20-F 1 dp29493_20f.htm FORM 20-F


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 20-F
 
(Mark One)
 
 
o
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
 
OR
 
 
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
for the fiscal year ended December 31, 2011
 
OR
 
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
for the transition period from ________________ to ________________
 
OR
 
 
o
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
Date of event requiring this shell company report
 
Commission file number: 011-34476
 
BANCO SANTANDER (Brasil) S.A.
 
(Exact name of Registrant as specified in its charter)
 
Federative Republic of Brazil
 
(Jurisdiction of incorporation)
 
Avenida Presidente Juscelino Kubitschek, 2,041 and 2,235 – Bloco A
 
Vila Olímpia
São Paulo, SP 04543-011
Federative Republic of Brazil
 
(Address of principal executive offices)
 
James H. Bathon, Managing Director - Legal and Compliance
Banco Santander, S.A.
 
New York Branch
45 E. 53rd Street
New York, New York 10022
(212) 350-3500
 
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
 
Securities registered or to be registered pursuant to Section 12(b) of the Act:
 
Title of each class
 
Name of each exchange on which registered
American Depositary Shares, each representing the right to receive 55 common shares, no par value, and 50 preferred shares, no par value, of Banco Santander (Brasil) S.A.
 
New York Stock Exchange
 
 
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
 
(Title of Class)
 
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None
 
(Title of Class)
 
Indicate the number of outstanding shares of each of the issuer’s classes of capital stock or common stock as of the close of business covered by the annual report.
 
212,450,478,000 common shares
 
185,846,700,000 preferred shares
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
 
x  Yes      o  No
 
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.
 
o  Yes      x  No
 
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.
 
x  Yes      o  No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
 
o  Yes      o  No
 
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:
 
US GAAP  o
International Financial Reporting Standards as
issued by the International Accounting Standards Board  x
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.
 
o  Item 17    o  Item 18
 
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).
 
o  Yes    x  No
 



 
 
BANCO SANTANDER (BRASIL) S.A.
__________________
   
Page
     
PRESENTATION OF FINANCIAL AND OTHER INFORMATION
1
FORWARD-LOOKING STATEMENTS
2
PART I
3
ITEM 1.  IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
3
  A.   Directors and Senior Management
3
  B.    Advisers
3
  C.    Auditors
3
ITEM 2.  OFFER STATISTICS AND EXPECTED TIMETABLE
3
  A.   Offer Statistics
3
  B.    Method and Expected Timetable
3
ITEM 3.  KEY INFORMATION
4
  A.   Selected Financial Data
4
  B.    Capitalization and Indebtedness
10
  C.    Reasons for the Offer and Use of Proceeds
10
  D.    Risk Factors
10
ITEM 4.  INFORMATION ON THE COMPANY
21
  A.   History and Development of the Company
21
  B.    Business Overview
26
  C.    Organizational Structure
107
  D.    Property, Plant and Equipment
108
ITEM 4A.  UNRESOLVED STAFF COMMENTS
108
ITEM 5.  OPERATING AND FINANCIAL REVIEW AND PROSPECTS
109
  A.   Operating Results
109
  B.    Liquidity and Capital Resources 147
  C.    Research and Development, Patents and Licenses, etc.
151
  D.   Trend Information
151
  E.    Off-Balance Sheet Arrangements
151
  F.    Contractual Obligations
152
ITEM 6.  DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
153
  A.   Management
153
  B.    Compensation
166
  C.    Board Practices
172
  D.    Employees
176
  E.    Share Ownership
177
ITEM 7.  MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
178
  A.   Major Shareholders
178
  B.    Related Party Transactions
180
  C.    Interests of Experts and Counsel
185
ITEM 8.  FINANCIAL INFORMATION
185
  A.   Consolidated Statements and Other Financial Information
185
  B.    Significant Changes
193
ITEM 9.  THE OFFER AND LISTING
193
  A.   Offering and Listing Details
193
  B.    Plan of Distribution
196
  C.    Markets
196
  D.    Selling Shareholders
198
  E.     Dilution
199
  F.     Expenses of the Issue
199
 
 
 
 
  C.   Material Contracts
212
  D.   Exchange Controls
212
  E.   Taxation
213
  F.   Dividends and Paying Agents
221
  G.   Statement by Experts
221
  H.   Documents on Display
221
  I.    Subsidiary Information
221
ITEM 11.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT RISK
221
ITEM 12.  DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
237
  A.   Debt Securities
237
  B.   Warrants and Rights
237
  C.   Other Securities
237
  D.   American Depositary Shares
237
PART II
238
ITEM 13.  DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
238
  A.   Defaults
238
  B.   Arrears and Delinquencies
239
ITEM 14.  MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
239
ITEM 15.  CONTROLS AND PROCEDURES
239
  A.   Disclosure Controls and Procedures
239
  B.   Management's Annual Report on Internal Control over Financial Reporting
239
  C.   Audit Report of the Registered Public Accounting Firm
240
  D.   Changes in Internal Control over Financial Reporting
240
ITEM 16.  [RESERVED]
240
ITEM 16A.  Audit Committee Financial Expert
240
ITEM 16B.  Code of Ethics
241
ITEM 16C.  Principal Accountant Fees and Services
241
ITEM 16D.  Exemptions from the Listing Standards for Audit Committees
241
ITEM 16E.  Purchases of Equity Securities by the Issuer and Affiliated Purchasers
242
ITEM 16F.  Change in Registrant's Certifying Accountant
243
ITEM 16G.  Corporate Governance
243
ITEM 16H.  Mine Safety Disclosure
245
PART III
246
ITEM 17.  Financial Statements
246
ITEM 18.  Financial Statements
246
ITEM 19.  Exhibits
246

 
 
In this annual report, the terms “Santander Brasil”, the “Bank”, “we”, “us”, “our” and “our company” mean Banco Santander (Brasil) S.A. and its consolidated subsidiaries (including, as from August 30, 2008, the entities of Banco Real), unless otherwise indicated.  References to “Banco Real” mean Banco ABN AMRO Real S.A. and ABN AMRO Brasil Dois Participações S.A. and their respective consolidated subsidiaries, unless otherwise indicated.  References to “Banespa” mean Banco do Estado de São Paulo S.A.—Banespa, one of our predecessor entities.  The terms “Santander Spain” and “our parent” mean Banco Santander, S.A.  References to “Santander Group” or “Grupo Santander” mean the worldwide operations of the Santander Spain conglomerate, as indirectly controlled by Santander Spain and its consolidated subsidiaries, including Santander Brasil.
 
All references herein to the “real”, “reais” or “R$” are to the Brazilian real, the official currency of Brazil.  All references to “U.S. dollars”, “dollars” or “U.S.$” are to United States dollars.  All references to the “euro”, “euros” or “€” are to the common legal currency of the member states participating in the European Economic and Monetary Union.  References to “CI$” are to Cayman Islands dollars.  See “Item 3. Key Information—A. Selected Financial Data—Exchange Rates” for information regarding exchange rates for the Brazilian currency.
 
Solely for the convenience of the reader, we have translated certain amounts included in “Item 3.  Key Information—A. Selected Financial Data” and elsewhere in this annual report from reais into U.S. dollars using the exchange rate as reported by the Brazilian Central Bank, the “Brazilian Central Bank” or “BACEN”, as of December 31, 2011, which was R$1.8758 to U.S.$1.00, or on the indicated dates (subject to rounding adjustments).  We make no representation that the real or U.S. dollar amounts actually represent or could have been or could be converted into U.S. dollars at the rates indicated, at any particular exchange rate or at all.
 
Certain figures included in this annual report have been subject to rounding adjustments.  Accordingly, figures shown as totals in certain tables may not be an arithmetic aggregation of the figures that precede them.
 
Consolidated Financial Statements
 
We maintain our books and records in reais, our functional currency and presentation currency for the consolidated financial statements.
 
This annual report contains our consolidated financial statements as of December 31, 2011, 2010 and 2009, and for the years ended December 31, 2011, 2010 and 2009.  Such consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”), as issued by the International Accounting Standards Board (“IASB”) and interpretations issued by the International Financial Reporting Interpretations Committee (“IFRIC”), and have been audited by Deloitte Touche Tohmatsu Auditores Independentes, an independent registered public accounting firm, whose report is included herein.
 
On August 29, 2008, Banco ABN AMRO Real S.A. and ABN AMRO Brasil Dois Participações S.A. (collectively, “Banco Real”) became our wholly-owned subsidiaries pursuant to a share exchange transaction (incorporação de ações).
 
IFRS differs in certain significant respects from U.S. GAAP.  IFRS also differs in certain significant respects from Brazilian GAAP.  Note 45 to our audited consolidated financial statements for the years ended December 31, 2011, 2010 and 2009, included herein, contains information relating to certain differences between IFRS and Brazilian GAAP.
 
For statutory purposes, under National Monetary Council (Conselho Monetário Nacional or “CMN”) Resolution No 3,786, dated September 24, 2009, we are required by the Brazilian Central Bank to prepare consolidated financial statements according to IFRS as issued by the IASB.  However, we will also continue to prepare statutory financial statements in accordance with accounting practices established by Brazilian corporate law and standards established by the CMN, the Brazilian Central Bank and document template provided in the Accounting National Financial System Institutions (Plano Contábil das Instituições Financeiras Nacional) or “Cosif” and the Brazilian Securities Commission (Comissão de Valores Mobiliários) or “CVM” to the extent such practices do not conflict with the rules of BACEN, the Accounting Pronouncements Committee (Comitê de
 
 
Pronunciamentos Contábeis) or “CPC”, the National Council of Private Insurance (Conselho Nacional de Seguros Privados) or “CNSP” and the Superintendency of Private Insurance (Superintendência de Seguros Privados) or “SUSEP”.  We refer to such Brazilian accounting practices as “Brazilian GAAP”.  See “Item 4. Information on the Company—B. Business Overview—Regulatory Overview—Auditing Requirements”.
 
Market Share and Other Information
 
We obtained the market and competitive position data, including market forecasts, used throughout this annual report from internal surveys, market research, publicly available information and industry publications.  This data is updated to the latest available information for 2011.  We have made these statements on the basis of information from third-party sources that we believe are reliable, such as the Brazilian association of credit card companies (Associação Brasileira de Empresas de Cartões de Crédito e Serviços), or “ABECS”; the Brazilian association of leasing companies (Associação Brasileira de Empresas de Leasing), or “ABEL”; the Brazilian association of savings and mortgage financing entities (Associação Brasileira das Entidades de Crédito Imobiliário e Poupança), or “ABECIP”, the national association of credit institutions, financing and investment (Associação Nacional das Instituições de Crédito, Financiamento e Investimento) or “ACREFI”; the Brazilian bank federation (FEBRABAN — Federação Brasileira de Bancos), or “FEBRABAN”; the Brazilian social and economic development bank (Banco Nacional de Desenvolvimento Econômico e Social), or “BNDES”; the Brazilian Institute of Geography and Statistics, or the “IBGE”; the Brazilian Central Bank; the Central Bank system (Sistema do Banco Central), or “SISBACEN”, a Brazilian Central Bank database; the Getúlio Vargas Foundation (FGV — Fundação Getúlio Vargas), or “FGV”; the Superintendency of Private Insurance (Superintendência de Seguros Privados), or “SUSEP”; the national association of financial and capital markets entities (Associação Brasileira das Entidades dos Mercados Financeiro e de Capitais), or “ANBIMA”; and the national federation of private retirement and life insurance (Federação Nacional de Previdência Privada e Vida), or “FENAPREVI”, among others.  Industry and government publications, including those referenced here, generally state that the information presented therein has been obtained from sources believed to be reliable, but that the accuracy and completeness of such information is not guaranteed.  Although we have no reason to believe that any of this information or these reports is inaccurate in any material respect, we have not independently verified the competitive position, market share, market size, market growth or other data provided by third parties or by industry or other publications.  We do not make any representation as to the accuracy of such information.
 
 
 
This annual report contains estimates and forward-looking statements, mainly in “Item 3. Key Information—D. Risk Factors”, “Item 5. Operating and Financial Review and Prospects” and “Item 4. Information on the Company—B. Business Overview”.  Some of the matters discussed concerning our business operations and financial performance include estimates and forward-looking statements within the meaning of the U.S. Securities Act of 1933 (the “Securities Act”) and the U.S. Securities Exchange Act of 1934 (the “Exchange Act”).
 
Our estimates and forward-looking statements are based mainly on our current expectations and estimates on projections of future events and trends, which affect or may affect our businesses and results of operations.  Although we believe that these estimates and forward-looking statements are based upon reasonable assumptions, they are subject to certain risks and uncertainties and are made in light of information currently available to us.  Our estimates and forward-looking statements may be influenced by the following factors, among others:
 
 
·
increases in defaults by our customers and in impairment losses;
 
 
·
decreases in deposits, customer loss or revenue loss;
 
 
·
increases in provisions for legal claims;
 
 
·
our ability to sustain or improve our performance;
 
 
·
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;
 
 
·
decreases in our level of capitalization;
 
 
·
changes in market value of Brazilian securities, particularly Brazilian government securities;
 
 
·
changes in regional, national and international business and economic conditions and inflation;
 
 
·
the ongoing effects of recent volatility in global financial markets crisis; and
 
 
·
other risk factors as set forth under “Item 3. Key Information—D. Risk Factors”.
 
The words “believe”, “may”, “will”, “estimate”, “continue”, “anticipate”, “intend”, “expect” and similar words are intended to identify estimates and forward-looking statements.  Estimates and forward-looking statements are intended to be accurate only as of the date they were made, and we undertake no obligation to update or to review any estimate and/or forward-looking statement because of new information, future events or other factors.  Estimates and forward-looking statements involve risks and uncertainties and are not guarantees of future performance.  Our future results may differ materially from those expressed in these estimates and forward-looking statements.  You should therefore not make any investment decision based on these estimates and forward-looking statements.
 
