46. Risk management

12 Months Ended

Dec. 31, 2020

Risk Management

46. Risk management

46. Risk management

Risk management at Banco Santander is based on the following principles:

A. Independence of the management activities related to the business;

B. Involvement of the senior management in decision-making;

C. Consensus in the decision making on credit operations between the Risk and Business departments;

D. Collegiate decision-making, which includes the branch network, aiming to encourage diversity of opinions and avoiding the attribution of individual decisions;

E. The use of statistical tools to estimate default, which includes internal rating, credit scoring and behavior scoring, RORAC (Return on Risk Adjusted Capital), VaR (Value at Risk), economic capital, scenario assessment, among others;

F. Global approach, which an integrated treatment of risk factors in the business departments and the concept of economic capital as a consistent metric for risk undertaken and for business management;

G. Common management tools

H. Organizational structure

I. Scopes and responsibilities

J. Risk limitation

K. Recognition

L. Effective information channel

M. Maintenance of a medium-low risk profile, and low volatility by:

• The portfolio diversification, limiting concentration in clients, groups, sectors, products or geographically speaking; the complexity level of market operations reduction; the analysis of social and environmental risks of businesses and projects financed by the bank; continuous follow up to prevent the portfolios from deteriorating.

• Policies and procedures definition that are part of the Regulatory Framework Risk, which regulates the risk activities and processes. They follow the instructions of the Board of Directors, the regulations of the BACEN and the international best practices in order to protect the capital and ensure business' profitability.

At Banco Santander, the risk management and control process is structured using as reference the framework defined at corporate level and described according to the following phases:

I. Adaptation of corporate management frameworks and policies that reflect Banco Santander’s risk management principles.

Within this regulatory framework, the corporate risk management framework, regulates the principles and standards governing Banco Santander´s risk activities, based on the corporate organization and a management models, meeting the necessary regulatory requirements for credit management.

The organizational model comprises the management map, which defines the risk function and governance, and the regulatory framework itself.

II. Identification of risks through the constant review and monitoring of exposures, the assessment of new products, businesses and deals (singular transactions);

III. Risks measurement using methods and models periodically tested.

IV. Preparation and distribution of a complete set of reports that are reviewed daily by the heads at all levels of Banco Santander management.

V. Implementation of a risk control system which checks, on a daily basis, the degree to which the Bank´s risk profile matches the risk policies approved and the risk limits set. The most noteworthy corporate tools and techniques (aforementioned) already in use at Banco Santander are in different stages of maturity regarding the level of implementation and use in the Bank. For wholesale segment, these techniques are in line with the corporate level development. For local segments, internal ratings and scorings based models, VaR and market risk scenario analysis and stress testing were already embedded in risk management routine while Expected loss, Economic Capital and RORAC have been integrated in risk management.

VI. Internal ratings- and scorings-based models which, by assessing the various qualitative and quantitative risk components by client and transaction, making it possible to estimate, firstly, the probability of default and, subsequently, the expected loss, based on Loss Given Default (LGD) estimates.

VII. Economic capital, as a homogeneous measurement of the assumed risk and the basis for the measurement of the performance management.

VIII. RORAC, used both as a transaction pricing tool in the whole sale segment (more precisely in global ranking and markets - bottom-up approach) as for in the analysis of portfolios and units (top-down approach).

IX. VaR, which is used for controlling and setting the market risk limits for the various treasury portfolios.

X. Scenario analysis and stress testing to supplement the analysis market and credit risk in order to assess the impact of alternative scenarios, even over provisions and capital.

a) Corporate Governance of the Risk Function

The structure of Banco Santander’s Risk Committee is defined in accordance with the highest standards of prudent management, while respecting local legal and regulatory environment.

Its main responsibilities are:

A. Integrate and adapt the Bank's risk to local level, further than the risk management strategy, tolerance level and predisposition to the risk, previously approved by the executive committee and board of directors, all matched with corporate standards of Banco Santander Spain;

B. Approve the proposals, operations and limits of clients and portfolio;

C. Regularly monitor all the risks inherent to the business, proving if your profile is adequate to what was established in the risk appetite.

D. Authorize the use of management tools and local risk models and being aware of the result of their internal validation.

E. Keeping updated, assessing and monitoring any observations and recommendations periodically formulated by the supervisory authorities regarding their functions.

The credit risk management structure is made up of departments that operate from the point of view of portfolio management and credit analysis and decision nuclei in an individualized way in Individuals, Companies and Wholesale. A specific area's mission is to consolidate portfolios and their respective risks, subsidizing management, as well as the Group's headquarters in Spain, with an integrated view of risks.

The credit risk management structure is made up of departments that operate from the point of view of managing the retail and wholesale portfolios. A specific area's mission is to consolidate portfolios and their respective risks, subsidizing management, as well as the Group's headquarters in Spain, with an integrated view of risks.

A specific structure is responsible for serving internal and external regulators, supervisors and auditors.

It has a core called ERM-Enterprise risk management, integrated by a set of functions, transversal to all risks, necessary for its adequate management. The areas of Methodology (development and parameterization of models) are part of this structure; Decision Engines; Credit Risk Control; Risk Control and Performance covering Risk Culture); Integrated management and Relationship with Supervisors and Local Provision & IFRS9.

b) Credit Risk

b.1) Introduction to the treatment of credit risk

The credit risk management provides subsidies to define strategies as risk appetite, to establish limits, including exposure analysis and trends as well as the effectiveness of the credit policy. The goal is to maintain a risk profile and adequate minimum profitability to offset the estimated default, both client and portfolio, as defined by the Executive Committee and Board of Directors. Additionally, it is responsible for the risk management systems applied in the identification, measurement, control and reduction of exposure to risk in individual or clustered by similar operations.

The risk management is specialized according to each clients' characteristics, being segregated between individual clients (with the accompanied of dedicated analysts) and customers with similar characteristics (standardized).

• Individualized management: It is performed by a defined risk analyst, which prepares the analysis, and forwards it to the Risk Committee and monitors the client's progress. It covers the Wholesale segment clients (Corporate and GB&M), Retail (Companies 3 and Governments, Institutions and Universities);

• Standardized management: Aimed at individuals and companies not classified as individualized clients. Based on automated models of decision-making and internal risk assessment, complemented by commercial heave and analysts specialized teams to handle exceptions.

Macroeconomic aspects and market conditions, sectored and geographical concentration, as well as client profiling and economic prospects are also evaluated and considered in the appropriate measuring of credit risk.

b.2) Measures and measurement tools

Rating tools

The Bank uses proprietary internal rating models to measure the credit quality of a given customer or transaction. Each rating relates to a certain probability of default or non-payment, determined on the basis of the customer's historical experience, to predict default. Rating/Scores models are used in the Bank’s loan approval and risk monitoring process.

The classification of loans into different categories is made according to the analysis of economic and financial situation of the client and any other registratered information updated frequently. New modes of operation are subject to credit risk evaluation, verification and adaptation to the controls adopted by the Bank.

Ratings assigned to customers are reviewed periodically to include any new financial information available and the experience in the Banking relationship. The frequency of the reviews is increased in case of customers that reach certain levels in the automatic warning systems and of customers classified as requiring special monitoring. The own rating tools are monitored and reviewed to qualifications by them awarded are progressively enhanced.

Credit risk parameters

The estimative of the risk parameters Probability of Default (PD) and Loss Given Default (LGD) are based on internal experience, i.e. on default observations and on the experience in defaulted loan recoveries during a defined credit cycle.

For low risk portfolios, such as banks, sovereign risk or global wholesale clients, the parameters are based on CDS market data and with global broadness, using Group Santander´s world presence.

For the other portfolios, parameter estimative are based on the Bank’s internal experience.

In addition to the Probability of Default (PD), the Bank is managing its credit portfolio, seeking to make loans to borrowers that have higher volumes of guarantees associated with the operations and also works constantly on strengthening its credit recovery department. These and other actions combined, are responsible for ensuring the adequacy of LGD parameters (Loss Given Default, the loss resulting from the borrower's default event to honor the principal and/or interest payments).

LGD calculation is based on net losses of non-performing loans, considering the guarantees associated with the transaction, revenues and expenses related to the recovery process and also the timing default.

Besides that, the Loss identification period, or “LIP,” is also considered in the estimation of the risk parameters that is represented by the time period between the occurrence of a loss event and the identification of an objective evidence of this loss. In other words, it represents the time horizon from the credit loss occurrence until the effective confirmation of such loss.

The Bank use proprietary internal rating models to measure the credit quality of a given client or transaction. Each rating relates to a certain probability of default or non-payment, determined on the basis of the client's history, with the exception of certain portfolios classified as “low default portfolios”. These ratings and models are used in loan approval and risk monitoring processes.

The table shown in note 9.b shows the portfolio by the internal risk rating levels and their probability of default.

