 
(2)Incorporated herein by reference to our annual report on Form 20-F filed with the Commission on June 30, 2003.
 
*Filed herewith.

 
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SIGNATURES
 
Pursuant to the requirements of Section 12 of the Securities Exchange Act, as amended, the registrant certifies that it meets all of the requirements for filing this annual report on Form 20-F and has duly caused this annual report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
ITAÚ UNIBANCO HOLDING S.A.
  
By:Roberto Egydio Setubal
Name:  Roberto Egydio Setubal
Title:Chief Executive Officer
  
By:Sérgio Ribeiro da Costa Werlang
Name:  Sérgio Ribeiro da Costa Werlang
Title: Chief Risk Officer
By:Silvio Aparecido de Carvalho
Name: Silvio Aparecido de Carvalho
Title: Chief Financial Officer

Dated:  June 30, 2009May 10, 2010

 
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