 
 
 
Directors and Senior Management
 
Not applicable.
 
B. 
Advisers
 
Not applicable.
 
C. 
Auditors
 
Not applicable.
 
 
A. 
Offer Statistics
 
Not applicable.
 
B. 
Method and Expected Timetable
 
Not applicable.
 
 
 
A. 
Selected Financial Data
 
Financial information for Santander Brasil at and for the years ended December 31, 2011, 2010, 2009, 2008 and 2007 has been derived from our audited consolidated financial statements prepared in accordance with IFRS.  See “Item 18. Financial Statements”.  Financial information for Banco Real has been consolidated with our consolidated financial statements since August 30, 2008.  Our results of operations for the year ended December 31, 2008 are not comparable to our results of operations for the years ended December 31, 2007 or December 31, 2009 because of the consolidation of Banco Real in our consolidated financial statements as from August 30, 2008.
 
This financial information should be read in conjunction with our audited consolidated financial statements and the related notes and “Item 5.  Operating and Financial Review and Prospects” included elsewhere in this annual report.
 
Income Statement Data in Accordance with IFRS
 
   
Santander Brasil
 
   
For the year ended December 31,
 
   
2011
   
2011
   
2010
   
2009
   
2008
   
2007
 
   
(in millions of U.S.$, except as otherwise indicated)(1)
   
(in millions of R$, except as otherwise indicated)
 
Interest and similar income
    27,581       51,736       40,909       39,343       23,768       13,197  
Interest expense and similar charges
    (12,706 )     (23,834 )     (16,814 )     (17,176 )     (12,330 )     (7,002 )
Net interest income
    14,875       27,902       24,095       22,167       11,438       6,195  
Income from equity instruments
    50       94       52       30       37       36  
Income from companies accounted for by the equity method
    29       54       44       295       112       6  
Fee and commission income
    4,675       8,769       7,833       7,148       4,809       3,364  
Fee and commission expense
    (762 )     (1,430 )     (998 )     (910 )     (555 )     (266 )
Gains (losses) on financial assets and liabilities (net)
    (61 )     (114 )     1,458       2,716       (1,286 )     1,517  
Exchange differences (net)
    (65 )     (121 )     417       (51 )     1,476       382  
Other operating income (expenses)
    (202 )     (379 )     (348 )     (115 )     (60 )     133  
Total income
    18,539       34,775       32,553       31,280       15,971       11,367  
Administrative expenses
    (6,596 )     (12,373 )     (11,231 )     (10,947 )     (7,185 )     (4,460 )
Depreciation and amortization
    (779 )     (1,462 )     (1,237 )     (1,249 )     (846 )     (580 )
Provisions (net)(2) 
    (1,632 )     (3,061 )     (1,974 )     (3,481 )     (1,230 )     (1,196 )
Impairment losses on financial assets (net)(3)
    (5,001 )     (9,382 )     (8,234 )     (9,966 )     (4,100 )     (2,160 )
Impairment losses on other assets (net)
    (21 )     (39 )     (21 )     (901 )     (77 )     (298 )
Gains (losses) on disposal of assets not classified as non-current assets held for sale
    3       5       (59 )     3,369       7       1  
Gains (losses) on non-current assets held for sale not classified as discontinued operations
    238       447       199       32       9       13  
Operating profit before tax
    4,751       8,911       9,997       8,137       2,549       2,687  
Income taxes
    (616 )     (1,155 )     (2,614 )     (2,629 )     (170 )     (784 )
Profit for the year
    4,135       7,756       7,383       5,508       2,379       1,903  
 
Earnings per share
                                               
Basic and diluted earnings per 1,000 shares
                                               
Common shares (reais) 
            18.55       17.67       15.32       11.59       14.02  
Preferred shares (reais) 
            20.41       19.44       16.85       12.75       15.43  
Common shares (U.S. dollars)(1)
            9.89       10.61       9.19       6.69       8.41  
Preferred shares (U.S. dollars)(1)
            10.88       11.67       10.11       7.65       9.26  
 
 
 
   
Santander Brasil
 
   
For the year ended December 31,
 
   
2011
   
2011
   
2010
   
2009
   
2008
   
2007
 
   
(in millions of U.S.$, except as otherwise indicated)(1)
   
(in millions of R$, except as otherwise indicated)
 
Dividends and interest on capital per 1,000 shares(4)
                                               
Common shares (reais) 
            7.61       8.47       4.11       4.26       16.30  
Preferred shares (reais) 
            8.37       9.32       4.52       4.69       17.93  
Common shares (U.S. dollars)(1)
            4.06       5.08       2.47       2.56       9.78  
Preferred shares (U.S. dollars)(1)
            4.46       5.59       2.71       2.81       10.76  
Weighted average shares outstanding (in thousands) – basic and diluted
                                               
Common shares
            212,841,732       212,841,732       183,650,861       104,926,194       69,383,705  
Preferred shares
            186,202,385       186,202,385       159,856,132       91,168,064       60,285,449  
 

(1)
Translated for convenience only using the selling rate as reported by the Brazilian Central Bank at December 31, 2011 for reais into U.S. dollars of R$1.87 to U.S.$1.00.
 
(2)
Mainly provisions for legal obligations, tax and social security, labor and civil litigations.
 
(3)
Net provisions to the credit loss allowance less recovery of loans previously written off.
 
(4)
Includes dividends based on net income and dividends based on reserves.
 
Balance Sheet Data in Accordance with IFRS
 
   
Santander Brasil
 
   
At December 31,
 
   
2011
   
2011
   
2010
   
2009
   
2008
   
2007
 
   
(in millions of U.S.$)(1)
   
(in millions of R$)
 
Assets
                                   
Cash and balances with the Brazilian Central Bank
    35,152       65,938       56,800       27,269       23,700       22,277  
Financial assets held for trading
    15,941       29,901       24,821       20,116       19,986       12,293  
Other financial assets at fair value through profit or loss(2)
    355       665       17,940       16,295       5,575       1,648  
Available-for-sale financial assets
    23,781       44,608       47,206       46,406       30,736       9,303  
Loans and receivables
    108,091       202,757       174,107       152,163       162,725       55,034  
Hedging derivatives
    43       81       116       163       106        
Non-current assets held for sale
    71       132       67       172       113       32  
Investments in associates
    225       422       371       419       634       55  
Tangible assets
    2,670       5,008       4,518       3,702       3,829       1,111  
Intangible assets
    16,758       31,435       31,963       31,618       30,995       1,799  
Tax assets
    8,663       16,250       14,842       15,779       12,920       4,223  
Other assets
    1,432       2,687       1,912       1,871       2,871       544  
Total assets
    213,182       399,886       374,663       315,973       294,190       108,319  
Liabilities
                                               
Financial liabilities held for trading
    2,691       5,047       4,785       4,435       11,210       4,650  
Other financial liabilities at fair value through profit or loss
                      2       307       690  
Financial liabilities at amortized cost
    155,375       291,452       253,341       203,568       213,973       84,781  
Deposits from the Brazilian Central Bank and deposits from credit institutions
    27,469       51,527       42,392       21,196       26,510       18,217  
Customer deposits
    93,013       174,474       167,949       149,440       155,495       55,147  
Marketable debt securities
    20,573       38,590       20,087       11,439       12,086       2,806  
Subordinated liabilities
    5,815       10,908       9,695       11,305       9,197       4,210  
Other financial liabilities
    8,504       15,952       13,218       10,188       10,685       4,401  
Hedging derivatives
    19       36             10       265        
Liabilities for insurance contracts
                19,643       15,527              
Provisions(3) 
    5,073       9,515       9,395       9,480       8,915       4,816  
 
 
 
   
Santander Brasil
 
   
At December 31,
 
   
2011
   
2011
   
2010
   
2009
   
2008
   
2007
 
   
(in millions of U.S.$)(1)
   
(in millions of R$)
 
Tax liabilities
    6,331       11,876       10,530       9,457       6,156       1,719  
Other liabilities
    2,094       3,928       3,605       4,228       3,527       1,454  
Total liabilities
    171,582       321,854       301,299       246,707       244,353       98,111  
Shareholders’ equity
    41,073       77,045       72,572       68,706       49,318       8,671  
Valuation adjustments
    516       968       784       559       514       1,537  
Non-controlling interests
    10       19       8       1       5        
Total equity
    41,599       78,032       73,364       69,266       49,837       10,208  
Total liabilities and equity
    213,182       399,886       374,663       315,973       294,190       108,319  
Average assets
    210,429       394,722       341,285       298,174       163,621       100,243  
Average interest-bearing liabilities
    130,316       244,446       198,456       184,332       109,455       69,204  
Average shareholders’ equity
    40,365       75,716       71,875       56,192       23,110       10,521  
 

(1)
Translated for convenience only using the selling rate as reported by the Brazilian Central Bank at December 31, 2011 for reais into U.S. dollars of R$1.87 to U.S.$1.00.
 
(2)
In 2010 and 2009, this item includes Investment fund units of Guarantors of Benefit Plans—PGBL/VGBL, in the amount of R$17,426 million and R$14,184 million, respectively, related to the liabilities for insurance contracts held by Santander Seguros, which were no longer included in the scope of consolidation in 2011, following the sale of Santander Seguros.  See “Item 4. Information on the Company—A. History and Development of the Company—Important Events—Sale of Santander Seguros”.
 
(3)
Mainly legal obligations, tax and social security, labor and civil litigation.
 
Ratios
 
   
At and for the year ended December 31,
 
   
2011
   
2010
   
2009
   
2008
   
2007
 
Profitability and performance
                             
Net yield(1) 
    8.6 %     8.8 %     9.7 %     8.6 %     7.2 %
Return on average total assets
    2.0 %     2.2 %     1.8 %     1.5 %     1.9 %
Return on average shareholders’ equity
    10.2 %     10.3 %     9.8 %     10.3 %     18.1 %
Adjusted return on average shareholders’ equity(2)
    16.2 %     16.9 %     19.3 %     16.8 %     18.1 %
Capital adequacy
                                       
Average shareholders’ equity as a percentage of average total assets
    19.2 %     21.1 %     18.8 %     14.1 %     10.5 %
Average shareholders’ equity excluding goodwill as a percentage of average total assets excluding goodwill(2)
    13.0 %     13.9 %     10.5 %     9.2 %     10.5 %
Basel capital adequacy ratio(3)
    19.9 %     22.1 %     25.6 %     14.7 %     14.2 %
Asset quality
                                       
Non-performing assets as a percentage of total loans(4)
    6.7 %     5.8 %     7.2 %     5.4 %     4.1 %
Non-performing assets as a percentage of total assets(4)
    3.3 %     2.7 %     3.1 %     2.6 %     2.2 %
Non-performing assets as a percentage of computable credit risk(4)(5)
    6.0 %     5.1 %     6.2 %     4.7 %     3.2 %
Allowance for credit losses as a percentage of non-performing assets(4)
    85.5 %     98.3 %     101.7 %     105.8 %     107.5 %
Allowance for credit losses as a percentage of total loans
    5.7 %     5.8 %     7.2 %     5.4 %     4.4 %
Net loan charge-offs as a percentage of total loans
    4.7 %     6.2 %     6.2 %     2.3 %     4.7 %
Non-performing assets as a percentage of shareholders’ equity(4)
    17.0 %     12.9 %     14.4 %     15.7 %     24.1 %
 
 
 
   
At and for the year ended December 31,
 
   
2011
   
2010
   
2009
   
2008
   
2007
 
Non-performing assets as a percentage of shareholders’ equity excluding goodwill(2)(4)
    26.2 %     21.1 %     24.5 %     35.4 %     24.1 %
                                         
Liquidity
                                       
Total loans, net as a percentage of total funding
    66.4 %     63.0 %     66.4 %     66.0 %     60.7 %
Deposits as a percentage of total funding
    82.0 %     87.6 %     88.2 %     89.5 %     91.3 %
Other Information
                                       
Efficiency
                                       
Efficiency ratio(6) 
    35.6 %     34.5 %     35.0 %     45.0 %     39.2 %
 

(1)
Net yield is defined as net interest income (including dividends on equity securities) divided by average interest earning assets.
 
(2)
“Adjusted return on average shareholders’ equity”, “Average shareholders’ equity excluding goodwill as a percentage of average total assets excluding goodwill” and “Non-performing assets as a percentage of shareholders’ equity excluding goodwill” are non-GAAP financial measurements which adjust “Return on average shareholders’ equity”, “Average shareholders’ equity as a percentage of average total assets” and “Non-performing assets as a percentage of shareholders’ equity”, to exclude the R$27 billion goodwill arising from the acquisition of Banco Real in 2008.
 
The reconciliation below presents the calculation of these non-GAAP financial measurements from each of their most directly comparable financial measurements.  Such reconciliation was made only for the years ended December 31, 2011, 2010, 2009 and 2008 because goodwill was not material in the year ended December 31, 2007 and, accordingly, the ratios presented are unaffected by the exclusion of goodwill.
 