Thousand of reais	2020	2019	2018
By maturity
Less than 1 Year	219,062,744	186,196,849	186,373,511
Between 1 and 5 years	147,013,817	117,841,564	99,309,551
More than 5 years	51,745,465	43,218,247	36,250,128
Loans and advances to customers, gross	417,822,026	347,256,660	321,933,190
By internal classification of risk
Low (1)	347,315,356	257,133,115	240,440,294
Medium-low (1)	24,277,405	56,549,196	50,485,682
Medium (2)	26,231,871	11,754,806	11,967,262
Medium-High (2)	3,896,457	8,512,386	7,722,198
High (3)	16,100,937	13,307,156	11,317,754
Loans and advances to customers, gross	417,822,026	347,256,660	321,933,190

(1) Transactions classifieds on Stage 1

(2) Transactions classifieds on Stage 2

(3) Transactions classifieds on Stage 3

The expected credit losses, measured using sufficient and available historical data, are shown below.

			2020
		Probability of default(1)	Default loss
	Exposure
Commercial and industrial	191,281,653	5%	41%
Real Estate Credit - construction	45,791,869	3%	7%
Individual loans	178,652,145	9%	52%
Leasing	2,096,359	1%	31%

(1) Prior to Post model adjustment impacts.

			2019
		Probability of default	Default loss
	Exposure
Commercial and industrial	145,387,439	7%	40%
Real Estate Credit - construction	39,720,713	3%	10%
Individual loans	160,036,668	10%	64%
Leasing	2,111,840	2%	41%

			2018
		Probability of default	Default loss
	Exposure
Commercial and industrial	141,293,616	8%	42%
Real Estate Credit - construction	36,515,352	4%	12%
Individual loans	137,287,593	8%	64%
Leasing	1,836,629	5%	32%

The exposure above are related to the credit operations, The Bank understands that the exposure related to the avals and sureties and other financial assets at amortized cost have low risk,

b.3) Observed loss: measures of credit cost

The Bank periodically estimate losses related to credit risk and then we compare those estimates with actual losses of the month. Periodically conduct tests in order to monitor and maintain control over credit risk.

To complement the use of admission and rating, the Bank use other measures that supports the prudent and effective management of credit risk, based on the loss observed.

The cost of credit is measured by the sum of credit losses and to the average loans portfolio of the same year.

b.4) Credit risk cycle

Banco Santander has a global view of its credit portfolio throughout the various phases of the risk cycle, with a level of detail that allows us to evaluate the current situation of risk and any movements. This mapping is followed by the Board of Directors and the Executive Committee of the bank that no only sets policies and risk procedures, limits and delegates responsibilities. It also approves and supervises the activities of the area.

The risk management process consists of identifying, measuring, analyzing, controlling, negotiating and deciding on, as appropriate, the risks incurred in the Bank’s operations and companies of the conglomerate. The risk cycle comprises three different phases:

• Pre-sale: this phase includes the risk planning and setting targets, determination of the Bank’s risk appetite, approval of new products, risk analysis and credit rating process, and limit setting.

• Sale: this is the decision-making phase for both pre-classified and specific transactions.

• Post-sale: this phase comprises the risk monitoring, measurement and control processes and the recovery process.

Planning and setting risk limits

Risk limit setting is a dynamic process that identifies Banco Santander’s risk appetite by assessing business proposals and its risk attitude. This process is defined through the risk appetite approved by the Bank's management and the units.

In the case of individualized risks, the most basic level is the customer, for which individual limits are set.

For GCB clients, a pre-classification model is used based on a system of measurement and monitoring of economic capital. In relation to the Corporate segment, the operational limit model is used in maximum nominal credit amounts.

To the risks of customers with standardized management, the limits of the portfolios are planned using credit management programs (SGP) agreed document for the areas of business and risks, and approved by the Executive Committee. This document contains the results expected for the business in terms of risk and return, beyond the limits which govern the activity and risk management. This client group has a more automated treatment in risks.

Risk analysis and rating process

Risk analysis is a pre-requisite for the approval of loans to clients by the Bank. This analysis consists of examining the counterparty’s ability on meeting its contractual obligations to the Banco Santander, which involves analyzing the client’s credit quality, its risk transactions, solvency, and sustainability of business and the return to be obtained in view of the risk assumed.

The risk analysis is conducted annually, at least, and can be held shortly when client profile indicates (through systems with centralized alerts, managers visits to clients or specific credit analysis), or when operations are not covered by pre-classification.

Decision-Making on Operations

The process of decision making on operations aims to analyze and adopt adopt in accordance with pre-established policies, taking into account risk appetite and any elements of the operation that are important in assessing risk and return.

The Banco Santander uses, among others, the RORAC methodology (profitability on risk-adjusted capital), for risk analysis and pricing in the decision-making process on transactions and deals.

Risk monitoring and control

In Individual retail, customers are systematically reviewed through a daily credit rating process. This process allows for revaluations in credit exposure, allowing increases in exposure for customers with good credit quality. In case of detection of deterioration in the level of risk, actions are automatically generated to contain credit risk and preventive actions. 

In the case of individualized management, the preventive detection of deterioration in the credit quality of the operation is the responsibility of the commercial manager in conjunction with the risk analyst. Additionally, risk monitoring is carried out through a permanent observation process for early identification of incidents that may occur in the evolution of operations, customers and their environment.

This monitoring process may result in the client’s classification in SCAN. This is a system which allows the differentiation of the management level and the action to be taken case-by-case.

Risk control function

The control function is performed by assessing risks from various complementary perspectives, the main pillars are the control by geographical location, business area, management model, product and process, facilitating thus the detection of specific areas requiring measures for which decisions should be taken. To obtain an overview of the bank's loan portfolio over the various phases of the credit cycle, with a level of detail that allows the assessment of the current risk situation and any movements.

Any changes in the Bank’s risk exposure are controlled on an ongoing and systematic basis. The impacts of these changes in certain future situations, both of an exogenous nature and those arising from strategic decisions, are assessed in order to establish measures that place the profile and amount of the loss portfolio within the parameters set by Executive Commission.

b.5) Credit recovery

"Strategies and action channels are defined according to the days of past due loans and the amounts, that result in a Map of Responsibilities and always look as the first alternative, the client's recovery.

The Bank uses tools as behavioral scoring to study the collection performance of certain groups, in order to reduce costs and increase recoveries. These models seek to measure the probability of clients becoming overdue adjusting collection efforts so that clients less likely to recover, receive timely actions. In cases the payments is most likely to happen, the focus is given in maintaining a healthy relationship with clients. All clients with severe or rescheduled credits delays values have internal restrictions.

Clients with high risk index have a model of recovery, with a commercial follow-up and a recovery specialist.

b.6) Credit risk from other perspective

Certain areas and specific views of credit risk deserve a specialist’s attention, complementary to global risk management.

Concentration risk

Concentration risk is an essential factor to be analyzed in the area of credit risk management. The Bank constantly monitors the degree of concentration of its credit risk portfolios, by economic sector, geographical area/country, product and client group.

The risk committee establishes the risk policies and reviews the exposure limits required to ensure adequate management of credit risk portfolio concentration.

From the sectorial standpoint, the distribution of the corporate portfolio is adequately diversified.

The Executive Vice-Presidence of Risks works closely with the Executive Vice-Presidence of Financial Strategic in the credit portfolio management, which includes reducing the concentration of exposures through several techniques, such as the arrangement of guarantees to mitigate the companies risk, credit derivatives for hedge purposes or the performance of securitization transactions, in order to optimize the risk/return ratio of the total portfolio.

Credit risk from financial market operations

This heading includes the credit risk arising in treasury operations with clients, mainly credit institutions. These operations are performed both via money market financing products with different financial institutions and via derivative instruments arranged for the purpose of serving our clients.

Risk control is performed using an integrated, real-time system that enables the Bank to know at any time the unused exposure limit with respect to any counterparty, any product and maturity and at any Bank unit.

Credit risk is measured at its current market value and its potential value (exposure value considering the future variation in the underlying market factors). Therefore, the equivalent credit risk (CRE) is defined as the sum of net replacement value plus the maximum potential value of the contracts in the future.

Environmental risk

The Banco Santander's Social and Environmental Responsibility Policy (PRSA), which follows the guidelines of CMN Resolution 3232/2014 and the SARB Regulation Nº. 14 of Febraban, establishes guidelines and consolidates specific policies for socio-environmental practices in business and in relationships with stakeholders. These practices include the management of socio-environmental risks, impacts and opportunities related to topics such as adequacy in credit granting and use, supplier management and socio-environmental risk analysis, which is carried out through the analysis of clients' socio-environmental practices. and Varejo, of the Corporate segment 3 (one of the Corporate Retail segments of the Bank), which have limits or credit risk above R$ 5 million and which are part of the 14 socio-environmental care sectors. In this case, the socio-environmental risk is analyzed in order to mitigate the issues of operational risk, capital risk, credit risk and reputational risk. Since 2009, Santander has been a signatory to the Equator Principles and this set of guidelines is used to mitigate socio-environmental risks in the financing of large projects.