   
At and for the year ended December 31,
 
   
2011
   
2010
   
2009
   
2008
 
   
(in millions of R$, except as otherwise indicated)
 
Return on average shareholders’ equity:
                       
Consolidated profit for the year
    7,756       7,383       5,508       2,379  
Average shareholders’ equity
    75,716       71,875       56,192       23,110  
Return on average shareholders’ equity
    10.2 %     10.3 %     9.8 %     10.3 %
Adjusted return on average shareholders’ equity:
                               
Consolidated profit for the year
    7,756       7,383       5,508       2,379  
Average shareholders’ equity
    75,716       71,875       56,192       23,110  
Average goodwill
    27,975       28,312       27,714       8,925  
Average shareholders’ equity excluding goodwill
    47,741       43,562       28,478       14,185  
Adjusted return on average shareholders’ equity
    16.2 %     16.9 %     19.3 %     16.8 %
Average shareholders’ equity as a percentage of average total assets:
                               
Average shareholders’ equity
    75,716       71,875       56,192       23,110  
Average total assets
    394,722       341,284       298,173       163,621  
Average shareholders’ equity as a percentage of average total assets
    19.2 %     21.1 %     18.8 %     14.1 %
Average shareholders’ equity excluding goodwill as a percentage of average total assets excluding goodwill:
                               
Average shareholders’ equity
    75,716       71,875       56,192       23,110  
Average goodwill
    27,975       28,312       27,714       8,925  
Average shareholders’ equity excluding goodwill
    47,741       43,562       28,478       14,185  
Average total assets
    394,722       341,284       298,173       163,621  
Average goodwill
    27,975       28,312       27,714       8,925  
Average total assets excluding goodwill
    366,746       312,972       270,460       154,696  
Average shareholders’ equity excluding goodwill as a percentage of average total assets excluding goodwill
    13.0 %     13.9 %     10.5 %     9.2 %
 
 
   
At and for the year ended December 31,
 
   
2011
   
2010
   
2009
   
2008
 
   
(in millions of R$, except as otherwise indicated)
 
Non-performing assets as a percentage of shareholders’ equity:
     
Non-performing assets
    13,073       9,349       9,900       7,730  
Shareholders’ equity
    77,045       72,572       68,706       49,318  
Non-performing assets as a percentage of shareholders’ equity
    17.0 %     12.9 %     14.4 %     15.7 %
Non-performing assets as a percentage of shareholders’ equity excluding goodwill:
                               
Non-performing assets
    13,073       9,349       9,900       7,730  
Shareholders’ equity
    77,045       72,572       68,706       49,318  
Goodwill
    27,218       28,312       28,312       27,488  
Shareholders’ equity excluding goodwill
    49,827       44,259       40,394       21,829  
Non-performing assets as a percentage of shareholders’ equity excluding goodwill
    26.2 %     21.1 %     24.5 %     35.4 %
 
Our calculation of these non-GAAP measures may differ from the calculation of similarly titled measures used by other companies.  We believe that these non-GAAP financial measures provide useful information to investors because the substantial impact of the R$27 billion goodwill arising from the acquisition of Banco Real during the year ended December 31, 2008 masks the significance of other factors affecting shareholders’ equity and the related ratios.  In addition, consistent with the guidance provided by the Basel II framework with respect to capital measurement, in all measures used to manage our business, we consider shareholders’ equity excluding goodwill.  We believe that exclusion of goodwill from shareholders’ equity, in addition to being consistent with Basel II, reflects the economic substance of our capital because goodwill is not an asset that can absorb cash losses and we do not otherwise take it into account in managing our operations.  Accordingly, we believe that the non-GAAP measures presented are useful to investors, because they reflect the economic substance of our capital.  The limitation associated with the exclusion of goodwill from shareholders’ equity is that it has the effect of excluding a portion of the total investment in our assets.  We compensate for this limitation by also considering shareholders equity including goodwill, as set forth in the above tables.
 
(3)
In July 2008, new regulatory capital measurement rules, which implement the Basel II standardized approach, went into effect in Brazil, including a new methodology for credit risk and operational risk measurement, analysis and management.  As a result, our capital adequacy ratios as of any date after July 2008 are not comparable to our capital ratios as of any prior date.  Our Basel capital adequacy ratios are calculated excluding goodwill, in accordance with the Basel II standardized approach (provided by the “International Convergence of Capital Measurement and Capital Standards—A Revised Framework Comprehensive Version” issued by the Basel Committee on Banking Supervision from the Bank for International Settlements).  In December 2010, the Brazilian Central Bank issued the Circular 3,515 that introduced the rule weight of 150% for lending operations over 24 months, allowing some exceptions given the type of operation, maturity and guarantees.  In November 2011, the Circular 3,515 was revoked and the Brazilian Central Bank issued the Circular 3,563 that required the application of 150% ask weight for financing vehicles, risk weight reduction for payroll loans originated up to July 2011 from 150% to 75% or 100%, and raised the risk weight to 300% for payroll and personal loans that have no specific purpose and a term over 60 months, originated as from November 14, 2011.
 
(4)
Non-performing assets include all credits past due by more than 90 days and other doubtful credits.  For further information see “Item 4. Information on the Company—Selected Statistical Information—Impaired Assets”.
 
(5)
Computable credit risk is the sum of the face amounts of loans and leases (including non-performing assets), guarantees and documentary credits.
 
(6)
Efficiency ratio is defined as administrative expenses divided by total income.  Our calculation for the efficiency ratio disclosed herein differs from another, with similar name, used by us in our quarterly managerial reports, due to an adjustment made in those quarterly reports in light of the results of the hedge of the investment in the Cayman Islands branch, which is included in our total income.  The adjustment, which impacts the line items income tax, gains (losses) on financial assets and liabilities and exchange rate differences, does not affect net profit.  Our management believes that the adjusted efficiency ratio provides a more consistent framework for evaluating and conducting business, as a result of excluding from our revenues the effect of the volatility caused by possible gains and losses on our hedging strategies for tax purposes.  For example, in 2011, the effects of the devaluation of the real against the U.S. dollar impacted our hedging of the investments held in our Cayman Islands branch generating losses of R$1,646 million recorded under “gains/losses on
 
 
 
financial assets and liabilities (net)”, equivalent to 1.6 percentage points variance in the efficiency ratio.  In 2010 and 2009, the impact of hedging the investment held in our Cayman Islands branch was a gain of R$272 million and R$1,146 million, respectively, which corresponded to a variation in the efficiency ratio of 0.3 percentage points in 2010 and 1.3 percentage points in 2009.  Considering the adjusted calculation, which excludes the effect of the hedging of the investment in our Cayman Islands branch as well as the variation of the foreign exchange rate of the real to U.S. dollar, the efficiency ratio was 34.0% in 2011, 34.8% in 2010 and 36.3% in 2009.
 
The table below presents the reconciliation of our adjusted efficiency ratio to the most directly comparable GAAP financial measurement for each of the periods presented.
 
   
At and for the years ended December 31,
 
   
2011
   
2010
   
2009
   
2008
   
2007
 
   
(in millions of R$, except as otherwise indicated)
 
Efficiency ratio
                             
Administrative expenses
    12,373       11,231       10,947       7,185       4,460  
Total income
    34,775       32,553       31,280       15,971       11,367  
of which:
                                       
Gains (losses) on financial assets and liabilities (net)
    (235 )     1,875       2,665       190       1,899  
Efficiency ratio
    35.6 %     34.5 %     35.0 %     45.0 %     39.2 %
                                         
Total Income
    34,775       32,553       31,280       15,971       11,367  
Income tax including effects of Cayman tax hedge
    1,646       272       1,146              
Total income excluding effects of Cayman tax hedge
    36,421       32,281       30,134       15,971       11,367  
                                         
Administrative expenses
    12,373       11,231       10,947       7,185       4,460  
Total income excluding effects of Cayman tax hedge
    36,421       32,281       30,134       15,971       11,367  
of which:
                                       
Gains (losses) on financial assets and liabilities (net) excluding effects of Cayman tax hedge
    1,411       1,603       1,519       190       1,899  
Efficiency ratio adjusted for effects of Cayman tax hedge
    34.0 %     34.8 %     36.3 %     45.0 %     39.2 %
 

Exchange Rates
 
The Brazilian foreign exchange system allows the purchase and sale of foreign currency and the international transfer of reais by any person or legal entity, regardless of the amount, subject to certain regulatory procedures.
 
Since 1999, the Brazilian Central Bank has allowed the real/U.S. dollar exchange rate to float freely, which resulted in increased foreign exchange rate volatility.  Until early 2003, the value of the real declined in relation to the U.S. dollar.  Since then, the trend has been of a strengthening of the real, except during the most severe period of the global economic crisis.  In the past, the Brazilian Central Bank has intervened occasionally to control unstable movements of exchange rates.  We cannot predict whether the Brazilian Central Bank or the Brazilian government will continue to let the real float freely or will intervene in the exchange rate through a currency band system or otherwise.  The real may fluctuate against the U.S. dollar substantially in the future.  For further information on these risks, see “—D. Risk Factors—Risks Relating to Brazil—Exchange rate volatility may have a material adverse effect on the Brazilian economy and our business.”
 
 
The following tables set forth the selling rate, expressed in reais per U.S. dollar (R$/U.S.$), for the periods indicated:
 
 
   
Period-end
   
Average(1)
   
Low
   
High
 
   
(per U.S. dollar)
 
Year:
                       
2007
    1.77       1.95       1.73       2.15  
2008
    2.33       1.84       1.56       2.50  
2009
    1.74       1.99       1.70       2.42  
2010
    1.66       1.76       1.65       1.88  
2011
    1.87       1.67       1.53       1.90  

 
   
Period-end
   
Average(1)
   
Low
   
High
 
   
(per U.S. dollar)
 
Month Ended:
                       
October 2011
    1.69       1.77       1.69       1.89  
November 2011
    1.81       1.79       1.73       1.89  
December 2011
    1.87       1.84       1.78       1.88  
January 2012
    1.74       1.79       1.74       1.87  
February 2012
    1.71       1.72       1.70       1.74  
March 2012 (through March 29)
    1.83       1.79       1.72       1.83  

Source: Brazilian Central Bank
 
(1)
Represents the average of the exchange rates on the closing of each business day during the period.
 
Exchange rate fluctuation will affect the U.S. dollar equivalent of the market price of our units on the Stock Exchange, Commodities and Futures BM&FBOVESPA S.A. (Bolsa de Valores, Mercadorias e Futuros, or “BM&FBOVESPA”), as well as the U.S. dollar value of any distributions we make with respect to our units, which will be made in reais.  See “—D. Risk Factors—Risks Relating to Brazil”.
 
Our parent company, Santander Spain, reports its financial condition and results of operations in euros.  As of December 31, 2011, the exchange rate for euro to real was R$2.43 per €1.00.
 
Capitalization and Indebtedness
 
Not applicable.
 
C. 
Reasons for the Offer and Use of Proceeds
 
Not applicable.
 
D. 
Risk Factors
 
Our business, financial condition and results of operations could be materially and adversely affected if any of the risks described below occur.  As a result, the market price of our units and the American Depositary Shares (“ADSs”) could decline, and you could lose all or part of your investment.  We may face additional risks and uncertainties that are not presently known to us, or that we currently deem immaterial, which may also impair our business.
 
 
Risks Relating to Brazil
 
The Brazilian government has exercised, and continues to exercise, significant influence over the Brazilian economy.  This involvement, together with Brazil’s political and economic conditions, could adversely affect our financial condition and the market price of our securities.
 
The Brazilian government frequently intervenes in the Brazilian economy and occasionally makes significant changes in policies and regulations.  The Brazilian government’s actions to control inflation and other policies and regulations historically have involved, among other measures, increases in interest rates, changes in tax policies, price controls, currency fluctuations, taxation on investment flows, capital controls and limits on imports.  Our business, financial condition and results of operations, as well as the market price of our securities, may be adversely affected by changes in policies or regulations involving, among others:
 
 
·
interest rates;
 
 
·
exchange rates and controls and restrictions on the movement of capital out of Brazil (such as those briefly imposed in 1989 and early 1990);
 
 
·
currency fluctuations;
 
 
·
inflation;
 
 
·
liquidity of the domestic capital and lending markets; and
 
 
·
tax and regulatory policies.
 
Although the Brazilian government has implemented what we believe to be sound economic policies over the past few years, uncertainty over whether the Brazilian government will implement changes in policy or regulation in the future may contribute to economic uncertainty in Brazil and to heightened volatility in the Brazilian securities markets and in the securities issued abroad by Brazilian issuers.  These uncertainties and other developments in the Brazilian economy may adversely affect us and the market value of our securities.
 
Near the end of 2010, in order to stabilize economic growth and prevent the economy from overheating, the Brazilian Central Bank began implementing certain restrictive monetary policies and other measures aimed at controlling consumer lending.  These measures included increasing the minimum capital requirement for certain loans, establishing standards for credit card holders to make minimum payments on outstanding credit card balances (set at 15% of outstanding balances in June 2011 and increased to 20% in December 2011), and expanding compulsory deposits for financial institutions.  Beginning in the second half of 2011, as indicators reflected a moderation and even potential weakening in economic activity, the Brazilian Central Bank eased many of the restrictive measures it had introduced previously.  Any changes in regulatory capital requirements for lending, reserve requirements or credit card regulations, among others, may materially adversely affect our business.
 
Government efforts to control inflation may hinder the growth of the Brazilian economy and could harm our business.
 
Brazil has experienced extremely high rates of inflation in the past and has therefore implemented monetary policies that have resulted in one of the highest interest rates in the world.  The Brazilian government’s measures to fight inflation, principally through the Brazilian Central Bank, have had and may in the future have significant effects on the Brazilian economy and our business.  Tight monetary policies with high interest rates and high compulsory deposit requirements may restrict Brazil’s growth and the availability of credit, reduce our loan volumes and increase our loan loss provisions.  Conversely, more lenient government and Brazilian Central Bank policies and interest rate decreases may trigger increases in inflation, and, consequently, growth volatility and the need for sudden and significant interest rate increases, which could negatively affect our interest rate spreads.
 
From January 2000 to August 2005, the average interest rate in Brazil was 18.9%, with the minimum rate of 15.25% and maximum of 26.50% during this period.  With the favorable macroeconomic environment and inflation stability, the Brazilian Central Bank began a cycle of reducing interest rates starting in September 2005 from 19.5%
 
 
to 8.75% in March 2010, when the interest rate reached a historical low.  After this period, in order to balance domestic demand, the Brazilian Central Bank began another period of adjustment in interest rates, which reached 12.5% in July 2011.  However, the Brazilian Central Bank revised its monetary policy in August 2011, when it implemented a monetary easing policy to mitigate the spillover effects of the ongoing international financial crisis (particularly in Europe).  As a result of this change in policy, the Special System of Settlement and Custody (Sistema Especial de Liquidação e Custódia – SELIC rate (which is the benchmark interest rate payable to holders of certain securities issued by the Brazilian government)) reached 9.75% in March 2012.
 
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 materially and adversely affect the growth of the Brazilian economy, our loan portfolios, our cost of funding and our income from credit operations.
 
The increase in the base interest rates may adversely affect us by reducing the demand for our credit and investment products, increasing funding costs and risk of default by our customers.  The decreases in basic interest rates may also have negative effects on our results by reducing interest income.  We also use an asset and liability management strategy to protect net interest income.  Any changes in interest rates may negatively impact our earnings, due to our asset and liability management strategy.
 
Changes in taxes and other fiscal assessments may adversely affect us.
 
The Brazilian government regularly enacts reforms to the tax and other assessment regimes to which we and our customers are subject.  Such reforms include changes in the rate of assessments and, occasionally, enactment of temporary taxes, the proceeds of which are earmarked for designated governmental purposes.  The effects of these changes and any other changes that result from enactment of additional tax reforms have not been, and cannot be, quantified and there can be no assurance that these reforms will not, once implemented, have an adverse effect upon our business.  Furthermore, such changes may produce uncertainty in the financial system, increasing the cost of borrowing and contributing to the increase in our non-performing credit portfolio.
 
Furthermore, such changes may produce uncertainty in the financial system, increasing the cost of borrowing and contributing to the increase in our non-performing credit.  Future changes in tax policy that may affect financial operations include the creation of new taxes.  For example, in July 2011, the Brazilian government introduced a tax on securities transactions (“IOF/Securities-Derivatives”) at the rate of 1.0% on the notional adjusted value of financial derivatives.  Also, the government changed the tax charged on consumer financial transactions in 2011:  an increase of 1.5% per year in April and a reduction of 0.5% per year in December.  Until 2007, certain financial transactions were subject to 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”).  However, much uncertainty exists as to whether the CPMF or a similar tax will be re-introduced in the future.  Also, the Brazilian Congress may discuss broad tax reforms in Brazil to improve the efficiency of allocation of economic resources, as proposed by the executive branch of the Brazilian federal government.  Major tax reforms in Brazil have been discussed over the last few years.  We cannot predict if such tax reforms will be implemented in the future.  The effects of these changes, if enacted, and any other changes that could result from the enactment of additional tax reforms, cannot be quantified.
 
Exchange rate volatility may have a material adverse effect on the Brazilian economy and on our business.
 
The Brazilian currency has during the past decades experienced frequent and substantial variations in relation to the U.S. dollar and other foreign currencies.  Between 2000 and 2002, the real depreciated significantly against the U.S. dollar, reaching a selling exchange rate of R$3.53 per U.S.$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 macroeconomic environment and a strong increase in foreign investment in Brazil, with the exchange rate reaching R$1.56 per U.S.$1.00 in August 2008.  As a result of the crisis in the global financial markets since mid-2008, the real depreciated 31.9% against the U.S. dollar over the course of 2008 and reached R$2.34 per U.S.$1.00 on December 31, 2008.  The real recovered in the second half of 2009 and continued to appreciate in 2010, reaching R$1.74 per U.S.$1.00 on December 31, 2009 and R$1.67 per U.S.$1.00 on December 31, 2010, mainly due to the recovery of consumer confidence and exports and foreign investments in the second half of 2009, the effects of which continued
 
 
through 2010.  The real continued to appreciate in early 2011 reaching R$1.53 per U.S.$1.00 on July 26, but depreciated during the second half of the year due to the ongoing international financial crisis (particularly in Europe) which caused certain selling pressure on the real and the exchange rate as of December 31, 2011 was R$1.88 per U.S.$1.00.  The real has since appreciated, reaching R$1.83 per U.S.$1.00 on March 29, 2012.
 
Depreciation of the real against the U.S. dollar could create inflationary pressures in Brazil and cause increases in interest rates, which could negatively affect the growth of the Brazilian economy as a whole and harm our financial condition and results of operations.  Additionally, depreciation of the real could make our foreign currency-linked obligations and funding more expensive, negatively affect the market price of our securities portfolios and have similar consequences for our borrowers.  Conversely, appreciation of the real relative to the U.S. dollar and other foreign currencies could lead to a deterioration of the Brazilian foreign exchange currency accounts, as well as dampen export-driven growth.  Depending on the circumstances, either depreciation or appreciation of the real could materially and adversely affect the growth of the Brazilian economy and our business, financial condition and results of operations.
 
Risks Relating to our Business and the Brazilian Financial Services Industry
 
Developments and the perception of risk in other countries, especially in the United States, European countries and in emerging market countries, may adversely affect our access to financing and the market price of our securities.
 
The market value of securities of Brazilian issuers is affected by economic and market conditions in other countries, including the United States, European countries (including Spain, where Santander Spain, our controlling shareholder, is based), as well as in other Latin American and emerging market countries.  Even though the world economy and the financial and capital markets had been recovering of the 2008 crisis throughout 2010 and early 2011, the conditions of the global markets again deteriorated in 2011.  European countries encountered serious fiscal problems, including high debt levels that impair growth and increase the risk of sovereign default.  At the same time, the United States faced fiscal difficulties, which culminated in the downgrade of the U.S. long-term sovereign credit rating by Standard & Poor’s.  Concerns regarding the crisis in Europe intensified in the third quarter of 2011 and the probability of a new global recession increased.  Although economic conditions in those 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.  In particular, investor perceptions of the risks associated with our securities may be affected by perception of risk conditions in Spain.  Additionally, crises in other emerging market countries may diminish investor interest in securities of Brazilian issuers, including our securities.  This could adversely affect the market price of our securities, restrict our access to the capital markets and compromise our ability to finance our operations in the future on favorable terms, or at all.
 
We are exposed to the 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 deteriorated sharply between 2007 and 2009.  During this period, major financial institutions, including some of the largest global commercial banks, investment banks and insurance companies experienced significant difficulties, especially lack of liquidity and depreciation of financial assets.  These difficulties constricted the ability of a number of major global financial institutions to engage in further lending activity and caused losses.  In addition, defaults by, and doubts about the solvency of certain financial institutions and the financial services industry generally led to market-wide liquidity problems which led and could continue to lead to losses or defaults by, and bankruptcies of, other institutions and contributed to a severe global recession.
 
The global economy began to recover from these conditions toward the end of 2009, however, such recovery depends on a number of factors, including a return of job growth and investments in the private sector as well as the timing of the exit from government credit easing policies by central banks globally.  In addition, global investor confidence remains cautious and recent downgrades of the sovereign debt of Ireland, Greece, Portugal, Italy, Spain and France have caused renewed volatility in the capital markets.  A continued or worsening disruption and volatility in the global financial markets could have a material adverse effect on our ability to access capital and liquidity on financial terms acceptable to us, if at all.  A slowing of the economic recovery or a renewed recession could result in a return of some or all of the adverse effects of the earlier recessionary conditions.
 
 
We continue to be exposed to disruptions and volatility in the global financial markets because of their effects on the financial and economic environment in the countries in which we operate, particularly Brazil, such as a slowdown in the economy, an increase in the unemployment rate, a decrease in the purchasing power of consumers and the lack of credit availability.  We lend primarily to Brazilian borrowers, and these effects could materially and adversely affect our customers and increase our non-performing loans, resulting in increased risk associated with our lending activity and requiring us to make corresponding revisions to our risk management and loan loss reserve models.  For example, in 2009, we experienced an increase in our non-performing loans overdue past 90 days from 5.4% of total loans on December 31, 2008 to 7.2% on December 31, 2009.  After this period, the levels of these operations decelerated and reached 5.8%, at the end of December 2010.  As of December 31, 2011, due in part to increasing economic uncertainty globally and a slowdown in the Brazilian economy, non-performing loans overdue past 90 days increased and accounted for 6.7% of total loans.
 
Continued or worsening disruption or volatility in the global financial markets could further increase negative effects on the financial and economic environment in Brazil and the other countries in which we operate, which could have a material adverse effect on us.
 
Changes in regulation may negatively affect us.
 
Brazilian financial markets are subject to extensive and continuous regulatory review by the Brazilian government, principally by the Brazilian Central Bank and the CVM.  We have no control over government regulations, which govern all aspects of our operations, including regulations that impose:
 
 
·
minimum capital requirements;
 
 
·
compulsory deposit and/or reserve requirements;
 
 
·
requirements for investments in fixed rate assets;
 
 
·
lending limits and other credit restrictions, including compulsory allocations;
 
 
·
limits and other restrictions on fees;
 
 
·
limits on the amount of interest banks can charge or the period for capitalizing interest;
 
 
·
accounting and statistical requirements; and
 
 
·
other requirements or limitations in the context of the global financial crisis.
 
The regulatory structure governing Brazilian financial institutions is continuously evolving, and the Brazilian Central Bank has been known to react actively and extensively to developments in our industry.  For example, since early 2008, the Brazilian Central Bank has repeatedly amended the rules related to compulsory deposit requirements in order to adjust the market liquidity in light of financial and economic conditions.  The measures of the Brazilian Central Bank and the amendment of existing laws and regulations, or the adoption of new laws or regulations (such as future implementation of Basel III rules related to regulatory capital) could adversely affect our ability to provide loans, make investments or render certain financial services.
 
Our securities and derivative financial instruments are subject to market price and liquidity variations due to changes in economic conditions and may produce material losses.
 
Financial instruments and securities represent a significant amount of our total assets.  Any realized or unrealized future gains or losses from these investments or hedging strategies could have a significant impact on our income.  These gains and losses, which we account for when we sell or mark-to-market investments in financial instruments, can vary considerably from one period to another.  If, for example, we enter into derivatives transactions to protect ourselves against decreases in the value of the real or in interest rates and the real instead increases in value or interest rates increase, we may incur financial losses.  We cannot forecast the amount of gains or losses in any future period, and the variations experienced from one period to another do not necessarily provide a meaningful forward-looking reference point.  Gains or losses in our investment portfolio may create volatility in net
 
 
revenue levels, and we may not earn a return on our consolidated investment portfolio, or on a part of the portfolio in the future.  Any losses on our securities and derivative financial instruments could materially and adversely affect our operating income and financial condition.  In addition, any decrease in the value of these securities and derivatives portfolios may result in a decrease in our capital ratios, which could impair our ability to engage in lending activity at the levels we currently anticipate.
 
The increasingly competitive environment and recent consolidations in the Brazilian financial services market may adversely affect our business prospects.
 
The Brazilian financial markets, including the banking, insurance and asset management sectors, are highly competitive.  We face significant competition in all of our main areas of operation from other Brazilian and international banks, both public and private, as well as insurance companies.  In recent years, the presence of foreign banks and foreign insurance companies in Brazil has increased, as well as competition in the sectors of banking and insurance.  Furthermore, the consolidation of the Brazilian financial sector, with the merger of large banks, especially in 2008 and 2009, and the privatization of public banks have also increased competition in the Brazilian market for banking and financial services more competitive.  In 2009, we experienced the compression of credit spreads by some of our competitors, following the public banks which aggressively increased their volume of loans with spreads lower than those charged by private banks.  As was the case in 2009, we may experience similar situations that may affect us negatively and reduce our market share in the future.
 
New mergers and acquisitions of banks and insurance companies by one of our competitors would likely increase such competitor’s market share and customer base, and, as a result, we may face heightened competition.  An increase in competition may negatively affect our business results and prospects by, among other things:
 
 
·
limiting our ability to increase our customer base and expand our operations;
 
 
·
reducing our profit margins on the banking, insurance, leasing and other services and products we offer; and
 
 
·
increasing competition for investment opportunities.
 
We may experience increases in our level of past due loans as our loan portfolio matures.
 
Our loan portfolio has grown substantially in recent years.  Any corresponding rise in our level of past due loans may lag behind the rate of loan growth.  Rapid loan growth may also reduce our ratio of past due loans to total loans until growth slows or the portfolio becomes more seasoned.  This may result in increases in our loan loss provisions, charge-offs and the ratio of past due loans to total loans.  In addition, as a result of the increase in our loan portfolio and the lag in any corresponding rise in our level of past due loans, our historic loan loss experience may not be indicative of our future loan loss experience.
 
Our loan portfolio may not continue to grow at the same rate and economic uncertainty may lead to a contraction in our loan portfolio.
 
There can be no assurance that our loan portfolio will continue to grow at rates similar to the historical growth rate we have experienced.  A reversal of the rate of growth of the Brazilian economy, a slowdown in the growth of customer demand, an increase in market competition or changes in governmental regulation and an increase of the SELIC rate, could adversely affect the rate of growth of our loan portfolio and our risk index and, accordingly, increase our required allowances for loan losses.  Economic uncertainty could materially adversely affect the liquidity, businesses and financial condition of our customers as well as lead to a general decline in consumer spending and a rise in unemployment.  All this could in turn lead to decreased demand for borrowings in general, which could have a material adverse effect on our business.
 
During the second half of 2011, the Brazilian economy showed signs of a moderate slowdown in economic activity, reflecting the combination of weaker global demand and the delayed effects of the Brazilian Central Bank’s restrictive monetary policies implemented between April 2010 and the first half of 2011.  The deceleration was particularly sharp in industrial production, which remained weak throughout the year.  Domestic demand also declined, but remained stronger than industrial activity, sustained by ongoing gains in employment and income.  
 