The mitigation of socioenvironmental risks in financing large projects is carried out based on analyzes based on the guidelines of the Equator Principles, a set of socioenvironmental criteria referenced in the International Finance Corporation (IFC) Performance Standards on Social and Environmental Sustainability and the Environmental Guidelines, Health and Safety of the World Bank Group.

The commitments assumed in the PRSA are detailed in other Bank policies, such as the Anti-Corruption Policy, Supplier Relationships and Homologation Policies and Social and Environmental Risk Policies, as well as the Private Social Investment Policy, which aims to guide the strategy in this area. and to present guidelines for social programs that strengthen this strategy.

b.7) Credit management - Main changes

The business trends observed in the year 2020 were consistent with the trends presented 2019, where in a challenging economic scenario. The Bank maintained the good quality of its business and did not presented major variances in its delinquency ratios. In December 2020, this ratio achieved 5.55% compared to 6.75% of December 2019 and 6.98%, of December, 2018.

Below is a table showing the evolution of the main credit indicators. 

	2020	2019	2018
Credit risk exposure - customers (Thousand of Reais)	466,104,042	391,569,227	364,193,664
Loans and advances to customers, gross (note 9)	417,822,026	347,256,660	321,933,190
Contingent Liabilities - Guarantees and other sureties (note 43,a)	48,282,016	44,312,567	42,260,474
Non-performing loans ratio (%) - unaudited	5.55%	6.75%	6.98%
Impairment coverage ratio (%) - unaudited	110.64%	96.58%	102.42%
Specific credit loss provisions, net of RAWO (*) (Thousand of Reais) - unaudited	25,640,489	22,625,750	22,969,315
Cost of credit (% of risk) - unaudited	4.35%	3.93%	3.90%
Data prepared on the basis of management criteria and the accounting criteria of the controller unit.
(*) RAWO = Recoveries of Assets Derecognized.

The Bank incorporates information about the future both in its assessment if the credit risk of an instrument has increased substantially since the initial recognition and in its measurement of the expected credit losses. Based on guidance from its internal committees and economic experts and considering a range of actual and anticipated external information, the Bank develops a base scenario as well as other possible scenarios. This process involves the projection of two or more additional economic scenarios and considers the respective probabilities of each result. External information includes economic data and forecasts published by government agencies and monetary authorities and selected private sector analysts and academics.

The base case represents the most likely result and is in line with the information used by the Bank for other purposes, such as strategic planning and budgeting. The other scenarios represent more optimistic and pessimistic results. Periodically, the Bank conducts more extreme stress tests to adjust its determination of these other representative scenarios.

					12/31/2020
					In Reais Million
	Over-collateralized assets			Under-collateralized assets
	Carrying value of the assets	Fair value of collateral	% collateral coverage	Carrying value of the assets	Fair value of collateral	% collateral coverage
Individuals (1)	57,633	182,430	317%	3,091	2,756	89%
Mortgages	45,746	100,201	219%	46	38	83%
Very small, small and middle-market companies, corporates and foreign loans (2)	41,428	143,168	346%	56,052	42,728	76%
Total	144,807	425,799	294%	59,188	45,522	77%

(1) Vehicles and others loans.

(2) Cayman and Luxemburgo.

Unsecured loans: 213,824.

					12/31/2019
					In Reais Million
	Over-collateralized assets			Under-collateralized assets
	Carrying value of the assets	Fair value of collateral	% collateral coverage	Carrying value of the assets	Fair value of collateral	% collateral coverage
Individuals (1)	53,899	150,853	280%	2,762	2,592	94%
Mortgages	39,016	84,862	218%	3	3	86%
Very small, small and middle-market companies, corporates and foreign loans (2)	34,008	116,236	342%	33,140	26,587	80%
Total	126,923	351,951	277%	35,905	29,182	81%

(1) Vehicles and others loans.

(2) Cayman and Luxemburgo.

Unsecured loans: 195,765.

c) Market Risk

Market risk is the exposure to risks such as interest rates, exchange rates, prices of goods, prices in the stock market and others values, according to the type of product, volume of operations, term and conditions of the agreement and underlying volatility.

The Bank operates according to global policies, within the Group’s risk tolerance level, aligned with the objectives in Brazil and in the world.

With this purpose, it has developed its own Risk management model, according to the following principles:

· Functional independence;

· Executive capacity sustained by knowledge and proximity with the client;

· Global reach of the function (different types of risks);

· Collective decision-making, that evaluates a variety of possible scenarios and do not compromise the results with individual decision (including Brazil Executive Risk Committee - Comitê Executivo de Riscos Brasil). This Comitee delimits and approves the operations. The Asset and Liabilities Committee, which responds for the capital management and structural risks, including country-risk, liquidity and interest rates.

· Management and improvement of the equation risk/return; and

· Advanced methodologies for risk management, such as Value at Risk – VaR (historical simulation of 521 days with a confidence level of 99% and time horizon of one day), scenarios, financial margin sensibility, equity value and contingency plan.

The Market Risks structure is part of the Vice Presidency of Credit and Market Risks, an independent area that applies risk policies taking into consideration the guidelines of the Board of Directors and the Risks Division of Santander in Spain.

c.1) Activities subject to market risk

The measurement, control and monitoring of the market risk area comprises all operations in which net worth risk is assumed. This risk arises from changes in the risk factors –interest rate, exchange rate, equities, commodity prices and the volatility thereof– and from the solvency and liquidity risk of the various products and markets in which the Bank operates.

The activities are segmented by risk type as follows:

I. Trading: this item includes financial services for clients, trading operations and positioning mainly in fixed-income, equity , foreign currency products and shares.

II. Balance sheets management: A risk management assessment aims to give stability to interest income from the commercial and economic value of the Bank, maintaining adequate levels of liquidity and solvency. The risk is measured by the balance sheets exposure to movements in interest rates and level of liquidity.

III. Structural risks:

· Structural foreign currency risk/hedges of results: foreign currency risk arising from the currency in which investments in consolidable and non-consolidable companies are made (structural exchange rate). This item also includes the positions taken to hedge the foreign currency risk on future results generated in currencies other than the Real (hedges of results).

· Structural equities risk: this item includes equity investments in non-consolidated financial and non-financial companies that give rise to equities risk.

The Financial management area is responsible for the balance sheet management risk and structural risks through the application of uniform methodologies adapted to the situation of each market in which the Bank operates. Thus, in the convertible currencies area, Financial management directly manages the Parent's risks and coordinates the management of the other units operating in these currencies. Decisions affecting the management of these risks are taken through the ALCO (Asset Liability Control committees) in the respective countries.

The Financial management goal is to ensure the stability and recurring nature of both the net interest margin of the commercial activity and the Bank’s economic value, whilst maintaining adequate liquidity and solvency levels.

Each of these activities is measured and analyzed using different tools in order to reflect their risk profiles as accurately as possible.

Interest rate Risk

The following table aggregates by product the cash flows of the operations of our perimeter of companies that have interest income. The transactions are presented by the book balance at the closing date of the years 2020, 2019 and 2018. It is not associated with the risk management of changes in interest rates or indexer mismatches, which is done by monitoring metrics of Marketplace. However, it allows to evaluate the concentrations of term and possible risks and below it, the balances of the same products are presented at the redemption value at maturity, except for the line dealing with receivables and obligations linked to derivative contracts.

						2020
						In millions of Reais
	Position of Accounts Subject to Interest Rate Risk	0 to 30 days	31 to 180 days	181 to 365 days	1 to 5 days	Above 5 years	Total
Remunerated Assets:
	Financial assets measured at fair value in income	-	153	50	250	1,747	2,200
	Debt Instruments	-	153	50	250	1,747	2,200
	Equity Instruments	-	-	-	-	-	-
	Derivatives	-	-	-	-	-	-
	Financial assets measured at fair value in profit or loss for trading	15,635	18,487	4,867	57,091	17,707	113,788
	Debt Instruments	3,480	11,789	3,150	47,287	14,078	79,784
	Equity Instruments	1,164	-	-	-	-	1,164
	Derivatives	10,992	6,698	1,717	9,804	3,629	32,840
	Financial assets not intended for trading Mandatory measured at the fair value of the result	439	-	-	-	-	439
	Equity Instruments	439	-	-	-	-	439
	Loans and Advances to Customers	-	-	-	-	-	-
	Financial assets measured at fair value in other comprehensive income	3,455	3,625	12,177	63,651	22,430	105,339
	Debt Instruments	3,383	3,625	12,177	63,651	22,430	105,267
	Equity Instruments	72	-	-	-	-	72
	Financial assets measured at amortized cost	50,776	130,066	55,339	152,438	63,844	452,462
	Loans and Other Amounts with Credit Institutions	25,201	39,879	2,765	3,799	-	71,644
	Loans and advances to customers	25,490	88,071	50,829	134,805	61,795	360,990
	Debt Instruments	85	2,117	1,745	13,833	2,049	19,828
	Total	70,305	152,331	72,433	273,429	105,728	674,227
Remunerated Liabilities:
	Financial Liabilities Measured at Fair Value in Income Held for Trading	55,313	7,878	2,088	12,629	3,515	81,424
	Derivatives	10,160	7,878	2,088	12,629	3,515	36,270
	Short Positions	45,153					45,153
	Financial liabilities at amortized cost	174,848	100,497	91,433	131,589	16,667	515,035
	Deposits from the Central Bank of Brazil and deposits from credit institutions	4,007	32,846	22,603	7,891	3,031	70,379
	Customer deposits	163,297	44,035	61,293	98,867	203	367,694
	Bonds and securities	7,544	23,616	7,537	24,832	313	63,841
	Debt Instruments Eligible to Capital	-	-	-	-	13,120	13,120
	Total	230,161	108,376	93,521	144,218	20,182	596,458