 
Inflation has declined as a result of the economic slowdown, but remains a point of concern for Brazilian regulatory authorities.  Ongoing global volatility (particularly in Europe), combined with the relative decline in inflation and its inherent risks for the Brazilian economy led the Brazilian Central Bank to reduce the target SELIC rate to 11.0% per annum in December 2011, and the Brazilian Central Bank partially reversed certain of the restrictive measures adopted in 2010 in an effort to stimulate credit growth.  In March, 2012 the Brazilian Central Bank further reduced the SELIC rate to 9.75% per annum.
 
Credit, market and liquidity risks may have an adverse effect on our credit ratings and our cost of funds.  Any downgrading in Brazil’s, our controlling shareholder’s, or our credit rating, would likely increase our cost of funding, require us to post additional collateral under some of our derivative contracts and adversely affect our interest margins and results of operations.
 
Credit ratings affect the cost and other terms upon which we are able to obtain funding.  Rating agencies regularly evaluate us and their ratings of our long-term debt are based on a number of factors, including our financial strength as well as conditions affecting the financial services industry generally.
 
Any downgrade in Brazil’s, our controlling shareholder’s, or our ratings, would likely increase our borrowing costs and require us to post additional collateral under some of our derivative contracts and could limit our access to capital markets and adversely affect our commercial business.  For example, a ratings downgrade could adversely affect our ability to sell or market certain of our products, such as subordinated securities, engage in certain longer-term and derivatives transactions, and retain our customers, particularly customers who need a minimum rating threshold in order to invest.  This, in turn, could reduce our liquidity and have an adverse effect on our operating results and financial condition.
 
Our foreign currency long-term debt is currently rated BBB with a stable outlook by Standard & Poor’s Ratings Services (“S&P”), BBB+ with a stable outlook by Fitch Ratings Ltd. (“Fitch”) and Baa2 with a positive outlook by Moody’s Investor Services, Inc. (“Moody’s”).  On February 13, 2012, Fitch downgraded our controlling shareholder’s ratings to A (Negative) from AA-, following a similar action on January 27, 2012, with the Spanish sovereign which was downgraded to A (Negative) from AA-. Furthermore, on February 13, 2012, S&P downgraded the rating of our controlling shareholder to A (Negative) from AA-.  Additionally, on December 16, 2011, Moody’s downgraded our controlling shareholder’s rating to Aa3 (Negative) from Aa2, and on February 13, 2012, downgraded Spain’s sovereign rating to A3 (Negative) from Aa2. Any additional adverse revisions to our controlling shareholder’s ratings and/or Brazil’s credit ratings may adversely affect our ratings, our business, future financial performance, stockholder’s equity and the price of our securities.
 
In light of the difficulties in the financial services industry and the financial markets, there can be no assurance that the rating agencies will maintain their current ratings or outlooks, or with regard to those rating agencies who have a negative outlook on our Company or our controlling shareholder, there can be no assurances that such agencies will revise such outlooks upward.  Our failure to maintain favorable ratings and outlooks would likely increase our cost of funding and adversely affect our interest margins and results of operations.
 
The effectiveness of our credit risk management is affected by the quality and scope of information available in Brazil.
 
In assessing customers’ creditworthiness, we rely largely on the credit information available from our own internal databases, certain publicly available consumer credit information and other sources.  Due to limitations in the availability of information and the developing information infrastructure in Brazil, our assessment of credit risk associated with a particular customer may not be based on complete, accurate or reliable information.  In addition, we cannot assure you that our credit scoring systems collect complete or accurate information reflecting the actual behavior of customers or that their credit risk can be assessed correctly.  Without complete, accurate and reliable
 
 
information, we have to rely on other publicly available resources and our internal resources, which may not be effective.  As a result, our ability to effectively manage our credit risk and subsequently our loan loss allowances may be materially adversely affected.
 
Since our principal sources of funds are short-term deposits, a sudden shortage of funds could cause an increase in costs of funding and an adverse effect on our revenues.
 
Customer deposits are our primary source of funding.  As of December 31, 2011, 55.3% of our customer deposits had remaining maturities of one year or less, or were payable on demand.  A significant portion of our assets have longer maturities, resulting in a mismatch between the maturities of liabilities and the maturities of assets.  If a substantial number of our depositors withdraw their demand deposits or do not roll over their time deposits upon maturity, our liquidity position, results of operations and financial condition may be materially and adversely affected.  We cannot assure you that in the event of a sudden or unexpected shortage of funds in the banking system, any money markets in which we operate will be able to maintain levels of funding without incurring higher funding costs or the liquidation of certain assets.  If this were to happen, our results of operations and financial condition may be materially adversely affected.
 
Our business is highly dependent on proper functioning and improvement of information technology systems.
 
Our business is highly dependent on the ability of our information technology systems to accurately process a large number of transactions across numerous and diverse markets and products in a timely manner.  The proper functioning of our financial control, risk management, accounting, customer service and other data processing systems is critical to our business and our ability to compete effectively.  We have backup data for our key data processing systems that could be used in the event of a catastrophe or a failure of our primary systems, and have established alternative communication networks where available.  However, we do not operate all of our redundant systems on a real time basis and cannot assure you that our business activities would not be materially disrupted if there were a partial or complete failure of any of these primary information technology systems or communication networks.  Such failures could be caused by, among other things, major natural catastrophes, software bugs, computer virus attacks or conversion errors due to system upgrading.  In addition, any security breach caused by unauthorized access to information or systems, or intentional malfunctions or loss or corruption of data, software, hardware or other computer equipment, could have a material adverse effect on our business, results of operations and financial condition.
 
Our ability to remain competitive and achieve further growth will depend in part on our ability to upgrade our information technology systems and increase our capacity on a timely and cost effective basis.  Any substantial failure to improve or upgrade information technology systems effectively or on a timely basis could materially and adversely affect our competitiveness, results of operations and financial condition.
 
We are subject to counterparty risk in our banking business.
 
We are exposed to counterparty risks in addition to credit risks associated with lending activities.  Counterparty risk may arise from, for example, investing in securities of third parties, entering into derivative contracts under which counterparties have obligations to make payments to us, or executing securities, futures, currency or commodity trades from proprietary trading activities 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.  If these risks give rise to losses, this could materially and adversely affect our results of operations and financial condition.  We have a diversified loan portfolio, with no specific concentration exceeding 10.0% of total loans, however we cannot assure this will continue to be the case.  If counterparty risks give rise to losses, this could materially and adversely affect our results of operations and financial condition.
 
Failure to protect personal information could adversely affect us.
 
We manage and hold confidential personal information of customers in the conduct of our banking operations.  Although we have procedures and controls to safeguard personal information in our possession, unauthorized disclosures could subject us to legal actions and administrative sanctions as well as damages that could materially and adversely affect our results of operations and financial condition.
 
 
Our loan portfolios are subject to risk of prepayment, which may result in reinvestment of assets on less profitable terms.
 
Our loan portfolios are subject to prepayment risk which results from the ability of a borrower to pay a loan prior to maturity and which comes at a time that is inconsistent with the financing of such loan by us.  Generally, in a declining interest rate environment, prepayment activity increases with the effect of reducing weighted average lives of interest earning assets and adversely affecting results.  Prepayment risk also has an adverse impact on our credit card and residential mortgage portfolios, since prepayments could shorten the weighted average life of these portfolios, which may result in a mismatch in funding or in reinvestment at lower yields.
 
Our market, credit and operational risk management policies, procedures and methods may not be fully effective in mitigating our exposure to all risks, including unidentified or unanticipated risks.
 
Our market and credit risk management policies, procedures and methods, including our use of value at risk, or “VaR”, and other statistical modeling tools, 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 metrics for managing risk are based upon our use of observed historical market behavior.  We apply statistical and other tools to these observations to arrive at quantifications of our risk exposures.  These qualitative tools and metrics 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 negatively affect our revenues and profits.
 
In addition, our businesses depend on the ability to process a large number of transactions efficiently and accurately.  Losses can result from inadequate personnel, inadequate or failed internal control processes and systems, information systems failures 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 have suffered losses from operational risk in the past, and there can be no assurance that we will not suffer material losses from operational risk in the future.
 
Our controlling shareholder has a great deal of influence over our business.
 
Santander Spain, our controlling shareholder, currently owns, directly and indirectly, approximately 75.6% of our total capital.  Due to its share ownership, our controlling shareholder has the power to control us and our subsidiaries, including the power to:
 
 
·
elect a majority of our directors that appoint our executive officers, set our management policies and exercise overall control over our company and subsidiaries;
 
 
·
agree to sell or otherwise transfer its controlling stake in our company; and
 
 
·
determine the outcome of substantially all actions requiring shareholder approval, including transactions with related parties, corporate reorganizations, acquisitions and dispositions of assets, and dividends.
 
The interests of Santander Spain may differ from our interests or those of our other shareholders, and the concentration of control in Santander Spain will limit other shareholders’ ability to influence corporate matters.  As a result, we may take actions that our other shareholders do not view as beneficial.
 
Our status as a controlled company and a foreign private issuer exempts us from certain of the corporate governance standards of the New York Stock Exchange (“NYSE”), limiting the protections afforded to investors.
 
We are a “controlled company” and a “foreign private issuer” within the meaning of the NYSE corporate governance standards.  Under the NYSE rules, a controlled company is exempt from certain NYSE corporate
 
 
governance requirements.  In addition, a foreign private issuer may elect to comply with the practice of its home country and not to comply with certain NYSE corporate governance requirements, including the requirements that (1) a majority of the board of directors consist of independent directors, (2) a nominating and corporate governance committee be established that is composed entirely of independent directors and has a written charter addressing the committee’s purpose and responsibilities, (3) a compensation committee be established that is composed entirely of independent directors and has a written charter addressing the committee’s purpose and responsibilities and (4) an annual performance evaluation of the nominating and corporate governance and compensation committees be undertaken.  Although we have similar practices, they do not entirely conform to the NYSE requirements, therefore we currently use these exemptions and intend to continue using them.  Accordingly, you will not have the same protections afforded to shareholders of companies that are subject to all NYSE corporate governance requirements.
 
Risks Relating to Our Units and American Depositary Shares (ADSs)
 
Cancellation of units may have a material and adverse effect on the market for the units and on the value of the units.
 
Holders of units may present these units or some of these units for cancellation in Brazil in exchange for the common shares and preferred shares underlying these units.  If unit holders present a significant number of units for cancellation in exchange for the underlying common shares and preferred shares, the liquidity and price of the units may be materially and adversely affected.
 
The relative volatility and limited liquidity of the Brazilian securities markets may negatively affect the liquidity and market prices of the units and the ADSs.
 
Although the Brazilian equity market is the largest in Latin America in terms of capitalization, it is smaller and less liquid than the major U.S. and European securities markets.  The BM&FBOVESPA is significantly less liquid than the NYSE or other major exchanges in the world.  As of December 31, 2011, the aggregate market capitalization of the BM&FBOVESPA was equivalent to approximately R$2.3 trillion (U.S.$1.2 trillion) and the top ten stocks in terms of trading volume accounted for approximately 53.1% of all shares traded on BM&FBOVESPA in the year ended December 31, 2011.  In contrast, as of December 31, 2011, the aggregate market capitalization of the NYSE was approximately U.S.$16.3 trillion.  Although any of the outstanding shares of a listed company may trade on the BM&FBOVESPA, 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, government entities or a principal shareholder.  The relative volatility and illiquidity of the Brazilian securities markets may substantially limit your ability to sell the units or ADSs at the time and price you desire and, as a result, could negatively impact the market price of these securities.
 
Actual or anticipated sales of a substantial number of units or our common shares or preferred shares in the future could decrease the market prices of the ADSs.
 
Sales of a substantial number of our units or our common shares or preferred shares in the future, or the anticipation of such sales, could negatively affect the market prices of our units and ADSs.  As of March 23, 2012, Santander Spain held approximately 75.6% of our total capital stock.  In connection with our listing on the BM&FBOVESPA, prior to October 7, 2012 (extendable under certain circumstances to October 7, 2014) Santander Brasil must have a public float that represents at least 25% of our total capital.  If, in the future, substantial sales of units or common shares or preferred shares are made by existing or future holders, the market prices of the ADSs may decrease significantly.  As a result, holders of ADSs may not be able to sell their ADSs at or above the price they paid for them.
 
The economic value of your investment may be diluted.
 
We may, from time to time, need additional funds and, in the event that public or private financing is unavailable or if our shareholders decide, we may issue additional units or shares.  Any additional funds obtained by such a capital increase may dilute your interest in our company.
 
 
Delisting of our shares from Level 2 of BM&FBOVESPA may negatively affect the price of our ADSs and units.
 
Companies listed on Level 2 of BM&FBOVESPA are required to have a public float of at least 25.0% of their outstanding shares.  Currently, our public float is approximately 24.1% of our outstanding capital.  We have a grace period of three years from October 7, 2009, the date of the listing our shares on Level 2 of BM&FBOVESPA, extendable for an additional two years upon presentation of a plan to BM&FBOVESPA to comply with the minimum public float requirement.  If we do not meet the minimum public float requirement, we may be subject to fines and eventually be delisted from Level 2 of BM&FBOVESPA and be traded at the regular level of BM&FBOVESPA.  Level 2 regulations are also subject to change, and we may not be able to comply with such changes.  Although such delisting could result in the obligation of the controlling shareholder to carry out a mandatory tender offer for the shares of the minority shareholders, such delisting may result in a decrease of the price of our shares, units and ADSs.
 
Holders of our units and our ADSs may not receive any dividends or interest on shareholders’ equity.
 
According to our by-laws, we must generally pay our shareholders at least 25% of our annual net income as dividends or interest on shareholders’ equity, as calculated and adjusted under Brazilian corporate law, which may differ significantly from our net income as calculated under IFRS.  This adjusted net income may be capitalized, used to absorb losses or otherwise retained as allowed under Brazilian corporate law method and may not be available to be paid as dividends or interest on shareholders’ equity.  Additionally, Brazilian corporate law allows a publicly traded company like ours to suspend the mandatory distribution of dividends in any particular year if our board of directors informs our shareholders that such distributions would be inadvisable in view of our financial condition or cash availability.  See “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—Payment of Dividends and Interest Attributable to Shareholders’ Equity—Dividends”.
 
Holders of ADSs may find it difficult to exercise voting rights at our shareholders’ meetings.
 
Holders of ADSs will not be direct shareholders of our company and will be unable to enforce directly the rights of shareholders under our by-laws and Brazilian corporate law.  Holders of ADSs may exercise voting rights with respect to the units represented by ADSs only in accordance with the deposit agreement governing the ADSs.  Holders of ADSs will face practical limitations in exercising their voting rights because of the additional steps involved in our communications with ADS holders.  For example, we are required to publish a notice of our shareholders’ meetings in specified newspapers in Brazil.  Holders of our units will be able to exercise their voting rights by attending a shareholders’ meeting in person or voting by proxy.  By contrast, holders of ADSs will receive notice of a shareholders’ meeting by mail from the American Depositary Receipts (“ADRs”) depositary following our notice to the depositary requesting the depository to do so.  To exercise their voting rights, holders of ADSs must instruct the ADR depositary on a timely basis on how they wish to vote.  This voting process necessarily will take longer for holders of ADSs than for holders of our units or shares.  If the ADR depositary fails to receive timely voting instructions for all or part of the ADSs, the depositary will assume that the holders of those ADSs are instructing it to give a discretionary proxy to a person designated by us to vote their ADSs, except in limited circumstances.
 
Holders of ADSs also may not receive the voting materials in time to instruct the depositary to vote the units underlying their ADSs.  In addition, the depositary and its agents are not responsible for failing to carry out voting instructions of the holders of ADSs or for the manner of carrying out those voting instructions.  Accordingly, holders of ADSs may not be able to exercise voting rights, and they will have little, if any, recourse if the units underlying their ADSs are not voted as requested.
 
Holders of ADSs could be subject to Brazilian income tax on capital gains from sales of ADSs.
 
Law No. 10,833 of December 29, 2003 provides that the disposition of assets located in Brazil by a non-resident to either a Brazilian resident or a non-resident is subject to taxation in Brazil, regardless of whether the disposition occurs outside or within Brazil.  This provision results in the imposition of income tax on the gains arising from a disposition of our units by a non-resident of Brazil to another non-resident of Brazil.  It is unclear whether ADSs representing our units, which are issued by the ADR depositary outside Brazil, will be deemed to be “property
 
 
located in Brazil” for purposes of this law.  There is no judicial guidance as to the application of Law No. 10,833 of December 29, 2003 and, accordingly, we are unable to predict whether Brazilian courts may decide that it applies to dispositions of our ADSs between non-residents of Brazil.  However, in the event that the disposition of assets is interpreted to include a disposition of our ADSs, this tax law would accordingly impose withholding taxes on the disposition of our ADSs by a non-resident of Brazil to another non-resident of Brazil.  See “Item 10. Additional Information—E. Taxation—Brazilian Tax Considerations”.
 
Any gain or loss recognized by a U.S. taxpayer will generally be treated as U.S. source gain or loss.  A U.S. taxpayer would not be able to credit any Brazilian tax imposed on the disposition of our units or ADSs against such person’s U.S. federal income tax liability, unless such credit can be applied (subject to applicable limitations) against tax due on other income of such person from foreign sources.
 
Judgments of Brazilian courts with respect to our units or ADSs will be payable only in reais.
 
If proceedings are brought in the courts of Brazil seeking to enforce our obligations in respect of the units or ADSs, we will not be required to discharge our obligations in a currency other than reais.  Under Brazilian exchange control limitations and according to Brazilian laws, an obligation in Brazil to pay amounts denominated in a currency other than reais may be satisfied in Brazilian currency only at the exchange rate, as determined by the Brazilian Central Bank or competent court, in effect on the date the judgment is obtained, and such amounts are then adjusted to reflect exchange rate variations through the effective payment date.  The then prevailing exchange may not afford non-Brazilian investors with full compensation for any claim arising out of or related to our obligations under the units or ADSs.
 
Holders of ADSs may be unable to exercise preemptive rights with respect to our units underlying the ADSs.
 
Holders of ADSs will be unable to exercise the preemptive rights relating to our units underlying ADSs unless a registration statement under the Securities Act, is effective with respect to those rights or an exemption from the registration requirements of the Securities Act is available.  We are not obligated to file a registration statement with respect to the shares relating to these preemptive rights or to take any other action to make preemptive rights available to holders of units or ADSs.  We may decide, in our discretion, not to file any such registration statement.  If we do not file a registration statement or if we and the ADR depository decide not to make preemptive rights available to holders of units or ADSs, those holders may receive only the net proceeds from the sale of their preemptive rights by the depositary, or if they are not sold, their preemptive rights will be allowed to lapse.
 
As a holder of ADSs you will have different shareholders’ rights than in the United States and certain other jurisdictions.
 
Our corporate affairs are governed by our by-laws and Brazilian corporate law, which may differ from the legal principles that would apply if we were incorporated in a jurisdiction in the United States or in certain other jurisdictions outside Brazil.  Under Brazilian corporate law, you and the holders of the preferred shares may have fewer and less well-defined rights to protect your interests relative to actions taken by our board of directors or the holders of our common shares than under the laws of other jurisdictions outside Brazil.
 
Although Brazilian corporate law imposes restrictions on insider trading and price manipulation, the form of these regulations and the manner of their enforcement may differ from that in the U.S. securities markets or markets in certain other jurisdictions.  In addition, in Brazil, self-dealing and the preservation of shareholder interests may be regulated differently, which could potentially disadvantage you as a holder of the preferred shares underlying ADSs.
 
 
A. 
History and Development of the Company
 
General
 
We are currently a publicly held company, incorporated under Brazilian law on August 9, 1985.  Our headquarters are located in Brazil, in the city of São Paulo, state of São Paulo, at Avenida Presidente Juscelino Kubitschek, 2,041 and 2,235, Bloco A, Vila Olímpia, 04543-011.  Our telephone number is 55-11-3553-3300.  
 
 
Documentation of our incorporation is duly registered with the Junta Comercial do Estado de São Paulo (Board of Trade of the State of São Paulo), or JUCESP, under NIRE (Registry Number) No. 35300332067.
 
Our agent for service is James H. Bathon, Managing Director - Legal and Compliance, Banco Santander, S.A., New York Branch, 45 E. 53rd Street New York, New York 10022.
 
Our board of directors at a meeting held on September 18, 2009 approved our global offering of units, including the issue of 525,000,000 (five hundred twenty-five million) units, all registered shares, without par value, free and clear of any liens or encumbrances, each representing 55 common shares and 50 preferred shares, all registered, without par value, free and clear of any liens or encumbrances.  The approved offering consisted of the simultaneous initial public offering of (1) units in Brazil (Brazilian Offering) in the over-the-counter market in accordance with CVM Instruction 400/2003 and (2) units outside of Brazil (International Offering), including in the form of ADRs representing ADSs registered with the U.S. Securities and Exchange Commission (SEC) under the Securities Act.  The board of directors also approved at such meeting our listing and the trading of units (comprised of common shares and preferred shares) in BM&FBOVESPA’s Level 2 of Corporate Governance Practices.
 
The units are traded on the BM&FBOVESPA, and the ADSs have been traded on the NYSE since October 7, 2009.
 
On October 29, 2009, the offering was increased by 6.9%, or 35,955,648 units, due to the partial exercise of the over-allotment option in the international offering.  The total capital increase amounted to R$12,989 million, net of issuance costs of R$194 million.
 
Overview
 
We are a leading full-service bank in Brazil, which we believe to be one of the most attractive markets in the world given its growth potential and low penetration rate of banking products and services.  We are the third largest private bank in Brazil in terms of assets, with an 8.4% market share, as of September 30, 2011, and the largest bank in Brazil controlled by a major global financial group, according to the Brazilian Central Bank.  Our operations are present in all Brazilian regions, strategically positioned in South and Southeast, an area that accounted for approximately 72.0% of Brazil’s GDP, and where we have one of the largest branch networks of any Brazilian bank.  For the year ended December 31, 2011, we generated net profit of R$7.8 billion, and at that date we had total assets of R$399.9 billion and total equity of R$78.0 billion.  Our Basel capital adequacy ratio (excluding goodwill) was 19.9%.
 
We operate our business along three segments: Commercial Banking, Global Wholesale Banking and Asset Management and Insurance.  Through our Commercial Banking segment, we offer traditional banking services, including checking and savings accounts, home and automobile financing, unsecured consumer financing, checking account overdraft loans, credit cards and payroll loans to mid- and high-income individuals and corporations (other than to our Global Banking & Markets clients).  Our Global Wholesale Banking segment provides sophisticated and structured financial services and solutions to a group of approximately 700 large local and multinational conglomerates, offering such products as global transaction banking, syndicated lending, corporate finance, equity and treasury.  Through our Asset Management and Insurance segment, we manage fixed income, money market, equity and multi-market funds and offer insurance products complementary to our core banking business to our retail and small- and medium-sized corporate customers.
 
Important Events
 
Launch of the Esso Santander Credit Card
 
On January 17, 2011 we began a partnership with Cosan Combustíveis e Lubrificantes, a subsidiary of Cosan S.A. Indústria e Comércio that owns the Esso and Mobil brands in Brazil, to launch the Esso Santander credit card.
 
We launched the Santander Esso credit card on May 16, 2011 and, on September 9, 2011, we began offering the Santander Shell credit card through nearly all of our sales channels.  By the end of 2011, we had approved 23,782 new contracts with customers and issued 29,247 credit cards combined (including primary and additional cardholders) under the Santander Esso and Santander Shell credit card programs.
 
 
Acquisition of Santander Spain’s Credit Portfolio
 
On February 21, 2011, our board of directors approved the acquisition, from Santander Spain through our Cayman Islands branch, on market terms, of a portfolio of trade and export financing agreements related to transactions carried out with Brazilian clients or their affiliate companies abroad.  During 2011, we acquired a portfolio amounting to U.S.$943 million.
 
Sale of Santander Seguros
 
On February 21, 2011, the board of directors approved the main terms and conditions of a transaction for the sale of all the outstanding shares of the capital stock of our wholly-owned subsidiary, Santander Seguros S.A. (“Santander Seguros”), to (1) Zurich Santander Insurance America, S.L., a holding company headquartered in Spain (“ZS Insurance”), 51% held, directly or indirectly, by Zurich Financial Services Ltd. and its affiliates (“Zurich Financial”) and 49% held by Santander Spain, and (2i) Inversiones ZS America SPA, a company headquartered in Chile and held by ZS Insurance (“Inversiones ZS”) (the “Santander Seguros Transaction”).
 
The Santander Seguros Transaction occurred on October 5, 2011, after the approval that was previously granted by SUSEP on August 23, 2011, by means of the transfer (1) of 11,251,174,948 common shares of Santander Seguros to ZS Insurance and (2) of three common shares of Santander Seguros to Inversiones ZS, against the payment of the preliminary purchase price to us, in the aggregate amount of R$2,752 million.  The income recognized in this operation was R$424 million, recorded as a result on disposal of non-current assets held for sale not classified as discontinued operations.
 
The final purchase price will be defined subsequently, in the second quarter of 2012, based on the special balance sheet prepared by Santander Seguros in relation to the period ended on September 30, 2011 and the purchase price adjustment mechanism set forth in the relevant stock purchase agreement dated July 14, 2011.  Once the final purchase price is defined, Santander Brasil will make the public announcements required by the Brazilian corporate law and CVM rules so as to allow the exercise of preemptive rights by its shareholders, which rights would allow our shareholders to acquire shares of Santander Seguros, in proportion to their holdings in our capital stock, for the same price paid by ZS Insurance to Santander Brasil.
 
The Santander Seguros Transaction is part of the foreign strategic joint venture entered into by and between Santander Spain and Zurich Financial, by which ZS Insurance acquired all of the casualty, life and private pension insurance companies of the Santander Group located in Argentina, Brazil, Chile, Mexico and Uruguay.
 
Santander Seguros’ main activity is the development of operations of life and personal insurance products as well as annuity and benefit plans and open-ended private pension entities.  Santander Seguros is the majority shareholder of Santander Brasil Seguros S.A. (Santander Brasil Seguros and, together with Santander Seguros, the “Insurance Companies”), whose main activity is the development of operations of property and casualty insurance products.
 
As part of the Santander Seguros Transaction, the Insurance Companies entered into distribution agreements with us for a 25-year minimum term, pursuant to which the Insurance Companies were granted exclusive access, for the term of the agreements, to our distribution channels, throughout our banking branch offices network, except for auto insurance, which was not included in the Santander Seguros Transaction.  As a result of such agreements, we are entitled to receive fees approximately equal to the fees we received prior to the Santander Seguros Transaction.
 
The Santander Seguros Transaction seeks to foster and strengthen our presence in the insurance market, broadening the array of products we offer and the range of our customer classes, which will enable us to increase our fee income in each insurance product category.
 
The Santander Seguros Transaction did not include Santander Capitalização S.A., our capitalization company that sells financial growth products combined with lottery features.  See “Item 4. Information on the Company—B. Business Overview—Asset Management and Insurance—Insurance—Capitalization Companies”.  Santander Capitalização S.A. remains under our control and was segregated, through a split-off, from Santander Seguros.  Our
 
 
business continues to include the distribution of insurance products, which are carried out by Santander S.A. – Serviços Técnicos, Administrativos e de Corretagem de Seguros.
 