						2019
Position of accounts subject to interest rate risk						In millions of Reais
		0 to 30 days	31 to 180 days	181 to 365 days	1 to 5 years	Above 5 years	Total
Interest-earning assets:
	Financial assets measured at fair value through profit or loss	3,891	1,091	737	8,444	4,446	18,609
	Debt instruments	-	3	140	188	889	1,220
	Equity instruments	171	-	-	-	-	171
	Trading derivatives	3,720	1,088	597	8,256	3,557	17,218
	Other Financial Assets At Fair Value Through Profit Or Loss	4,261	802	3,981	16,737	7,075	32,856
	Debt instruments	2,232	802	3,981	16,737	7,075	30,827
	Equity instruments	2,029	-	-	-	-	2,029
	Investments Held to Maturity	98	96	280	3,679	3,981	8,134
	Reserves  from Brazilian Central Bank	69,663	-	-	-	-	69,663
	Financial Assets Measured at Amortized Cost	28,416	75,794	51,603	112,467	54,815	323,095
	Total	106,329	77,783	56,601	141,327	70,317	452,357
Interest-bearing liabilities:
	Deposits from credit institutions	224,610	62,181	69,277	70,882	2,556	429,506
	Subordinated debts	-	-	-	10,077	-	10,077
	Marketable debt securities	3,677	25,781	19,125	28,134	3,475	80,192
	Trading derivatives	4,597	1,621	1,074	9,119	3,828	20,239
	Short positions	23,501	-	-	-	-	23,501
	Total	256,385	89,583	89,476	118,212	9,859	563,515
						2018
Position of accounts subject to interest rate risk						In millions of Reais
		0 to 30 days	31 to 180 days	181 to 365 days	1 to 5 years	Above 5 years	Total
Interest-earning assets:
	Financial Assets Held For Trading	8,193	6,155	12,013	67,606	25,964	119,931
	Debt instruments	5,359	5,192	8,294	58,363	23,460	100,668
	Equity instruments	807	-	-	-	-	807
	Trading derivatives	2,027	963	3,719	9,243	2,504	18,456
	Other Financial Assets At Fair Value Through Profit Or Loss	677	9,091	368	16,702	3,577	30,415
	Debt instruments	379	9,091	368	16,702	3,577	30,117
	Equity instruments	298	-	-	-	-	298
	Non-Current Assets Held For Sale	24	521	89	3,603	3,826	8,063
	Reserves  from Brazilian Central Bank	70,103	-	-	-	-	70,103
	Loans and Receivables	27,387	101,441	35,900	85,318	60,966	311,012
	Total	106,387	107,208	48,370	173,229	94,333	539,524
Interest-bearing liabilities:
	Deposits from credit institutions	200,818	47,172	65,606	71,413	5,343	390,352
	Subordinated debts	9,857	-	-	-	9,687	19,544
	Marketable debt securities	13,353	20,875	14,612	30,138	9,715	88,693
	Trading derivatives	1,104	1,370	3,257	9,673	3,322	18,726
	Short positions	32,440	-	-	-	-	32,440
	Total	257,572	69,417	83,475	111,224	28,067	549,755

Currency Risk

			2020
			In millions of Reais
Asset:	Dollar	Euro	Others	Total
Cash/Applications/Debt Instruments	42,860	1,870	569	45,299
Loans and advances to customers	5,803	3,187	1,140	10,130
Investments in Foreign Subsidiaries and Dependence	57,914	215	-	58,129
Derivatives	125,495	10,451	2,795	138,741
Others	25,866	-	-	25,866
Total	257,937	15,723	4,504	278,164
Liabilities:	Dollar	Euro	Others	Total
Funding in foreign currency	61,173	384	-	61,557
Derivatives	147,911	14,449	2,854	165,214
Others	39,972	219	437	40,629
Total	249,057	15,052	3,291	267,400

			2019
			In millions of Reais
Asset:	Dollar	Euro	Others	Total
Cash/Applications/Debt Instruments	12,406	224	1	12,631
Loans and advances to customers	4,776	1,920	-	6,696
Investments in Foreign Subsidiaries and Dependence	50,193	3,557	-	53,750
Derivatives	150,538	13,053	9,712	173,303
Others	10,521	574	-	11,095
Total	228,434	19,328	9,713	257,475
Liabilities:	Dollar	Euro	Others	Total
Funding in foreign currency	59,416	925	49	60,390
Derivatives	169,136	20,184	8,515	197,835
Others	-	60	1,009	1,069
Total	228,552	21,169	9,573	259,294
			2018
			In millions of Reais
Asset:	Dollar	Euro	Others	Total
Cash/Applications/Debt Instruments	348,797	-	-	348,797
Loans and advances to customers	4,505	155	-	4,660
Investments in Foreign Subsidiaries and Dependence	45,345	3,390	-	48,735
Derivatives	231,240	18,163	2,490	251,893
Others	23,619	1,974	42	25,635
Total	653,506	23,682	2,532	679,720
Liabilities:	Dollar	Euro	Others	Total
Funding in foreign currency	390,418	462	145	391,025
Derivatives	262,396	24,809	2,391	289,596
Others	1,007	-	-	1,007
Total	653,821	25,271	2,536	681,628

c.2) Methodologies

Trading

Banco Santander calculates minimum capital requirement for market risks using the internal model since approval by Bacen in May 2018.

The standard methodology for measuring and controlling market risks applied to financial intermediation activities by Banco Santander in 2020, 2019 and 2018 was Value at Risk (VaR), which measures the maximum expected loss with a certain level of confidence, in a certain period. This methodology is based on a standard historical simulation with a 99% confidence level and a one-day horizon. Statistical adjustments were made to efficiently incorporate the most recent events that condition the level of risk assumed.

Specifically, the Bank uses a time window of two years or 521 daily data obtained retrospectively from the reference date of the VaR calculation. Two figures are calculated each day, one by applying an exponential decline factor which gives a lesser weighting to more distant observations in time, and another with uniform weightings for all observations. The VaR reported is the higher of these two figures.

VaR is not the only measure available to determine the risk to which an institution is exposed. It is used for its ease of understanding calculation, good reference to the level of risk incurred by the Bank, but other metrics and methodologies are also used to allow the Bank to exercise greater risk control in all markets in which it operates.

Among these measures, scenario analysis stands out, which consists of defining behavior scenarios for several financial variables and determining the impact on results by applying them to the Bank's activities. These scenarios can replicate past events (crises, for example) or else determine plausible scenarios that are unrelated to past events. A minimum of three types of scenarios are defined (plausible, severe and extreme) which, together with VaR, make it possible to obtain a much more complete spectrum of the risk profile.

The positions are monitored daily through an exhaustive control of the variations of the portfolios in order to detect possible incidents and correct them immediately.

A daily income account is an excellent indicator of risk, as it allows observing and detecting the impact of changes in financial variables in portfolios.

Finally, in the control of credit management activities (credits actively traded - trading book) and derivatives, due to their atypical character, specific measures are evaluated. In the case of derivatives, these measures are assessed for sensitivity to price fluctuations in the underlying (delta and gamma), volatility (vega) and time (theta). In the case of credit management activities (actively traded) in the trading portfolios, the controlled measures include sensitivity to spread, jump-to-default and concentration of positions by rating level.

c.3) Balance-sheet management

Interest rate risk

The Bank analyses the sensitivity of the net interest margin and market value of equity to changes in interest rates. This sensitivity arises from maturity and interest rate repricing gaps in the various balance sheets items.

On the basis of the balance-sheets interest rate position, and considering the market situation and outlook, the necessary financial measures are adopted to align this position with that desired by the Bank. These measures can range from the taking of positions on markets to the definition of the interest rate features of commercial products.

The measures used by the Bank to control interest rate risk in these activities are the interest rate gap, the sensitivity of net interest margin (NIM) and market value of equity (MVE) to changes in interest rates, the duration of capital, value at risk (VaR), the EaR (Earning At Risk) and scenario analysis.

Interest rate gap of assets and liabilities

The interest rate gap analysis focuses on the mismatches between the reevaluation deadlines of on-balance-sheets assets and liabilities and off-balance-sheets items. This analysis facilitates a basic snapshot of the balance sheet structure and enables concentrations of interest rate risk in the various maturities to be detected. Additionally, it is a useful tool for estimating the possible impact of potential changes in interest rates on the entity's net interest margin and market value of equity.

The flows of all the on and off-balance sheet headings must be broken down and placed at the point of repricing or maturity. The duration and sensitivity of contracts that do not have a maturity date they are analyzed and estimated using an internal model.

Net interest margin (NIM) sensitivity

The sensitivity of the net interest margin measures the change in the expected accruals for a specific period (12 months) given a shift in the interest rate curve.

The sensitivity of the net interest margin is calculated by simulating the margin both for a scenario of changes in the interest rate curve and for the current scenario. The sensitivity is the difference between the two margins calculated.

Market value of equity (MVE) sensitivity

The sensitivity of the market value of equity is a complementary measure to the sensitivity of the net interest margin.

This sensitivity measures the interest rate risk implicit in the market value of equity based on the effect of changes in interest rates on the present values of financial assets and liabilities.

Value at risk (VaR) and Earnings at Risk (EaR)

It is defined with 99% base points of the MVE’s loss distribution function, calculated considering the market value of the positions, based on the payback obtained in the last two years and with degree of statistical certainty (level of trust) to a defined time horizon.

It is also applied a similar methodology to calculate the maximum loss in NII (EaR), in order to consider the interest rate risk even in economic value impact as in financial margin.

The unit sums the return vectors of the VAR with the return vectors of EaR, resulting the total return vector. The composition is made considering in the metric of EaR the losses in financial margin that occur between the initial moment (reference date) and the holding period of the not-trading portfolio. The losses in the economic value takes in consideration the impact of the ending positions after the holding period.

c.4) Liquidity risk

Liquidity risk is associated with the Bank's ability to finance purchase commitments at reasonable market prices and to carry out its business plans with stable sources of financing,

Liquidity management of Santander Bank

For the control and liquidity management, the Santander bank uses short and long-term metrics and stress metrics that are capable of measuring the safe liquidity buffer so that the bank comfortably honors its obligations to the market and shareholders.

Then, we can cite:

Short-term metrics and liquidity stress:

a. LCR

The Santander Bank uses the Liquidity Coverage Ratio (LCR) in its liquidity risk management. LCR is a short-term index for a 30 days stress scenario, results from the division of high quality assets and net outflows in 30 days.

The Total High Liquidity Assets – HQLA is composed mainly of Brazilian federal government bonds and compulsory returns. The net outflows are composed mainly of losses of deposits, offset in part by inflows, mainly loans.

b. Liquidity stress scenarios:

The Liquidity management requires the analysis of financial scenarios in which potential problems whit liquidity are assessed, for which is necessary to construct and study scenarios in crisis situations. The model used for this analysis is the Stress Test

The stress test evaluate the financial structure of the institution and its capacity to resist and react to more extreme situations.

The purpose of the Liquidity Stress Test is to allow the simulation of adverse market conditions, making it possible to evaluate the impacts on the institution´s liquidity and ability to payments, in order to anticipate the solutions or even avoid positions that excessively liquidity in stress scenarios.

The scenarios are define from the analysis of market behavior during previous crisis. Four crisis scenarios are develop, with different intensities.

From the stress models analysis, the concept of minimum liquidity was define, which is sufficient to support liquidity losses for a determined day horizon in all simulated crisis scenarios.

Long-term metrics

Its objective is to measure the stability of sources of financing against the assets committed. The NSFR metric developed by BIS and adapted by the local regulator, which objective through determined percentages, to verify if the institution has stable source of funding to sustain its assets. This metrics has different weights by term, client’s segment and product type. It is calculated monthly by the institution.

c. Liquidity indicators

In order to help management, some liquidity indicators are calculated on a monthly basis, like ratios of concentration by counterparties and concentration by segments.

Clients Funding

The Bank has different funding sources, both in products and mix of clients, with a healthy distribution between the segments. The total of clients resources is currently in R$ 78,6 billion and presented an increase comparing with 2019 amount, highlighting the increasing of time deposit funding and the keeping of financial letters inventory.

					In millions of Reais
	2020			2019
	0 a 30 days	Total	%	0 a 30 days	Total	%
Demand deposits	35,550	35,550	100%	29,524	29,524	100%
Savings accounts	62,210	62,210	100%	49,040	49,040	100%
Time deposits	77,298	279,778	28%	53,321	190,344	28%
Interbank deposit	818	5,145	16%	871	4,299	20%
Funds from acceptances and issuance of securities	7,544	70,628	11%	3,921	85,963	5%
Borrowings and Onlendings	3,189	67,760	5%	5,077	54,880	9%
Subordinated Debts / Debt Instruments Eligible to Compose Capital	-	13,120	0%	-	10,175	0%
Total	186,609	534,191	100%	141,754	424,225	33%

		In millions of Reais
	2018
	0 a 30 days	Total	%
Demand deposits	18,854	18,854	100%
Savings accounts	46,068	46,068	100%
Time deposits	49,771	190,971	26%
Interbank deposit	863	4,118	21%
Funds from acceptances and issuance of securities	3,681	70,110	5%
Borrowings and Onlendings	5,181	45,936	11%
Subordinated Debts / Debt Instruments Eligible to Compose Capital	9,857	19,666	50%
Total	134,275	395,723	34%

Assets and liabilities in accordance with the remaining contractual maturities, considering the undiscounted flows are as follows:

																2020
																In millions of Reais
						0 to 30 days			31 to 180 days	181 to 365 days			1 to 5 years
	Future Cash Flows Except for Derivatives															Above 5 years			Total
Remunerated Assets:
	Financial assets measured at fair value in income					-			174	98			667			2,900			3,839
	Debt Instruments					-			174	98			667			2,900			3,839
	Financial assets measured at fair value in profit or loss for trading					16,028			19,211	5,763			63,618			25,489			130,108
	Debt Instruments					3,873			12,513	4,046			53,814			21,859			96,104
	Equity Instruments					1,164			-	-			-			-			1,164
	Derivatives					10,992			6,698	1,717			9,804			3,629			32,840
	Financial assets not intended for trading Mandatory measured at the fair value of the result					439			-	-			-			-			439
	Equity Instruments					439			-	-			-			-			439
	Financial assets measured at fair value in other comprehensive income					5,000			3,874	13,850			75,849			35,538			134,110
	Debt Instruments					4,928			3,874	13,850			75,849			35,538			134,038
	Equity Instruments					72			-	-			-			-			72
	Financial assets measured at amortized cost					53,147			145,280	69,004			208,295			135,783			611,509
	Loans and Other Amounts with Credit Institutions					24,638			40,579	2,901			4,205			-			72,324
	Loans and advances to customers					28,424			102,379	64,194			188,430			135,987			519,415
	Debt Instruments					85			2,321	1,909			15,660			(205)			19,771
	Total					74,615			168,538	88,715			348,429			199,709			880,005
Remunerated Liabilities:
	Financial Liabilities Measured at Fair Value in Income Held for Trading					55,313			7,878	2,088			12,629			3,515			81,424
	Derivatives					10,160			7,878	2,088			12,629			3,515			36,270
	Short Positions					45,153													45,153
	Financial liabilities at amortized cost					176,223			101,111	93,103			145,931			16,471			532,838
	Deposits from the Central Bank of Brazil and deposits from credit institutions					3,707			33,039	22,860			8,014			2,802			70,421
	Customer deposits					165,171			44,571	62,606			110,809			215			383,372
	Bonds and securities					7,345			23,502	7,637			27,109			333			65,925
	Debt Instruments Eligible to Capital					-			-	-			-			13,120			13,120
	Total					463,072			217,979	190,382			317,119			39,972			1,228,525
														2019
Non-Discounted Future Flows Except Derivatives														In millions of Reais
			0 to 30 days		31 to 180 days			181 to 365 days				1 to 5 years			Above 5 years			Total
Interest-earning assets:
Financial assets measured at fair value through profit or loss		3,766		1,103			802				8,894			6,157			20,722
Debt instruments		46		15			205				638			2,600			3,504
Trading derivatives		3,720		1,088			597				8,256			3,557			17,218
Other financial assets at fair value through profit or loss		2,642		1,160			4,853				23,638			15,502			47,795
Debt instruments		2,642		1,160			4,853				23,638			15,502			47,795
Investments Held to Maturity		99		111			327				4,066			6,030			10,633
Reserves  from Brazilian Central Bank		69,663		-			-				-			-			69,663
Financial Assets Measured at Amortized Cost		32,417		89,335			65,395				159,615			110,607			457,369
Total			108,587		91,709			71,377				196,213			138,296			606,182
Interest-bearing liabilities:
Deposits from credit institutions		218,883		61,461			71,953				79,666			2,660			434,623
Subordinated Debts / Debt Instruments Eligible to Compose Capital		-		-			-				12,673			-			12,673
Marketable debt securities		3,697		26,096			19,829				31,407			4,628			85,657
Trading derivatives		4,597		1,621			1,074				9,119			3,828			20,239
Short positions		23,501		-			-				-			-			23,501
Total			250,678		89,178			92,856				132,865			11,116			576,693
															2018
Non-Discounted Future Flows Except Derivatives														In millions of Reais
			0 to 30 days		31 to 180 days			181 to 365 days				1 to 5 years			Above 5 years			Total
Interest-earning assets:
Financial Assets Held For Trading		7,388		6,199			12,162				80,590			52,584			158,923
Debt instruments		5,361		5,236			8,443				71,347			50,080			140,467
Trading derivatives		2,027		963			3,719				9,243			2,504			18,456
Available-For-Sale Financial Assets		379		9,230			379				18,666			6,037			34,691
Debt instruments		379		9,230			379				18,666			6,037			34,691
Non-Current Assets Held For Sale		24		558			126				3,904			5,119			9,731
Reserves  from Brazilian Central Bank		70,103		-			-				-			-			70,103
Loans and Receivables		29,234		111,216			45,564				116,107			85,637			387,758
Total			107,128		127,203			58,231				219,267			149,377			661,206
Interest-bearing liabilities:
Deposits from credit institutions		198,259		46,926			67,142				79,161			8,819			400,307
Subordinated Debts / Debt Instruments Eligible to Compose Capital		9,857		-			-				-			9,687			19,544
Marketable debt securities		13,395		21,343			15,290				33,627			9,717			93,372
Trading derivatives		1,104		1,370			3,257				9,673			3,322			18,726
Short positions		32,440		-			-				-			-			32,440
Total			255,055		69,639			85,689				122,461			31,545			564,389

Scenario analysis / Contingency plan

Based on the results obtained in the Stress Test, the bank draws up the Liquidity Contingency Plan, which constitutes a formal set of preventive and corrective actions to be triggered in times of liquidity crisis. The activation of the Plan results from the monitoring of internal parameters related to the conditions of the market and the Bank’s liquidity. These parameters serve identify different levels of crisis severity and, then, determine if there need to start the activation process.

After the crisis is identified, a communication is established between the internal areas capable of carrying out the corrective actions and mitigating the problems originated.

These corrective actions are measures capable of generating liquidity to solve or mitigate the effects of the crisis and are taken considering their complexities, implementation period and its liquidity impact.

The parameters and measures of this Plan are reviewed at any time, when necessary, however its minimum period of review is annual.

c.5) Structural foreign currency risk / Hedges of results / Structural equities risk

These activities are monitored by measuring positions, VaR and results.

c.5.1) Complementary measures

Calibration and test measures

Back-testing consists of performing a comparative analysis between VaR estimates and daily “clean” results (profit or loss on the portfolios at the end of the preceding day valued at following-day prices) and “dirty” (managerial income taking into account also the costs, intraday results and loading). The aim of these tests is to verify and provide a measure of the accuracy of the models used to calculate VaR.

Back-testing analyses performed at Banco Santander comply, at the very least, with the BIS recommendations regarding the verification of the internal systems used to measure and manage financial risks. Additionally, the Santander Bank also conducts hypothesis tests: excess tests, normality tests, Spearman’s rank correlation, average excess measures, etc.

The assessment models are regularly calibrated and tested by a specialized unit.

c.6) Control system

Limit setting

The limit setting process is performed together with the budgeting activity and is the tool used to establish the assets and liabilities available to each business activity. Limit setting is a dynamic process that responds to the level of risk considered acceptable by management.

The limits structure requires a process to be performed that pursues, among others, the following objectives:

1. To identify and delimit, in an efficient and comprehensive manner, the main types of financial risk incurred, so that they are consistent with business management and the defined strategy.

2. To quantify and communicate to the business areas the risk levels and profile deemed acceptable by senior management so as to avoid undesired risks.

3. To provide flexibility to the business areas for the efficient and timely assumption of financial risks, due to changes in the market and business strategy, and within the risks level considered acceptable by the Bank.

4. To allow business makers to assume risks which, although prudent, are sufficient to obtain the budgeted results.

5. To delimit the range of products and underlying assets with which each Treasury unit can operate, considering features such as assessment model and systems, liquidity of the instruments involved, etc.

c.7) Risks and results in 2020

Financial Intermediation Activities

The average VaR from the Bank´s trading portfolio in 2020 ended in R$30,3 million. The dynamic management of this profile allows the Bank to change its strategy to capitalize the opportunities offered by a uncertain environment.

c.7.1) Asset and liability management

Interest rate risk

Convertible currencies

At 2020 year-end, the sensitivity of the net interest margin at one year to parallel increases of 100 basis points applied to Banco Santander portfolios was concentrated on the BRL interest rate curve was positive by R$334 million.

Also at 2020 year-end, the sensitivity market value of equity to parallel increases of 100 basis points applied to the Banco Santander in the BRL interest rate curve was positive by R$2,063 million.

Quantitative risk analysis

The interest rate risk in balance sheets management portfolios, measured in terms of sensitivity of the net interest margin (NIM) at one year to a parallel increase of 100 b.p. in the interest rate curve, was at the beginning of 2019 and 2018, reaching a maximum of R$134 million in December 2019. The sensitivity value decreased R$202 million during 2019, reaching a maximum of R$2,342 million in October. The main factors that occurred in 2019 and influenced in sensitivity were the volatility of the exchange rate (convexity effect), portfolio’s decayment update of implicit methodology on cash flow of the Bank’s products and liquidity.

Million of Reais
	2020	2019	2018
Sensibilities
Net Interest Margin	432	334	200
Market Value of Equity	1,771	2,063	1,861
Value at Risk - Balance
VaR	1,365	1,755	1,744

c.8) Sensitivity analysis

The risk management is focused on portfolios and risk factors pursuant to the requirements of regulators and good international practices.

Financial instruments are segregated into trading and Banking portfolios, as in the management of market risk exposure, according to the best market practices and the transaction classification and capital management criteria of the New Standardized Approach of regulators. The trading portfolio consists of all transactions with financial instruments and products, including derivatives, held for trading, and the Banking portfolio consists of core business transactions arising from the different Banco Santander business lines and their possible hedges. Accordingly, based on the nature of Banco Santander’s activities, the sensitivity analysis was presented for trading and Banking portfolios.

Banco Santander performs the sensitivity analysis of the financial instruments in accordance with requirements of regulatory bodies and international best practices, considering the market information and scenarios that would adversely affect the positions and the income of the Bank.

The table below summarizes the stress amounts generated by Banco Santander’s corporate systems, related to the Banking and trading portfolio, for each one of the portfolio scenarios as of December 31, 2020.

Trading portfolio

		2020
Risk Factor	Description	Scenario 1	Scenario 2	Scenario 3
Interest Rate - Reais	Exposures subject to changes in interest fixed rate	(24,305)	(275,618)	(551,236)
Coupon Interest Rate	Exposures subject to changes in coupon rate of interest rate	(880)	(9,048)	(18,096)
Coupon - US Dollar	Exposures subject to changes in coupon US Dollar rate	(5,757)	(8,376)	(16,753)
Coupon - Other Currencies	Exposures subject to changes in coupon foreign currency rate	(109)	(5,593)	(11,187)
Foreign currency	Exposures subject to foreign exchange	(15,859)	(396,473)	(792,947)
Eurobond/Treasury/Global	Exposures subject to Interest Rate Variation on Papers Traded on the International Market	(1,653)	(1,359)	(2,718)
Inflation	Exposures subject to change in coupon rates of price indexes	(37,322)	(267,221)	(534,442)
Shares and Indexes	Exposures subject to change in shares price	(184)	(4,604)	(9,208)
Commodities	Exposures subject to change in commodities' prices	(52)	(1,288)	(2,575)
Total (1)		(86,122)	(969,581)	(1,939,161)

(1) Amounts net of taxes.

Scenario 1: a shock of +10 and -10 base points on the interest curves and 1% to price changes (currency and stocks);

Scenario 2: a shock of +25% and -25% in all risk factors, are considered the greatest losses per risk factor;

Scenario 3: a shock of +50% and -50% in all risk factors, are considered the greatest losses per risk factor.

Portfolio Banking

		2020
Risk Factor	Description	Scenario 1	Scenario 2	Scenario 3
Interest Rate - Reais	Exposures subject to changes in interest fixed rate	(24,638)	(639,741)	(1,870,133)
TR and Long-Term Interest Rate - (TJLP)	Exposures subject to changes in Exchange of TR in TJLP	(49,854)	(576,298)	(903,045)
Inflation	Exposures subject to change in coupon rates of price indexes	(42,424)	(286,671)	(585,067)
Coupon - US Dollar	Exposures subject to changes in coupon US Dollar rate	(2,803)	(60,177)	(109,050)
Coupon - Other Currencies	Exposures subject to changes in coupon foreign currency  rate	(6,615)	(60,266)	(69,259)
Interest Rate Markets International	Exposures subject to changes in interest rate negotiated roles in international market	(14,660)	166,540	317,466
Foreign Currency	Exposures subject to Foreign Exchange	(655)	(16,371)	(32,742)
Total (1)		(141,649)	(1,472,984)	(3,251,830)

(1) Amounts net of taxes,

Scenario 1: a shock of +10bps and -10bps in interest rate curves and 1% price variance (currency and stocks); are considered the greatest losses per risk factor;

Scenario 2: a shock of +25% and -25% in all risk factors, are considered the greatest losses per risk factor;

Scenario 3: a shock of +50% and -50% in all risk factors, are considered the greatest losses per risk factor,

d) Bank´s business is highly dependent on the proper functioning 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, and on our ability to rely on our digital technologies, computer and email services, software and networks, as well as on the secure processing, storage and transmission of confidential data and other information in our computer systems and networks. 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.

e) Independent Structure

The Operational Risk & Internal Control area, under the Executive Risk Vice-Presidency, acts independently as a second line of defense, supporting and challenging the first line of defense. Guidelines, policies and processes to ensure the conduct and adequacy of the Operational Risk Control and management Model.

One area adopts the definition of the Basel Committee, Central Bank of Brazil and other corporate instructions applicable locally for Operational Risk such as the possibility of loss of inadequacy or failure of operational processes, systems or by external events. In addition, Banco Santander 's Board of Directors opted for the Alternative Standardized Approach (ASA) to calculate the portion of the Reference Equity (PR) related to Operational Risk.

e.1) Operational Risks & Internal Control

The Operational Risk & Internal Control area has a mission with Banco Santander: To support the fulfillment of strategic objectives and the decision-making process, in adapting and meeting mandatory requirements, maintaining soundness, reliability, reducing and mitigating losses due to risks operational, in addition to implementation, dissemination of the Operational Risk culture.

Additionally, the Operational Risk & Internal Control area works to prevent Operational Risks and supports the continuous strengthening of the Internal Controls system, meeting the requirements of the Regulatory Bodies, Basel Accord, resolutions of the National Monetary Council (CMN) and Applicable Regulators. This Model also follows the guidelines established by Banco Santander Spain based on the COSO - Committee of Sponsoring Organizations of the Treadway Commission –Internal Control– Integrated Framework 2013.

Control and management model

Santander Brasil has implemented a model based on lines of defense that aims to improve and continuously develop the management and control of operational risks, ensuring that structures can assess, monitor, control, mitigate, report and reduce the risks and losses to which they are exposed.

The attributions of this model include carrying out activities for the identification, evaluation, monitoring, control, mitigation and reporting of Operational Risk. Thus, different analyzes and follow-ups are carried out and reported. The main instruments that make up the Operational Risk Control and management Model are presented below:

·Definition of the operational risk appetite;

·Capture and evaluation of loss events (internal and external);

·Training, Communication and Culture;

·Evaluation of products and services;

·Self-assessment of operational risks;

·Scenario analysis;

·Risk and Control Indicators;

·Internal controls.

Model Governance

The Model has the approval of the Executive Risk Committee and approval by the Board of Directors, integrating the Organization's corporate governance structure and responsibility. Periodically, the relevant matters of Operational Risks are communicated to senior management for awareness and deliberations.

As part of the Risk Governance system, the Senior Forum on Internal Controls and Operational Risks (CIRO) is also implemented, whose objective is to deliberate for the Risk Pro Officers (RPO), of the 1st Line of Defense, policies, processes, procedures, strategy and decisions on the topics to be applied in the business units, and has a bimonthly periodicity.

In order to ensure a structured process for disseminating the culture of Operational Risk management and control, the relevant topics are dealt with in specific Committees and Forums.

e.2) Responsibilities and duties of the Operational Risks and Internal Controls area

• Disseminate the Operational Risk and Internal Controls management-oriented culture and converge towards the prevention and reduction of Operational Risk events and losses, mitigating the financial, legal and reputational impacts.

• Improve risk analysis to reduce, consolidate and prioritize mitigation actions.

• Maintain the dynamics and control of operational risk exposure in line with risk appetite.

• Establish roles and responsibilities, with follow-up with those responsible in the lines of defense.

• Ensure business continuity and strengthen the Internal Controls environment.

• Provide adequate level of coverage in business units.

• Provide support for the Organization's strategic decisions based on the integrated Operational Risk profile and emerging trends.

• Implement the best practices for management and control of operational risks in the 1st and 2nd Lines of Defense.

• Identify the Operational Risk profile of the Organization.

• Provide continuous improvement of existing methodologies and deepening the culture of responsibility for Operational Risks and Internal Controls.

e.3) Differential factor

The Operational Risks & Internal Control area invests in the development, training and updating of its professionals so they can keep up with changes in the business environment, in addition to offering training programs for other professionals through the intranet and on-site courses. Among the personal course, we highlight the achievement of training aimed at increasing culture of RO management, training for the capture of operational losses, among others.

This has made a significant contribution to the Bank consistently achieve its strategic and operational goals, by providing knowledge of the exposure to assumed operational risks and the controlled environment, maintaining the Bank’s low-risk profile and ensuring the sustainable development of its operations.

The Bank highlights:

• Mandatory training for all Banco Santander employees through e-learnings ("NetCursos"), addressing the issue of operational risks;

• The creation, dissemination and maintenance of Instruction Manuals, promoting corporate values and commitment;

• Coordination of the annual process for projecting losses caused by operational risks, defining action plans to reduce these losses and for accountability;

• Development of key risk indicators, aiming to monitor the main operational risks;

• Composition of lines of defense for the role of ORM – Operational risk management networks: "“RPO-Risk Pro Officer” whose function is to report to the executive the follow-up of the topics of Operational Risk at the strategic level of the Executive Board, “RPA-Risk Pro Agent " and "OR Assist" covering the perimeter of RO and "experts" in cases where the operational risk is transverse to the organization.

e.4) Communication Policy

The Operational Risks & Internal Control area is part of Santander’s governance structure and produces a series of specific monthly reports for management through the Integrated Operational Risk Committee (“CIRO”) and the “Forum RO”, detailing events that occurred, the main activities undertaken, corrective, preventive action plans and follow-up, ensuring transparency and knowledge to the governance forums.

f) Reputation Risk

f.1) Reputation Risk

The reputation risk is defined as a risk of a negative economic impact, current and potential, due to a perception unfavorable of the Bank by its employees, clients, shareholders/investors and society in general.

The reputation risk may arise from multiple sources and, in many cases, is derived from other risk events. In general, these sources might be related to the business and other support activities that are realized by the Bank, the economic context, social or politic, or even by other events arising from other competitors that might affect the Bank.

f.2) Compliance

It is defined as legal risk, of regulatory sanctions, financial loss or reputation that an institution may suffer as a result of failures in the compliance with laws, rules, ethics and conduct codes and good bank practices. The compliance risk management has the goal of being preventive and includes the monitoring, educative processes, Consulting, risk evaluation and corporative communication related to the rules and legislation applicable to each business department.

f.3) Directives

a. Compliance principles – Ethics and Conduct in the Securities Markets

The Bank’s ethical principles and conduct parameters are established in internal policies which are made available to all employees. Conduct Code in the Securities Markets and its formal acknowledgement is mandatory to all staff working close to securities markets. Proper communication channels are in place to clarify doubts and complaints from employees, the monitoring and controlling of these information are conducted in a way that adherence to the rules established is secured.

b. Preventing Money Laundering and Combating the Financing of Terrorism

The Bank’s money Laundering Prevention policies and terrorism financing prevention are based on the knowledge and rigorousness of the acceptance of new clients, complemented by the continuous scrutiny of all transactions where the Bank are involved in. The importance given to the theme is reflected on the direct involvement of management, namely the Operational Money Laundering Prevention and Compliance Committee, which meets each month to deliberate on issues regarding the theme and to be directly involved with new clients acceptance and suspicious transactions reporting.

c. New products and services and suitability

All new products and services are analyzed internally by different technical areas, until their risks have been completely mapped, and subsequently resolved by the Local Marketing Committee (CLC), composed of Santander executives. After the analysis and approval of new products and services, follow-up is carried out to mitigate any risks of conduct in marketing.

g) Compliance with the regulatory framework

The Banco Santander has assumed a firm commitment to the principles underlying the “Revised Framework of International Convergence of Capital Measurement and Capital Standards” (Basel II). This framework allows entities to make internal estimates of the capital they are required to hold in order to safeguard their solvency against events caused by various types of risk. As a result of this commitment, the Bank has devoted all the human and material resources required to ensure the success of the Basel II implementation plan. For this purpose, a Basel II team was created in the past, consisting of professionals from the Bank’s different departments: mainly Finance, Risks, Technology and Operations, Internal Audit −to verify the whole process, as the last layer of control at the entity−, and Business −particularly as regards the integration of the internal models into management. Additionally, specific work teams have been set up to guarantee the proper management of the most complex aspects of the implementation.

Supplementing the efforts of the Basel II operating team, the Bank management has displayed total involvement from the very beginning. Thus, the progress of the project and the implications of the implementation of the New Capital Accord by the Banco Santander have been reported to the management committee and to the board of directors on a regular basis.

In the specific case of credit risk, the implementation of Basel II entails the recognition, for regulatory capital purposes, of the internal models that have been used for management purposes.

The institution has applied the internal models based ratings methodology (AIRB) of Basel II in part of its portfolios, in compliance with regulatory requirements.

The additional capital requirements derived from the self-assessment process (Pillar II) should be compensated by the risk profile that characterizes the Bank's business activities (low average risk), due to its focus on Commercial Bank (small and medium-sized enterprises and Individuals) and the diversification of the business. The Pillar II which considers the impact of risks not addressed under Pillar I (regulatory capital) and the benefits arising from the diversification among risks, businesses and geographical locations.

Regarding the other risks addressed under Pillar I of Basel II, Banco Santander was approved for the use of internal models for market risk and will remain using the standardized method for operational risk, since it considers the premature use of advanced models (AMA) for this purpose. Regarding the Market Risk, Banco Santander was approved to the use of Internal Models in February 2018 and started to disclose the capital by this method from May 2018.

Pillar II is another significant line of action under the Basel Corporate Framework. In addition to the methodology supporting the economic capital model review and strengthening, the technology was brought into line with the platform supporting Pillar I, so that all the information on credit risk will come from this source.

Besides the Basel II implementations, Banco Santander complies with the new regulations of Basel III, according to the standards issued by Bacen.

According to the definition proposed by the Basel Committee (Basel III), Credit Valuation Adjustment (CVA) is an adjustment to the fair value of derivative financial instruments in order to measure the credit risk of a counterparty. Thus, the CVA depends on the credit spread of the counterparty, as well as the market risk factors that drives the values of the derivatives and, therefore, their exposure. In an analytical way, the CVA can be defined by the following expression:

CVA = EE * PD * DF * LGD ⁽¹⁾

(1) EE=Expected Exposure; PD=Probability of Default; DF=Discount Factor; LGD=Loss Given Default

Expected Exposure (EE) is the future exposure of the derivative based on the counterparty's market risk. The probability of default (PD) is calculated based on credit spreads and is also marked to market. The discount factor (DF) is the factor that brings to the present value the projected exposure weighted by its respective probability of default. A Loss Given Default (LGD) is the estimated loss in the event of a credit.

g.1) Internal validation of risk models

Internal validation is an important stage of model life cycle besides of being a pre-requisite for the supervisory validation process by Basel II implementation. A specialized team of the Entity, with sufficient independence, obtains a technical opinion on the adequacy of the internal models for the intended internal or regulatory purposes, and concludes on their usefulness and effectiveness. This team must also assess whether the risk management and control procedures are adequate for the Entity’s risk strategy and profile.

In addition to the regulatory requirement compliance, the internal validation department provides an essential support to the risk committee and management, since the internal validation area is responsible for providing a qualified and independent opinion so that the responsible authorities decide on the authorization of the use of models (for management purposes as well as regulatory use).

Internal model validation at Banco Santander encompasses credit risk models, market risk models, ALM, pricing models, stress test models, the economic capital model and other models related to the exercise of ICAAP. The scope of the validation includes not only the more theoretical or methodological aspects, but also the technology systems and the quality of the data they provide, on which their effective operation relies, and, in general, all the relevant aspects of advanced risk management (controls, reporting, uses, involvement of management, etc.). Therefore, the goal of internal validation is to review quantitative, qualitative, technological and corporate governance related to regulatory and management aspects concerning the model risk control.

Among the main functions of the Internal Model Validation department are the following:

i. Establish general validation principles, conducting an independent evaluation process including (I) data quality, (II) Methodology aspects (III) technological environment, (IV) performance and (V) use and government;

ii. Evaluate the methodology and data used in the development of the model and challenge the model and its use, stating the implications and limitations of the model, as well as the associated risks;

iii. Issue a technical opinion on the adequacy of internal models for the intended internal and regulatory effects, concluding on their usefulness and effectiveness; and

iv. Provide essential support to risk committees and management of the Bank, through a qualified and independent opinion for responsible decision-making on the authorization of the use of models (for management purposes as well as regulatory use).

It is important to note that Banco Santander's internal validation function is fully consistent with the independent validation criteria for advanced approach issued by the Basel Committee, the European supervisor 'home regulator' (Banco de España and the European Central Bank) and the Bacen in compliance with the rules Circular 3,648 dated March 4, 2013 (Chapter III), Circular Letter 3,565 of September 6, 2012, Circular 3,547 of July 2011, and Circ. 3648 IRB, 3646 IMA of 4/3/13, and Res. 4.277 of 31/10/13 and 4389 of 18/12/14 fair value, Res. 4557 of 23/02/17 GIR and Circ. 3876 of 31/01/18 IRRBB.

In this case, the Bank maintains a Segregation of functions between internal validation and internal audit, which is the last layer of Bank control validation.

The Internal Audit is responsible for evaluating and reviewing the internal validation methodology and work and issues opinions with an effective level of autonomy. Internal Audit (third line of defense), as the ultimate control function in the Group, should (i) periodically assess the adequacy of policies, methods and procedures and (ii) confirm that they are effectively implemented in the management.

g.2) Capital management

Capital management considers the regulatory and economic aspects and its objective is to achieve an efficient capital structure in terms of cost and compliance, meeting the requirements of the regulatory authorities and supporting to accomplish the goals of the classification of rating agencies and investors' expectations.

h) Economic capital

h.1) Main objectives

The development of economic capital models in finance aims to solve a fundamental problem of regulatory capital, Sensitivity Risk.

In this context, the economic capital models are essentially designed to generate risk-sensitive estimative, allowing greater precision in risk management, as well as better allocation of economic capital by business units of Banco Santander.

The Banco Santander has directed efforts to build a model of robust and integrated economic capital to the business management.

The main objectives of the structure of economic capital of the Banco Santander are:

1 - Consolidate Pillar I and other risks which affect business in a single quantitative model, and determine estimates of capital by establishing correlations between different risks;

2 - Quantify and monitor different types of variations in risk;

3 - Distribute capital consumption between the different portfolios and manage the efficiency of return on capital (RORAC);

4 - Estimating the Economic Value Added for each business unit. Economic profit must exceed the cost of the Bank's capital;

5 - Accordance with the regulation in locations where the Bank operates in the review process of Pillar II by supervisors.

h.2) The Economic Capital Model

In calculating the economic capital, it is the Bank's definition of losses to be covered. Thus, it is used a confidence interval necessary to ensure business continuity. The risk profile in Brazil is distributed by Credit risk, Market, ALM, Business, Operations and materials assets. However, to successfully anticipate the changes proposed in Basel III, new risks have been incorporated to model: Intangibles, pension funds (defined benefit) and deferred tax assets, which allow the Bank to adopt a position even more conservative and prudent.

% Capital	2020	2019	2018
Risk Type
Credit	69%	72%	72%
Market	2%	2%	2%
ALM	2%	5%	8%
Business	3%	3%	6%
Operational	6%	7%	5%
Fixed Assets	2%	2%	1%
Intangible Assets	5%	1%	0%
Pension Funds	2%	4%	1%
Deferred Tax Assets	9%	5%	5%
TOTAL	100%	100%	100%

RoRAC

Banco Santander has used the RORAC, with the following objectives:

1 – Analyze and set a minimum price for operations (admission) and clients (monitoring).

2 – Estimate capital consumption of each client, economic groups, portfolio or business segment, in order to optimize the allocation of economic capital, maximizing the efficiency of the Bank.

3 – Measure and monitor business performance.

To evaluate the operations of global clients, the calculation of economic capital considers some variables used in the calculation of expected and unexpected losses.

Among these variables are:

1 – Counterparty rating;

2 – Maturity;

3 – Guarantees;

4 – Type of financing;

The economic value added is determined by the cost of capital. To create value for shareholders, the minimum return operation must exceed the cost of capital of Banco Santander.