The Santander Seguros Transaction is subject to SUSEP´s final confirmation (homologação).
 
Offer for Sale of 25 million ADSs
 
On May 25, 2011, Santander Brasil announced that Banco Madesant – Sociedad Unipessoal S.A. (“Madesant”), an affiliated company of Santander Spain, would offer for sale on the secondary market, after December 31, 2010, from time to time, up to 25,000,000 or our ADSs listed on the NYSE.  We filed with the SEC an automatically effective Registration Statement on Form F-3 to permit such resale be carried out in the United States.  See “Item 10.  Additional Information—Policy for the Trading of Our Securities” and “Item 10.  Additional Information—Disclosure of Trading by Our Controlling Shareholder, Directors, Officers or Members of the Fiscal Council.”
 
Resignation of Mr. Fabio Colletti Barbosa
 
On August 23, 2011, Mr. Fabio Colletti Barbosa announced his resignation as chairman of our board of directors.  Mr. Barbosa was replaced by Mr. Celso Clemente Giacometti, an independent member of our board of directors and of our audit committee.  Mr. Barbosa spent 16 years at Santander Brasil, Banco Real and ABN AMRO, during which time he held the positions of CEO and chairman of the board of directors.
 
Reduction of Outstanding Shares
 
On August 24, 2011, the BM&FBOVESPA approved our request to reduce our free float, as defined under the BM&FBOVESPA’s Level 2 Corporate Governance Listing Regulation, down to 14.1%, exclusively in the context of:
 
(1)    our share buyback program (either of units or ADRs), as approved by our board of directors.  Shares underlying our units or ADRs acquired or to be acquired pursuant to the buyback program may not be cancelled.  See “Item 10.  Additional Information—Purchase of our Own Shares by Us” for further information about our Buyback Program; and
 
(2)    acquisitions abroad, by Banco Santander, S.A., or an affiliated entity of the Santander Group, of ADRs corresponding up to 2% of our total shares (in addition to the BM&FBOVESPA authorization granted on October 28, 2010 for the acquisition of 1.0% of our total shares by Madesant).  See “Item 10. Additional Information—Policy for the Trading of Our Securities,” “Item 10. Additional Information—Disclosure of Trading by Our Controlling Shareholder, Directors, Officers or Members of the Fiscal Council” and “Item 16E.  Purchase of Equity Securities by the Issuer and Affiliated Purchasers.”
 
Such authorization does not affect our obligation to obtain a free float of 25% within the term set forth in our listing agreement for adhesion to the Level 2 segment of the BM&FBOVESPA.
 
Amendment to Form F-3 - Shelf Registration Statement and Sales of our ADSs by the Santander Group
 
On November 14 and 15, 2011, we filed an amendment to our automatic shelf registration statement and a related prospectus supplement with the SEC with the purpose of having available for sale on a registered basis approximately 8% of our capital stock.  At such time, the Santander Group expected to use the registration to allow greater flexibility of Santander Spain in fulfilling its commitment to deliver approximately a 5% stake in our capital stock under our outstanding exchangeable bond, and fulfill our commitment to reach a 25% free float prior to October 2012 (or October 2014, if the term is extended pursuant to approval from the BM&FBOVESPA).
 
Subsequently on January 9, 2012, Grupo Empresarial Santander, S.L. transferred to Santander Spain ADRs representing approximately 5% of our capital stock, as part of an internal reorganization in the Santander Group, to the transfer of approximately 4% of our capital stock to a third party, which shall deliver such interest to the investors of the exchangeable bonds issued by Santander Spain in October, 2010, upon maturity. Santander Spain subsequently transferred an additional approximately 0.6% and 0.8% of our total capital stock in separate transactions. As a result of such transfers, Santander Spain, directly or indirectly, held approximately 76.4% of our voting capital stock and approximately 75.6% of our total capital stock, and our free float was approximately 24.1% of the total stock as of March 23, 2012.
 
 
History
 
The Santander Group has expanded globally through a number of acquisitions and the successful integration of the acquired businesses to achieve synergies.
 
In 1957, the Santander Group first entered the Brazilian market through an operating agreement with Banco Intercontinental do Brasil S.A.  Since the 1990s, the Santander Group has sought to establish a strong Latin American presence, particularly in Brazil.  The Santander Group pursued this strategy through organic growth as well as acquisitions.  In 1997, the Santander Group acquired Banco Geral do Comércio S.A., a medium-sized retail bank, which subsequently changed its name to Banco Santander Brasil S.A.  In the following year, the Santander Group acquired Banco Noroeste S.A. to further strengthen its position as a retail bank in Brazil.  In 1999, Banco Noroeste was merged into Banco Santander Brasil.  In January 2000, the Santander Group acquired Banco Meridional S.A. (including its subsidiary Banco Bozano, Simonsen S.A.), a bank active in retail and wholesale banking primarily in Southern Brazil.
 
The Santander Group has consistently demonstrated its ability to execute significant acquisitions in Brazil, integrate the acquired companies into its existing business and improve the acquired companies’ operating performance.  This was the case, in particular, with the acquisition in November 2000 of Banespa, a bank owned by the State of São Paulo.  Through this acquisition, the Santander Group transformed itself into one of Brazil’s largest financial groups with strong retail and wholesale banking, with operations present in all Brazilian regions, strategically positioned in the South and Southeast.  Following the acquisition, the Santander Group implemented an information technology modernization at Banespa.  Within a year of the acquisition, Banespa’s efficiency ratio improved significantly.
 
Despite operating in Brazil under different legal entities, Santander Brasil has had centralized management and administrative functions in Brazil since 2000.  In 2006, Santander Brasil, following shareholder and Brazilian Central Bank approval, consolidated its investments into one entity, Banco Santander Banespa S.A., which was later renamed Banco Santander (Brasil) S.A., thereby simplifying our corporate and tax structure, improving our operating efficiency and reducing administrative costs through the integration and upgrade of the different information technology platforms.  In 2007, the Santander Group implemented a brand unification program.
 
Banco Real Acquisition
 
On November 1, 2007, RFS Holdings B.V., a consortium comprising Santander Spain, The Royal Bank of Scotland Group PLC, Fortis SA/NV and Fortis N.V. (“Fortis”), acquired 96.95% of the shares of ABN AMRO Holding N.V. (and together with ABN AMRO Bank N.V. “ABN AMRO”), the controlling shareholder of Banco Real.  On December 12, 2007, the Brazilian antitrust authorities (Conselho Administrativo de Defesa Econômica, or CADE) approved without conditions the acquisition of ABN AMRO’s Brazilian entities by the consortium.  In the first quarter of 2008, Fortis and Santander Spain reached an agreement whereby Santander Spain acquired the right to the Brazilian asset management activities of ABN AMRO, which Fortis had acquired as part of the consortium’s purchase of ABN AMRO.  On July 24, 2008, Santander Spain took indirect share control of Banco Real, which it then incorporated into the Santander Group to consolidate its investments in Brazil.  At shareholders meetings of each of Santander Brasil and Banco Real held on August 29, 2008, the acquisition by Santander Brasil of Banco Real’s share capital was approved through a share exchange transaction (incorporação de ações), and Banco Real became a wholly-owned subsidiary of Santander Brasil.  At the time of the share exchange transaction, Banco Real was the fourth largest private Brazilian bank in terms of assets.  As a result of the share exchange transaction, we became the third largest private bank in Brazil in terms of assets, according to the Brazilian Central Bank.  On April 30, 2009, Banco Real was merged into Santander Brasil and Banco Real ceased to exist as a separate legal entity.  In October 2011, the merger was approved by the Brazilian Central Bank.
 
Capital Expenditures and Divestitures
 
Our principal capital expenditures are comprised of investments in information technology.  The technology platform we have adopted focuses on our customers and supports our business model.  In each of 2011, 2010 and 2009 total investments in information technology were R$848 million, R$1,150 million and R$473 million, respectively.
 
 
In early 2011, we completed the integration with the migration of accounts and operations of all customers, individual and corporate, to our new technology platform.  Since then, customers can benefit from on a wide range of products and services.  This project has always been focused on continually improving the standard of care and level of customer services.
 
Technology management by specialized companies belonging to Santander Group enables us to achieve a global scale and other benefits similar to outsourcing without the loss-of-control downside of externalizing core activities.
 
For further discussion of our technology infrastructure see “—B. Business Overview—Technology and Infrastructure” below.
 
Our major divestiture in the past three fiscal years and until the date of this annual report was the sale, in March 2010, of the building that housed the former headquarters of Banco Real, located at Avenida Paulista 1,374, São Paulo, for a total amount of R$270.0 million.  This transaction was consummated through a purchase agreement dated on March 4, 2010 with Fundo de Investimento Imobiliário Prime Portfólio corresponding to the sale of 60.0% of the building and a purchase agreement dated on March 5, 2010 with Top Center Empreendimentos e Participações Ltda. corresponding to the sale of 40% of the building.  We have financed 40% of the purchase price of the building.
 
Public takeover offers
 
No matters to report.
 
B. 
Business Overview
 
Our Competitive Strengths
 
We believe that our profitability and competitive advantages are the result of our five pillars: (1) nationwide presence with a strong market position in higher income regions of the country; (2) wide range of products targeted to the needs of each client; (3) conservative risk profile; (4) scalable state-of-the-art technology platform; and (5) focus on sustainable growth, both organically and through selective acquisitions.
 
Relationship with the Santander Group
 
We believe that being part of the Santander Group offers us a significant competitive advantage over the other banks in our peer group, none of which is part of a similar global banking group.  The Santander business model provides that each unit has to be self-sufficient in terms of capital and liquidity.  However, this relationship allows us to:
 
 
·
leverage the Santander Group’s global information systems platform, reducing our technology development costs, providing operational synergies with the Santander Group and enhancing our ability to provide international products and services to our customers;
 
 
·
access the Santander Group’s multinational client base;
 
 
·
take advantage of the Santander Group’s global presence, in particular in other countries in Latin America, to offer international solutions for our Brazilian corporate customers’ financial needs as they expand their operations globally;
 
 
·
selectively replicate or adapt the Santander Group’s successful product offerings from other countries in Brazil;
 
 
·
benefit from the Santander Group’s operational expertise in areas such as internal controls and risk management, which practices have been developed in response to a wide range of market conditions across the world and which we believe will enhance our ability to expand our business within desired risk limits;
 
 
 
·
leverage the Santander Group’s experience with integrations to maximize and accelerate the generation of synergies from any future acquisitions; and
 
 
·
benefit from the Santander Group’s management training and development which is composed of a combination of in-house training and development with access to managerial expertise in other Santander Group units outside Brazil.
 
Strong presence in attractive demographic and geographic areas
 
We believe we are well positioned to benefit from the growth in our customer base and the relatively low penetration of financial products and services in Brazil, through sales of key products such as credit cards and insurance.  After the acquisition of Banco Real we strengthened our competitive position in all Brazilian regions, mainly the South and Southeast, areas that accounted for approximately 72.0% of Brazil’s GDP, and where we now have one of the largest branch networks among Brazilian banks, according to the Brazilian Central Bank.
 
Our strong presence in the South and Southeast regions of Brazil also allows us to reach mid- and high-income customers that provide access to a stable and low cost funding base through a wide variety of funding instruments.  Furthermore, our focus on these income classes has increased our profitability, as they have traditionally produced higher volumes and margins.  We define the growing mid- and high-income classes in Brazil as individuals with monthly income in excess of R$1,200 and R$4,000, respectively.  Thus, our presence in these attractive geographic areas, combined with our focus on mid- and high-income customers allow us to effectively cover a significant portion of Brazil’s economic base.  In 2010 and 2011, we expanded and strengthened our geographic presence by opening 110 branches and 154 branches, respectively.
 
We believe there is further potential for growth through the use of our existing, redesigned information technology platform by increasing the penetration of financial products and services with our client base, which, as of December 31, 2011, comprised 25.3 million customers, including 19.3 million customers who held an active or inactive current account during a 30-day period, according to the Brazilian Central Bank, and other customers who did not have a current account but utilize one of our other product offerings, such as credit cards.  For example, only 20.3% of our current account holders had personal loans and only 56.8% had a credit card.
 
Track record of successful integrations
 
Since 1997, the Santander Group has acquired six banks in Brazil, demonstrating its ability to execute complex acquisitions in this market, integrate the acquired companies into its existing business and improve the acquired companies’ operating performance, most recently with our acquisition of Banco Real.  We started the process of the operational, commercial and technological integration of Banco Real immediately following the share exchange transaction (incorporação de ações) in August 2008.  We developed a three-year integration plan.  Our wholesale banking operations have been fully integrated since the end of 2008.  In 2009, we began the integration of the branch networks and electronic distribution channels.  In 2010, we concluded the unification of our brand and of customer service in all branches, at all ATMs, in our Internet Banking platform and other customer service channels.  In early 2011 we completed the full integration of Banco Real’s operations with the migration of all customer accounts and operations to our new technology platform.  Since then, customers benefit from a wide range of products and services.  This integration process has always been focused on continually improving the standard of care and level of customer services.
 
We completed the full integration of Banco Real´s operations with ours during 2011.
 
Leading market position
 
We rank third among private banks in Brazil in terms of assets, with a market share of 8.4%, as of September 30, 2011, according to the Brazilian Central Bank.  Among these banks, we believe we hold a top three market position in most of our key product lines as evidenced by our market share in the following selected products and regions.
 
 
   
At November 30, 2011
Market share (%)
 
Payroll/individual loans
    11.9  
Individual loans
    19.2  
Payroll
    7.8  
Auto leasing/CDC
    15.0  
Credit cards
    11.8  
Branches*
    12.4  
Southeast*
    16.2  
South*
    9.3  

Source: Brazilian Central Bank.
(*) Market share of December/2011
 
The acquisition of Banco Real has further extended our reach in the Brazilian market.  We believe that our size and market leadership position provide us with exceptional competitive opportunities including the ability to gather market intelligence to support decision-making in determining business opportunities and in meeting our customers’ needs operating as a full-service bank.  Since the acquisition of Banco Real, we have increased our market share in individual loans, credit cards and branches.  In addition, we are a leading wholesale bank in Brazil.  Through our unique access to the Santander Group’s global network, we are able to support our large Brazilian corporate customers in the internationalization of their businesses, for example, through trade and acquisition financing, which brings together a loan syndicate that could use several take-out strategies in different markets.  As one of the top tiered banks in the country, and in light of the opportunities for leveraging our operating segments, our broad product offering and geographic presence, we believe we are well positioned to gain market share.
 
State-of-the-art integrated technology platform
 
We operate a high generation customer-centered technology platform that incorporates the standards and processes, as well as the proven innovations, of both the Santander Group worldwide and Banco Real.  The incorporation of a customer relationship management system enables us to deliver products and services targeted to the needs of our customers.  Because our IT platform is integrated with that of the Santander Group, we are able to support our customer’s global businesses and benefit from a flexible and scalable platform that will support our growth in the country.  This platform has been enriched with a set of customer-focused features inherited from Banco Real, which we believe provides us with a significant competitive advantage.
 
Our Strategy
 
In 2011, upon the full integration of Banco Real, we entered in a new phase of expansion and consolidation of our business in Brazil.  We revisited our position in the market place and elaborated a new strategic plan with one objective: to be our clients’ preferred bank by 2013.  Our plan is to implement the concept of agility and simplicity in everything we do, showing complete integration and a flawless service.
 
Santander 3.1 was born in this context.  The project is being developed within five pillars and will involve multiple areas of the Bank.  Our five pillars are:
 
 
·
Full consolidation of the operational databases;
 
 
·
Leverage the fact that we are a well prepared bank with products and services that suit different segments;
 
 
·
Aggressively reposition the bank within target markets;
 
 
·
Improve our strategic position and relationships with clients and other markets;
 
 
·
Value our brand
 
In practice, we will simplify our operational structure, consolidate our operational risk plan, reinforce our presence in areas such as merchant acquisition, financing and real estate.  We will invest in relationships, loyalty and retention of our individual clients and finally, develop our brand.
 
 
Ultimately, we believe this will guide us towards our target to be the best bank to work for, the bank with the greatest client satisfaction, the most attractive brand in the country and the most advantageous investment to shareholders.
 
In the beginning of 2011, our executive committee defined the values that should inspire us on a daily basis:
 
“To be our customer’s choice for being the simple and safe, efficient and profitable bank, that constantly seeks to improve the quality of every service, with a team that enjoys working together to conquer everyone’s recognition and trust”.
 
We believe that we can achieve these goals by employing the following strategies:
 
Improve operating efficiency by benefiting from integration synergies and implementing best practices
 
We will continue seeking ways to further improve our operating efficiency and margins.  We intend to maintain our investment discipline and direct resources to areas that generate improvements in customer care and areas that increase our revenues.  In 2011, our efficiency ratio (general expenses divided by total revenue) increased to 35.6%.  In 2010, the ratio decreased to 34.5%, due primarily to the effects of foreign exchange gains and the Cayman Islands branch tax hedge, and in 2009, it was 35.0% (adjusting total revenue for the impact of our Cayman Islands Branch tax hedge, the efficiency ratio would be 34.0% in 2011, 34.8% in 2010 and 36.3% in 2009).  For a reconciliation of our adjusted efficiency ratio to the nearest GAAP measurement, see “Item 3.  Key Information—A.  Selected Financial Data—Ratios”.
 
Expand product offering and distribution channels in Commercial Banking
 
We intend to further increase our business and operations throughout Brazil, expanding our Commercial Banking services to existing and prospective retail customers.  We plan to offer new products and services to existing customers based on each customer’s profile through our numerous distribution channels by leveraging our customer relationship management data base and IT platform.  Our efforts related to the offer of new products and expansion of our reach to other markets will continue to be focused on the correct risk measurement of those opportunities.  We also will seek to increase our market share through the offering of innovative banking products and intend to focus on product areas where we believe there is opportunity to increase our presence in the Brazilian market, for example in credit cards and insurance products.  Furthermore, we plan to attract current account holders by capturing users of our products, such as automobile financing, insurance or credit cards.  We will continue to focus our marketing efforts to enlarge our customer base and increase the number of products used by each client, as well as to increase our share in those products for which clients generally operate with more than one bank.  We intend to improve our competitiveness by further strengthening our brand awareness, particularly through marketing.
 
We intend to improve and expand the distribution channels for our products through our traditional branch network and alternative marketing and direct sales distribution channels such as telemarketing, Internet banking and correspondent banks.  We will continue to maximize the synergies and leverage the opportunities between our corporate and retail businesses.  For instance, when rendering payroll services to our corporate customers, we can place an onsite service unit at our corporate client’s premises and thereby access its employees as a potential new customer base and achieve the critical mass necessary to open a new branch in that area.  We intend to grow our mortgage business as a consequence of the housing deficit in Brazil and the legal reforms supporting mortgage financing.
 
Capitalize on our strong market position in the wholesale business
 
We provide multinational corporations present in Brazil and local companies, including those with operations abroad, with a wide variety of financial products, utilizing our worldwide network to serve our customers’ needs with customized solutions.  We intend to further focus on our strong worldwide position as a client relationship wholesale bank, in line with the Santander Group’s worldwide strategy for the Global Wholesale Banking segment.  We expect to benefit from the Santander Group’s strengthened market position as a key player in the global banking industry and thereby strengthen our existing relationships and build new lasting relationships with new customers, exploring the widest possible range of our product portfolio, particularly higher margin products.  In addition, as a leading local player with the support of a major international financial institution, we intend to be a strong supporter
 
 
of Brazilian corporations as they continue to expand their businesses worldwide.  Moreover, we believe that we can use our relationship with large corporate customers to access their suppliers as potential new customers.  In addition, we intend to distribute treasury products to smaller companies or individuals through the Santander Global Connect (“SGC”) platform.
 
Further develop a transparent and sustainable business platform
 
We believe that our commitment to transparency and sustainability will help us create a business platform to maintain growth in our operations over the long term and that is instrumental to forge business relationships, improve brand recognition and attract talented professionals.  In this context, we will maintain a commitment to economic, social and environmental sustainability in our procedures, products, policies and relationships.  We will continue building durable and transparent relationships with our customers through understanding their needs and designing our products and services to meet those needs.  We will continue to sponsor educational opportunities through Santander Universidades and the Universia portal to foster future potential customer relationships.
 
Continue growing our insurance product distribution
 
We intend to continue growing our insurance product distribution business.  We expect to increase our presence within the insurance segment by leveraging our strong branch network and client base, in all Brazilian regions, especially in the South and Southeast, to cross-sell insurance products with the goal of maximizing the income generated by each customer, as well as using our strong relationships with small and medium-sized businesses with annual gross revenues of less than R$30 million, or “SMEs”, and large corporations within the country.  We intend to sell insurance products by means of our traditional distribution channels, such as branches, and also through ATMs, call center and Internet banking.
 
On October 5, 2011, we concluded the sale of all outstanding shares of the capital stock of our wholly-owned subsidiary, Santander Seguros and indirectly of Santander Brasil Seguros, to ZS Insurance, held directly or indirectly, 51% by Zurich and 49% by Santander Spain, and Inversiones ZS.  See “Item 4.  Information on the Company—A. History and Development of the Company—Important Events—Sale of Santander Seguros”.
 
Business Overview
 
Our business consists of three operating segments: Commercial Banking, Global Wholesale Banking and Asset Management and Insurance.
 
Commercial Banking
 
We focus on long-term relationship with our individual and corporate customers (other than global enterprise customers that are serviced by our Global Wholesale Banking segment), seeking to support all of their financial needs through our credit, banking services and financial products.  Our business model and segmentation allows us to provide a tailored approach to each client in order to address their specific needs.
 
Our customers are serviced throughout Brazil primarily through our branch network, which, as of December 31, 2011, consisted of 2,355 branches, 1,420 on-site service units (located at our corporate customers’ premises), 18,419 ATMs, 40 personalized reception centers for specific enterprises, and four new private banking offices, as well as our complete and modern Internet banking platform and our call center operations.
 
Global Wholesale Banking
 
We are a leading wholesale bank in Brazil and offer financial services and sophisticated and structured solutions to our customers, in parallel with our proprietary trading activities.  Our wholesale banking business focuses on servicing approximately 700 large local and multinational conglomerates, which we refer to as Global Banking & Markets, or “GB&M”, customers.  In the year ended December 31, 2011, services to our GB&M customers represented approximately 28% of our operations, in terms of profit before tax.  Our wholesale business provides our customers with a wide range of domestic and international services that are specifically tailored to the needs of each client.  We offer products and services in the following key areas: global transaction banking, credit markets, corporate finance, equities, rates, market making and proprietary trading.  Our customers benefit from the global
 
 
services provided by the Santander Group’s integrated wholesale banking network and local market expertise.  Our proprietary trading desk is under strict risk control oversight and has consistently shown positive results, even under volatile scenarios.
 
Asset Management and Insurance
 
According to ANBIMA, Santander Brasil Asset Management DTVM S.A. (“Santander Brasil Asset Management”) is the fifth largest asset management company in Brazil with R$128 billion in assets under management.  The volume of our Asset Management and Insurance Business grew 7.0% in 2011 and as of December 31, 2011, we had a 6.8% share of the market in the Brazilian funds industry.  Our assets under management represented approximately 38.0% of the Santander Group’s volume of assets under management worldwide as of December 31, 2011.  We believe our rigorous governance, disciplined investment management process, wide range of product offerings and prudent risk management contributed to the investment grade ratings assigned to our asset management business by the rating agencies Standard & Poor’s and Moody’s.
 
We distribute insurance products from some of Brazil’s largest insurance companies.  We concentrate on the sale of products issued by Santander Seguros, which represented almost 91% of our insurance premiums in the year ended December 31, 2011.  The products we distribute as part of our insurance brokerage services include life, automobile, property and casualty, industrial equipment and crop insurance.  We focus on simple standardized banking product-related insurance mainly intended for our retail banking customers.
 
On October 5, 2011, we concluded the sale of all outstanding shares of the capital stock of our wholly-owned subsidiary, Santander Seguros and indirectly of Santander Brasil Seguros, to ZS Insurance, held directly or indirectly, 51% by Zurich and 49% by Santander Spain, and Inversiones ZS.  See “Item 4.  Information on the Company—A. History and Development of the Company—Important Events—Sale of Santander Seguros”.
 
The following chart sets forth our operating segments and their main focus.
 
 
Commercial Banking
 
 
Global Wholesale Banking
 
 
Asset Management and Insurance
·      Retail banking
 
–      Individuals
 
–      SMEs
 
·      Enterprises with annual gross revenues in excess of R$30 million but less than R$250 million
 
·      Corporations with annual gross revenues in excess of R$250 million (other than global corporate clients)
 
·      Consumer finance
 
·      Global corporate clients, or GB&M
 
·      Treasury
 
·      Asset management
 
·      Insurance brokerage
 
The following table presents the breakdown of our net interest income and profit before tax by operating segment.
 
   
For the year ended December 31,
 
   
2011
   
2010
   
2009
   
2011
   
2010
   
2009
 
   
Net interest income
   
Profit before tax
 
   
(in millions of R$)
 
Commercial Banking
    24,971       21,301       20,091       5,128       6,347       4,898  
Global Wholesale Banking
    2,589       2,501       1,943       2,947       2,818       2,689  
Asset Management and Insurance
    342       292       133       835       832       550  
Total
    27,902       24,095       22,167       8,911       9,997       8,137  
 

 
Commercial Banking
 
Our Commercial Banking segment’s activities include products and services for retail customers, enterprises and corporations (other than global corporate clients who are served by our Global Wholesale Banking segment) and our consumer finance business.
 
Retail Banking
 
Our retail banking customer base includes individuals, SMEs with annual revenues of less than R$30 million and certain government institutions.  Individual customers are divided into private customers, a select group of clients with a minimum of R$3,0 million in assets available for investment, high income customers, with monthly income in excess of R$4,000; mid income customers, with monthly income between R$1,200 and R$4,000; and low income customers, with monthly income below R$1,200.  We believe that our clear customer classifications allow us to target customers with products that fit their specific needs.
 
We follow different service models for each customer class:
 
 
·
Private banking: We seek to provide our private banking customers personal service from a highly trained team in exclusive offices, with the objective of providing privacy and individualized service.
 
 
·
High-income customers: Our model includes differentiated areas in our regular branches (Van Gogh area) and is based on personal relationships with our account managers.
 
 
·
Mid-income customers: We use a multi-channel service model, supported by our account managers.  We provide differentiated services to customers we view as upwardly mobile.
 
 
·
Low-income customers: Our emphasis is on serving customers through alternative channels.  In our branches, these customers are served under a standardized model through pools of managers, with a sales-oriented approach.  Differentiated services are offered to customers we view as upwardly mobile.
 
 
·
SMEs: For medium-sized enterprises, our model is centered on a relationship with the account manager while for small-sized enterprises, we rely more on multi-channel distribution.  Special platforms are used to offer differentiated services to clients with a high earnings potential.
 
At December 31, 2011, our retail banking operations had approximately 25.3 million customers, consisting of approximately 24.1 million individuals and 1.1 million SMEs, an increase of 2.2 million customers in total in comparison with 2010.  At December 31, 2011, we had approximately 9.3 million current account holders, consisting of approximately 8.7 million individuals and 0.6 million SMEs.
 
The range of products and services we offer to our retail customers includes: