UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
(Mark One)
| ¨ | 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, 2016 |
OR
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to . |
OR
| ¨ | 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: 001-34476
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) 350-3604
(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 | |
| Units, each composed of 1 common share, no par value, and 1 preferred share, no par value | New York Stock Exchange* | |
| Common Shares, no par value | New York Stock Exchange* | |
| Preferred Shares, no par value | New York Stock Exchange* | |
| American Depositary Shares, each representing one unit (or a right to receive one unit) which is composed of 1 common share, no par value, and 1 preferred share, no par value, of Banco Santander (Brasil) S.A. | New York Stock Exchange | |
| 7.375% Tier 1 Subordinated Perpetual Notes | N/A | |
| 6.000% Tier 2 Subordinated Notes due 2024 | N/A |
| * | Not for trading purposes, but only in connection with the listing of American Depositary Shares pursuant to the requirements of the Securities and Exchange Commission. |
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
(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 or common stock as of the close of the period covered by the annual report.
| Title of Class | Number of Shares Outstanding | |||
| Common shares | 3,850,970,714 | |||
| Preferred shares | 3,712,111,703 | |||
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes x No ¨
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
Yes ¨ No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No ¨
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).
Yes ¨ 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 ¨ | Non-accelerated Filer ¨ |
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
| ¨ | U.S. GAAP |
| x | International Financial Reporting Standards as issued by the International Accounting Standards Board |
| ¨ | Other |
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
¨ Item 17 ¨ 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).
Yes ¨ No x
Presentation of Financial and Other Information
General
In this annual report, the terms “Santander Brasil,” the “Bank,” “we,” “us,” “our,” “our company” and “our organization” mean Banco Santander (Brasil) S.A. and its consolidated subsidiaries, 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 term “Santander Spain” means Banco Santander, S.A. References to “Santander Group” 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 (or “U.S.”) dollars. All references to “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. References to “£” are to United Kingdom pounds sterling. 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 (Banco Central do Brasil), or the “Brazilian Central Bank,” as of December 31, 2016, which was R$3.2591 to U.S.$1.00, or on the indicated dates (subject, on any applicable date, 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 the presentation currency for our consolidated financial statements.
This annual report contains our consolidated financial statements as of December 31, 2016, 2015 and 2014, and for the years ended December 31, 2016, 2015 and 2014. 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 IFRS Interpretation Committee (“IFRIC”). Our consolidated financial statements as of December 31, 2016 and for the year ended December 31, 2016 have been audited by PricewaterhouseCoopers Auditores Independentes, or “PwC.” Our consolidated financial statements as of December 31, 2015 and 2014 and for the years ended December 31, 2015 and 2014 have been audited by Deloitte Touche Tohmatsu Auditores Independentes, or “Deloitte.” PwC and Deloitte are independent registered public accounting firms, whose reports are included herein.
IFRS differs in certain significant respects from generally accepted accounting principles in the United States (“U.S. GAAP”). IFRS also differs in certain significant respects from Brazilian GAAP (as defined below). Appendix I to our audited consolidated financial statements for the years ended December 31, 2016, 2015 and 2014, included herein, contains information relating to certain differences between IFRS and Brazilian GAAP.
Under Brazilian law, we are required by the Brazilian Central Bank to prepare consolidated financial statements according to IFRS. However, we will also continue to prepare statutory financial statements in accordance with accounting practices established by the Law 6,404, dated December 15, 1976 (“Brazilian Corporate Law”) and standards established by the National Monetary Council (Conselho Monetário Nacional), or “CMN,” the Brazilian Central Bank and document template provided in the Accounting Chart for National Financial System Institutions (Plano Contábil das Instituições do Sistema Financeiro Nacional), and the Brazilian Securities and Exchange Commission (Comissão de Valores Mobiliários), or “CVM,” to the extent such practices do not conflict with the
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rules of the Brazilian Central Bank, the Accounting Pronouncements Committee (Comitê de Pronunciamentos Contábeis), to the extent approved by the Brazilian Central Bank, the National Council of Private Insurance (Conselho Nacional de Seguros Privados), and the Superintendence 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—Regulation and Supervision—Other Applicable Laws and Regulations—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, as of the date of this annual report. 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 savings and mortgage financing entities (Associação Brasileira das Entidades de Crédito Imobiliário e Poupança) or “ABECIP”; 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); the national association of financial and capital markets entities (Associação Brasileira das Entidades dos Mercados Financeiro e de Capitais) or “ANBIMA”; the Brazilian Central Bank; the Brazilian social and economic development bank (Banco Nacional de Desenvolvimento Econômico e Social) or “BNDES”; the Brazilian Institute of Geography and Statistics (Instituto Brasileiro de Geografia e Estatística) or the “IBGE”; the Brazilian bank federation (Federação Brasileira de Bancos), or “FEBRABAN”; the national federation of private retirement and life insurance (Federação Nacional de Previdência Privada e Vida); the Getúlio Vargas Foundation (Fundação Getúlio Vargas) or “FGV”; the Brazilian Central Bank system (Sistema do Banco Central); the SUSEP; and the CVM, among others.
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This annual report contains estimates and forward-looking statements subject to risks and uncertainties, principally 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. Private Securities Litigation Reform Act of 1995.
Our estimates and forward-looking statements are based mainly on our current expectations and estimates or 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:
| · | general economic, political, social and business conditions in Brazil, including the impact of the current international economic environment and the macroeconomic conditions in Brazil; |
| · | exposure to various types of inflation and interest rate risks, and Brazilian government efforts to control inflation and interest rates; |
| · | exposure to the sovereign debt of Brazil; |
| · | the effect of interest rate fluctuations on our obligations under employee pension funds; |
| · | exchange rate volatility; |
| · | infrastructure and labor force deficiencies in Brazil; |
| · | economic developments and perception of risk in other countries; |
| · | increasing competition and consolidation in the Brazilian financial services industry; |
| · | extensive regulation by the Brazilian government and the Brazilian Central Bank, among others; |
| · | changes in reserve requirements; |
| · | changes in taxes or other fiscal assessments; |
| · | potential losses associated with non-performing loans or non-performance by counterparties to other types of financial instruments; |
| · | a decrease in the rate of growth of our loan portfolio; |
| · | potential prepayment of our loan and investment portfolio; |
| · | potential increase in our cost of funding, in particular with relation to short-term deposits; |
| · | a default on, or a ratings downgrade of, the sovereign debt of Brazil or of our controlling shareholder; |
| · | the effectiveness of our credit risk management policies; |
| · | our ability to adequately manage market and operational risks; |
| · | potential deterioration in the value of the collateral securing our loan portfolio; |
| · | our dependence on proper functioning of information technology systems; |
| · | our ability to protect personal data; |
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| · | our ability to protect our reputation; |
| · | our ability to detect and prevent money laundering and other illegal activity; |
| · | our ability to manage the growth of our operations; |
| · | our ability to successfully and effectively integrate acquisitions or to evaluate risks arising from asset acquisitions; and |
| · | other risk factors as set forth under “Item 3. Key Information—D. Risk Factors” in this annual report. |
The words “believe,” “may,” “will,” “aim,” “estimate,” “continue,” “anticipate,” “intend,” “expect,” “forecast,” 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.
The forward-looking statements contained in this report speak only as of the date of this report. We do not undertake to update any forward-looking statement to reflect events or circumstances after that date or to reflect the occurrence of unanticipated events.
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ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
1A. Directors and Senior Management
Not applicable.
Not applicable.
Not applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
2B. Method and Expected Timetable
Not applicable.
Financial information for Santander Brasil at and for the years ended December 31, 2016, 2015, 2014, 2013 and 2012 has been derived from our audited consolidated financial statements prepared in accordance with IFRS as issued by the IASB. See “Item 18. Financial Statements.” 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
| For the year ended December 31, | ||||||||||||||||||||||||
| 2016 | 2016 | 2015 | 2014 | 2013 | 2012 | |||||||||||||||||||
| (in millions of U.S.$)(1) | (in millions of R$) | |||||||||||||||||||||||
| Interest and similar income | 23,671 | 77,146 | 69,870 | 58,924 | 51,217 | 52,644 | ||||||||||||||||||
| Interest expense and similar charges | (14,286 | ) | (46,560 | ) | (38,533 | ) | (31,695 | ) | (22,738 | ) | (21,057 | ) | ||||||||||||
| Net interest income | 9,385 | 30,586 | 31,337 | 27,229 | 28,479 | 31,587 | ||||||||||||||||||
| Income from equity instruments | 79 | 259 | 143 | 222 | 81 | 94 | ||||||||||||||||||
| Income from companies accounted for by the equity method | 15 | 48 | 116 | 91 | 91 | 73 | ||||||||||||||||||
| Fee and commission income | 4,157 | 13,548 | 11,797 | 11,368 | 10,742 | 9,611 | ||||||||||||||||||
| Fee and commission expense | (789 | ) | (2,571 | ) | (2,314 | ) | (2,602 | ) | (2,641 | ) | (2,001 | ) | ||||||||||||
| Gains (losses) on financial assets and liabilities (net) | 925 | 3,016 | (20,002 | ) | 2,748 | (1,146 | ) | (548 | ) | |||||||||||||||
| Exchange differences (net) | 1,404 | 4,575 | 10,084 | (3,636 | ) | 551 | 378 | |||||||||||||||||
| Other operating income (expenses) | (192 | ) | (625 | ) | (347 | ) | (470 | ) | (445 | ) | (623 | ) | ||||||||||||
| Total income | 14,985 | 48,837 | 30,814 | 34,950 | 35,712 | 38,571 | ||||||||||||||||||
| Administrative expenses | (4,578 | ) | (14,920 | ) | (14,515 | ) | (13,942 | ) | (13,850 | ) | (13,773 | ) | ||||||||||||
| Depreciation and amortization | (455 | ) | (1,483 | ) | (1,490 | ) | (1,362 | ) | (1,252 | ) | (1,201 | ) | ||||||||||||
| Provisions (net)(2) | (836 | ) | (2,725 | ) | (4,001 | ) | (2,036 | ) | (2,692 | ) | (2,057 | ) | ||||||||||||
| 5 |
| For the year ended December 31, | ||||||||||||||||||||||||
| 2016 | 2016 | 2015 | 2014 | 2013 | 2012 | |||||||||||||||||||
| (in millions of U.S.$)(1) | (in millions of R$) | |||||||||||||||||||||||
| Impairment losses on financial assets (net)(3) | (4,081 | ) | (13,301 | ) | (13,634 | ) | (11,272 | ) | (14,118 | ) | (16,476 | ) | ||||||||||||
| Impairment losses on other assets (net) | (35 | ) | (114 | ) | (1,221 | ) | 4 | (345 | ) | (38 | ) | |||||||||||||
| Gains (losses) on disposal of assets not classified as non-current assets held for sale | 1 | 4 | 781 | 87 | 460 | 501 | ||||||||||||||||||
| Gains (losses) on non-current assets held for sale not classified as discontinued operations | 27 | 87 | 50 | 15 | 103 | (52 | ) | |||||||||||||||||
| Operating profit before tax | 5,027 | 16,384 | (3,216 | ) | 6,443 | 4,018 | 5,475 | |||||||||||||||||
| Income taxes | (2,737 | ) | (8,919 | ) | 13,050 | (736 | ) | (233 | ) | (37 | ) | |||||||||||||
| Net Profit from Continuing Operations | 2,290 | 7,465 | 9,834 | 5,708 | 3,785 | 5,438 | ||||||||||||||||||
| Discontinued Operations(4) | — | — | — | — | 2,063 | 55 | ||||||||||||||||||
| Consolidated Profit for the Year | 2,290 | 7,465 | 9,834 | 5,708 | 5,848 | 5,493 | ||||||||||||||||||
| (1) | Translated for convenience only using the selling rate as reported by the Brazilian Central Bank as of December 31, 2016, for reais into U.S. dollars of R$3.2591 to U.S.$1.00. |
| (2) | Mainly provisions for tax risks and legal obligations, and judicial and administrative proceedings of labor and civil lawsuits. For further discussion, see notes 23 and 24 to our consolidated financial statements. |
| (3) | Net provisions to the credit loss allowance less recovery of loans previously written off. |
| (4) | On December 17, 2013, we concluded the sale of our asset management business, by way of disposal of all of the shares of Santander Brasil Asset Management Distribuidora de Títulos e Valores Mobiliários S.A. The gains/losses from our disposal of Santander Brasil Asset Management Distribuidora de Títulos e Valores Mobiliários S.A. are recorded in “Discontinued Operations” pursuant to IFRS 5 – Discontinued Operations. |
Earnings and Dividend per Share Information
| For the year ended December 31, | ||||||||||||||||||||
| 2016 | 2015 | 2014 | 2013 | 2012 | ||||||||||||||||
| Basic and Diluted Earnings per 1,000 shares | ||||||||||||||||||||
| From continuing and discontinued operations(1) | ||||||||||||||||||||
| Basic Earnings per shares (reais) | ||||||||||||||||||||
| Common Shares | 929.93 | 1,236.96 | 709.69 | 719.89 | 689.29 | |||||||||||||||
| Preferred Shares | 1,022.92 | 1,360.66 | 780.66 | 791.87 | 758.22 | |||||||||||||||
| Diluted Earnings per shares (reais) | ||||||||||||||||||||
| Common Shares | 929.03 | 1,235.79 | 709.40 | 719.60 | 688.87 | |||||||||||||||
| Preferred Shares | 1,021.93 | 1,359.36 | 780.34 | 791.56 | 757.75 | |||||||||||||||
| Basic Earnings per shares (U.S. dollars) (2) | ||||||||||||||||||||
| Common Shares | 285.34 | |||||||||||||||||||
| Preferred Shares | 313.87 | |||||||||||||||||||
| Diluted Earnings per shares (U.S. dollars) (2) | ||||||||||||||||||||
| Common Shares | 285.06 | |||||||||||||||||||
| Preferred Shares | 313.57 | |||||||||||||||||||
| From continuing operations | ||||||||||||||||||||
| Basic Earnings per shares (reais) | ||||||||||||||||||||
| Common Shares | 929.93 | 1,236.96 | 709.69 | 460.35 | 628.34 | |||||||||||||||
| Preferred Shares | 1,022.92 | 1,360.66 | 780.66 | 506.38 | 750.57 | |||||||||||||||
| Diluted Earnings per shares (reais) | ||||||||||||||||||||
| Common Shares | 929.03 | 1,235.79 | 709.40 | 460.16 | 681.92 | |||||||||||||||
| Preferred Shares | 1,021.93 | 1,359.36 | 780.34 | 506.18 | 750.11 | |||||||||||||||
| Basic Earnings per shares (U.S. dollars) (2) | ||||||||||||||||||||
| Common Shares | 285.34 | |||||||||||||||||||
| Preferred Shares | 313.87 | |||||||||||||||||||
| 6 |
| For the year ended December 31, | ||||||||||||||||||||
| 2016 | 2015 | 2014 | 2013 | 2012 | ||||||||||||||||
| Diluted Earnings per shares (U.S. dollars) (2) | ||||||||||||||||||||
| Common Shares | 285.06 | |||||||||||||||||||
| Preferred Shares | 313.57 | |||||||||||||||||||
| From discontinued operations | ||||||||||||||||||||
| Basic Earnings per shares (reais) | ||||||||||||||||||||
| Common Shares | — | — | — | 259.54 | 6.95 | |||||||||||||||
| Preferred Shares | — | — | — | 285.49 | 7.65 | |||||||||||||||
| Diluted Earnings per shares (reais) | ||||||||||||||||||||
| Common Shares | — | — | — | 259.43 | 6.95 | |||||||||||||||
| Preferred Shares | — | — | — | 285.38 | 7.64 | |||||||||||||||
| Basic Earnings per shares (U.S. dollars) (2) | ||||||||||||||||||||
| Common Shares | — | — | — | |||||||||||||||||
| Preferred Shares | — | — | — | |||||||||||||||||
| Diluted Earnings per shares (U.S. dollars) (2) | ||||||||||||||||||||
| Common Shares | — | — | — | |||||||||||||||||
| Preferred Shares | — | — | — | |||||||||||||||||
| Dividends and interest on capital per 1,000 shares (undiluted) | ||||||||||||||||||||
| Common Shares (reais) | 666.21 | 784.90 | 193.26 | 305.15 | 335.73 | |||||||||||||||
| Preferred Shares (reais) | 732.83 | 863.39 | 212.59 | 332.36 | 369.30 | |||||||||||||||
| Common Shares (U.S. dollars)(2) | 204.42 | 201.01 | 72.76 | 128.98 | 164.29 | |||||||||||||||
| Preferred Shares (U.S. dollars)(2) | 224.86 | 221.11 | 80.03 | 141.88 | 180.72 | |||||||||||||||
| Weighted average share outstanding (in thousands) – basic | ||||||||||||||||||||
| Common Shares | 3,828,555 | 3,839,159 | 3,851,278 | 3,858,717 | 3,860,354 | |||||||||||||||
| Preferred Shares | 3,689,696 | 3,700,299 | 3,710,746 | 3,719,858 | 3,721,493 | |||||||||||||||
| Weighted average shares outstanding (in thousands) – diluted(3) | ||||||||||||||||||||
| Common Shares | 3,832,211 | 3,842,744 | 3,852,823 | 3,860,239 | 3,862,679 | |||||||||||||||
| Preferred Shares | 3,693,352 | 3,703,884 | 3,712,291 | 3,721,380 | 3,723,817 | |||||||||||||||
| (1) | Per share amounts reflect the effects of the bonus share issue and reverse share split described under “Item 5. Operating and Financial Review and Prospects—A. Operating Results—Factors Affecting the Comparability of our Results of Operations—Bonus Shares and Reverse Share Split (Inplit),” for each period presented. |
| (2) | Translated for convenience only using the selling rate as reported by the Brazilian Central Bank as of December 31, 2016, for reais into U.S. dollars of R$3.2591 to U.S.$1.00. |
| (3) | Average annual balance sheet data has been calculated based upon the average of the monthly balances at 13 dates: as of December 31 of the prior year and each of the month-end balances of the 12 subsequent months. |
Balance Sheet Data
| As of December 31, | ||||||||||||||||||||||||
| 2016 | 2016 | 2015 | 2014 | 2013 | 2012 | |||||||||||||||||||
| (in millions of U.S.$)(1) | (in millions of R$) | |||||||||||||||||||||||
| Assets | ||||||||||||||||||||||||
| Cash and balances with the Brazilian Central Bank | 33,937 | 110,605 | 89,143 | 55,904 | 51,714 | 55,535 | ||||||||||||||||||
| Financial assets held for trading | 26,042 | 84,874 | 50,537 | 56,014 | 30,219 | 31,638 | ||||||||||||||||||
| Other financial assets at fair value through profit or loss | 525 | 1,711 | 2,080 | 997 | 1,298 | 1,228 | ||||||||||||||||||
| Available-for-sale financial assets | 17,740 | 57,815 | 68,265 | 75,164 | 46,287 | 44,149 | ||||||||||||||||||
| Held to maturity investments | 3,083 | 10,048 | 10,098 | — | — | — | ||||||||||||||||||
| Loans and receivables | 90,838 | 296,049 | 306,269 | 264,608 | 258,778 | 226,957 | ||||||||||||||||||
| Hedging derivatives | 68 | 223 | 1,312 | 213 | 323 | 156 | ||||||||||||||||||
| Non-current assets held for sale | 411 | 1,338 | 1,237 | 930 | 275 | 166 | ||||||||||||||||||
| Investments in associates and joint ventures | 304 | 990 | 1,061 | 1,023 | 1,064 | 472 | ||||||||||||||||||
| Tax assets | 8,822 | 28,753 | 34,770 | 23,020 | 22,060 | 21,497 | ||||||||||||||||||
| Other assets | 1,566 | 5,104 | 3,802 | 5,067 | 5,085 | 5,601 | ||||||||||||||||||
| 7 |
| As of December 31, | ||||||||||||||||||||||||
| 2016 | 2016 | 2015 | 2014 | 2013 | 2012 | |||||||||||||||||||
| (in millions of U.S.$)(1) | (in millions of R$) | |||||||||||||||||||||||
| Tangible assets | 2,039 | 6,646 | 7,006 | 7,071 | 6,886 | 5,938 | ||||||||||||||||||
| Intangible assets | 9,278 | 30,237 | 29,814 | 30,221 | 29,064 | 29,271 | ||||||||||||||||||
| Total assets | 194,653 | 634,393 | 605,395 | 520,231 | 453,053 | 422,608 | ||||||||||||||||||
| Average total assets* | 185,832 | 605,646 | 571,918 | 478,560 | 435,286 | 408,143 | ||||||||||||||||||
| Liabilities | ||||||||||||||||||||||||
| Financial liabilities held for trading | 15,839 | 51,620 | 42,388 | 19,570 | 13,554 | 5,352 | ||||||||||||||||||
| Financial liabilities at amortized cost | 144,696 | 471,579 | 457,282 | 392,186 | 329,701 | 306,976 | ||||||||||||||||||
| Deposits from the Brazilian Central Bank and deposits from credit institutions | 24,128 | 78,634 | 69,451 | 63,674 | 34,032 | 35,074 | ||||||||||||||||||
| Customer deposits | 75,924 | 247,445 | 243,043 | 220,644 | 200,156 | 188,595 | ||||||||||||||||||
| Marketable debt securities | 30,635 | 99,843 | 94,658 | 70,355 | 65,301 | 54,012 | ||||||||||||||||||
| Subordinated debts | 143 | 466 | 8,097 | 7,294 | 8,906 | 11,919 | ||||||||||||||||||
| Debt Instruments Eligible to Compose Capital | 2,550 | 8,312 | 9,959 | 6,773 | — | — | ||||||||||||||||||
| Other financial liabilities | 11,316 | 36,879 | 32,073 | 23,446 | 21,306 | 17,376 | ||||||||||||||||||
| Hedging derivatives | 95 | 311 | 2,377 | 894 | 629 | 282 | ||||||||||||||||||
| Provisions(2) | 3,613 | 11,776 | 11,410 | 11,127 | 10,892 | 12,775 | ||||||||||||||||||
| Tax liabilities | 1,870 | 6,095 | 5,253 | 12,423 | 11,693 | 13,784 | ||||||||||||||||||
| Other liabilities | 2,516 | 8,199 | 6,850 | 5,346 | 4,928 | 4,303 | ||||||||||||||||||
| Total liabilities | 168,630 | 549,581 | 525,559 | 441,548 | 371,397 | 343,472 | ||||||||||||||||||
| Stockholders’ equity | 26,214 | 85,435 | 83,532 | 80,105 | 83,340 | 79,921 | ||||||||||||||||||
| Other Comprehensive Income | (414 | ) | (1,348 | ) | (4,132 | ) | (1,802 | ) | (1,973 | ) | (1,022 | ) | ||||||||||||
| Non-controlling interests | 223 | 726 | 435 | 380 | 289 | 237 | ||||||||||||||||||
| Total Stockholders’ Equity | 26,023 | 84,812 | 79,835 | 78,683 | 81,655 | 79,136 | ||||||||||||||||||
| Total liabilities and stockholders’ equity | 194,653 | 634,393 | 605,395 | 520,231 | 453,053 | 422,608 | ||||||||||||||||||
| Average interest-bearing liabilities* | 125,209 | 408,067 | 400,008 | 318,639 | 287,382 | 265,328 | ||||||||||||||||||
| Average total stockholders’ equity* | 25,860 | 84,283 | 81,475 | 78,818 | 80,916 | 77,886 | ||||||||||||||||||
| * | The average annual balance sheet data has been calculated based upon the average of the monthly balances at 13 dates: at December 31 of the prior year and for each of the month-end balances of the 12 subsequent months. |
| (1) | Translated for convenience only using the selling rate as reported by the Brazilian Central Bank as of December 31, 2016, for reais into U.S. dollars of R$3.2591 to U.S.$1.00. |
| (2) | Mainly provisions for tax risks and legal obligations, and judicial and administrative proceedings of labor and civil lawsuits. |
Selected Consolidated Ratios(*)
| At and for the Year Ended December 31, | ||||||||||||||||||||
| 2016 | 2015 | 2014 | 2013 | 2012 | ||||||||||||||||
| in (%) | ||||||||||||||||||||
| Profitability and performance | ||||||||||||||||||||
| Return on average total assets | 1.2 | 1.7 | 1.2 | 1.3 | 1.3 | |||||||||||||||
| Asset quality | ||||||||||||||||||||
| Impaired assets as a percentage of loans and advances to customers (gross)(1) | 7.0 | 7.0 | 5.6 | 6.2 | 7.6 | |||||||||||||||
| Impaired assets as a percentage of total assets(1) | 3.0 | 3.1 | 2.7 | 3.1 | 3.8 | |||||||||||||||
| Impairment losses to customer as a percentage of impaired assets(1) (4) | 87.0 | 81.9 | 95.8 | 96.1 | 87.0 | |||||||||||||||
| Impairment losses to customers as a percentage of loans and advances to customers (gross) (5) | 6.1 | 5.7 | 5.4 | 6.0 | 6.6 | |||||||||||||||
| 8 |
| At and for the Year Ended December 31, | ||||||||||||||||||||
| 2016 | 2015 | 2014 | 2013 | 2012 | ||||||||||||||||
| in (%) | ||||||||||||||||||||
| Derecognized assets as a percentage of loans and advances to customers (gross) | 4.3 | 4.4 | 4.9 | 6.5 | 7.2 | |||||||||||||||
| Impaired assets as a percentage of stockholders’ equity(1) | 22.3 | 23.3 | 17.8 | 17.2 | 20.3 | |||||||||||||||
| Capital adequacy | ||||||||||||||||||||
| Basel capital adequacy ratio(2) | 16.3 | 15.7 | 17.5 | 19.2 | 20.8 | |||||||||||||||
| Efficiency | ||||||||||||||||||||
| Efficiency ratio(3) | 30.6 | 47.1 | 39.9 | 38.8 | 35.7 | |||||||||||||||
| * | The average annual balance sheet data has been calculated based upon the average of the monthly balances at 13 dates: at December 31 of the prior year and for each of the month-end balances of the 12 subsequent months. |
| (1) | Impaired assets include all loans and advances past due by more than 90 days and other doubtful credits. For further information see “Item 4. Information on the Company—B. Business Overview—Selected Statistical Information—Assets—Impaired Assets.” |
| (2) | Basel capital adequacy ratio as measured pursuant to Brazilian Central Bank rules in effect as from December 31, 2014. This ratio is subject to a phased-in implementation schedule established by the Brazilian Central Bank, which is expected to be completed by 2019. The Basel III framework applies to all commercial banks operating in Brazil and covers, among other things, minimum capital requirements, capital buffers, risk-based capital measures, liquidity standards, exposures to central counterparties, as well as the definition of consolidated enterprise level (conglomerado prudencial). Since the enactment of the initial Basel III framework in 2013, the authorities have been implementing additional regulations and some important amendments to the existing framework. For more information see “Item 4. Information on the Company—B. Business Overview—Regulation and Supervision—Capital Adequacy and Leverage – Basel.” |
| (3) | Efficiency ratio is determined by taking administrative expenses divided by total income. |
| (4) | In 2016, including the debt instruments accounted for in the loans and receivables, the ratio is 95.2%. For the prior years, the debt instruments amount is not material. |
| (5) | In 2016, including the debt instruments accounted for in the loans and receivables the ratio is 6.3%. For the prior years, the debt instruments amount is not material. |
Selected Consolidated non-GAAP Ratios(*)
| At and for the Year Ended December 31, | ||||||||||||||||||||
| 2016 | 2015 | 2014 | 2013 | 2012 | ||||||||||||||||
| in (%) | ||||||||||||||||||||
| Profitability and performance | ||||||||||||||||||||
| Net yield(1) | 6.2 | 6.6 | 6.9 | 8.1 | 9.6 | |||||||||||||||
| Return on average stockholders’ equity(2) | 8.9 | 12.1 | 7.3 | 7.3 | 7.1 | |||||||||||||||
| Adjusted return on average stockholders’ equity(2) | 13.3 | 18.5 | 11.3 | 10.9 | 10.8 | |||||||||||||||
| Average stockholders’ equity as a percentage of average total assets(2)(*) | 13.9 | 14.2 | 16.4 | 18.5 | 19.1 | |||||||||||||||
| Average stockholders’ equity excluding goodwill as a percentage of average total assets excluding goodwill(2)(*) | 9.7 | 9.8 | 11.3 | 13.1 | 13.3 | |||||||||||||||
| Asset quality | ||||||||||||||||||||
| Impaired assets as a percentage of credit risk exposure (3) | 6.3 | 6.0 | 4.8 | 5.4 | 6.7 | |||||||||||||||
| Impaired assets as a percentage of stockholders’ equity excluding goodwill(2)(3) | 33.5 | 36.1 | 27.5 | 25.9 | 30.9 | |||||||||||||||
| Liquidity | ||||||||||||||||||||
| Loans and advances to customers, net as a percentage of total funding(4) | 58.0 | 59.3 | 63.9 | 69.0 | 67.9 | |||||||||||||||
| Efficiency | ||||||||||||||||||||
| Adjusted efficiency ratio(5) | 34.9 | 34.8 | 38.1 | 36.4 | 34.4 | |||||||||||||||
| (*) | The average annual balance sheet data has been calculated based upon the average of the monthly balances at 13 dates: at December 31 of the prior year and for each of the month-end balances of the 12 subsequent months. |
| (1) | “Net yield” is defined as net interest income (including dividends on equity securities) divided by average interest earning assets. The ratio is disclosed in the table of non-GAAP financial measures presented immediately after these notes. |
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| (2) | “Adjusted return on average stockholders’ equity,” “Average stockholders’ equity excluding goodwill as a percentage of average total assets excluding goodwill” and “Impaired assets as a percentage of stockholders’ equity excluding goodwill” are non-GAAP financial measures which adjust “Return on average stockholders’ equity,” “Average stockholders’ equity as a percentage of average total assets” and “Impaired assets as a percentage of stockholders’ equity,” to exclude the goodwill arising from the acquisition of Banco Real in 2008, Getnet Adquirência e Serviços para Meios de Pagamento S.A. (“GetNet”) and Super Pagamentos e Administração de Meios Eletrônicos Ltda. (“Super”), both in 2014, Banco Olé Bonsucesso Consignado S.A. (current name of Banco Bonsucesso Consignado S.A.) in 2015, and BW Guirapá I S.A. in 2016. Our calculation of these non-GAAP financial measures may differ from the calculation of similarly titled measures used by other companies. We believe that these non-GAAP financial measures supplement the GAAP information provided to investors regarding the substantial impact of the R$27 billion goodwill arising from the acquisition of Banco Real during the year ended December 31, 2008, the R$1.1 billion goodwill arising from the acquisition of GetNet and Super both during 2014, the acquisition of an interest in Banco Bonsucesso Consignado S.A. (currently known as Banco Olé Bonsucesso Consignado S.A.) in 2015 and the significance of other factors affecting stockholders’ equity and the related ratios. Accordingly, we believe that the non-GAAP financial measures presented are useful to investors. The limitation associated with the exclusion of goodwill from stockholders’ 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 stockholders’ equity including goodwill. |
| (3) | Credit risk exposure is the sum of the amortized cost amounts of loans and advances to customers (including impaired assets), guarantees and documentary credits. We include off-balance sheet information in this measure to better demonstrate our total managed credit risk. The reconciliation of the measure to the most comparable IFRS measure is disclosed in the table of non-GAAP financial measures presented immediately after these notes. |
| (4) | Total funding is the sum of financial liabilities at amortized cost, excluding other financial liabilities. For a breakdown of the components of total funding, see “Item 5. Operating and Financial Review and Prospects—B. Liquidity and Capital Resources—Liquidity and Funding.” |
| (5) | Adjusted efficiency ratio excludes the effect of the hedge for investments held abroad. This exclusion affects the income tax, gains (losses) on financial assets and liabilities and exchange rate differences line items but does not affect the “Net profit from continuing operations” line item because the adjustment to gains (losses) on financial assets and liabilities and exchange rate difference is offset by the adjustment to income tax. 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 more details, see the table below. |
| For the year ended December 31, | ||||||||||||||||||||
| 2016 | 2015 | 2014 | 2013 | 2012 | ||||||||||||||||
| (in millions of R$, except percentages) | ||||||||||||||||||||
| Effects of the hedge for investments held abroad | (6,140 | ) | 10,919 | 1,668 | 2,367 | 1,437 | ||||||||||||||
| Efficiency ratio | 30.6 | % | 47.1 | % | 39.9 | % | 38.8 | % | 35.7 | % | ||||||||||
| Adjusted efficiency ratio | 34.9 | % | 34.8 | % | 38.1 | % | 36.4 | % | 34.4 | % | ||||||||||
The information in the table below presents the calculation of specified non-GAAP financial measures from each of their most directly comparable IFRS financial measures. Our calculation of these non-GAAP financial measures may differ from the calculation of similarly titled measures used by other companies. We believe that these non-GAAP financial measures supplement the GAAP information provided to investors regarding the substantial impact of the R$1.1 billion goodwill arising from the acquisition of GetNet and Super both during 2014, the acquisition of Banco Bonsucesso S.A. in 2015 and the significance of other factors affecting stockholders’ equity and the related ratios. See “Item 4. Information on the Company—4A. History and Development of the Company—Important Events.” The limitation associated with the exclusion of goodwill from stockholders’ equity is that it has the effect of excluding a portion of the total investment in our assets. We compensate for this limitation by also considering stockholders’ equity including goodwill, as set forth in the above tables. Accordingly, while we believe that the non-GAAP financial measures presented are useful to investors and support their analysis, the non-GAAP financial measures have important limitations as analytical tools, and investors should not consider them in isolation or as substitutes for analysis of our results as reported under GAAP measures including under IFRS.
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Reconciliation of Non-GAAP Ratios to Their Most Directly Comparable IFRS Financial Measures
| At and for the year ended December 31, | ||||||||||||||||||||
| 2016 | 2015 | 2014 | 2013 | 2012 | ||||||||||||||||
| (in millions of R$, except as otherwise indicated) | ||||||||||||||||||||
| Return on average stockholders’ equity: | ||||||||||||||||||||
| Consolidated profit for the year | 7,465 | 9,834 | 5,708 | 5,848 | 5,493 | |||||||||||||||
| Average stockholders’ equity (*) | 84,283 | 81,475 | 78,818 | 80,916 | 77,886 | |||||||||||||||
| Return on average stockholders’ equity (*) | 8.9 | % | 12.1 | % | 7.3 | % | 7.3 | % | 7.1 | % | ||||||||||
| Adjusted return on average stockholders’ equity(*): | ||||||||||||||||||||
| Consolidated profit for the year | 7,465 | 9,834 | 5,708 | 5,848 | 5,493 | |||||||||||||||
| Average stockholders’ equity(*) | 84,283 | 81,475 | 78,818 | 80,916 | 77,886 | |||||||||||||||
| Average goodwill(*) | 28,343 | 28,376 | 27,747 | 27,218 | 27,218 | |||||||||||||||
| Average stockholders’ equity excluding goodwill(*) | 55,940 | 53,130 | 51,071 | 53,698 | 50,668 | |||||||||||||||
| Adjusted return on average stockholders’ equity(*) | 13.3 | % | 18.5 | % | 11.3 | % | 10.9 | % | 10.8 | % | ||||||||||
| Average stockholders’ equity as a percentage of average total assets(*): | ||||||||||||||||||||
| Average stockholders’ equity(*) | 84,283 | 81,475 | 78,818 | 80,916 | 77,886 | |||||||||||||||
| Average total assets(*) | 605,646 | 571,860 | 478,560 | 435,283 | 408,143 | |||||||||||||||
| Average stockholders’ equity as a percentage of average total assets(*) | 13.9 | % | 14.2 | % | 16.5 | % | 18.5 | % | 19.1 | % | ||||||||||
| Average stockholders’ equity excluding goodwill as a percentage of average total assets excluding goodwill(*): | ||||||||||||||||||||
| Average stockholders’ equity(*) | 84,283 | 81,475 | 78,818 | 80,916 | 77,886 | |||||||||||||||
| Average goodwill(*) | 28,343 | 28,376 | 27,747 | 27,218 | 27,218 | |||||||||||||||
| Average stockholders’ equity excluding goodwill(*) | 55,940 | 53,130 | 51,071 | 53,698 | 50,668 | |||||||||||||||
| Average total assets(*) | 605,646 | 571,860 | 478,560 | 435,283 | 408,143 | |||||||||||||||
| Average goodwill(*) | 28,343 | 28,376 | 27,747 | 27,218 | 27,218 | |||||||||||||||
| Average total assets excluding goodwill(*) | 577,303 | 543,515 | 450,813 | 408,065 | 380,925 | |||||||||||||||
| Average stockholders’ equity excluding goodwill as a percentage of average total assets excluding goodwill(*) | 9.7 | % | 9.8 | % | 11.3 | % | 13.1 | % | 13.3 | % | ||||||||||
| Impaired assets as a percentage of stockholders’ equity: | ||||||||||||||||||||
| Impaired assets | 18,887 | 18,599 | 14,011 | 14,022 | 16,057 | |||||||||||||||
| Stockholders’ equity | 84,813 | 79,835 | 78,683 | 81,655 | 79,136 | |||||||||||||||
| Impaired assets as a percentage of stockholders’ equity | 22.3 | % | 23.3 | % | 17.8 | % | 17.2 | % | 20.3 | % | ||||||||||
| Impaired assets as a percentage of stockholders’ equity excluding goodwill: | ||||||||||||||||||||
| Impaired assets | 18,887 | 18,599 | 14,011 | 14,022 | 16,057 | |||||||||||||||
| Stockholders’ equity | 84,813 | 79,835 | 78,683 | 81,655 | 79,136 | |||||||||||||||
| Goodwill | 28,355 | 28,333 | 28,271 | 27,218 | 27,218 | |||||||||||||||
| Stockholders’ equity excluding goodwill | 56,458 | 51,502 | 50,412 | 54,437 | 51,918 | |||||||||||||||
| Impaired assets as a percentage of stockholders’ equity excluding goodwill | 33.5 | % | 36.1 | % | 27.8 | % | 25.9 | % | 30.9 | % | ||||||||||
| Impaired assets as a percentage of loans and receivables: | ||||||||||||||||||||
| Loans and advances to customers, gross | 268,438 | 267,266 | 249,110 | 226,206 | 210,740 | |||||||||||||||
| Impaired assets | 18,887 | 18,599 | 14,011 | 14,022 | 16,057 | |||||||||||||||
| Impaired assets as a percentage of loans and receivables | 7.0 | % | 7.0 | % | 5.6 | % | 6.2 | % | 7.6 | % | ||||||||||
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| At and for the year ended December 31, | ||||||||||||||||||||
| 2016 | 2015 | 2014 | 2013 | 2012 | ||||||||||||||||
| (in millions of R$, except as otherwise indicated) | ||||||||||||||||||||
| Impaired assets as a percentage of credit risk exposure: | ||||||||||||||||||||
| Loans and advances to customers, gross | 268,438 | 267,266 | 249,110 | 226,206 | 210,740 | |||||||||||||||
| Guarantees | 33,265 | 43,611 | 39,334 | 31,150 | 28,571 | |||||||||||||||
| Credit risk exposure | 301,703 | 310,877 | 288,445 | 257,357 | 239,312 | |||||||||||||||
| Impaired assets | 18,887 | 18,599 | 14,011 | 14,022 | 16,057 | |||||||||||||||
| Impaired assets as a percentage of credit risk exposure | 6.3 | % | 6.0 | % | 4.9 | % | 5.4 | % | 6.7 | % | ||||||||||
| Loans and advances to customers, net as a percentage of total funding: | ||||||||||||||||||||
| Loans and advances to customers, gross | 268,438 | 267,266 | 249,110 | 226,206 | 210,740 | |||||||||||||||
| Impairment losses(1) | 16,435 | 15,233 | 13.421 | 13,472 | 13,966 | |||||||||||||||
| Total Funding(2) | 434,700 | 425,209 | 368,741 | 308,395 | 289,600 | |||||||||||||||
| Loans and advances to customers, net as a percentage of total funding(2) | 58.0 | % | 59.3 | % | 63.9 | % | 69.0 | % | 67.9 | % | ||||||||||
| (*) | The average annual balance sheet data has been calculated based upon the average of the monthly balances at 13 dates: at December 31 of the prior year and for each of the month-end balances of the 12 subsequent months. |
(1) Provision for impairment losses of loans and advances to customers
(2) Total funding is the sum of financial liabilities at amortized cost, excluding the other financial liabilities.
The table below presents the reconciliation of our adjusted efficiency ratio to the most directly comparable GAAP financial measures for each of the periods presented.
| At and for the year ended December 31, | ||||||||||||||||||||
| 2016 | 2015 | 2014 | 2013 | 2012 | ||||||||||||||||
| (in millions of R$, except as otherwise indicated) | ||||||||||||||||||||
| Efficiency ratio | ||||||||||||||||||||
| Administrative expenses | 14,920 | 14,515 | 13,942 | 13,850 | 13,773 | |||||||||||||||
| Total income | 48,837 | 30,814 | 34,950 | 35,712 | 38,570 | |||||||||||||||
| of which: | ||||||||||||||||||||
| Gains (losses) on financial assets and liabilities (net) and exchange differences (net) | 7,591 | (9,918 | ) | (888 | ) | (595 | ) | (170 | ) | |||||||||||
| Efficiency ratio | 30.6 | % | 47.1 | % | 39.9 | % | 38.8 | % | 35.7 | % | ||||||||||
| Total Income | 48,837 | 30,814 | 34,950 | 35,712 | 38,570 | |||||||||||||||
| Effects of the hedge for investments held abroad | (6,140 | ) | 10,919 | 1,668 | 2,367 | 1,437 | ||||||||||||||
| Total income excluding effects of the hedge for investments held abroad | 42,697 | 41,733 | 36,735 | 38,079 | 40,007 | |||||||||||||||
| Administrative expenses | 14,920 | 14,515 | 13,942 | 13,850 | 13,773 | |||||||||||||||
| Efficiency ratio adjusted for effects of the hedge for investments held abroad | 34.9 | % | 34.8 | % | 38.1 | % | 36.4 | % | 34.4 | % | ||||||||||
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 increasing exchange rate volatility. Until early 2003, the real declined against the U.S. dollar. Between 2004 and 2008, the real strengthened against the U.S. dollar, except in the most severe periods of the global economic crisis. Given the recent turmoil in international markets and the current Brazilian macroeconomic outlook, the real depreciated against the U.S. dollar from mid-2011 to early 2016. Beginning in early 2016 through the end of 2016, the real appreciated against the U.S. dollar, primarily as a result of Brazil’s changing political conditions. In 2017 to the date of this annual report, the real has continued to appreciate against the U.S. dollar due to optimism about economic recovery in Brazil and the improved political climate. In the past, the Brazilian Central Bank has intervened occasionally to control high volatility in the foreign exchange rates. We cannot predict whether the
| 12 |
Brazilian Central Bank or the Brazilian government will continue to permit the real to float freely or will intervene in the exchange rate market through the return of a currency band system or otherwise. In the future, the real may fluctuate substantially against the U.S. dollar.
Furthermore, Brazilian law provides that, whenever there is a serious imbalance in Brazil’s balance of payments or there are compelling reasons to foresee a serious imbalance, temporary restrictions may be imposed on remittances of foreign capital abroad. Any such restrictions on remittances of foreign capital abroad may limit our ability to make distributions to holders of our ADRs. We cannot assure you that such measures will not be taken by the Brazilian government in the future. Exchange rate fluctuations will affect the U.S. dollar equivalent of the price of our shares in reais on the BM&FBOVESPA as well as the U.S. dollar equivalent of any distributions we make with respect to our shares, which will be made exclusively in reais. Exchange rate fluctuations may also adversely affect our financial condition. For further information on these risks, see “—D. Risk Factors—Risks Relating to Brazil and Macroeconomic Conditions in Brazil and Globally—Exchange rate volatility may have a material adverse effect on the Brazilian economy and on 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: | ||||||||||||||||
| 2012 | 2.04 | 1.96 | 1.70 | 2.11 | ||||||||||||
| 2013 | 2.34 | 2.16 | 1.95 | 2.45 | ||||||||||||
| 2014 | 2.66 | 2.36 | 2.19 | 2.74 | ||||||||||||
| 2015 | 3.90 | 3.34 | 2.57 | 4.19 | ||||||||||||
| 2016 | 3.26 | 3.48 | 3.12 | 4.16 | ||||||||||||
| Month Ended: | ||||||||||||||||
| September 2016 | 3.25 | 3.26 | 3.19 | 3.33 | ||||||||||||
| October 2016 | 3.18 | 3.19 | 3.12 | 3.24 | ||||||||||||
| November 2016 | 3.40 | 3.34 | 3.20 | 3.44 | ||||||||||||
| December 2016 | 3.26 | 3.35 | 3.26 | 3.47 | ||||||||||||
| January 2017 | 3.13 | 3.20 | 3.13 | 3.27 | ||||||||||||
| February 2017 | 3.10 | 3.11 | 3.05 | 3.15 | ||||||||||||
| March 2017 (through March 24) | 3.13 | 3.13 | 3.08 | 3.17 | ||||||||||||
Source: Brazilian Central Bank.
| (1) | Represents the average of the exchange rates at the close of each business day during the period. |
Our parent company, Santander Spain, reports its financial condition and results of operations in euros. As of December 31, 2016, the exchange rate for euro to real was R$3.4384 per €1.00.
3B. Capitalization and Indebtedness
Not applicable.
3C. Reasons for the Offer and Use of Proceeds
Not applicable.
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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 Receipts (“ADRs”) could decline, and you could lose all or part of your investment.
Risks Relating to Brazil and Macroeconomic and Political Conditions in Brazil and Globally
The Brazilian government has exercised significant influence over the Brazilian economy. The Brazilian government’s macroeconomic management strategies, as well as Brazilian political and economic conditions, could adversely affect us and the trading price of our securities.
The Brazilian government has frequently intervened in the Brazilian economy and has on occasion made significant changes in policy and regulations. In the past, the Brazilian government has adopted measures, including, among others, changes in regulations, price controls, capital controls, changes in the exchange rate regime and limitations on imports, which have affected Brazilian asset prices. Recently, the Brazilian government has adopted measures, including changes in tax policies and constraints that have affected Brazilian asset prices and the trading price of our securities.
We and the trading price of our securities may be adversely affected by changes in policy, laws, or regulations at the federal, state and municipal levels involving or affecting factors such as:
| · | interest rates; |
| · | currency volatility; |
| · | inflation; |
| · | reserve requirements; |
| · | capital requirements; |
| · | liquidity of capital and lending markets; |
| · | non-performing loans; |
| · | tax policies; |
| · | the regulatory framework governing our industry; |
| · | exchange rate controls and restrictions on remittances abroad; and |
| · | other political, social and economic developments in or affecting Brazil. |
Uncertainty over whether the Brazilian government will implement changes in policy or regulation creates instability in the Brazilian economy, increasing the volatility of the Brazilian securities markets, which may have an adverse effect on us and our securities. Recent economic and political instability has led to a negative perception of the Brazilian economy and higher volatility in the Brazilian securities markets, which also may adversely affect us and our securities. The overall trend of the Brazilian political and economic arenas may also affect the business of the Brazilian financial industry.
We are not able to fully estimate the impact of global and Brazilian political and macroeconomic developments and economic regulatory policy changes on our business and lending activity, nor are we able to predict how current or future measures implemented by regulatory policy-makers may impact our business. In addition, due to the current political instability, there exists substantial uncertainty regarding future economic policies and we cannot predict what policies will be adopted by the Brazilian government and whether these policies will negatively affect the economy or our business or financial performance. Any changes in regulatory capital requirements for lending, reserve requirements, or product and service regulations, among others, or continued political uncertainty may materially adversely affect our business.
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Political instability in Brazil may adversely affect Brazil’s economy and investment levels, and have a material adverse effect on us.
Brazil’s political environment has historically influenced, and continues to influence, the performance of the country’s economy. Political crises have affected and continue to affect the confidence of investors and the general public, and have historically resulted in economic deceleration and heightened volatility in the securities issued by Brazilian companies.
The recent economic instability in Brazil has contributed to a decline in market confidence in the Brazilian economy as well as to a deteriorating political environment. Weak macroeconomic conditions in Brazil are expected to continue in 2017. In addition, various ongoing investigations into allegations of money laundering and corruption being conducted by the Office of the Brazilian Federal Prosecutor, including the largest such investigation known as “Lava Jato,” have negatively impacted the Brazilian economy and political environment.
In August 2016, the Brazil’s senate approved the removal of Brazil’s then-President from office, after completion of the legal and administrative process for impeachment, for infringing budgetary laws. The former Vice-President, who assumed the interim presidency of Brazil since the former President’s suspension in May, was sworn in by the senate to serve out the remainder of the presidential term until 2018. In addition, there is an ongoing proceeding before the Brazilian Higher Electoral Court (Tribunal Superior Eleitoral) against the electoral alliance between the former President and the current one (former Vice-President) in connection with the 2014 elections, which may affect the office of the current President. We cannot predict which policies the current President may adopt or change during his mandate or the effect that any such policies might have on our business and on the Brazilian economy. Any such new policies or changes to current policies may have a material adverse effect on us.
For the last few years, political demonstrations in Brazil have also affected the development of the Brazilian economy and investors’ perception about Brazil. For example, street protests, which started in mid-2013 and continued through 2016, demonstrated the public’s dissatisfaction with the worsening Brazilian economic condition (including an increase in inflation and fuel prices as well as rising unemployment), the perception of widespread corruption, as well as the potential for severe water and electricity rationing following a decrease in rainfall and water reservoir levels throughout Brazil in early 2016. Additionally, the “Lava Jato” corruption investigations involving certain oil and gas, energy, construction and infrastructure companies, as well as public agents and politicians, have raised investors’ risk aversion with regard to Brazil.
Furthermore, the Brazilian economy has experienced a sharp downturn in recent years due, in part, to the economic and monetary policies of the Brazilian government and the global drop in commodities prices. Uncertainty over whether the acting 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 securities issued abroad by Brazilian companies.
Continuing political instability in Brazil could also materially adversely affect us.
Ongoing investigations relating to corruption and diversion of public funds that are being conducted by the Brazilian federal police as well as other Brazilian and non-Brazilian regulators and law enforcement officials may adversely affect the growth of the Brazilian economy and could have a material adverse effect on us.
Certain Brazilian companies active in the oil and gas, energy, construction and infrastructure sectors are facing investigations by the CVM, the U.S. Securities and Exchange Commission (the “SEC”), the U.S. Department of Justice, the Brazilian Federal Police and the Brazilian Federal Prosecutor’s Office, the Comptroller General of Brazil and other relevant governmental authorities, in connection with corruption allegations (the so called “Lava Jato” investigations). The Brazilian federal police is also investigating allegations of improper payments made by Brazilian companies to officials of the Board of Tax Appeals (Conselho Administrativo de Recursos Fiscais), or CARF, a tax appeals tribunal (the so-called “Operação Zelotes”). It is alleged that the purpose of such improper payments was to induce those officials to reduce or waive certain tax-related penalties imposed by the Brazilian federal revenue authority, which were under appeal in the CARF.
Depending on the duration and outcome of such investigations, the companies involved may face a reduction in their revenues, downgrades from rating agencies or funding restrictions, among other negative effects. Given the significance of the companies cited in these investigations in the Brazilian economy, the investigations and their fallout have had an adverse effect on Brazil’s economic growth prospects in the near short to medium term.
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Furthermore, the negative effects on such companies and others may also impact the level of investments in infrastructure in Brazil, which may lead to lower economic growth or contraction in the near to medium term (according to data from the IBGE, the Brazilian economy’s gross domestic product (“GDP”) contracted by 3.8% in 2015 and 3.6% in 2016). In addition, we have credit exposure to certain of the companies involved in the “Lava Jato” and other governmental, regulatory and private investigations. To the extent that the repayment ability of these companies is hampered by any fines and/or other sanctions that may be imposed upon them or reputational or commercial damage as a result of the “Lava Jato” investigations, we may also be materially adversely affected.
As a result of the allegations under the “Lava Jato” investigations and the economic downturn, Brazil was downgraded to non-investment grade status by S&P in September 2015, by Fitch Ratings in December 2015, by Moody’s in February 2016 and downgraded again by Fitch in May 2016. Various major Brazilian companies were also downgraded. Such downgrades have further worsened the conditions of the Brazilian economy and the condition of Brazilian companies, especially those relying on foreign investments over 2016 and 2017. More recently, the “Lava Jato” investigations have also reached members of the executive and legislative branches of the Brazilian government, which has caused considerable political instability, and as a result, persistently poor economic conditions in Brazil could have a material adverse effect on us. It is difficult to predict the effects of such political instability.
Government efforts to control inflation and changes in interest rates may hinder the growth of the Brazilian economy and could have an adverse effect on us.
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. Since the establishment of the Plano Real (a set of measures designed to stabilize the Brazilian economy) in 1994 and until 2015, Brazil’s annual consumer price inflation levels were below 10%. However, in 2015, consumer price inflation increased above 10%, to 10.7%, while in 2016 consumer price inflation reached 6.3%. 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 reserve requirements may restrict Brazil’s growth and the availability of credit, reduce our loan volumes and increase our loan loss provisions. Conversely, less strict 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 spreads.
In March 2010, due to a favorable macroeconomic environment, inflation stability and following a monetary easing cycle initiated by the Brazilian Central Bank, the SELIC rate (the acronym for “Special Settlement and Custody System” in Portuguese – the benchmark interest rate payable to holders of certain Brazilian government securities, based on the Brazilian Central Bank’s overnight rate) reached a then historical low of 8.65% since the implementation of the Plano Real. In October 2012, the SELIC rate reached an annual rate of 7.14%, its lowest level ever, as a result of a monetary easing policy to mitigate the spillover effects of the then ongoing international financial crisis (particularly in Europe). In 2013, the Brazilian Central Bank began a monetary tightening cycle due to rising inflation, the depreciation of the real, and a perceived recovery of certain economic activity. The SELIC rate was increased by 275 basis points, reaching 9.90% in November 2013, the last monetary policy committee meeting of the year. The upward trend continued and in December 2014, the SELIC rate reached 11.65%. In March 2015, the SELIC rate was increased to 12.65%, due to continuing inflation pressures and was further increased to 13.15% in April 2015, to 13.65% in June, and to 14.15% in July 2015. In December 2016, the SELIC rate was lowered to 13.65%, and in January 2017 the SELIC rate was further lowered to 12.90%, and to 12.25% in February 2017, where it currently remains.
The 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. We estimate that in 2016, a 1.0% increase or decrease in the base interest rate would have resulted in a decrease or increase, respectively, in our net interest income of R$385 million. Any changes in interest rates may negatively impact our business, financial condition and results of operations. In addition, increases in base interest rates may adversely affect us by reducing the demand for our credit and investment products, increasing funding costs and increasing in the short run the risk of default by our customers.
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Inflation adversely affects our personnel and other administrative expenses that are directly or indirectly tied to inflation indexes, generally the consumer price index (Índice de Preços ao Consumidor – Amplo), or “IPCA,” and the general index of market prices (Índice Geral de Preços-Mercado), or “IGP-M.” For example, considering the amounts in 2016, each additional percentage point change in inflation, would impact our personnel and other administrative expenses by approximately R$78 million and R$67 million, respectively.
Despite the Brazilian Central Bank’s repeated increases of the SELIC rate during the period from 2013 to 2016, inflation has continued to increase until recently, reaching 6.3% for the twelve-month period ending December 31, 2016, and decreasing to 4.8% for the twelve-month period ending February 28, 2017.
Inflation, government measures to curb inflation and speculation related to possible measures regarding inflation may significantly contribute to uncertainty regarding the Brazilian economy and weaken investors’ confidence in Brazil. Future Brazilian governmental actions, including interest rate decreases, intervention in the foreign exchange market and actions to adjust or fix the value of the real, may trigger increases in inflation and adversely affect the performance of the Brazilian economy as a whole. Any of the aforementioned developments may adversely affect our asset quality. Furthermore, Brazil’s high rate of inflation, compounded by high and increasing interest rates, declining consumer spending and increasing unemployment, may have a material adverse impact on the Brazilian economy as a whole, as well as on us.
Exposure to Brazilian federal government debt could have a material adverse effect on us.
We invest in Brazilian government sovereign bonds. As of December 31, 2016, approximately 19.4% of our total assets, and 85.5% of our securities portfolio, was comprised of debt securities issued by the Brazilian government. Any failure by the Brazilian government to make timely payments under the terms of these securities, or a significant decrease in their market value, will have a material adverse effect on us.
Fluctuations in interest rates and other factors may affect our obligations under legacy employee pension funds.
We sponsor certain defined benefit pension plans and a health care plan that benefit certain of our former and current employees, most of which were inherited from Banespa (though we discontinued the use of defined benefit pension plans for our employees in 2005).
In order to determine the funded status of each legacy defined benefit pension plan and, consequently, the carried reserves necessary to pay future beneficiaries, we use certain actuarial techniques and assumptions, which are inherently uncertain and involve the exercise of significant judgment, including with respect to interest rates, which are a key assumption in determining our current obligations under the legacy pension plans as interest rates are used to calculate the present value of such obligations.
Changes in the present value of our obligations under our legacy defined benefit pension plans could cause us to have to increase contributions to reduce or satisfy the deficits, which would divert resources from use in other areas of our business. Any such increase may be due to factors over which we have no or limited control. Increases in our pension liabilities and obligations could have a material adverse effect on our business, financial condition and results of operations.
Decreases in interest rates can increase the present value of obligations under our legacy defined benefit pension plans, such as occurred during the year of 2012, when the SELIC rate decreased to a historic low of 7.14% p.a., and may materially and adversely affect the funded status of our legacy defined benefit plans and require us to make additional contributions to these plans to meet our pension funding obligations.
Exchange rate volatility may have a material adverse effect on the Brazilian economy and on us.
The Brazilian currency has, during past decades, experienced frequent and substantial variations in relation to the U.S. dollar and other foreign currencies. In 2011, due to the ongoing international financial crisis (particularly in Europe) the exchange rate reached R$1.88 per U.S.$1.00 as of December 31, 2011. From 2012 to 2014, the real continued to depreciate due to a decrease in commodities prices and a recovery of the U.S. economy, reaching R$2.04 per U.S.$1.00 on December 31, 2012, R$2.34 per U.S.$1.00 on December 31, 2013 and R$2.65 per U.S.$1.00 on December 31, 2014.
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However, during 2015, due to the poor economic conditions in Brazil, including as a result of political instability, the real devalued at a much higher rate than in previous years. On September 24, 2015, the real fell to the lowest level since the introduction of the currency, at R$4.195 per U.S. $1.00. Overall in 2015, the real depreciated 47%, reaching R$3.905 per U.S. $1.00 on December 31, 2015. In 2016, the real faced continuing fluctuations, primarily as a result of Brazil’s political instability, but had appreciated 17.0% year-over-year against the U.S. dollar as of December 31, 2016 to R$3.26 per U.S. $1.00. On March 24, 2017, the exchange rate was R$3.13 per U.S.$1.00. There can be no assurance that the real will not substantially depreciate or appreciate further against the U.S. dollar.
In the year ended December 31, 2016, a variation of 1.0% in the exchange rate of reais to U.S. dollars would have resulted in a variation of income on our net foreign exchange position denominated in U.S. dollars of R$0.6 million.
Depreciation of the real relative to the U.S. dollar has created additional inflationary pressures in Brazil, which have led to increases in interest rates, limited Brazilian companies’ access to foreign financial markets and prompted the adoption of recessionary policies by the Brazilian government. Depreciation of the real may also, in the context of an economic slowdown, lead to decreased consumer spending, deflationary pressures and reduced growth of the Brazilian economy as a whole, and thereby harm our asset base, 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.
Infrastructure and workforce deficiency in Brazil may impact economic growth and have a material adverse effect on us.
Our performance depends on the overall health and growth of the Brazilian economy. Brazilian GDP growth has fluctuated over the past few years, with growth of 2.7% in 2013 but decreasing to 0.1% in 2014, a contraction of 3.8% in 2015 and a contraction of 3.6% in 2016. Growth is limited by inadequate infrastructure, including potential energy shortages and deficient transportation, logistics and telecommunication sectors, the lack of a qualified labor force, and the lack of private and public investments in these areas, which limit productivity and efficiency. Any of these factors could lead to labor market volatility and generally impact income, purchasing power and consumption levels, which could limit growth, increase delinquency rates and ultimately have a material adverse effect on us.
Developments and the perception of risk in other countries may adversely affect the Brazilian economy and market price of Brazilian issuers’ 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) and in other Latin American and emerging market countries. Although economic conditions in Europe and in the United States 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 capital markets and compromise our ability to finance our operations in the future on favorable terms, or at all.
In the years of 2014, 2015 and 2016, there was an increase in volatility in all Brazilian markets due to, among other factors, uncertainties about how monetary policy adjustments in the United States would affect the international financial markets, the increasing risk aversion to emerging market countries, and the uncertainties regarding Brazilian macroeconomic and political conditions. These uncertainties adversely affected us and the market value of our securities.
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In addition, we continue to be exposed to disruptions and volatility in the global financial markets because of their effects on the financial and economic environment, particularly in 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.
Disruption or volatility in the global financial markets could further increase negative effects on the financial and economic environment in Brazil, which could have a material adverse effect on us.
Risks Relating to the Brazilian Financial Services Industry and our Business
The strong competitive environment in the Brazilian financial services market may adversely affect us, including 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, as well as state-owned institutions. In recent years, the competition has increased in the banking and insurance sectors.
Non-traditional providers of banking services, such as Internet based e-commerce providers, mobile telephone companies and internet search engines may offer and/or increase their offerings of financial products and services directly to customers. These non-traditional providers of banking services currently have an advantage over traditional providers because they are not subject to banking regulation. Several of these competitors may have long operating histories, large customer bases, strong brand recognition and significant financial, marketing and other resources. They may adopt more aggressive pricing and rates and devote more resources to technology, infrastructure and marketing. New competitors may enter the market or existing competitors may adjust their services with unique product or service offerings or approaches to providing banking services. If we are unable to successfully compete with current and new competitors, or if we are unable to anticipate and adapt our offerings to changing banking industry trends, including technological changes, our business may be adversely affected. In addition, our failure to effectively anticipate or adapt to emerging technologies or changes in customer behavior, including among younger customers, could delay or prevent our access to new digital-based markets which would in turn have an adverse effect on us.
The rise in the use of internet and mobile banking platforms by financial services customers in recent years could negatively impact our investments in traditional bank premises, equipment and personnel for our branch network. The persistence or acceleration of this shift in the demand for financial services towards internet and mobile banking may require changes to our retail distribution strategy. Our failure to swiftly and effectively implement such changes could have an adverse effect on our competitive position.
Increasing competition could also require that we increase our rates offered on deposits or lower the rates we charge on loans, which could also have a material adverse effect on us, including our profitability. It may also negatively affect our business results and prospects by, among other things, limiting our ability to increase our customer base and expand our operations and increasing competition for investment opportunities.
In addition, if our customer service levels were perceived by the market to be materially below those of our competitor financial institutions, we could lose existing and potential business. If we are not successful in retaining and strengthening customer relationships, we may lose market share, incur losses on some or all of our activities or fail to attract new deposits or retain existing deposits, which could have a material adverse effect on us.
We are subject to substantial regulation and regulatory and governmental oversight which could adversely affect us.
The Brazilian financial markets are subject to extensive and continuous regulatory control by the Brazilian government, principally by the Brazilian Central Bank, the CVM and CMN, which, in each case, materially affects our business. We have no control over the issuance of new regulations that may affect our operations, including in respect of:
| · | minimum capital requirements; |
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| · | reserve and compulsory deposit requirements; |
| · | limits on investments in fixed 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; and |
| · | accounting and statistical requirements. |
The regulation governing Brazilian financial institutions is continuously evolving, and the Brazilian Central Bank has reacted actively and extensively to developments in our industry.
Changes in regulations in Brazil and international markets may expose us to increased compliance costs and limitations on our ability to pursue certain business opportunities and provide certain products and services. Brazilian regulators are constantly updating prudential standards in accordance with the recommendations of the Basel Committee on Banking Supervision, in particular with respect to capital and liquidity, which could impose additional significant regulatory burdens on us. For example, future liquidity standards could require us to maintain a greater proportion of our assets in highly-liquid but lower-yielding financial instruments, which would negatively affect our net interest margin. There can be no assurance that future changes in regulations or in their interpretation or application will not have a material adverse effect on us.
As some of the banking laws and regulations have been recently issued or become effective, the manner in which those laws and related regulations are applied to the operations of financial institutions is still evolving. Moreover, to the extent these recently adopted regulations are implemented inconsistently in Brazil, we may face higher compliance costs. The measures of the Brazilian Central Bank and the amendment of existing laws and regulations, or the adoption of new laws or regulations could adversely affect our ability to provide loans, make investments or render certain financial services. No assurance can be given generally that laws or regulations will be adopted, enforced or interpreted in a manner that will not have a material adverse effect on our business and results of operations. Furthermore, regulatory authorities have substantial discretion in how to regulate banks, and this discretion, and the regulatory mechanisms available to the regulators, have been increasing during recent years. Regulation may be imposed on an ad hoc basis by governments and regulators in response to a crisis, and these may especially affect financial institutions such as us that may be deemed to be systemically important. In addition, the volume, granularity, frequency and scale of regulatory and other reporting requirements necessitate a clear data strategy to enable consistent data aggregation, reporting and management. Inadequate management information systems or processes, including those relating to risk data aggregation and risk reporting, could lead to a failure to meet regulatory reporting requirements or other internal or external information demands and we may face supervisory measures as a result.
We may also be subject to potential impacts relating to regulatory changes affecting our controlling shareholder, Santander Spain, due to continued significant financial regulatory reform in jurisdictions outside of Brazil that directly or indirectly affect Santander Spain’s businesses, including Spain, the European Union, the United States, and other jurisdictions. Changes to current legislation and their implementation through regulation (including additional capital, leverage, funding, liquidity and tax requirements), policies (including fiscal and monetary policies established by central banks and financial regulators, and changes to global trade policies), and other legal and regulatory actions may impose additional regulatory burdens on Santander Group, including Santander Brasil, in these jurisdictions. In the European Union, these reforms could include changes relating to capital requirements, liquidity and funding or implemented as a result of the unification of the European banking system under a European Banking Union. In the United States, these reforms could result from current, pending, and future legislation, including the continued implementation of or changes to the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). See “Item 4. Information on the Company—B. Business Overview—Regulation and Supervision—Other Applicable Laws and Regulations—U.S. Banking Regulation.” We cannot predict the final outcome of any financial regulatory reform in the European Banking Union, the United States or elsewhere and we cannot yet determine their effects on Santander Spain and, consequently, their effects on us, but regulatory changes may result in additional costs for us.
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Increases in reserve, compulsory deposit and minimum capital requirements may have a material adverse effect on us.
The Brazilian Central Bank has periodically changed the level of reserves and compulsory deposits that financial institutions in Brazil are required to maintain with the Brazilian Central Bank, as well as determined compulsory allocation requirements to finance government programs. The Brazilian Central Bank may increase the reserve and compulsory deposit or allocation requirements in the future or impose new requirements. Increases in reserve and compulsory deposit or allocation requirements reduce our liquidity to fund our loan portfolio and other investments and, as a result, may have a material adverse effect on us.
Compulsory deposits and allocations generally do not yield the same return as other investments and deposits because a portion of compulsory deposits and allocations:
| · | do not bear interest; |
| · | must be held in Brazilian federal government securities; and |
| · | must be used to finance government programs, including a federal housing program and rural sector subsidies. |
In 2013, 2014, 2015, 2016, and early 2017 the CMN and Brazilian Central Bank published several rules to implement Basel III in Brazil. This new set of regulations covers the revised definition of capital, capital requirements, capital buffers, credit valuation adjustments, exposures to central counterparties, leverage and liquidity coverage ratios, and treatment of systemically important financial institutions. No assurance can be given that the Basel III rules will be adopted, enforced or interpreted in a manner that will not have an adverse effect on us. Furthermore, in January 2017, the CMN issued a new rule by means of which the Brazilian Central Bank established the terms for segmentation for financial institutions, financial institution groups, and other institutions authorized to operate by the Brazilian Central Bank for proportional application of the prudential regulation, considering the size, international activity and risk profile of members of each segment. By February 2017, the Brazilian Central Bank published the initial categorization of financial institutions in the different segments according to the terms set forth in the new resolution.
For more information on the rules implementing Basel III, see “Item 4. Information on the Company—B. Business Overview—Regulation and Supervision—Capital Adequacy and Leverage—Basel” and “Item 5. Operating and Financial Review and Prospects—B. Liquidity and Capital Resources—Capital Management.”
We may not be able to detect or prevent money laundering and other criminal activities fully or on a timely basis, which could expose us to additional liability and could have a material adverse effect on us.
We are required to comply with applicable anti-money laundering (“AML”), anti-terrorism, anti-corruption, sanctions and other laws and regulations applicable to us. These laws and regulations require us, among other things, to conduct full customer due diligence (including sanctions and politically-exposed person screening) and keep our customer, account and transaction information up to date. We have implemented effective financial crime policies and procedures detailing what is required from those responsible. We are also required to conduct AML training for our employees and to report suspicious transactions and activity to appropriate law enforcement following full investigation by the Special Incidents area.
Financial crime has become the subject of enhanced regulatory scrutiny and supervision by regulators globally. AML, anti-corruption and sanctions laws and regulations are increasingly complex and detailed and have become the subject of enhanced regulatory supervision, requiring improved systems, sophisticated monitoring and skilled compliance personnel.
We have developed policies and procedures aimed at detecting and preventing the use of our banking network for money laundering and other financial crime related activities. These require implementation and embedding within our business effective controls and monitoring, which in turn requires on-going changes to systems and operational activities. Financial crime is continually evolving and, as noted, is subject to increasingly stringent regulatory oversight and focus. This requires proactive and adaptable responses from us so that we are able to deter threats and criminality effectively. Even known threats can never be fully eliminated, and there will be instances where we may be used by other parties to engage in money laundering and other illegal or improper activities. In
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addition, we rely heavily on our employees to assist us by spotting such activities and reporting them, and our employees have varying degrees of experience in recognizing criminal tactics and understanding the level of sophistication of criminal organizations. Where we outsource any of our customer due diligence, customer screening or anti-financial crime operations, we remain responsible and accountable for full compliance and any breaches. If we are unable to apply the necessary scrutiny and oversight, there remains a risk of regulatory breach.
Additionally, in 2015 and in early 2016, pursuant to a new resolution issued by the United Nations Security Council, as well as a recently enacted law and regulations issued by the Brazilian Central Bank for the implementation of the aforementioned resolution in Brazil, additional compliance requirements were imposed on us and other financial institutions operating in Brazil, which relate to the local enforcement of sanctions imposed by the United Nations Security Council resulting from certain resolutions. We believe we already have the control and compliance procedures in place to satisfy such additional compliance requirements. However, we continue to evaluate their impact on our control and compliance procedures and whether adjustments will need to be made to our control and compliance procedures as a result.
If we are unable to fully comply with applicable laws, regulations and expectations, our regulators and relevant law enforcement agencies have the ability and authority to impose significant fines and other penalties on us, including requiring a complete review of our business systems, day-to-day supervision by external consultants and ultimately the revocation of licenses.
The reputational damage to our business and global brand would be severe if we were found to have breached AML, anti-corruption or sanctions requirements. Our reputation could also suffer if we are unable to protect our customers’ data or bank products and services from being accessed or used for illegal or improper purposes.
In addition, while we review our relevant counterparties’ internal policies and procedures with respect to such matters, to a large degree we rely upon our relevant counterparties to maintain and properly apply their own appropriate compliance measures, procedures, and internal policies. Such measures, procedures and internal policies may not be completely effective in preventing third parties from using our (and our relevant counterparties’) services as a conduit for illicit purposes (including illegal cash operations) without our (or our relevant counterparties’) knowledge. If we are associated with, or even accused of having breached AML, anti-terrorism, or sanctions requirements our reputation could suffer and/or we could become subject to fines, sanctions and/or legal enforcement (including being added to “black lists” that would prohibit certain parties from engaging in transactions with us), any one of which could have a material adverse effect on our operating results, financial condition and prospects.
We are exposed to risk of loss from legal and regulatory proceedings.
We face risk of loss from legal and regulatory proceedings, including tax proceedings, that could subject us to monetary judgments, regulatory proceedings, fines and penalties. The current regulatory and tax enforcement environment in Brazil reflects an increased supervisory focus on enforcement, combined with uncertainty about the evolution of the regulatory regime, and may lead to material operational and compliance costs.
We are from time to time subject to certain claims and party to certain legal proceedings incidental to the normal course of our business, including in connection with conflicts of interest, lending activities, relationships with our employees, economic plans and other commercial or tax matters. In view of the inherent difficulty of predicting the outcome of legal matters, particularly where the claimants seek very large or indeterminate damages, or where the cases present novel legal theories, involve a large number of parties or are in the early stages of discovery, we cannot state with confidence what the eventual outcome of these pending matters will be or what the eventual loss, fines or penalties related to each pending matter may be. The amount of our reserves in respect of these matters is substantially less than the total amount of the claims asserted against us, and, in light of the uncertainties involved in such claims and proceedings, there is no assurance that the ultimate resolution of these matters will not significantly exceed the reserves currently accrued by us. As a result, the outcome of a particular matter may be material to our operating results for a particular period.
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We are subject to review by taxing authorities, and an incorrect interpretation by us of tax laws and regulations may have a material adverse effect on us.
The preparation of our tax returns requires the use of estimates and interpretations of complex tax laws and regulations and is subject to review by taxing authorities. We are subject to the income tax laws of Brazil. These tax laws are complex and subject to different interpretations by the taxpayer and relevant governmental taxing authorities, leading to disputes which are sometimes subject to prolonged evaluation periods until a final resolution is reached. In establishing a provision for income tax expense and filing returns, we must make judgments and interpretations about the application of these inherently complex tax laws. If the judgment, estimates and assumptions we use in preparing our tax returns are subsequently found to be incorrect, there could be a material adverse effect on us. In some jurisdictions, the interpretations of the taxing authorities are unpredictable and frequently involve litigation, which introduces further uncertainty and risk as to tax expense.
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 applicable taxes and, occasionally, enactment of temporary levies, 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 cannot be quantified and there can be no assurance that any such reforms would not 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.
Changes in tax policy, including the creation of new taxes, may occur with relative frequency and such changes could have an adverse effect on our financial position or operating results. For example, in 2011, the Brazilian government established the Tax on Financial Transactions (the “IOF Tax”). It applied at a rate of 1.0% per day on the notional value of increased foreign exchange exposure, but has currently reduced to zero with respect to foreign exchange. The IOF Tax rates applicable to local loans to individuals and legal entities have been frequently adjusted (both increases and decreases) in recent years. The currently applicable IOF Tax rates applicable to local loans are approximately 1.5% for legal entities and 3.0% for individuals, but could change in the future. We cannot estimate the impact that a change in tax laws or tax policy could have on our operations. For example, the IOF Tax is a tool used by the Brazilian government to regulate economic activity, which does not directly impact our results of operations, though changes in the IOF Tax can impact our business volumes generally.
Also, the Brazilian Congress may discuss broad tax reforms in Brazil to improve the efficiency of allocation of the 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 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.
Our loan and investment portfolios are subject to risk of prepayment, which could have a material adverse effect on us.
Our fixed rate loan and investment portfolios are subject to prepayment risk, which results from the ability of a borrower or issuer to pay a debt obligation prior to maturity. Generally, in a low interest rate environment, prepayment activity increases, which reduces the weighted average lives of our earning assets and could have a material adverse effect on us. We would also be required to amortize net premiums or commissions into income over a shorter period of time, thereby reducing the corresponding asset yield and net interest income. Prepayment risk also has a significant adverse impact on credit card and collateralized mortgage loans, since prepayments could shorten the weighted average life of these assets, which may result in a mismatch in our funding obligations and reinvestment at lower yields. Prepayment risk is inherent to our commercial activity and an increase in prepayments could have a material adverse effect on us.
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The credit quality of our loan portfolio may deteriorate and our loan losses reserves could be insufficient to cover our actual loan losses, which could have a material adverse effect on us.
Risks arising from changes in credit quality and the recoverability of loans and amounts due from counterparties are inherent in a wide range of our business. Non-performing or low credit quality loans have in the past negatively impacted our results of operations and could do so in the future. In particular, the amount of our reported non-performing loans may increase in the future as a result of growth in our total loan portfolio, including as a result of loan portfolios that we may acquire in the future whose credit quality turns out to be worse than we anticipated, or other factors, including factors beyond our control, such as adverse changes in the credit quality of our borrowers and counterparties or a general deterioration in economic conditions in Brazil and globally. If we were unable to control the level of our non-performing or poor credit quality loans, this could have a material adverse effect on us.
Our provisions for impairment losses are based on our current assessment of and expectations concerning various factors affecting the quality of our loan portfolio. These factors include, among other things, our borrowers’ financial condition, repayment abilities and repayment intentions, the realizable value of any collateral, the prospects for support from any guarantor, government macroeconomic policies, interest rates and the legal and regulatory environment. Because many of these factors are beyond our control and there is no precise method for predicting loan and credit losses, we cannot assure you that our current or future provisions for impairment losses will be sufficient to cover actual losses. If our assessment of and expectations concerning the abovementioned factors differ from actual developments, if the quality of our total loan portfolio deteriorates, for any reason, or if the future actual losses exceed our estimates of incurred losses, we may be required to increase our provisions for impairment losses, which may adversely affect us. If we were unable to control or reduce the level of our non-performing or poor credit quality loans, this could have a material adverse effect on us.
The rate of growth of our loan portfolio has decreased from its historical average and economic uncertainty may lead to a contraction in our loan portfolio.
The rate of growth of our loan portfolio has decreased from its historical average and there can be no assurance that it will return to its previous levels. The recent slow growth rate of the Brazilian economy experienced in 2012 2014 and recession in 2015 and 2016, a slowdown in the growth of customer demand, an increase in market competition, changes in governmental regulation and an increase of the SELIC rate have adversely affected the rate of growth of our loan portfolio, which increased by a small amount in 2016 and our risk index and, consequently, increased our required allowances for impairment losses. Ongoing economic uncertainty could adversely affect liquidity, businesses and financial condition of our customers, as well as lead to a general decline in consumer spending, a rise in unemployment and an increase in household indebtedness. All this could lead to a decrease in demand for borrowings in general, which could have a material adverse effect on our business.
Liquidity and funding risks are inherent in our business and 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 and our liquidity levels.
Liquidity risk is the risk that we either do not have available sufficient financial resources to meet our obligations as they fall due or can secure them only at excessive cost. This risk is inherent in any retail and commercial banking business and can be heightened by a number of enterprise-specific factors, including over-reliance on a particular source of funding, changes in credit ratings or market-wide phenomena such as market dislocation. Continued constraints in the supply of liquidity, including in inter-bank lending, has affected and may materially and adversely affect the cost of funding our business, and extreme liquidity constraints may affect our current operations and our ability to fulfill regulatory liquidity requirements, as well as limit growth possibilities.
Increases in prevailing market interest rates and in our credit spreads can significantly increase the cost of our funding. Changes in our credit spreads may be influenced by market perceptions of our creditworthiness. Changes to interest rates and our credit spreads occur continuously and may be unpredictable and highly volatile.
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 wholesale markets financing ceases to become available, or becomes excessively expensive, we may be forced to raise the rates we pay on deposits, with a view to attracting more customers, and/or to sell assets, potentially at depressed prices. The persistence or worsening of
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these adverse market conditions or an increase in base interest rates could have a material adverse effect on our ability to access liquidity and cost of funding.
We rely, and will continue to rely, primarily on commercial deposits as our main source of funding. As of December 31, 2016, 77.0% of our customer deposits had remaining maturities of one year or less, or were payable on demand, while 48.7% of our assets have longer maturities, resulting in a mismatch between the maturities of liabilities and the maturities of assets. The ongoing availability of this type of funding is sensitive to a variety of factors outside our control, such as general economic conditions and the confidence of commercial depositors in the economy and in the financial services industry, and the availability and extent of deposit guarantees, as well as competition between banks or with other products, such as mutual funds, for deposits. Any of these factors could significantly increase the amount of commercial deposit withdrawals in a short period of time, thereby reducing our ability to access commercial deposit funding on economically appropriate and reasonable terms, or at all, in the future. If these circumstances were to arise, this could have a material adverse effect on our operating results, financial condition and prospects.
If current facilities were rapidly removed or significantly reduced, this could have a material adverse effect on our ability to access liquidity and on our funding costs.
Our ability to manage our funding base may also be affected by changes to the regulation on compulsory reserve requirements in Brazil. For more information on the rules on compulsory reserve requirements, see “Item 4. Information on the Company—B. Business Overview—Regulation and Supervision—Other Applicable Laws and Regulations—Compulsory Reserve Requirements.”
We cannot assure you that in the event of a sudden or unexpected shortage of funds in the banking system, we will be able to maintain levels of funding without incurring high funding costs, a reduction in the term of funding instruments or the liquidation of certain assets. If this were to happen, we could be materially adversely affected.
Our cost of funding is affected by our credit ratings and any risks may have an adverse effect on our credit ratings and our cost of funds. Any downgrade in Brazil’s, our controlling shareholder’s, or our credit rating, would likely increase our cost of funding, requiring 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, conditions that generally affect the financial services industry and the economic environment in which we operate. In addition, due to the methodology of the main rating agencies, our credit rating is affected by the rating of Brazilian sovereign debt and the rating of our controlling shareholders. If Brazil’s sovereign debt or the debt of our controlling shareholder is downgraded, our credit rating would also likely be downgraded similarly.
Any downgrade in Brazil’s sovereign credit ratings, those of our controlling shareholder, or in our ratings, would likely increase our borrowing costs. 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.
While certain potential impacts of these downgrades are contractual and quantifiable, the full consequences of a credit rating downgrade are inherently uncertain, as they depend upon numerous dynamic, complex and inter-related factors and assumptions, including market conditions at the time of any downgrade, whether any downgrade of our long-term credit rating precipitates downgrades to our short-term credit rating, and assumptions about the potential behaviors of various customers, investors and counterparties. Actual outflows could be higher or lower than any hypothetical examples, depending upon certain factors including which credit rating agency downgrades our credit rating, any management or restructuring actions that could be taken to reduce cash outflows and the potential liquidity impact from loss of unsecured funding (such as from money market funds) or loss of secured funding capacity. Although unsecured and secured funding stresses are included in our stress testing scenarios and a portion of our total liquid assets is held against these risks, a credit rating downgrade could still have a material adverse effect on us.
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In 2013, Spain’s sovereign credit rating outlook was revised to stable from negative by the three major risk rating agencies (S&P on November 29, Fitch on November 1 and Moody’s on December 4). Subsequently, Moody’s upgraded Spain’s sovereign rating to Baa2 from Baa3 with a positive outlook on February 21, 2014. Fitch Ratings upgraded Spain’s sovereign rating to BBB+ from BBB with a stable outlook on April 25, 2014. S&P upgraded Spain’s sovereign rating to BBB+ from BBB with a stable outlook on October 2, 2015. In February 2016, Moody’s revised Spain’s sovereign outlook to stable from positive. Santander Spain’s long-term debt is currently rated investment grade by the major rating agencies, such credit ratings currently being: A3 with a stable outlook by Moody’s and A- with a stable outlook by Fitch Ratings. In February 2017, S&P upgraded Santander Spain’s outlook to positive. Santander Spain is rated at least one notch above Spain’s sovereign rating by each of S&P, Fitch and Moody’s.
S&P lowered Brazil’s credit rating in September 2015 from BBB- to BB+ (a non-investment grade rating), and then again in mid-February 2016 from BB+ to BB with a negative outlook, mainly due to the continuing weak economic conditions of Brazil, political instability, the ongoing “Lava Jato” investigations and uncertainty as to whether the Brazilian government will enact reforms in the 2016 federal budget to improve the country’s fiscal accounts and economic situation. Fitch Ratings also lowered Brazil’s credit rating in December 2015 from BBB to BB+ (a non-investment grade rating), and then again in May 2016 from BB+ to BB, citing Brazil’s worsening economic outlook and growing political crisis as reasons for downgrading the country. Moody’s lowered Brazil’s credit rating from Baa2 to Baa3 (which was still an investment grade rating) in August 2015 and then to Ba2 (a non-investment grade rating) with a negative outlook in February 2016. Brazil’s sovereign rating is currently rated by the three major risk rating agencies as follows: BB with a negative outlook by S&P, BB by Fitch Ratings. In March 2017, Moody’s upgraded Brazil’s credit rating from Ba2 negative to Ba2 stable outlook. Any further downgrade in Brazil’s sovereign rating would likely increase our funding costs and adversely affect us, including our asset quality.
As a result of the lowering of Brazil’s sovereign credit rating, our long-term foreign currency credit rating was lowered during the course of 2015 and in early 2016: on August 12, 2015, Moody’s lowered our credit rating from Baa2 to Baa3, lowering it again on February 24, 2016 to Ba2 and on September 10, 2015, S&P lowered our credit rating from BBB- to BB+ (a non-investment grade rating), lowering it again on February 17, 2016 to BB. Our foreign long-term bank deposits are currently rated BB with a negative outlook by S&P and Ba2 with a stable outlook by Moody’s. Any further downgrade in our long-term debt in foreign currency would likely increase our funding costs and adversely affect our interest margins and results of operations.
We cannot assure you that the rating agencies will maintain their current ratings or outlooks, or with regard to those rating agencies that have a negative outlook with respect to us 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’ credit worthiness, we rely largely on the credit information available from our own internal databases, certain publicly available customer credit information, information relating to credit contracted, which is provided by the Brazilian Central Bank 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 allowances for impairment losses may be materially adversely affected.
Social and environmental risks may have a material adverse effect on us.
As part of the risk analysis we undertake with respect to our customers, we take into account environmental factors (such as soil and water contamination, vegetation suppression or lack of environmental authorizations) as well as social factors (such as the existence of working conditions akin to slavery). Any failure by us to identify and accurately assess these factors and the potential risks to us before entering into proposed transactions with our
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clients may result in damage to our image and reputation as well as have a material adverse effect on our business, results of operations and financial condition.
The value of the collateral securing our loans may not be sufficient, and we may be unable to realize the full value of the collateral securing our loan portfolio.
The value of the collateral securing our loan portfolio may fluctuate or decline due to factors beyond our control, including, among others, macroeconomic factors globally and in Brazil, as well as force majeure events. We may also not have sufficiently recent information on the value of collateral, which may result in an inaccurate assessment for impairment losses of our loans secured by such collateral. If any of the above were to occur, we may need to make additional provisions to cover actual impairment losses of our loans, which may materially and adversely affect our results of operations and financial condition.
We are subject to market, operational and other related risks associated with our derivative transactions and our investment positions that could have a material adverse effect on us.
We enter into derivative transactions for trading purposes, as well as for hedging purposes. We are subject to market, credit and operational risks associated with these transactions, including basis risk (the risk of loss associated with variations in the spread between the asset yield and the funding and/or hedge cost) and credit or default risk (the risk of insolvency or other inability of the counterparty to a particular transaction to perform its obligations thereunder, including providing sufficient collateral). We also hold securities in our own portfolio as part of our investment and hedging strategies.
Financial instruments, including derivative instruments and securities represented 23.1% of our total assets as of December 31, 2016. 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.
Failure to successfully implement and continue to improve our risk management policies, procedures and methods, including our credit risk management system, could materially and adversely affect us, and we may be exposed to unidentified or unanticipated risks.
The management of risk is an integral part of our activities. We seek to monitor and manage our risk exposure through a variety of separate but complementary financial, credit, market, operational, compliance and legal reporting systems. We employ a broad and diversified set of risk monitoring and risk mitigation techniques which 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.
We use certain qualitative tools and metrics for managing market risk, including our use of value at risk, or “VaR,” and statistical modeling tools, which 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. We could face adverse consequences as a result of decisions, which may lead to actions by management, based on models that are poorly developed, implemented or used, or as a result of the modeled outcome being misunderstood or the use of such information for purposes for which it was not designed. In addition, if existing or potential customers or counterparties believe our
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risk management is inadequate, they could take their business elsewhere or seek to limit their transactions with us. This could have a material adverse effect on our reputation, as well as our revenues and profits. We also face risks from operational losses that may occur due to inadequate processes, people and systems failures or even from external events like natural disasters, terrorism, robbery and vandalism. Despite the operational risk management process supported by the Board and the internal audit tests, the internal controls and procedures effectiveness may not be fully adequate or sufficient to avoid all the known and unknown operational risks. We have suffered losses from operational risk in the past, including losses related to the migration of customer accounts in connection with acquisitions, phishing scams perpetuated by third parties, and information system platform upgrades. There can be no assurance that we will not suffer material losses from operational risk in the future, including losses related to security breaches.
As a commercial bank, one of the main types of risks inherent in our business is credit risk. For example, an important feature of our credit risk management system is to employ an internal credit rating system to assess the particular risk profile of a customer. As this process involves detailed analyses of the customer, taking into account both quantitative and qualitative factors, it is subject to human or IT systems errors. In exercising their judgment on current or future credit risk behavior of our customers, our employees may not always be able to assign an accurate credit rating, which may result in our exposure to higher credit risks than indicated by our risk rating system.
Failure to effectively implement, consistently follow or continuously refine our credit risk management system may result in an increase in the level of non-performing loans and a higher risk exposure for us, which could have a material adverse effect on us.
Failure to adequately protect ourselves against risks relating to cyber-security could materially and adversely affect us.
We face various cyber-security risks, including but not limited to: penetration of our information technology systems and platforms by ill-intentioned third parties, infiltration of malware (such as computer viruses) into our systems, contamination (whether intentional or accidental) of our networks and systems by third parties with whom we exchange data, unauthorized access to confidential customer and/or proprietary data by persons inside or outside of our organization, and cyber-attacks causing systems degradation or service unavailability that may result in business losses.
We may not be able to successfully protect our information technology systems and platforms against such threats. We have seen in recent years computer systems of companies and organizations being targeted, not only by cyber criminals, but also by activists and rogue states. We have been and continue to be subject to a range of cyber-attacks, such as denial of service, malware and phishing. Cyber-attacks could give rise to the loss of significant amounts of customer data and other sensitive information, as well as significant levels of liquid assets (including cash). In addition, cyber-attacks could give rise to the disablement of our information technology systems used to service our customers. As attempted attacks continue to evolve in scope and sophistication, we may incur significant costs in our attempt to modify or enhance our protective measures against such attacks, or to investigate or remediate any vulnerability or resulting breach, or in communicating cyber-attacks to our customers.
If we fail to effectively manage our cyber security risk, e.g., by failing to update our systems and processes in response to new threats, this could harm our reputation and adversely affect our operating results, financial condition and prospects through the payment of customer compensation, regulatory penalties and fines and/or through the loss of assets. In addition, we may also be subject to cyber-attacks against critical infrastructures of Brazil. Our information technology systems are dependent on such critical infrastructure and any cyber-attack against such critical infrastructure could negatively affect our ability to service our customers. As we do not operate such critical infrastructure, we have limited ability to protect our information technology systems from the adverse effects of such a cyber-attack. See “Item 4. Information on the Company—B. Business Overview—Technology and Infrastructure.”
We are subject to counterparty risk in our business.
We are exposed to counterparty risk 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
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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, clearing houses or other financial intermediaries.
We routinely transact with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, mutual funds, hedge funds and other institutional clients. Defaults by, and even rumors or questions about the solvency of, certain financial institutions and the financial services industry generally have led to market-wide liquidity problems and could lead to losses or defaults by other institutions. Many of the routine transactions we enter into expose us to significant credit risk in the event of default by one of our significant counterparties.
If these risks give rise to losses, this could materially and adversely affect us. We have a diversified loan portfolio, with no specific concentration exceeding 10% of total loans. Furthermore, currently, 2% of our loan portfolio is allocated to our largest debtor and 10% to our next 10 largest debtors. 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.
The financial problems faced by our customers could adversely affect us.
Market turmoil and economic recession could materially and adversely affect the liquidity, credit ratings, businesses and/or financial conditions of our borrowers, which could in turn increase our non-performing loan ratios, impair our loan and other financial assets and result in decreased demand for borrowings in general. We have credit exposure to borrowers which have entered or may shortly enter bankruptcy or similar proceedings. We may experience material losses from this exposure.
In addition, our customers may further significantly decrease their risk tolerance to non-deposit investments such as stocks, bonds and mutual funds, which would adversely affect our fee and commission income. We may also be adversely affected by the negative effects of the heightened regulatory environment on our customers due to the high costs associated with regulatory compliance and proceedings. Any of the conditions described above could have a material adverse effect on us.
We engage in transactions with related parties that others may not consider to be on an arm’s length basis.
We and our affiliates have entered into a number of services agreements pursuant to which we render and/or receive services, such as administrative, accounting, finance, treasury, legal services and others from (or provide such services to) related parties. We are likely to continue to engage in transactions with such related parties (including our controlling shareholder) that others may not consider to be on an arm’s length basis. Future conflicts of interests between us and any of our affiliates, or among our affiliates, may arise, which conflicts may not be resolved in our favor. See “Item 7. Major Shareholders and Related Party Transactions.”
Changes in accounting standards could impact reported earnings.
The entities that set accounting standards and other regulatory bodies periodically change the financial accounting and reporting standards that govern the preparation of our consolidated financial statements. These changes can materially impact how we record and report our financial condition and results of operations. In some cases, we could be required to apply a new or revised standard retroactively, resulting in the restatement of prior period financial statements.
Our business is highly dependent on 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 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.
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,
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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. We must continually make significant investments and improvements in our information technology infrastructure in order to remain competitive. We cannot assure you that in the future we will be able to maintain the level of capital expenditures necessary to support the improvement or upgrading of our information technology infrastructure. Any substantial failure to improve or upgrade our information technology systems effectively or on a timely basis could materially and adversely affect us.
Failure to protect personal information could adversely affect us.
We manage and hold confidential personal information of customers in the ordinary course of our banking operations. Although we have procedures and controls to safeguard personal information in our possession, unauthorized disclosures or security breaches could subject us to legal actions and administrative sanctions as well as damages that could materially and adversely affect our operating results, financial condition and prospects. Further, our business is exposed to risk from potential non-compliance with policies, employee misconduct or negligence and fraud, which could result in regulatory sanctions and serious reputational or financial harm. It is not always possible to deter or prevent employee misconduct, and the precautions we take to detect and prevent this activity may not always be effective. In addition, we may be required to report events related to information security issues (including any cyber security issues), events where customer information may be compromised, unauthorized access and other security breaches, to the relevant regulatory authorities. Any material disruption or slowdown of our systems could cause information, including data related to customer requests, to be lost or to be delivered to our clients with delays or errors, which could reduce demand for our services and products and could materially and adversely affect us.
Damage to our reputation could cause harm to us.
Maintaining a positive reputation is critical to our attracting and maintaining customers, investors and employees. Damage to our reputation can therefore cause significant harm to our business and prospects. Harm to our reputation can arise from numerous sources, including, among others, employee misconduct, including the possibility of fraud perpetrated by our employees, litigation or regulatory outcomes, failure to deliver minimum standards of service and quality, compliance failures, unethical behavior, and the activities of customers and counterparties. Further, negative publicity regarding us, whether or not true, may result in harm to us.
Actions by the financial services industry generally or by certain members of, or individuals in, the industry can also affect our reputation. For example, the role played by financial services firms in the financial crisis and the seeming shift toward increasing regulatory supervision and enforcement has caused public perception of us and others in the financial services industry to decline.
We could suffer significant reputational harm if we fail to identify and manage potential conflicts of interest properly. The failure, or perceived failure, to adequately address conflicts of interest could affect the willingness of clients to deal with us, or give rise to litigation or enforcement actions against us. Therefore, there can be no assurance that conflicts of interest will not arise in the future that could cause material harm to us.
Any failure to establish or preserve a favorable reputation among our customers and in the market in general could have a material adverse effect on us.
We plan to continue to expand our operations and we may not be able to manage such growth effectively, which could have an adverse impact on us, including our profitability.
We allocate management and planning resources to develop strategic plans for organic growth and to identify possible acquisitions and disposals and areas for restructuring our businesses. From time to time, we evaluate acquisition and partnership opportunities that we believe offer additional value to our shareholders and are consistent with our business strategy. We cannot provide assurance that we will, in all cases, be able to manage our
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growth effectively or deliver our strategic growth objectives. Challenges that may result from our strategic growth decisions include our ability to:
| · | manage efficiently the operations and employees of expanding businesses; |
| · | maintain or grow our existing customer base; |
| · | assess the value, strengths and weaknesses of investment or acquisition candidates, including local regulation that can reduce or eliminate expected synergies; |
| · | finance and integrate strategic investments or acquisitions; |
| · | align our current information technology systems adequately with those of an enlarged group; |
| · | apply our risk management policy effectively to an enlarged group; and |
| · | manage a growing number of entities without over-committing management or losing key personnel. |
Any failure to manage growth effectively could have a material adverse effect on our operating results, financial condition and prospects.
In addition, any acquisition or venture could result in the loss of key employees and inconsistencies in standards, controls, procedures and policies.
Moreover, the success of the acquisition or venture will at least in part be subject to a number of political, economic and other factors that are beyond our control. Any of these factors, individually or collectively, could have a material adverse effect on us.
Risks Relating to Our Controlling Shareholder, Our Units and American Depositary Receipts (ADRs)
Our ultimate controlling shareholder has a great deal of influence over our business and its interests could conflict with ours.
Santander Spain, our ultimate controlling shareholder, currently owns, directly and indirectly, approximately 88.8% of our total capital (not including the shares held by Banco Madesant - Sociedade Unipessoal). 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; |
| · | influence the appointment of our principal officers; |
| · | declare the payment of any dividends; |
| · | agree to sell or otherwise transfer its controlling stake in our company; and |
| · | determine the outcome of substantially all actions requiring shareholder approval, including amendments of our by-laws, transactions with related parties, corporate reorganizations, acquisitions and dispositions of assets, and dividends. |
In December 2012, primarily in response to the requirements of the European Banking Authority, Santander Spain adopted a corporate governance framework (Marco de Gobierno Interno del Grupo Santander) to organize and standardize the corporate governance practices of certain companies of Santander Group (including us). We adopted this corporate governance framework in May 2013, subject to the precedence of applicable Brazilian laws, regulations and limitations, such as banking secrecy laws, as well as our corporate governance practices, including our policies for related party transactions and for disclosure of material acts and facts. See “Item 16G. Corporate Governance.”
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On July 27, 2015, as a result of the new requirements of the European Central Bank, the Bank of Spain and the regulators in different jurisdictions, our parent, Santander Spain established a new corporate governance model for its subsidiaries, with the purpose of setting forth a clear and transparent conceptual framework to govern their relationship. Our Board of Directors approved the new corporate governance model on January 26, 2016.
We operate as a stand-alone subsidiary within the Santander Group. Our controlling shareholder has no liability for our banking operations, except for the amount of its holdings of our capital stock and for other specific limited circumstances under Brazilian law. The interests of Santander Spain may differ from the interests of our other shareholders, and the concentration of control in Santander Spain will limit other stockholders’ 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 (i) a majority of the board of directors consists of independent directors, (ii) 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, (iii) 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 (iv) 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.
The liquidity and market prices of the units and the ADRs may be adversely affected by the cancelation of units or substantial sale of units and shares in the market.
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 and ADRs may be materially and adversely affected.
Also, 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 ADRs. 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 ADRs may decrease significantly. As a result, holders of ADRs may not be able to sell their ADRs at or above the price they paid for them.
The relative volatility and limited liquidity of the Brazilian securities markets may negatively affect the liquidity and market prices of the units and the ADRs.
The BM&FBOVESPA is significantly less liquid than the NYSE or other major exchanges in the world. As of December 31, 2016, the aggregate market capitalization of the BM&FBOVESPA was equivalent to approximately R$2.24 trillion (U.S.$711 billion) and the top ten stocks in terms of trading volume accounted for approximately 42.71% of all shares traded on BM&FBOVESPA in the year ended December 31, 2016. In contrast, as of December 31, 2016, the aggregate market capitalization of the NYSE was approximately U.S.$ 19 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 limited liquidity of the Brazilian securities markets may substantially limit your ability to sell the units or ADRs at the time and price you desire and, as a result, could negatively impact the market price of these securities.
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If securities analysts do not publish research or reports about our business or if they downgrade our ADRs or shares or our sector, the price of our ADRs and/or our shares price and trading volume could decline.
The trading market for our ADRs and our shares has been affected in part by the research and reports that industry and financial analysts publish about us or our business. We do not control these analysts. Furthermore, if one or more of the analysts who cover us downgrade our ADRs, our shares or our industry, change their views regarding the shares of any of our competitors, or other companies in our sector, or publish inaccurate or unfavorable research about our business, the market price of our ADRs and/or shares could decline. If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, we could lose visibility in the market, which in turn could cause our ADR and/or share price or trading volume to decline.
The economic value of your investment may be diluted.
We may, from time to time, need additional funds and we may issue additional units or shares. Any additional funds obtained by such a capital increase may dilute your interest in our company.
Discontinuation of the current corporate governance practices may negatively affect the price of our ADRs and units.
After completion of the voluntary exchange offers by Santander Spain in Brazil and in the United States (respectively, the “Brazilian Exchange Offer” and the “U.S. Exchange Offer”) for the acquisition of up to the totality of our shares that were not held by the Santander Group at that time, we are no longer subject to the obligations of the special listing segment of BM&FBOVESPA known as Corporate Governance Level 2 (the “Level 2 Segment”). Currently, we voluntarily comply with certain of the corporate governance requirements for companies listed on the Level 2 Segment.
Discontinuation, in whole or in part, of our existing corporate governance practices or minimum protections may adversely affect your rights as a security holder and may result in a decrease of the price of our shares, units and ADRs.
Holders of our units and our ADRs may not receive any dividends or interest on stockholders’ equity.
According to our By-Laws, we must generally pay our shareholders at least 25.0% of our annual net income as dividends or interest on stockholders’ equity, as calculated and adjusted under Brazilian Corporate Law (“adjusted net income”), which may differ significantly from our net income as determined under IFRS. This adjusted net income may be used to increase capital, used to absorb losses or otherwise retained as allowed under Brazilian Corporate Law and may not be available to be paid as dividends or interest on stockholders’ equity. Additionally, Brazilian Corporate Law allows a publicly traded company, like ours, to suspend the mandatory distribution of dividends and interest on stockholders’ equity 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. We paid R$1.5 billion, R$6.2 billion and R$5.3 billion (R$0.41, R$1.65 and R$1.40 per unit, respectively) as dividends and interest on stockholders’ equity (considering gross value) in 2014, 2015 and 2016, respectively, in accordance with our dividend policy, but there can be no assurance that dividends and interest on stockholders’ equity will be paid in future. We are also subject to Brazilian banking regulations that may limit the payment of dividends or interest on stockholders’ equity. See “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—History of Payment of Dividends and Interest Attributable to Stockholders’ Equity.”
Holders of ADRs may find it difficult to exercise voting rights at our stockholders’ meetings.
Holders of ADRs will not be our direct shareholders and will be unable to enforce directly the rights of shareholders under our By-Laws and Brazilian Corporate Law. Holders of ADRs may exercise voting rights with respect to the units represented by ADRs only in accordance with the deposit agreement governing the ADRs. Holders of ADRs will face practical limitations in exercising their voting rights because of the additional steps involved in our communications with ADR holders. For example, we are required to publish a notice of our stockholders’ meetings in specified newspapers in Brazil. Holders of our units will be able to exercise their voting rights by attending a stockholders’ meeting in person or voting by proxy. By contrast, holders of ADRs will receive notice of a stockholders’ meeting by mail from the ADRs depositary following our notice to the depositary requesting the depository to do so. To exercise their voting rights, holders of ADRs 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
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ADRs than for holders of our units or shares. If the ADR depositary fails to receive timely voting instructions for all or part of the ADRs, the depositary will assume that the holders of those ADRs are instructing it to give a discretionary proxy to a person designated by us to vote their ADRs, except in limited circumstances.
Holders of ADRs also may not receive the voting materials in time to instruct the depositary to vote the units underlying their ADRs. In addition, the depositary and its agents are not responsible for failing to carry out voting instructions of the holders of ADRs or for the manner of carrying out those voting instructions. Accordingly, holders of ADRs may not be able to exercise voting rights, and they will have little, if any, recourse if the units underlying their ADRs are not voted as requested.
Holders of ADRs could be subject to Brazilian income tax on capital gains from sales of ADRs.
Law 10,833 of December 29, 2003 provides that the disposal 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 disposal occurs outside or within Brazil. This provision results in the imposition of income tax on the gains arising from a disposal of our units by a non-resident of Brazil to another non-resident of Brazil. It is unclear whether ADRs 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. We believe ADRs do not qualify as property located in Brazil and, thus, should not be subject to Brazilian income tax. Nevertheless, there is no judicial guidance as to the application of Law 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 ADRs between non-residents of Brazil. However, in the event that the disposition of assets is interpreted to include a disposition of our ADRs, this tax law would accordingly impose withholding taxes on the disposition of our ADRs 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 ADRs 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.
Our corporate disclosure may differ from disclosure regularly published by issuers of securities in other countries, including the United States.
Issuers of securities in Brazil are required to make public disclosures that are different from, and that may be reported under presentations that are not consistent with, disclosures required in other countries, including the United States. In particular, for regulatory purposes, we currently prepare and will continue to prepare and make available to our shareholders statutory financial statements in accordance with IFRS as issued by the IASB and Brazilian GAAP, both of which differ from U.S. GAAP in a number of respects. In addition, as a foreign private issuer, we are not subject to the same disclosure requirements in the United States as a domestic U.S. registrant under the Exchange Act, including the requirements to prepare and issue quarterly reports, the proxy rules applicable to domestic U.S. registrants under Section 14 of the Exchange Act or the insider reporting and short-swing profit rules under Section 16 of the Exchange Act. Accordingly, the information about us available to you will not be the same as the information available to shareholders of a U.S. company and may be reported in a manner with which you are not familiar.
Investors may find it difficult to enforce civil liabilities against us or our directors and officers.
The majority of our directors and officers reside outside of the United States. In addition, all or a substantial portion of our assets and their assets are located outside of the United States. Although we have appointed an agent for service of process in any action against us in the United States with respect to our ADRs, none of our directors or officers has consented to service of process in the United States or to the jurisdiction of any United States court. As a result, it may be difficult for investors to effect service of process within the United States on such persons.
Judgments of Brazilian courts with respect to our units or ADRs will be payable only in reais.
Our By-Laws provide that we, our shareholders, our directors and officers and the members of our fiscal council shall submit to arbitration any and all disputes or controversies that may arise amongst ourselves relating to, or originating from, the application, validity, effectiveness, interpretation, violations and effects of violations of the provisions of Brazilian Corporate Law, our By-Laws, the rules and regulations of the CMN, the Brazilian Central
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Bank and the CVM, as well as other rules and regulations applicable to the Brazilian capital markets and the rules and regulations of the Arbitration Regulation of the Market Arbitration Chamber. However, in specific situations, including whenever precautionary motions are needed for protection of rights, the dispute or controversy may have to be brought to a Brazilian court. If proceedings are brought in the courts of Brazil seeking to enforce our obligations in respect of the units or ADRs, 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 rate may not afford non-Brazilian investors with full compensation for any claim arising out of or related to our obligations under the units or ADRs.
Holders of ADRs may be unable to exercise preemptive rights with respect to our units underlying the ADRs.
Holders of ADRs will be unable to exercise the preemptive rights relating to our units underlying ADRs 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 ADRs. We may decide, at our discretion, not to file any such registration statement. If we do not file a registration statement or if we and the ADR depositary decide not to make preemptive rights available to holders of units or ADRs, 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 ADRs you will have different shareholders’ rights than do shareholders of companies incorporated in the United States and certain other jurisdictions.
Our corporate affairs are governed by our By-Laws and by 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, holders of the ADRs are not our direct shareholders and will have to exercise their voting rights through the depositary. Therefore, holders of ADRs may have fewer and less well-defined rights to protect their 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 ADRs.
ITEM 4. INFORMATION ON THE COMPANY
| 4A. | History and Development of the Company |
General
We are a publicly held company (sociedade anônima) of indefinite term, incorporated under Brazilian law on August 9, 1985. Our corporate name is Banco Santander (Brasil) S.A. and our commercial name is Banco Santander. 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 Commercial Registry of the State of São Paulo (Junta Comercial do Estado de São Paulo or JUCESP), under NIRE (Registry Number) 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.
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History
The Santander Group has expanded globally through a number of acquisitions and the 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 its presence in Latin America, 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., which subsequently changed its name to Banco Santander Brasil S.A. In the following year, the Santander Group acquired Banco Noroeste S.A. 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.).
In November 2000, the Santander Group acquired Banespa, a bank owned by the State of São Paulo, and became one of Brazil’s largest financial groups. In 2006, Santander Brasil consolidated its investments into one entity, Banco Santander Banespa S.A., which was later renamed Banco Santander (Brasil) S.A. In 2007, the Santander Group implemented a brand unification program to consolidate our operations in Brazil at such time under the Santander brand.
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. 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 absorbed into the Santander Group to consolidate its investments in Brazil. 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. On April 30, 2009, Banco Real was merged into Santander Brasil and Banco Real ceased to exist as a separate legal entity.
Important Events
Sale of Santander Securities Services Brasil DTVM S.A. (current corporate name of CRV Distribuidora de Títulos e Valores Mobiliários S.A.)
On June 19, 2014, we executed preliminary documents containing the main terms and conditions relating to the sale of our qualified custody business operations, and of all of the shares issued by Santander Securities Services Brasil DTVM S.A. (current corporate name of CRV Distribuidora de Títulos e Valores Mobiliários S.A.) (“SSS DTVM”), one of our subsidiaries that was engaged in the rendering of third-party fund administration services.
The transaction was part of a broader alliance between Santander Spain, certain investment funds controlled by Warburg Pincus, a leading global private equity firm, and the Singaporean sovereign fund Temasek. As part of this alliance, Santander Spain will become the owner of 50% of the shares in a holding company that will integrate the Santander Group’s custody units located in Spain, Brazil and Mexico. Warburg Pincus and Temasek will hold the remaining 50% of the shares issued by such holding company.
The transaction was completed on August 31, 2015, once all regulatory approvals applicable in Brazil had been obtained. Santander Securities Services Brasil Participações S.A. (“Santander Securities Brasil”), which is indirectly controlled by Santander Spain, became the owner of shares representing 100% of the total share capital of SSS DTVM, and SSS DTVM acquired the qualified custody business from Santander Brasil. The purchase price for the shares was R$859 million. The transaction generated capital gains of approximately R$450 million after taxes.
Investment Agreement Between Santander Brasil and Banco Bonsucesso S.A.
On July 30, 2014, we, through our controlled company Aymoré Crédito, Financiamento e Investimento S.A. (“Aymoré CFI”) entered into an investment agreement with Banco Bonsucesso S.A. (“Banco Bonsucesso”) whereby we and Banco Bonsucesso agreed to form a joint venture in the payroll credit card loan and payroll loan segments,
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currently known as Banco Olé Bonsucesso Consignado S.A., or “Banco Olé Bonsucesso Consignado,” and formerly known as Banco Bonsucesso Consignado S.A.
On February 10, 2015, with the approval of the Brazilian Central Bank, the transaction was completed and Santander Brasil, through Aymoré CFI, became the controlling shareholder of Banco Olé Bonsucesso Consignado, holding 60% of the share capital of the entity. Banco Bonsucesso owns the remaining portion of Banco Olé Bonsucesso Consignado’s share capital (i.e., a 40% interest).
The transaction involved the transfer to Banco Olé Bonsucesso Consignado of the payroll loan business and payroll credit card loans of Banco Bonsucesso, and our investment, through Aymoré CFI, of R$460 million in Banco Olé Bonsucesso Consignado.
Banco Olé Bonsucesso Consignado became the exclusive vehicle of Banco Bonsucesso and its subsidiaries for the offer of payroll loans in Brazil. We will also continue to originate payroll loan transactions through our own independent channels.
Investment in Super Pagamentos e Administração de Meios Eletrônicos Ltda.
On October 3, 2014, we, through Aymoré CFI, signed an investment agreement with Super Pagamentos e Administração de Meios Eletrônicos Ltda. (“Super”), whereby Aymoré CFI agreed to subscribe and pay for shares issued by Super representing 50% of Super’s total and voting capital. Super is a Brazilian digital service provider that offers online payment accounts, prepaid cards and access to simplified financial services. The transaction reinforced our presence in the electronic payment market.
The transaction was concluded on December 12, 2014, following the completion of certain conditions precedent set forth in the investment agreement, including the prior approval of the Brazilian Central Bank (obtained on December 2, 2014). Aymoré CFI subscribed for and acquired 20 million new common shares issued by Super for a value of R$31,128 million. We, through Aymoré CFI, control Super.
On January 4, 2016, Aymoré CFI informed the sellers of its decision to exercise the call option for the shares representing the remaining 50% of Super’s total voting capital owned by the sellers, for a value of approximately R$113 million. The transaction was completed on March 10, 2016, following receipt of approval from the Brazilian Central Bank. In May 2016 Super received approval from the Brazilian Central Bank to operate as a payment institution.
Buyback Program
On November 3, 2016, our board of directors approved, in continuation of the buyback program that expired on the same date, the buyback program of units and ADRs issued by us, directly or through our branch in the Cayman Islands, to be held in treasury or subsequently sold. The buyback program will cover the acquisition of up to 38,402,972 units or ADRs, representing 38,402,972 common shares and 38,402,972 preferred shares, corresponding to approximately 1.02% of our share capital. The term of the buyback program is up to 12 months counted from November 4, 2016.
Financial Co-Operation and Joint Venture with Banque PSA Finance
On July 24, 2015, and in furtherance of the partnership in Europe between Banque PSA Finance (“Banque PSA”) and Santander Consumer Finance for the joint operation of the vehicle financing business related to PSA Peugeot Citroën (“PSA”) brands (which include Peugeot, Citroën and DS), we entered into binding agreements for a joint venture in Brazil with Banque PSA to offer financial and insurance products to consumers and distributors of PSA brands in Brazil.
After the fulfilment of the applicable conditions precedent, which included obtaining the appropriate regulatory authorizations, the joint venture began its operations on August 1, 2016.
The principal entity around which the partnership is formed in Brazil is Banco PSA Finance Brasil S.A., 50% of which is held by our wholly-owned subsidiary, Aymoré CFI, and 50% of which is owned by Banque PSA. The transaction also contemplates the acquisition by Santander Brasil of 100% of PSA Finance Arrendamento
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Mercantil S.A. and of 50% of PSA Corretora de Seguros e Serviços Ltda., an entity of the PSA group dedicated to the distribution of insurance products in Brazil.
The joint venture adds the network of PSA Group’s distributors in Brazil to the distribution channels of Santander Brasil for the offering of financial and insurance products, especially in the vehicle-financing sector.
Establishment of Credit Intelligence Bureau
On January 20, 2016, we entered into a non-binding memorandum of understanding with Banco Bradesco S.A., Banco do Brasil S.A., Caixa Econômica Federal and Itaú Unibanco S.A., for the creation of a credit intelligence bureau (“CIB”). The CIB will be structured as a corporation and each of Santander Brasil, Banco Bradesco S.A., Banco do Brasil S.A., Caixa Econômica Federal and Itaú Unibanco S.A. will have a 20% ownership stake in the corporation.
The purpose of the CIB will be to develop a database that, in conformity with applicable laws, will collect, reconcile and handle the credit information of individuals and legal entities that register with the CIB and expressly authorize the inclusion of their credit information on the CIB’s database. We believe this initiative will lead to an increased degree of efficiency and improvement of our credit management activities, and will also facilitate the disbursement of long and medium-term lines of credit to participants in the Brazilian Financial System and to other corporate entities.
The incorporation of the CIB is subject to the satisfaction of certain conditions precedent customary for similar transactions, including the execution of definitive agreements. The necessary regulatory authorizations, including by the Brazilian Central Bank and the Brazilian Anti-Trust Authority (Conselho Administrativo de Defesa Econômica), or “CADE,” have already been granted.
Joint Venture with Hyundai Motor Brasil Montadora de Automóveis Ltda. and Hyundai Capital Services, Inc.
On April 28, 2016, our wholly-owned subsidiary Aymoré CFI entered into a joint venture with Hyundai Motor Brasil Montadora de Automóveis Ltda.(“Hyundai Motor Brasil”) and Hyundai Capital Services, Inc. (“Hyundai Capital”), for the incorporation of (i) Banco Hyundai Capital Brasil S.A. and (ii) an insurance brokerage company, in order to provide, respectively, auto finance and insurance brokerage services and products to consumers and Hyundai dealerships in Brazil.
Aymoré CFI will own a 50% equity stake in the joint venture entities while Hyundai Capital and Hyundai Motor Brasil will have equity stakes of 25% each in the joint venture entities.
In order to implement the joint venture, the incorporation of Banco Hyundai Capital Brasil S.A. and of the insurance brokerage company are subject to certain regulatory approvals, including, in the case of Banco Hyundai Capital Brasil S.A., obtaining the Brazilian Central Bank’s authorization to operate as a banking entity.
In addition to working towards obtaining the necessary regulatory approvals, Aymoré CFI, Hyundai Motor Brasil and Hyundai Capital are currently working on the development of the administrative and operational structures for the joint venture.
Partnership with American Airlines Inc.
On December 9, 2016, Santander Brasil and American Airlines Inc. entered into a ten-year commercial participation agreement for the marketing and issuance of co-branded credit cards, with the purpose of offering AAdvantage® miles to their respective clients as a result of their daily purchases.
Capital Expenditures and Divestitures
Our main capital expenditures include investments in our Information Technology (“IT”) platform in Brazil. Our IT platform focuses on our customers and supports our business model. In 2016, 2015 and 2014, total investments in IT were R$895 million, R$858 million and R$1,029 million, respectively.
In 2016 and 2015, we continually improved our technology platform by means of investments in systems and infrastructure renewal. During these years, our main projects were: RDA (Risk Data Aggregation), CRM (Customer
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Relationship Management), Big Data transformation, Cyber Security, Channel Transformation (Mobile, Internet, Bank Branch), new Santander consumer purchasing model, Digital Back Office, agile, DevOps and intern cloud implementation.
Technology management by specialized companies within the Santander Group enables us to achieve a global scale and other benefits similar to outsourcing, without the loss-of-control that is often seen when outsourcing core activities. For further discussion regarding our technology infrastructure see “—B. Business Overview—Technology and Infrastructure.”
Our major divestiture in the past three fiscal years and until the date of this annual report was the sale, in August 2015, of our qualified custody business through the sale of all the shares of SSS DTVM to Santander Securities Brasil (in this respect, please see “Item 5. Operating and Financial Review and Prospects—A. Operating Results—Factors Affecting the Comparability of Our Results of Operations—Sale of the Investment Fund Management and Managed Portfolio Operations”).
| 4B. | Business Overview |
Our Competitive Strengths
We believe that our main competitive strengths are: (i) being part of the Santander Group; (ii) maintaining sophisticated risk management practices; (iii) maintaining a strong capital base; (iv) maintaining a modern technology platform; and (v) focusing on sustainable growth with a strong presence in attractive demographic and geographic areas. We are active in large investments in infrastructure, while supporting the growth of small and medium enterprises (“SMEs”) and the future of Brazilian citizens through our university funding programs.
Synergies from Our Affiliation with the Santander Group
We believe that being part of the Santander Group offers us a significant competitive advantage over our competitors. While, under the Santander Group’s business model, each unit is required to be self-sufficient in terms of capital and liquidity, our relationship allows us to:
| · | access the Santander Group’s global information systems platform, which reduces our technology development costs, provides operational synergies with the Santander Group and enhances our ability to provide global products and services to our customers; |
| · | provide our individual and SME customers with the benefits of a strong presence in certain markets, predominantly in Latin America and Western Europe; |
| · | take advantage of good practices already implemented in other countries, providing all of our customers with products and services via modern and integrated channels; |
| · | benefit from the Santander Group’s operational expertise in areas such as internal controls and risk management, which have been developed in response to a wide range of market conditions across the world and which we believe enhance our ability to expand our business within desired risk limits; |
| · | take advantage of the Santander Group’s experience with integration to maximize and accelerate the generation of synergies from any 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. |
Sophisticated Risk Management Practices
High quality risk management is one of the Santander Group hallmarks and, consequently, one of our priorities. Throughout its 150 years, the Santander Group has combined prudence in risk management with the use of advanced techniques, always aiming to generate recurrent and balanced earnings and to create shareholder value. Our risk management model is a key factor for achieving our strategic objectives.
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Our risk management principles are: (i) independence and risk assessment; (ii) business support to maintain risk quality; (iii) decision-making based on committee involvement; and (iv) use of modern tools and systems to analyze risk effectively. Our risk management policy seeks to maintain a medium-low and predictable profile for all our risk.
To manage our risk, we have incorporated the Santander Group’s global program of risk management into various levels of our organization. The entire Bank is responsible for risk management, from our branch employees to our risk management committee members. Our risk management and control is structured along three independent but coordinated levels, each with its own responsibilities: (i) risk management at the level of the origination of our financial products and activities (e.g., through credit checks on potential borrowers); (ii) control and management of our risk management function; and (iii) internal audits.
Strong Capital Base
As of December 31, 2016, our Basel capital adequacy ratio was 16.3%. We endeavor to maintain an efficient capital structure enabling us to safeguard our solvency even in stress scenarios, consistent with recent Basel III capital rules, and our business strategy and asset growth plan.
For further information, please see “Item 5. Operating and Financial Review and Prospects—A. Operating Results—Factors Affecting the Comparability of Our Results of Operations—Plans to Optimize our Capital Structure.” For further information on our capital adequacy requirements, please see “—Regulation and Supervision—Capital Adequacy and Leverage—Basel.”
Modern Technology Platform
We operate a modern and global technology platform that is interconnected with the Santander Group platform. This allows us to assist our customers on a global scale and to provide them core banking services quickly and efficiently.
Over the last three years, we have made significant improvements in our technology platform, focusing on the modernization, improvement in offers and simplification of products, services and processes. As example, in 2014, we inaugurated our new IT Center, which we believe is the largest in Latin America.
In 2015, in order to improve customer experience and increase employee engagement, we put on the market the “É Comigo Santander,” a mobile application for exclusive use by employees, which enables them to report online issues that impact the banking experience of our customers and to improve services provided to our customers. We also implemented a new account opening process (Welcome Kit), which makes available to our customers on the same day on which they open a current account with us, their account debit and credit cards and the PIN for each card.
During the course of 2016, as part of our digital strategy expansion, our number of digital clients (clients that have used at least one online mobile or internet banking service) increased by 45.1% reaching 6.4 million as of December 31, 2016 compared to 2015. To date, we have more than 300,000 clients to whom we provide banking services exclusively via our digital branch platform. In addition, we have also made significant progress in the biometric registration of our clients, which enables us to provide secure and practical banking services to our customers. As of December 31, 2016, more than 6.3 million of our customers had their biometric data registered with us.
In 2016, we also introduced the “ContaSuper,” a pre-paid card model, which is totally digital and user friendly. The “ContaSuper” system allows users to manage their daily financial activities (including transferring funds, doing online shopping, charging the card with credit on 10 different currencies, and other uses) entirely online in a user friendly interface. In cards, in order to increase security and usability in our online interactions with our clients, we also introduced the “Santander Way” mobile application, which is an online credit/debit card tool. The application allows clients to track credit/debit card transactions safely in real time. It also has other functionalities, like control over the cards’ credit limit and a “virtual” credit card, optimized for online transactions, among other functions. In addition, we also redesigned the business model for our consumer finance unit with the introduction of “+negócios” in July 2016. “+negócios” is an innovative digital commercial platform designed to be simple and intuitive and which enables users to simulate loan payments based on certain pre-defined parameters (e.g., income, current liabilities and, amount of the loan, among others), that can increase loan effectiveness, credit approval and proposal formalization in addition to providing portfolio management reports.
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Strong presence in attractive demographic and geographic areas
We focus continuously on sustainable growth. We believe that we are well positioned to benefit from the growth of our customer base and the relatively low penetration of financial products and services in Brazil. We have a strong presence in attractive demographic and geographic areas and we have strengthened our competitive position in all Brazilian regions.
In addition, to maintaining a significant branch network, we endeavor to adapt our products and services to the evolving needs of our customers. In 2014, we acquired GetNet, which has given us the ability to offer integrated e-banking services for SME customers, which services include a current account, cash management services and POS machines. Furthermore, we also entered into a joint venture with Banco Bonsucesso to improve our position in the payroll credit market. See “—A. History and Development of the Company—Important Events.”
In 2015, we repositioned our Santander Van Gogh segment, aimed at our upper middle income customers, and introduced a range of new products, services, customer service and financial advice tailored to this segment. In the second half of 2015, we relaunched our enterprise segment called “Santander Negócios & Empresas,” a proprietary financial and non-financial solution aimed at creating a new relationship model that facilitates entrepreneurship and the growth of SMEs.
In 2016, we undertook various actions to increase and diversify our revenues as well as the loyalty of our customers. For example, our consumer finance business settled a joint venture agreement with Banque PSA Finance for car financing and financial services. We also introduced our consortium business product line. This product line consists of a purchasing pool through which a group of people pay monthly installments on a certain item (e.g., a car) so that every month the group can afford to buy one of the items, which is then awarded by draw to one of the group members. There is a fee charged by the pool administrator (i.e., us) but no interest. This product line leverages our customer loyalty and provides a commission revenue with reduced risk and capital cost. We have also created a new agribusiness unit, which includes the opening of specialized branches, the creation of a team with expertise in that sector and the offering of certain unit-specific products. This effort was already recognized by the market with the “Lide Agronegócio 2016” award.
We work constantly to improve our customers’ experience. We have recently implemented a new sales management tool called “Modelo Certo,” which has resulted in business productivity and customer satisfaction. For example, there was an overall improvement in customer satisfaction for individuals in a customer satisfaction survey by IBOPE Inteligência, a Brazilian market research firm, in the second half of 2016. In this survey, Santander Select, our high income segment, jumped from fourth place in 2015 to second place, Santander Van Gogh, our medium income segment, maintained its second place, and our segment focused on lower income customers achieved first place.
In 2016, we also saw results of initiatives we had launched in previous years. GetNet, our acquiring business, has shown consistent results with a 30% increase in revenues in 2016 and an increase of 2.0 p.p. in market share, reaching 10.6% in December 2016, according to ABECS. Moreover, as a result of the repositioning of “Santander Negócios & Empresas” our SMEs segment received an award for best bank for SMEs in the world, as well as for and in Latin America, from Euromoney in 2016.
Our branch network, service channels, and technology platform have enough capacity for substantial growth in our customer base and financial transactions. We are ranked third among the privately-owned banks in Brazil in terms of assets, with a market share of 8.1% as of September 2016, according to information provided by the Brazilian Central Bank. Among these banks, we believe that we have a strategic position in the majority of our key product lines, as evidenced by our market share in the following products and regions.
| As
of December 31, 2016 Market share (%) | ||||
| Payroll/individual loans | 7.5 | % | ||
| Individual loans | 10.3 | % | ||
| Payroll loans | 6.5 | % | ||
| Auto leasing/CDC (Auto loans) | 20.8 | % | ||
| Credit cards | 11.2 | % | ||
| Branches | 11.3 | % | ||
Source: Brazilian Central Bank.
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Our Strategy
We are a universal bank with focus on retail banking. We believe that the only way to grow, recurrently and sustainably, is to provide our services with excellence and to consistently strive to increase our clients’ level of satisfaction by being a Simple, Personal and Fair Bank. As a result, our strategy is focused on the following objectives:
| · | To increase customer loyalty with simple, effective and segmented products and services, and through a multi-channel platform. |
| · | To improve recurrence and sustainability of our business, by diversifying our revenue base, while also taking into account the balance between loans, funding and services as well as maintaining efficient cost management and strict risk controls. |
| · | To maintain discipline in capital and liquidity management, so that we can respond effectively to regulatory challenges and business opportunities. |
| · | To increase productivity through an intense agenda of productive transformation, both operationally and commercially. |
We prioritize selective growth, a long lasting relationship with our shareholders and an alignment with the country’s economic and social development agenda.
Our Business
Overview
We operate along two segments: Commercial Banking and Global Wholesale Banking.
The following chart sets forth our operating segments and their main focus.
| Commercial Banking | Global Wholesale Banking | |
| · Retail banking | · Global Corporate Banking (“GCB”) | |
| · Individuals | · Proprietary Trading | |
| · SMEs (annual gross revenues up to R$200 million) | ||
| · Corporate (annual gross revenues in excess of R$200 million, other than global corporate clients) | ||
| · Consumer finance |
The following table presents the breakdown of our net interest income and profit before tax by operating segment:
| For the year ended December 31, | ||||||||||||||||||||||||
| 2016 | 2015 | 2014 | 2016 | 2015 | 2014 | |||||||||||||||||||
| Net interest income | Profit before tax | |||||||||||||||||||||||
| (in millions of R$) | ||||||||||||||||||||||||
| Commercial Banking | 27,366 | 27,041 | 25,042 | 12,652 | (5,565 | ) | 4,231 | |||||||||||||||||
| Global Wholesale Banking | 3,211 | 4,297 | 2,186 | 3,732 | 2,349 | 2,212 | ||||||||||||||||||
| Total | 30,586 | 31,337 | 27,229 | 16,384 | (3,216 | ) | 6,443 | |||||||||||||||||
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In our Commercial Banking business segment, we focus on long-term relationships 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, financial products, acquiring services, asset management and insurance products. We also offer special financing and credit opportunities for corporate customers pursuing social and environmental improvement programs. Our business model and segmentation allow us to provide a tailored approach to each client in order to address their specific needs.
Through our Global Wholesale Banking segment we 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 local and multinational conglomerates, which we refer to as GCB customers. 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. 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.
Our business is strongly committed to sustainability. Our sustainable strategy is based on three pillars: (i) social and financial inclusion, (ii) education, and (iii) social and environmental business and management. In 2016 we were selected by the BM&FBOVESPA for the seventh consecutive year to form part of its ISE - Corporate Sustainability Index. The ISE – Corporate Sustainability Index highlights companies with a recognized commitment to social responsibility and business sustainability, in addition to acting as a promoter of best practices in the business community.
As of December 31, 2016 our loans and advances to customers grew 0.4% and reached R$268,438 million compared to R$267,266 million as of December 31, 2015.
The following table shows a managerial breakdown of our loans and advances to customers by client category at the dates indicated:
| For the year ended December 31, | Change,
as of December 31, 2016 vs. December 31, 2015 | |||||||||||||||||||
| 2016 | 2015 | 2014 | R$ million | % | ||||||||||||||||
| (in millions of R$) | ||||||||||||||||||||
| Individuals | 91,195 | 84,578 | 77,809 | 6,617 | 7.8 | % | ||||||||||||||
| Consumer finance | 26,608 | 25,850 | 27,686 | 758 | 2.9 | % | ||||||||||||||
| Small and Medium Enterprises(1) | 42,440 | 43,524 | 42,191 | (1,084 | ) | (2.5 | )% | |||||||||||||
| Large Corporations(2) | 108,195 | 113,315 | 101,425 | (5,120 | ) | (4.5 | )% | |||||||||||||
| Total | 268,438 | 267,266 | 249,111 | 1,171 | 0.4 | % | ||||||||||||||
| (1) | Companies with annual gross revenues of up to R$200 million. |
| (2) | Companies with annual gross revenues exceeding R$200 million, including our global corporate clients. |
Commercial Banking
Our Commercial Banking business includes products and services for retail customers, enterprises and corporations (other than global corporate clients, who are served by our Global Wholesale Banking segment), our consumer finance business and our asset management and insurance services.
We serve clients throughout Brazil, primarily through our branch network, which as of December 31, 2016 consisted of 2,254 branches, 1,167 mini branches (postos de atendimento bancário or “PABs” located at our corporate customers’ premises) and 13,806 ATMs.
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Retail Banking
Individuals
Our current individual customer classification model is as follows:
| · | Private Banking: serves a select group of clients with a minimum of R$5.0 million in assets available for investment. Our objective is to provide our clients a comprehensive range of financial products, banking services, tax planning and advisory services relating to investments and asset allocation; |
| · | Santander Select: serves customers who earn more than R$10,000 per month and have R$30,000 in investments, or earn more than R$20,000 per month, or have investments above R$300,000. Our objective is to provide a differentiated value proposal focused on wealth management advisory services. The segment currently has 101 exclusive agencies and 10 store-in-store; |
| · | Santander Van Gogh: serves customers who earn more than R$4,000 per month or have investments above R$40,000. Our objective is to understand the needs of our clients at each stage of their life and provide them with financial advice and solutions, through credit lines or investment alternatives, to meet our clients’ needs; and |
| · | Santander Individuals: serves customers who earn less than R$4,000 per month. Our business model offers simple and efficient solutions with an attractive cost benefit to the customer, primarily through electronic channels. |
We offer our retail lending products to customers through our extensive branch network and on-site service units. See “—Distribution Network.” The following table sets forth our individual customer loan portfolio at the dates indicated, as per our management records:
| For the year ended December 31, | Change,
as of December 31, 2016 vs. December 31, 2015 | |||||||||||||||||||
| 2016 | 2015 | 2014 | R$ million | % | ||||||||||||||||
| (in millions of R$) | ||||||||||||||||||||
| Leasing/Auto Loans(1) | 1,869 | 2,470 | 3,219 | (601 | ) | (24.3 | ) | |||||||||||||
| Credit cards | 20,524 | 19,013 | 18,218 | 1,511 | 7.9 | |||||||||||||||
| Payroll loans(2) | 18,918 | 14,836 | 11,178 | 4,082 | 27.5 | |||||||||||||||
| Mortgages | 27,313 | 26,134 | 21,581 | 1,179 | 4.5 | |||||||||||||||
| Agricultural Loans | 3,416 | 3,438 | 3,371 | (22 | ) | (0.6 | ) | |||||||||||||
| Personal loans/Other | 19,155 | 18,687 | 20,242 | 468 | 2.5 | |||||||||||||||
| Total | 91,195 | 84,578 | 77,809 | 6,617 | 7.8 | |||||||||||||||
| (1) | Including the loans to individuals in the consumer finance segment, the auto loan portfolio totaled R$26.7 billion as of December 31, 2016, R$26.1 billion as of December 31, 2015 and R$29.0 billion as of December 31, 2014. |
| (2) | Includes Banca Olé Bonsucesso Consignado´s Portfolio payroll loans from the agreement between Santander Brasil and Banco Bonsucesso. |
Payroll Loans
A payroll loan is a typical retail product with a differentiated method of payment. Monthly installments are deducted directly from customers’ payroll by their employer and then credited to Santander Brasil, significantly reducing our credit risk. Our customers are typically employees from the public sector, private sector and retirees benefitting from a state pension. We had a 6.5% market share in payroll loans with a loan portfolio of R$18.9 billion in this category as of December 31, 2016, compared to a market share of 5.4% and a loan portfolio of R$14.8 billion as of December 31, 2015, according to the Brazilian Central Bank (including payroll loans from the agreement between Santander Brasil and Banco Bonsucesso).
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Credit Cards
We operate in the credit card market issuing Visa and MasterCard cards to our customers (including both account and non-account holders). Our revenues from credit cards include administration fees, interest on unpaid balances, annuity fees and withdrawal fees.
The total credit card portfolio grew 8.7% in 2016 compared to 2015, reaching R$21.1 billion. In 2016, our average base of active credit card customers increased 4.7% compared to 2015, reaching 6.4 million of active credit cards. Our credit card revenues increased by 9.4% in 2016 and as of December 31, 2016 our market share was 11.1%.
Holders of credit cards issued by Santander Brasil have access to the Esfera rewards program, which offers exclusive deals and discounts, as well as to Bonus Esfera, which enables customers to exchange their Esfera reward points for certain products, services and travel benefits.
In 2016, we were among the first banks to launch digital platforms such as the Samsung Pay online payment platform and our own Santander Way mobile application, which is an online credit card tool allowing customers, among other things, to track their credit card use online.
We have also launched two new innovative credit cards in the market:
| · | “Play,” which is aimed at college students and has a dynamic credit limit that increases according to customers’ usage and payment history. |
| · | “1|2|3,” which is aimed at customers with higher incomes and Santander Van Gogh customers. “1|2|3” allows users to earn points from our Esfera rewards program (each U.S. dollar spent equals one point in domestic transactions, two points in online transactions and three points in international transactions). |
In 2016, we entered into an agreement with American Airlines for exclusive co-branded cards issuance in Brazil. In addition, we also have partnerships for co-branded credit cards with Vivo, Shell, Dufry and Ferrari, which enable us to offer exclusive benefits to our customers.
In January 2017, the CMN enacted a new resolution establishing that credit card bills and the debt balance of other forward paying products may be used as revolving credit only until the following bill. Thereafter, financial institutions must offer customers another type of financing on more favorable conditions than those typically found in the credit card market. See “Item 4. Information on the Company—B. Business Overview—Regulation and Supervision—Other Applicable Laws and Regulations—Credit Cards.”
Super
Super is a financial technology company which was acquired by Santander Brasil in March 2016 with the aim of enabling Santander Brasil to offer a convenient payment platform for managing the financial affairs of customers across all income segments and occupations.
As a result of an integrated action, a commercial effort between Super and Santander Brasil’s segments such as SMEs and branches’ network, we increased the number of active users of this digital payment platform from approximately 76,000 active users in December 2015 to approximately 223,000 in December 2016, which led to an increase in fees collected by Super of approximately 350% from 2015 to 2016.
We took important steps towards further integrating Super within our business during the course of 2016. Such steps included integration with Santander Brasil’s existing digital channel and introducing our ContaSuper product to high-income customers as a useful tool to manage domestic and travel expenses.
Mortgages
We offer long-term loans to our customers for the purchase of real estate, secured by deeds of trust, which we consider a strategic product due to its lower risk and ability to increase customer loyalty. Mortgages accounted for an important share of our credit portfolio in 2016. In addition to financing for individuals, we also offer credit lines
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to corporate customers in the real estate construction industry, as a rule, for the financing of up to 80% of the project cost.
As of December 2016, we had a 6.03% market share in Brazil in terms of amounts outstanding under mortgage products, according to the Brazilian Central Bank. As of December 2016, our individual sector mortgage loans portfolio was R$27.3 billion, a 4.5% increase compared to December 2015, and our total mortgage loans portfolio reached R$36.6 billion.
On average, the loan-to-value ratio of our housing loans is 59.8%. We do not offer mortgage loans that do not meet prime lending regulatory standards, which means that (i) we do not make any loans for more than 80% of the value of the property to be purchased, (ii) borrowers must meet certain minimum monthly income levels evidenced by recent payroll information and tax returns to confirm their employment or other types of revenue, which allows us to evaluate their credit risk profile and (iii) monthly payments may not exceed 35% of borrowers’ monthly gross income.
Insurance Brokerage Services
In 2011, Santander Spain entered into a long-term alliance with Zurich Financial Services Group (“Zurich”) in relation to Latin America. Pursuant to the terms of this alliance, Zurich, through certain of its subsidiaries, acquired a majority interest in the insurance operations of the Santander Group in Argentina, Brazil, Chile, Mexico and Uruguay. Furthermore, as part of the alliance, it was agreed that Santander Brasil would exclusively distribute these insurance products over the following 25 years through its branch network. As a result of these arrangements, we receive payments from Zurich equivalent to those received before the transaction for the distribution of insurance products.
This transaction enabled us to combine Zurich’s insurance know-how with our distribution capacity in Brazil, allowing us to offer a broad variety of insurances, which aims to meet the particular needs of our different retail segments.
In 2015, we launched Santander AutoCompara (www.autocompara.com.br), a tool which allows customers to compare car insurances prices for insurance coverage across several insurance companies.
Capitalization Products
Targeted toward medium and large customers, as well as SMEs, capitalization products are savings account products that generally require customers to deposit a fixed amount with us to be returned at the end of an agreed upon term, with accrued interest. In addition, the customer is automatically entered into periodic drawings for the opportunity to win significant cash prizes. Thus, capitalization products are similar to certificates of deposits, except that, along with purchasing a product that receives a return on principal, the customer has a chance of receiving cash prizes during the term of the product based on random drawings.
Our capitalization products transactions are carried out through our subsidiary Santander Capitalização S.A. and are focused on bank assurance products.
Small and Medium Enterprises (SMEs)
Our current SMEs classification model is as follows:
Business 3: companies with annual revenue over R$20 million and up to R$200 million. Our focus is to strengthen relationships with our customers in this segment by offering a complete and sophisticated range of products and services, with dedicated and qualified managers, customer service centers, a dedicated and exclusive call center unit, and the support of product experts and local risk analysts;
| · | Business 2: companies with annual revenue over R$2 million and up to R$20 million. Our focus is to increase customer loyalty in this segment through products and services tailored to the needs of each client, with emphasis on cash flow management solutions and adequate credit offering; and |
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| · | Business 1: companies with annual revenue up to R$2 million. Our focus is providing a differentiated service, integrating financial solutions, both for the business as for their partners, bringing simplicity and economy to their day-to-day operations, mainly through our acquiring services. |
In 2016, we undertook initiatives aimed at improving our offering to each class of SME, namely:
| · | for Business 3 SMEs, we created a team focused on multinational firms, established in Sao Paulo; |
| · | for Business 2 SMEs, we created focus branches which consolidate clients with an annual revenue between R$3 million and R$20 million, which branches are staffed by relationship managers specifically trained to attend to the needs of these types of SMEs; and |
| · | for Business 1 SMEs, we launched the Digital Companies Service focused on companies with an annual revenue of up to R$300 thousand, for which we provide simplified offers and exclusive relationship managers. |
In addition, we have also repositioned the “Santander Negócios & Empresas” customer segment, improving our financial offer and launching a non-financial offer, called “Programa Avançar.” The program provides companies with concrete deliverables, such as videos, events and workshops in order to develop partner and employee skills, build teams to support talent hiring, and helps connect our customers to international trade through the Santander Trade portal.
The table below sets forth our SME loan portfolio at the dates indicated, as per our management records:
| For the year ended December 31, | Change,
December 31, 2016 vs. December 31, 2015 | |||||||||||||||||||
| 2016 | 2015 | 2014 | R$ million | % | ||||||||||||||||
| (in millions of R$) | ||||||||||||||||||||
| Agricultural lending | 322 | 243 | 283 | 79 | 32.5 | |||||||||||||||
| Working capital loans | 12,695 | 14,736 | 16,966 | (2,041 | ) | (13.9 | ) | |||||||||||||
| Buyer financing | 21 | 27 | 27 | (6 | ) | (22.2 | ) | |||||||||||||
| Vendor financing | 10 | 9 | 8 | 1 | 11.1 | |||||||||||||||
| Discounted receivables | 1,491 | 1,228 | 1,037 | 263 | 21.4 | |||||||||||||||
| Comex | 1,259 | 1,954 | 1,658 | (695 | ) | (35.6 | ) | |||||||||||||
| Overdraft facility | 2,837 | 3,072 | 3,113 | (235 | ) | (7.6 | ) | |||||||||||||
| Refinancing | 4,365 | 3,691 | 3,393 | 674 | 18.3 | |||||||||||||||
| Resolution 2,770 | 35 | 78 | 109 | (43 | ) | (55.1 | ) | |||||||||||||
| Account overdraft loans | 1,734 | 1,983 | 2,042 | (249 | ) | (12.6 | ) | |||||||||||||
| CDC/leasing(1) | 1,506 | 1,521 | 1,733 | (15 | ) | (1.0 | ) | |||||||||||||
| Other(2) | 16,165 | 14,982 | 11,822 | 1,183 | 8 | |||||||||||||||
| Total(3) | 42,440 | 43,524 | 42,191 | (1,084 | ) | (2.5 | ) | |||||||||||||
| (1) | Does not include consumer finance products. |
| (2) | Includes credit cards, mortgage finance products and other products. |
| (3) | Includes SMEs with annual gross revenues up to R$200 million. |
Agribusiness
In 2015, we undertook a review of our activities in the agribusiness sector, both at the retail and wholesale markets. During 2016, we worked to improve our value proposition for the sector offering new client interface and speeding up credit approvals and back office. This work enabled us to identify synergies and generate opportunities in the agribusiness sector, launch product offerings, enlarge our specialized commercial team, create a new client segmentation, and use new risk management tools. These developments have led to improved results for Santander Brasil in the agribusiness sector, with our market share in the sector increasing by 2.6 p.p.
In early 2017, we created a new agribusiness customer unit, which includes the opening of specialized branches, the creation of a team with expertise in that sector and the offering of certain segment-specific products.
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Merchant Acquiring Market
The acquisition of GetNet, which was completed in 2014, has given us more flexibility to invest in, and influence the, business strategy within the Brazilian electronic payments sector, creating opportunities for us to gain scale in this segment and to make use of the product portfolio and services of GetNet.
In particular, GetNet enables us to provide a fully integrated offering to SME customers, including card payment solutions. One of them is “Conta Integrada,” a bundle combining a current account with an integrated card payment solution. As a result of Conta Integrada and other measures, GetNet’s transactional volume has increased 30% during 2016.
In 2016 we also integrated additional payment methods into our card payment solutions offering (including American Express, Elo, Hiper, Hipercard, Alelo and Ticket), launched “Santander Mais Gestão,” an offer that merges card payment solutions with a financial conciliator focused on medium and large companies, and launched “Vermelhinha,” a solution that targets self-employed professionals and small companies.
Corporate
Our corporate customer segment is comprised of large companies that have annual gross revenues greater than R$200 million (other than global corporate clients). We focus on fostering a close relationship with our corporate customers by providing them with customer-tailored services. To that end, we offer a wide range of specialized products and services that are compatible with the products and services we offer to our GCB customers. In 2016, our team comprised approximately 115 bankers and more than 96 product specialists across Brazil and dedicated exclusively to our corporate sector.
Consumer Finance
Aymoré CFI is our main channel for consumer finance, with expertise in providing consumer credit directly to borrowers or through intermediate agencies. We have a total portfolio of R$26.6 billion, in an operation based on four pillars: (i) vehicle financing, where we are the market leader with 20.8% market share (including our joint ventures with RCI Banque S.A., or “RCI,” and with PSA); (ii) captive banks, through joint ventures with RCI (Renault and Nissan) and PSA (Peugeot and Citroën), white label partnerships with Hyundai, Subaru Volvo and Chery; (iii) Webmotors S.A. (“Webmotors”) (an online car trading portal active in the Brazilian market); and (iv) consumer credit through intermediate customers (i.e., stores), or industrial or partner brands, including businesses in the furniture, tourism, nautical, health, technology, accessibility equipment, renewable energy and cleaner processes sectors, among others.
In July 2016 we also introduced “+negócios.” +negócios is an innovative digital commercial platform designed to be simple and intuitive and which allows for faster loans simulations, credit approval and proposal formalization in addition to providing portfolio management reports.
In December 2016, the portfolio of Aymoré CFI consisted of over 12,700 business partners and a sales team composed of approximately 1,270 employees (operators and businesses managers).
Asset Management
Santander Asset Management, a holding company jointly owned by the Santander Group (with a 50% interest) and Warburg Pincus and General Atlantic (with a combined 50% interest), currently owns the Santander Group’s former asset management business. Santander Asset Management is present in Brazil, Germany, Argentina, Chile, Mexico, Puerto Rico, Portugal, the United Kingdom, Poland, USA and Spain) with U.S.$194.1 billion in assets under management as of December 31, 2016.
Following the partial divestiture of our asset management business and the creation of Santander Asset Management, we continue to act as administrator, meaning we continue to represent Santander Asset Management in certain respects, carry out certain client-facing activities on behalf of Santander Asset Management, and engage in sales and distribution activities in relation to Santander Asset Management products. We do not, however, manage the funds invested by clients with Santander Asset Management or make investment decisions with respect to such funds. Such fund management activities are carried out independently by Santander Asset Management. See “Item 5. Operating and Financial Review and Prospects—A. Operating Results—Factors Affecting the
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Comparability of Our Results of Operations—Sale of the Investment Fund Management and Managed Portfolio Operations.”
As of December 31, 2016, Santander Asset Management’s Brazil division had R$222.3 billion of assets under management, according to ANBIMA. During the course of 2016, Santander Asset Management’s Brazil division remained the fifth largest Brazilian asset management firm with a 25.8% increase in assets under management and an increase in market share of 0.59p.p. to 6.30%, according to ANBIMA. In 2016, Santander Asset Management’s Brazil division has reinforced its product offering with the launch of a new family of multimarket funds aimed at customers in our Private Banking and Santander Select segments.
During the course of 2016, Santander Asset Management’s Brazil division was also recognized in the main local rankings, receiving “Top Asset Manager – Fixed Income” ranking from ValorInvest/S&P in July 2016 as well as being elected as Best Asset Manager – Money Market funds by Guia Exame in December 2016. More recently, we have been recognized for the third consecutive year as the Best Bank to Invest, an award that takes into account the performance of the funds managed by Santander Asset Management’s Brazil division (GVcef and Fractal Consult – January, 2017).
In 2016, the Santander Group reached an agreement with Warburg Pincus and General Atlantic pursuant to which the Santander Group will acquire their 50% share in Santander Asset Management. This transaction on completion will bring Santander Asset Management back to the 100% ownership of Santander Group.
Global Wholesale Banking
GCB
GCB is the global business unit that covers those clients that, due to their size and complexity, require tailored services or high value added wholesale products. In this segment, we provide a wide range of domestic and international financial services to large Brazilian and multinational companies. Our customers in the GCB segment benefit from the global structure of services provided by the Santander Group with its worldwide integrated wholesale banking network and global services solutions, combined with its local market expertise and provision of integrated services.
In 2016, GCB focused on its customer relationship model and on building partnerships with other sectors of Santander Brasil. To do so, it sought to improve the sales of products in the GCB portfolio to other segments within Santander Brasil such as corporate, private banking, retail clients and SME customers. In addition, GCB maintained its sustainable growth objective, diversifying and distributing our results across Tier II and III clients, increasing active asset portfolio management, and increasing its operational capacity through investments in process redesigns and enhancements in technological platforms.
We offer a range of services from core products to highly complex customized solutions in the following key areas:
| · | Global Transaction Banking, Development and Management Products Area and Specialized Sales, which includes cash management, local loans and trade finance, correspondent banking, local and international guarantees (both trade and non-trade); |
| · | Financial Solutions and Advisory (FS&A), which is responsible for project financing and advising, debt capital markets, FI distribution, syndicated loans and acquisition finance, other structured financings, tax equities, subordinated debt and energy efficiency transactions. |
| · | Investment Banking, which includes advisory on mergers and acquisitions and equity capital markets operations; |
| · | Equities, which includes cash equities services for individuals, corporate and financial institutional investors, equity derivatives, futures and equity research; |
| · | Treasury Sales, which is responsible for offering treasury products such as foreign exchange transactions, over the counter derivatives, deposits and other financial and structured products; |
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| · | Market Making, which is responsible for the pricing of client deals originated by our sales force from corporate, institutional, private banking and retail segments. |
The GCB team is dedicated to client coverage comprising a range of industries, including telecommunications, retail, aviation, real estate and logistics, power, construction and infrastructure, natural resources, food, agribusiness and financial institutions.
We are one of the leading banks in capital markets and financial advisory services in the Brazilian and international markets, as evidenced by the league tables for the industry according to Bloomberg and Thomson Reuters.
Our mergers and acquisitions team ranked first in Bloomberg and Thomson Reuters league tables for Brazil in terms of volume of announced transactions in 2016, with a total of 16 transactions. In Latin America, under the same criteria, we also ranked first in 2016, compared to fifth in 2015.
Our Brazilian equity capital markets division participated as bookrunner in numerous offerings in recent years. In 2016, we ranked third in equity issuances according to Bloomberg, with a total of five executed transactions.
In 2016, we also played an important role in the international and domestic debt capital markets for Brazilian issuers. In the international debt capital markets, we acted as coordinator in 14 out of 16 transactions involving Brazilian corporate issuers, thereby achieving a leadership position in this market with U.S.$20.25 billion raised for clients during the year. In the domestic market, we participated in 28 transactions, which raised a total of R$10 billion in funding for companies. Among the long-term fixed income issues, we achieved a 9% market share in 2016 and ranked fourth in the relevant ANBIMA rankings.
Our project finance team has advised and structured the most important projects in recent years in several sectors of the economy. The Santander Group is one of the main players in project finance around the world. For the seventh time in the last eight years Santander Brasil is the leader in the Brazilian market, as evidenced by ANBIMA’s financial advisors ranking in 2015. In Latin America, we are the leading bank in project finance, according to Dealogic rankings for 2016.
In 2016, our Brazilian project finance team acted as financial advisor and/or lender in relation to 38 wind energy projects with a total output exceeding 1,000 megawatts. Our Brazilian project finance team also acted as advisor and lender of the second largest photovoltaic complex under construction in Brazil, which consists of seven projects with a total output of 210 megawatts and, finally, we advised on and financed four hydroelectric projects with a total output of approximately 794 megawatts.
We also acted as lead financial advisor to the principal winner of the largest auction held by the Brazilian National Electric Energy Agency (Agência Nacional de Energia Elétrica), or “ANEEL.” As part of this auction, ANEEL offered concessions regarding approximately 13,300 kilometers of transmission lines for an estimated capital expenditure of R$25 billion. In April 2016, our client won the bid for the largest offered lot, a transmission line with an extension of 1,100 km in Northern Brazil for a capital expenditure of R$1.9 billion. In October 2016, other important clients of GCB team won three offered lots, totaling R$2.4 billion in investments and 1,065 km of transmission lines, including the largest lot of the auction. These transactions demonstrate Santander Brasil’s outstanding position in project finance advisory services.
In 2016, we have also offered, through our structured lending division, and our asset and capital structuring division, several structured financing solutions, allowing our clients to execute their strategic investment plans.
In 2016, we performed strongly in transactions involving the BNDES, as demonstrated by the fact that BNDES disbursed R$3.86 billion to our wholesale clients (clients with revenues above R$90 million per year). Further, we achieved a 17.6% market share, compared to 14.2% in 2015. We also performed strongly in Multilateral and Export Credit Agencies transactions in Brazil, arranging transactions totaling R$5.03 billion for our clients in 2016. Further, we achieved a 25% market share in Latin America and first place in the Dealogic Global Trade Finance Review ranking for 2016. In addition, we retained our position as first bank in the IFC’s ranking for total committed portfolio volume in the B-Loan category in 2016.
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In 2016, our equities department integrated the equity, derivatives and futures’ teams of our brokerage house, and Research. The objective behind this integration was to offer the best advisory and expand the range of investment services for individual, corporate and institutional clients. With 19 analysts and a coverage universe of more than 155 companies in Latin America, 329 events and conferences were offered to clients.
In addition to order execution services, Santander Corretora has developed its own portfolio of products and services, increasing its number of proprietary Recommended Portfolios to a total of ten (each suited to different investment profiles). Improvements have also been made in user experience, such as the implementation of a system enabling us to investment suggestions directly to the customers’ mobiles.
We also offer, through our treasury sales team, foreign exchange products, OTC derivatives and investments to all of our clients, including institutional investors, corporate clients and individuals. We have an effective coverage, based on teams, which are specialized in each of these segments, as well as structuring and products teams that work to create and maintain a portfolio that allows us to offer our customers the most innovative solutions available in the market.
In 2016, our treasury sales team maintained its first-rank position in foreign exchange products according to the Brazilian Central Bank, with a 14.3% market share. In 2016, we also won the “Best Performance House, Brazil” category in the structured transactions certificates (Certificados de Operações Estruturadas), or “COE,” and guaranteed capital fund by Structured Retail Products) and we also maintained our third-rank position in COEs, according to CETIP.
Proprietary Trading
Our proprietary trading division is responsible for the management of our proprietary books and the establishment of a relevant presence as a leading liquidity provider across local and foreign markets.
Distribution Network
Our distribution network provides integrated financial services and products to our customers through a variety of channels, including branches and mini-branches (or PABs), ATMs, call centers, the internet and mobile banking. The following table presents our principal distribution network as of December 31, 2016:
| As of December 31, 2016 | ||||
| Branches | 2,254 | |||
| PABs | 1,167 | |||
| ATMs | 13,806 | |||
Branch Network
Our branch network offers all of our products and services to our customers. As of December 31 of 2016, we had a network of 2,254 full service branches throughout Brazil, 85.71% of which were concentrated in the Southeast and South regions.
The table below shows the geographic distribution of our network throughout Brazil, as of December 31, 2016:
| Branches | PABs | ATMs | ||||||||||
| Central West | 100 | 65 | 553 | |||||||||
| Northeast | 183 | 118 | 1,230 | |||||||||
| North | 39 | 40 | 290 | |||||||||
| Southeast | 1,627 | 815 | 10,124 | |||||||||
| South | 305 | 129 | 1,609 | |||||||||
| Total | 2,254 | 1,167 | 13,806 | |||||||||
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The following map shows the geographic distribution of our branch network, each region’s share of 2014 GDP and our market share as of December 31, 2016, according to the Brazilian Central Bank. Market share is calculated by dividing the number of our branches in the region by the number of branches for all principal banks in such region:
Source: GDP - IBGE 2014 / Market Share – Brazilian Central Bank December 2016
PABs
We offer daily banking services to our SME and corporate customers and their employees through our PABs - located on their sites, as well as in hospitals and universities. Our PABs are generally exclusive sale points at customers’ sites. We believe that the presence of PABs in our customers’ offices strengthens our relationship and builds loyalty with those customers, who benefit from the convenience of conducting their banking transactions at their workplace.
Client Service Channels
We also distribute our products and services through ATMs, the internet, mobile banking and call centers. This contributes significantly to our product sales revenue, strengthening the relationship with the customer and the customer’s satisfaction.
ATMs
We operate an extensive network of 13,806 ATMs, including those located in our branches and PABs. In addition, our customers have access to the “Banco24Horas” network, which operates 19,868 ATM units. Through this network, our customers are able to access their accounts and conduct banking transactions, as well as purchase most of the products and services available in our portfolio. In 2016, the implementation of digital biometrics technology in our ATMs was accelerated, achieving 100% coverage of our ATMs and 6.3 million clients registered their biometric information to allow account access and provision of services through biometric access procedures. This allows our customers to execute ATM transactions faster and safer, without the need for presenting cards or passwords.
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Call Centers
Our call centers provide our customers with the opportunity to make inquiries execute payment transactions and apply for products and services, such as personal loans. Our call centers are also an important distribution channel that offers our clients additional products and services. The following table presents summarized operating statistics of our call centers for the periods indicated.
| As of December 31, | Change,
December 31, 2016 vs. December 31, 2015 | |||||||||||||||||||
| 2016 | 2015 | 2014 | Change | % | ||||||||||||||||
| Number of individual customers (in thousands) | 1,733 | 2,076 | 2,155 | (343 | ) | (17.0 | )% | |||||||||||||
| PAS(1) | 3,472 | 3,428 | 3,278 | 44 | 1.3 | % | ||||||||||||||
| Headcount | 5,248 | 5,344 | 5,194 | (96 | ) | (1.8 | )% | |||||||||||||
| Percentage of using customers per month | 20.1 | % | 22.8 | % | 23.5 | % | (2.7) p.p. | — | ||||||||||||
| (1) | Work stations set up for call center activities. |
Internet Banking
Internet banking enables customers to conduct banking transactions at their convenience, such as obtaining account information, financial transfers, contracting products and making payments. The following table presents operating statistics for our internet banking segment for the periods indicated.
| As of December 31, | Change,
December 31, 2016 vs. December 31, 2015 | |||||||||||||||||||
| 2016 | 2015 | 2014 | Change | % | ||||||||||||||||
| Number of individual customers (in thousands) | 3,229 | 3,444 | 3,098 | (215 | ) | (6.2 | )% | |||||||||||||
| Percentage of using customers | 37.5 | % | 37.9 | % | 36.8 | % | (0.4) p.p. | — | ||||||||||||
Mobile Banking
In 2014, we launched a new application for individual customers, which gives clients access to consolidated information relating to all of their accounts, products and services via a single access platform. The application is a significant improvement in the user experience as it offers a simplified and intuitive function with mobile devices. In 2015, we made further improvements to the user experience by further simplifying intuitive functionality and making available to our customers fingerprint access to their consolidated information through certain smartphones.
We continued to improve the application in 2016 by updating it with the inclusion of new services and products. We have also integrated the application with our customer relationship management system, enabling us to offer targeted products to customers and to undertake customized advertising campaigns.
The following table presents operating statistics for our mobile banking segment for the periods indicated.
| As of December 31, | Change,
December 31, 2016 vs. December 31, 2015 | |||||||||||||||||||
| 2016 | 2015 | 2014 | Change | % | ||||||||||||||||
| Number of individual customers (in thousands) | 3,618 | 2,027 | 1,166 | 1,591 | 78.0 | % | ||||||||||||||
| Percentage of using customers | 42.0 | % | 34.4 | % | 14.0 | % | 7.6 p.p. | — | ||||||||||||
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Customer Funding
Since we are primarily a commercial bank, customer deposits are our main source of funding. These deposits, combined with capital and other instruments, enable us to cover our liquidity needs and legal reserve requirements. As of December 31, 2016, customer deposits amounted to R$247.4 billion, representing 56.9% of total funding, which amounted to R$434.7 billion.
For further discussion of our funding, see “Item 5. Operating and Financial Review and Prospects—B. Liquidity and Capital Resources—Liquidity and Funding.”
Technology and Infrastructure
One of our key goals is to become a true digital bank, capable of providing customers and employees with products and services via internet and mobile banking in a manner which is easy to handle. To achieve this goal, we have released a new application called “Santander Way” developed for the credit card and payments market which, among other functionalities, is aimed at improving our customer interface and allows our customers to manage their expenditure, limits, and unlock their credit cards to be able to use them abroad.
In order to serve our customers effectively, to improve our profitability and grow our business, we continuously invest in new technology and renewal of equipment and infrastructure. We believe that proper management of technology is key to the efficient management of our business. Our technology platform focuses on our customers and supports our business model. We operate a modern global technology platform that is interconnected with the platform of the Santander Group, which allows us to serve our customers on a global scale, under a platform that is uniquely customer-centered. See “Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions—Information Technology Platform.”
We have put in place extensive security measures to mitigate the risk of cyber-security threats affecting our technology platforms and our business. We have taken into consideration the best practices set forth in the ISO-27002 security standard to assist us in formulating such security measures. The security measures, which we currently have in place include, but are not limited to access and privilege management, separation of test and production environments, network security analysis, incident management, baseline configuration of hardware and software, activity log correlation, malware prevention and remediation, and security analysis of third-party operations. We employ a range of security processes and solutions to enact such security measures, including regular compliance checks and maintaining continuous monitoring of network activity by our Security Operations Center. We also perform periodic reviews of cyber-security threats and related controls, including periodic penetration tests performed by independent third parties. In addition, we are constantly investing in technology and security solutions, as well as conducting user training and awareness efforts. Furthermore, we cooperate and exchange information and experience relating to cyber-security with local and international security communities, such as local telecommunications companies and other financial institutions, and in our capacity as a member of the Financial Services – Information Sharing and Analysis Center community.
In 2014, we opened and concluded the migration of our operation to the new data center located in Campinas. During the course of 2015, we began the first cycle of disaster recovery plan, or “DRP,” tests of the data center. These tests consist of activating the alternative infrastructure, simulating a real disaster situation in the main Data Center, and evaluating the system’s availability to support critical business functions. In 2016, the fourth DRP test was successfully carried out.
In 2016, we introduced our new human resources interactive portal which includes new tools such as working hours management, team information and personalized alerts. In addition, we have introduced “Santander Pessoas,” an application which enables employees to clock in and out by geolocation, and review their pay slips and working hours. We also launched Academia Santander which is both a physical space and an online platform intended to spread knowledge among our employees regarding strategic subjects such as innovation, digital culture and business unit management, among others.
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Communications and Marketing
Santander Brasil’s strategy is focused on close and transparent customer relations, which requires that communication and marketing play a vital role in our business. Tools such as advertising, social networks, sponsorships, events and institutional publications represent our activities, products and services, and our strategy for the promotion of our way of doing business.
In 2016, we conducted a comprehensive review of our communications processes, standards and practices, both internal and external, as part of the “What can we do for you today?,” an initiative which is designed to help Santander Brasil to achieve the following goals: (i) show customers that we understand their needs and are always in search of the best solutions for them; (ii) promote an organizational culture focused on customer service; and (iii) reinforce our ongoing commitment and effort to stay contemporary.
Sponsorships and Culture
Our sponsorship initiatives are focused on two areas: (i) entrepreneurship, and (ii) democratization of the access to outdoor culture and physical activities.
In entrepreneurship, we sponsor “Endeavor,” a non-profit organization focused on the development of entrepreneurship. During 2016, we also sponsored “Taste of São Paulo,” the first edition of an international gastronomic festival in Brazil, with the aim of generating business for entrepreneurs in this segment.
Regarding access to culture, we sponsor the “Museu do Amanhã,” an interactive science museum in Rio de Janeiro with a focus on education. The museum has received over one million visitors during its first year of operation. It also accounts for the revitalization of an old neighborhood in the city. We have also sponsored the art gallery of Claudia Andaujar, at the Instituto Inhotim in the state of Minas Gerais, since 2015. In 2016 we also began sponsoring the largest greenhouse at the Jardim Botânico of Inhotim. We also inaugurated the Teatro Santander, a cultural space for musicals with large casts, concerts, shows, and plays in the first quarter of 2016. In its first nine months of operation, the theater received more than 150,000 viewers.
In terms of outdoor physical activities, we sponsor the “Academias ao Ar Livre,” or outdoor gyms in both São Paulo and Rio de Janeiro. These outdoor gyms feature bodybuilding equipment as well as physical education professors to direct activities. In addition, the “Estações de Ginástica” also make available gym equipment in urban areas, such as São Paulo, Rio de Janeiro, and Goiânia. Still in 2016 we sponsored the “Caminhada da Paz,” in São Paulo, with a route that includes installations promoting peace.
We also sponsor two sports initiatives that are connected with the Santander Group: a major South American soccer tournament (Copa Libertadores da América) for which we are the official bank, and Scuderia Ferrari Formula One team, which we have sponsored since 2010.
In 2016, our “Santander Cultural” initiative celebrated its 15th anniversary. Housed in a historical building in Porto Alegre, in the state of Rio Grande do Sul, it operates in visual arts, cinema, and music, in addition to initiatives in the areas of education and knowledge. Throughout this period, Santander Cultural promoted 70 art exhibitions, 700 music shows, 3,100 films, and art workshops, as well as supporting a library housing document archives that preserve 15 thousand banking items. The “Santander Cultural” initiative has already attracted over 5 million visitors. Lastly, the Santander Brasil collection acts to preserve, promote and disseminate both the visual arts and institutional heritage of Santander Brasil.
Communication and Events
We relate to all of our stakeholders via a number of platforms. For example, we utilize social networks to establish dialog on issues of common interest as a means of increasing the engagement and involvement of the followers of our brand. Using this model, Santander Brasil amassed around 2.7 million fans on Facebook, 173,000 followers on Twitter and 38,000 followers on Instagram in 2016. The Annual Report, drawn up in accordance with Global Reporting Initiative (GRI) standards, is another important communication tool for our different stakeholders. We also issue quarterly reports to the market, including releases to shareholders, while using communications channels and tools available to us – intranet, our institutional website, the shareholder portal, public relations experts and events – to interact with our audiences.
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Sustainability
Our sustainability strategy is based on three pillars, which are aligned with our business and Brazil’s development priorities: (i) social and financial inclusion; (ii) education; and (iii) social and environmental businesses and management.
Social and Financial Inclusion
| · | Our microcredit unit, which is the largest among privately-owned banks in Brazil based on market share and portfolio value, provided financing totaling approximately in 2016, R$602.4 million for more than 148,000 active customers / operations. |
| · | We have invested in programs to guarantee the rights of children, adolescents and the elderly in municipalities throughout Brazil. The Programa Amigo de Valor, for instance, allows Santander Brasil, as well as our employees and customers to transfer part of their owed income tax directly to the Child and Adolescent’s Rights Funds. In 2016, this program raised funds totaling R$10.5 million, which were directed to 36 projects throughout Brazil. |
| · | The Programa EscolaBrasil, a corporate volunteering program focusing on public schools, is present in 183 partner schools. In 2016, there were 438 voluntary actions, 56 of which focused on financial education. Over 9,000 employees, family members, friends and partners participated in the program. |
Education
| · | We support higher education. We are the most active private institution in Brazil in this segment, and we have partnerships with universities and their value chain (students, young professionals, teachers and administrative staff). In 2016, we maintained 389 partnerships with universities. In 2016, Santander Universidades Brasil, has granted more than 34 thousand scholarships and invested R$27 million in scholarships for higher education. |
| · | Universia is the largest university collaboration network in Latin America, which has been sponsored by Santander, comprising 1,407 higher education institutions in 23 countries. Its aim is to promote employability, training, entrepreneurship and innovation. The partner universities comprise a total of 19.9 million students and teachers from various countries of Latin America and the Iberian Peninsula. In Brazil, there are 404 participating institutions, comprising 5.8 million students and teachers, which account for 76% of the Brazilian higher education system. |
Social and Environmental Businesses
We offer products, services and programs which promote the development of our customers’ businesses in more sustainable ways, namely:
| · | In 2016, social and environmental funding, which includes Retail Banking, “Santander Financiamentos,” Corporate Banking and Agribusiness, has amounted to approximately R$1.2 billion, in 6,968 contracts. |
| · | For individuals, we offer products related to accessibility, renewable energies and cleaner processes. In 2016, 4,731 people benefited from these credit lines. |
| · | For SMEs, we finance projects to mitigate the social and environmental impacts of our customers’ businesses through (i) reduction of water and/or energy consumption, (ii) adoption of renewable energy sources, (iii) waste management efficiency and (iv) corporate governance. |
| · | We have signed an agreement with the European Investment Bank to make a credit line available to SMEs in certain conditions (i.e., the beneficiaries must be companies with up to 3,000 employees and revenues between R$30 million and R$200 million) pursuant to which we disbursed a total of R$454.8 million in 2016. Through “Santander Financiamentos,” we accredited partners who offer our lines of credit to their final customers that invest in projects related to renewable energies, energy efficiency/solutions and efficient water usage. These lines of credit are offered to both our account-holding and non-account holding customers, who can repay the line of credit in 60 monthly instalments. |
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| · | In 2012, we launched the “Santander Sustainable Agriculture Program” (“SSAP”) which aims to promote a low-carbon economy by seeking alternatives to traditional methods of agriculture and livestock rearing based on a balance between economic, social and environmental issues. The SSAP empowers farmers and other related professionals by assisting them in (i) addressing technical issues relating to soil, water, waste, energy and climate change, as well as financial and legal matters, (ii) creating awareness among customers about the Brazilian Forest Code and the Rural Environmental Registry, (iii) fostering innovation by offering lines of credit to finance equipment and services with a reduced environmental impact, (iv) disseminating and encouraging the production of knowledge and good business practices in relation to the aforementioned issues and (v) articulating partnerships with companies engaged in promoting progress towards sustainability in the sector. In 2016, more than R$367 million were awarded and more than 280 clients received awareness training regarding environmental issues and best practices in agribusiness. |
| · | In 2015, we launched the “Produzindo Certo” program. We, Bayer CropScience, Unilever and Yara Fertilizers entered into a partnership for the purpose of encouraging soybean producers to comply with high environmental and social sustainability standards. The program supports soybean producers in obtaining the “Round Table Responsible Soy” certification (“RTRS”). The RTRS is aligned with the Stockholm Convention, which regulates the use of agrochemicals in the world. Our role is to offer a differentiated service to these producers, offering and approving lines of credit to finance agricultural activities through our “Rural Credit,” “Certificate of Rural Product” or BNDES loan programs. In this first phase (2015 harvest period) of the program, 186,000 tons of soybeans were certified, over R$2 million were committed to assist producers in complying with high social and environmental standards, more than 2,000 hectares of native vegetation were regenerated and a total of 62 farm owners were engaged in the program and are currently implementing improvements in their practices. |
| · | We have worked on an issuance of green bonds for the Suzano Papel e Celulose, a major Brazilian pulp and paper producer, in an aggregate principal amount of €500 million with a 10 years maturity. The company will use part of the resources to finance projects involving forest management, water treatment, reduction of the consumption of water and chemicals and will involve mainly the factories in Imperatriz in the state of Maranhão and Mucuri in the state of Bahia. |
Commitment to Addressing Climate Change
Our commitment to climate change initiatives is based on three pillars:
| · | Responsibility for our impact on the environment: |
| · | In the period from 2011 to 2015, we reduced our total energy consumption by 11%. In 2016, our energy consumption decreased by 13%, compared to 2015 and our long-term goal is to continue to reduce it, by 9% based on 2015 levels by 2018. |
| · | We have developed contingency plans of business branch network for occurrences related to climate change, catastrophes and natural disasters. These plans are a result of a study which anticipates the vulnerabilities of our activities due to possible water shortages and price changes and availability of energy on account of climate change. |
| · | Low carbon business: structuring solutions for financing a low carbon economy, with focus on renewable energies and sustainable agriculture. |
| · | Engagement and Transparency: Santander Brasil’s commitment to fighting climate change was reaffirmed in Paris during the COP 21, a global meeting which brought together leaders from the government, business and not-for-profit sector. In addition we participate in business discussion forums with a view to the advancement of climate-friendly business practices and policies in Brazil, such as CT Climate organized by the Brazilian Business Council for Sustainable Development. Alongside eight other major Brazilian and international banks, we have joined a pilot program for the evaluation of the possible impact of droughts on credit portfolios, which is led by the German cooperation agency (Deutsche Gesellschaft für Internationale Zusammenarbeit) and the United Nations Environment Program Finance Initiative. Finally, we participate in a project led by FEBRABAN to quantify the volume of resources allocated by the |
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| Brazilian financial sector in the green economy, which includes the resources allocated to sectors essential to the transition to a low-carbon economy. |
Socio-Environmental Responsibility Policy
In December 2014, our executive committee and board of directors approved our Social and Environmental Responsibility Policy (“PRSA”). The PRSA follows the guidelines of Resolution No. 4.327/14 of the National Monetary Council and Normative Instruction SARB No. 14 of FEBRABAN. We implemented the PRSA in February 2015. The PRSA establishes principles and guidelines and consolidates specific policies and procedures for our social and environmental practices in business and in the relationship with stakeholders, including risk management, impacts and opportunities. In 2016, PRSA’s governance was consolidated through the implementation of a panel of indicators, which is monitored by a multi-departmental group within Santander Brasil.
Sustainability in the Management of Suppliers
Since 2007, our relationship with our suppliers has been supported by the guidelines of the Global Compact, an initiative of the United Nations to promote best practices in human rights, labor relations, environment and anti-corruption. We have incorporated these guidelines in our supplier contracting process.
During the approval process, potential suppliers are evaluated on technical, administrative, legal and social and environmental aspects. For all suppliers which are considered critical, we have an Index of Supplier Qualification (IQF). In the formalization of the supply of a service or purchase of goods, we use contracts that have clauses of social and environmental responsibility aligned with the Global Compact guidelines.
In 2016, we also implemented the Corporate Milestone of Agreements with Third Parties and Suppliers Control, which establishes guidelines governing our relationship with our suppliers with a view to mitigating the risks (in terms, for example, of compliance, sustainability and reputation, among others) involved in these relationships.
Recognitions
Our sustainability strategy and practices have been recognized by the inclusion of Santander Brasil, for the seventh consecutive year, in the portfolio of the Índice de Sustentabilidade Empresarial - “ISE” (Business Sustainability Index), of BM&FBOVESPA. The ISE highlights companies with recognized commitment to social responsibility and business sustainability, in addition to acting as a promoter of best practices in the business community.
Other recognition in 2016 included:
| · | Climate Disclosure Leadership Index (CDLI): we were recognized as one of the leading companies in the Carbon Disclosure Project; |
| · | EXAME Sustainability Guide, which included us as one of the companies featured in its April publication; and |
| · | Spanish Chamber of Commerce in Brazil Award of Sustainability: our activities in microcredit were recognized in the United Nations Sustainable Development Goals category. |
Insurance Coverage
We maintain insurance policies that we renew annually in order to protect our assets. All of our branches, affiliates and administrative buildings are insured against loss caused by fire, lightning, explosions and other all risks policy coverage. Such coverage establishes reimbursement for the asset replacement value.
We also maintain an insurance policy against third-party damage to our properties.
Additionally, we maintain a directors and officers, or “D&O” insurance policy for our management against third-party complaints regarding management acts. There are insurance policies against crimes, employee dishonesty and damages arising out of public offerings.
We also maintain an insurance policy against hacker attacks and cyber-crimes.
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Dependence on Patents, Licenses, Contracts and Processes
In Brazil, ownership of trademarks can be acquired only through a validly approved registration with the National Institute of Intellectual Property (Instituto Nacional de Propriedade Industrial, or “INPI”), the agency responsible for registering trademarks, patents and designs in Brazil. After registration, the owner has exclusive rights of use of the trademark throughout Brazil for a ten-year period that can be successively renewed for equal periods.
As of the date of this annual report, we own 632 trademarks in Brazil, 440 of which are owned by Santander Brasil, with the remaining 192 owned by other companies of the Group.
The major trademarks we use, including, among others, the “Santander” and “Banco Santander” brands, are owned by the Santander Group. One of the Santander Group’s affiliates granted us a license to use such brands. All material trademarks for our business are registered or have been submitted to INPI by us or by the Santander Group.
We also own the principal domain names used in our business, which include:
| (1) | www.santanderbrasil.com.br; |
| (2) | www.bancosantander.com.br; |
| (3) | www.bsantander.com.br; |
| (4) | www.corretorasantander.com.br; |
| (5) | www.gruposantander.com.br; |
| (6) | www.santander.b.br; |
| (7) | www.santander.net.br; and |
| (8) | www.santander.com.br. |
Our Intellectual Property department monitors social media pages for any unauthorized use of our trademarks. Also, our internet domain names are registered and monitored by the Santander Group in accordance with its policies, and the registration and creation by us of internet domain names are subject to the prior approval of our Intellectual Property department.
Competition
In the last few decades, the Brazilian financial system has experienced significant structural changes, following the evolution on the country’s economic environment and developing a solid framework, for both legal and financial supervision.
The consolidation of the Brazilian financial sector in the recent past, with the merger of large banks and the privatization of state-owned banks, led to increased competition in the Brazilian market for banking and financial services. According to the Brazilian Central Bank, in December 2015 there were 133 universal banks, 21 commercial banks and 13 investment banks, along with several brokers, leasing companies and other financial institutions operating in Brazil. Between 2011 and 2016, the Brazilian economy grew less than in prior years while delinquency rates, inflation and currency depreciation increased. Consequently, financial institutions operating in Brazil intensified their efforts to hedge their exposure to credit risk by increasing their provisions for credit losses, moving their credit portfolio from products with larger spreads (and therefore, increased credit risk) to products with lower risks (and therefore, lower spreads) and shifting to a more conservative product mix.
Currently, there are five commercial financial institutions at the forefront of the Brazilian financial industry in terms of assets: Santander Brasil, Bradesco, Itaú Unibanco, Banco do Brasil and Caixa Econômica Federal. Together, these financial institutions accounted for 76.6% of the credit and 70.4% of the deposits available in the country in September 2016, according to the Brazilian Central Bank and the financial statements of the aforementioned banks.
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Industry Transformation
Recently, the Brazilian banking industry has tried to adapt itself to the economic environment of the post-global crisis world, in a transformation process that has brought important changes to the country’s banking model.
One of these changes is the shift to a more conservative product mix. Due to the increase in default rates and the regulatory changes that increased banks’ capital requirements, the leading banks have started to move their credit portfolio from products with larger spreads (and therefore, increased credit risk) to products with lower risks (and therefore, lower spreads). The leading banks have also attempted to change the composition of their revenue, reducing revenue derived from financial margins (which are subject to default risks) and increasing revenue derived from fees (which are not subject to default risks).
As a result of the abovementioned changes, there was a significant increase of interest of the banks in efficiency improvement, aiming to offset, at least partially, losses resulting from the change in product mix and the decrease in credit spreads.
Public Sector
Despite the privatizations and consolidations in the banking industry, the Brazilian government still controls commercial banks at both the state and federal levels. In addition to their significant role as credit providers (with a 56.5% market share) and deposit takers (with a 53.2% market share), the state-owned banks also act as regional development agencies, with a strong position in markets such as housing and rural credit.
The three main financial institutions controlled by the federal government are:
| · | Banco do Brasil, a full service bank that offers a wide range of products to the public and private sectors, and runs public rural loans programs. It is the main financial agent of the Brazilian government; |
| · | Caixa Econômica Federal, a full service bank, mainly involved in deposit taking, housing credit and urban infrastructure development; and |
| · | BNDES, a development bank which offers credit lines of medium and long-term financing at competitive interest rates to the private sector, especially the industrial sector. It operates with direct or indirect financing, through the transfer of resources to other state or privately-owned financial institutions. |
Private Sector
We consider two privately-owned financial institutions to be our main competitors: Bradesco and Itaú Unibanco. Both have established brands and distribution capacity throughout the country, competing in every category of banking activity. Furthermore, we also face competition from local and regional banks that operate with commercial banking products in specific niches. In the GCB segment, our competitors are global financial institutions focused on investment bank services, which fill this role as a result of their experience in complex and structured operations, as well as their distribution network throughout Europe, North America and Asia.
Market Share
The following table shows the market share of the four leading financial institutions in Brazil at the dates indicated:
| Santander Brasil | Bradesco | Itaú Unibanco(*) | Banco
do Brasil | |||||||||||||
| (In percentage) | ||||||||||||||||
| Total Assets(1) | 8.1 | % | 15.6 | % | 17.2 | % | 17.8 | % | ||||||||
| Total Lending(2) | 8.3 | % | 12.6 | % | 11.7 | % | 21.0 | % | ||||||||
| Total Deposits(2) | 7.6 | % | 12.4 | % | 12.1 | % | 16.1 | % | ||||||||
| Demand Deposits(2) | 5.6 | % | 11.8 | % | 14.2 | % | 24.5 | % | ||||||||
| Savings Accounts(2) | 5.4 | % | 14.6 | % | 14.9 | % | 22.8 | % | ||||||||
| Time Deposits(2) | 9.7 | % | 11.0 | % | 9.5 | % | 8.8 | % | ||||||||
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| Santander Brasil | Bradesco | Itaú Unibanco(*) | Banco
do Brasil | |||||||||||||
| (In percentage) | ||||||||||||||||
| Mutual Funds(3) | 7.7 | % | 22.7 | % | 21.7 | % | 22.4 | % | ||||||||
| Retail(3) | 9.1 | % | 13.0 | % | 18.1 | % | 37.4 | % | ||||||||
| (*) | Itaú Unibanco Holding S.A. without Latin America (excluding Brazil) operations |
| (1) | According to the Brazilian Central Bank’s IF data as of September 2016. |
| (2) | According to the Brazilian Central Bank, reported and presented in accordance with Brazilian GAAP (December 2016). |
| (3) | According to ANBIMA (December 2016). |
Credit Market in Brazil
There has been a steady increase in credit penetration in Brazil since 2003, but it is still at a level below that of other developed and emerging markets. However, after a decade during which credit penetration more than doubled compared to GDP, the pace of growth slowed down between 2014 and 2016. The following charts show total credit as a percentage of GDP:
Total Credit as a percentage of GDP
Sources: The graph on left is based on data from the Brazilian Central Bank. The graph on the right is based on data from the Bank for International Settlements on “Credit to non-financial sector” and takes into account lending from all sectors to the private non-financial sector as of September 30, 2016.
The Brazilian credit market is based on two types of loans:
| · | mandatory or earmarked credit, which is subject to government-controlled interest rates and follows rules for funding and destination defined by law; and |
| · | market-based credit, which is not subject to any constraints regarding interest rates, funding or resource allocation. |
By the end of December 2016, 50.1% of the R$3,105 billion of total credit outstanding in Brazil was market-based credit, of which 50.1% was loans to individuals and 49.9% was corporate loans:
| 2016 | 2015 | 2014 | ||||||||||
| (in billions of reais) | ||||||||||||
| Total Credit Outstanding | 3,105 | 3,219 | 3,017 | |||||||||
| Earmarked Credit | 1,549 | 1,582 | 1,441 | |||||||||
| Market-Based Credit | 1,556 | 1,637 | 1,577 | |||||||||
| Corporate | 747 | 832 | 793 | |||||||||
| Individuals | 809 | 805 | 783 | |||||||||
Source: Brazilian Central Bank.
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Retail Credit
According to the Brazilian Central Bank, the total outstanding market-based credit for individuals increased at an average annual compounded rate (“CAGR”) of 5.3% between December 2011 and December 2016, reaching R$808.8 billion or 26.1% of all the loans in Brazil.
The following table shows the evolution of the main retail credit products offered to individuals:
| 2016 | 2015 | 2014 | Change between December 31, 2016 vs. December 31, 2015 | |||||||||||||
| (in billions of R$, except percentages) | ||||||||||||||||
| Overdraft Accounts | 23.3 | 24.6 | 24.5 | (5.5 | )% | |||||||||||
| Payroll Loans | 287.6 | 273.9 | 252.2 | 5.5 | % | |||||||||||
| Personal Credit | 101.7 | 105.6 | 101.0 | (5.4 | )% | |||||||||||
| Credit Card | 184.9 | 172.7 | 160.8 | 6.6 | % | |||||||||||
| Autos | 144.8 | 162.7 | 187.2 | (11.1 | )% | |||||||||||
| Mortgage Financing (only individuals) | 534.3 | 499.6 | 431.6 | 7.0 | % | |||||||||||
| Rural Credit (only individuals) | 162.5 | 153.7 | 145.6 | 5.7 | % | |||||||||||
| Others | 121.3 | 118.7 | 109.2 | 3.1 | % | |||||||||||
| Total | 1,560.5 | 1,512.3 | 1,412.1 | 3.2 | % | |||||||||||
Source: Brazilian Central Bank.
Even with the economic recession in the 2015-2016 biennium, the housing and real estate financing market continued to grow. According to the Brazilian Central Bank, the ratio of mortgage loans to GDP increased from 4.3% in December 2011 to 8.4% in December 2016. Housing and real estate financing represents approximately 34.2% of the retail credit market in Brazil according to the Brazilian Central Bank. As of December 31, 2016, our market share was 5.1%.
Historically, the costs of market-based loans in Brazil have always been high, due to the lack of competition and high default rates. A safer and more attractive market-based loan for individuals is the payroll loan. As its payments are deducted directly from the borrower’s paycheck, it is considerably less risky and, therefore, has lower interest rates than unsecured consumer credit, and presented a CAGR of 12.5% between December 2011 and December 2016. As of December 31, 2016, payroll loans represented approximately 18.4% of the retail credit market in Brazil. As of December 31, 2016, we had 6.5% of the market share in payroll loans, according to the Brazilian Central Bank.
The auto financing market has very competitive interest rates and the market’s ability to access a low-cost source of funding is an important advantage. Thus, this market has been dominated by the large retail banks, which gradually assumed the business from the automakers’ lending arms. As this product is secured by the asset being financed, it tends to have lower default rates than other market-based products. As a result of deteriorating economic conditions in Brazil, the auto financing portfolio decreased by 11.1% in 2016. As of December 31, 2016, we ranked first in the auto finance market, with a market share of 20.8%, according to the Brazilian Central Bank.
The credit card market has relatively high default rates and, as a result, higher interest rates than other market-based products. This market is dominated by the large retail banks, operating their own labels associated with international labels (such as Visa and MasterCard). In November 2013, the Brazilian Central Bank began to regulate electronic payment services. It is expected that this supervision will help decrease the risk of electronic transactions and reduce related costs. As of December 31, 2016, we had 11.2% of the market share in credit cards, according to the Brazilian Central Bank.
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Corporate Credit
According to the Brazilian Central Bank data, the amount of loans granted to companies has increased at a CAGR of 6.8% between December 2011 and December 2016, reaching R$1.5 trillion, or 49.7% of the country’s total lending. The main corporate products are the BNDES loans, which represent 17.8% of the country’s total lending, and working capital loans, that represent 10.4%.
Asset Management
According to ANBIMA, the asset management industry in Brazil increased at a CAGR of 11.2% between December 2011 and December 2016, reaching R$3.3 trillion of total assets. Retail funds represent 16.2% of this total, or R$530.0 billion. The largest players of the market are the large financial conglomerates and their main clients are institutional investors, including pension funds, insurance companies and private banking clients. As of December 31, 2016 we had a 7.7% market share with regard to assets under administration, according to ANBIMA.
REGULATION AND SUPERVISION
The basic institutional framework of the Brazilian financial system was established by Law 4,595, of December 31, 1964, as amended from time to time (the “Banking Reform Law”). The Banking Reform Law created the CMN, responsible for establishing the general guidelines of the monetary, foreign currency and credit policies, as well as regulating the institutions of the financial system.
Principal Regulatory Agencies
CMN
The CMN oversees the Brazilian monetary, credit, budgetary, fiscal and public debt policies. The CMN is formed by the president of the Brazilian Central Bank, the Minister of Planning and the Minister of Finance and is chaired by the Minister of Finance. Pursuant to the Banking Reform Law, the CMN is the highest regulatory entity within the Brazilian financial system, authorized to regulate the credit operations of Brazilian financial institutions, to regulate the Brazilian currency, to supervise Brazil’s reserves of gold and foreign exchange, to determine Brazilian savings and investment policies and to regulate the Brazilian capital markets with the purpose of promoting the economic and social development of Brazil. In this regard, the CMN also oversees the activities of the Brazilian Central Bank and the CVM.
Brazilian Central Bank
The Brazilian Central Bank is responsible for implementation of the CMN policies related to foreign currency and credit, regulation of Brazilian financial institutions, including as regards the minimum capital and compulsory deposit requirements, disclosure of the transactions carried out by financial institutions, as well as their financial information and monitoring and regulation of foreign investments in Brazil. The Brazilian Central Bank has committees to address specific issues, noteworthy among which is the Monetary Policy Committee (“Copom”), which has the purpose of adopting measures to fulfill the inflation targets defined by the CMN and establishing monetary policy guidelines. The activity of the Copom in the control of inflation targets includes the definition of the target for the SELIC Rate (the average rate for daily financing, backed by federal instruments, as assessed under the Special Settlement and Custody System) and publication of reports on the Brazilian economic and financial environment and projections for the inflation rate.
CVM
The CVM is responsible for implementation of the policies established by the CMN related to securities, with the purpose of regulating, developing, controlling and inspecting the securities market and its participants (companies with securities traded in the market, investment funds, investors, financial agents, such as custodians of instruments and securities, asset managers, independent auditors, consultants and instruments and securities analysts).
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Self-Regulating Entities
The Brazilian financial and capital markets are also subject to the regulation of self-regulating entities that are divided by field of activity. The self-regulating entities include, among others, the National Association of Investment Banks – ANBIMA, the Brazilian Association of Credit Card and Services Companies – ABECS, the Brazilian Banks Federation – FEBRABAN, the Brazilian Association of Publicly-Held Companies – ABRASCA and the BM&FBOVESPA.
Principal Limitations and Obligations of Financial Institutions
In line with leading international standards of regulation, Brazilian financial institutions are subject to a series of limitations and obligations. In general such limitations and obligations concern the offering of credit, the concentration of risk, investments, operating procedures, loans and other transactions in foreign currency, the administration of third-party funds and micro-credit. The restrictions and requirements for banking activities, established by applicable legislation and regulations, include the following:
| · | No financial institution may operate in Brazil without the prior approval of the Brazilian Central Bank. In addition, foreign banks must be expressly authorized by a presidential decree to operate in Brazil. |
| · | A Brazilian financial institution may not hold direct or indirect equity interests in any company located in Brazil or abroad without prior approval of the Brazilian Central Bank. In addition, the corporate purpose of the company in which the financial institution invests shall be complementary or subsidiary to the activities carried out by the financial institution. The following do not depend on such prior approval: (i) equity interests typically held in the investment portfolios of investment banks, development banks, development agencies (agências de fomento) and full-service banks with investment or development portfolios and (ii) temporary equity interests not registered as permanent assets of the financial institution. |
| · | Brazilian financial institutions must submit for prior approval by the Brazilian Central Bank the corporate documents that govern their organization and operation, including but not limited to those related to capital increases, transfer of headquarters, opening, transfer or closing of branches (whether in Brazil or abroad), election of the members of the statutory bodies and any corporate restructuring or alteration in the composition of their equity control. |
| · | Brazilian financial institutions must fulfill minimum capital and compulsory deposit requirements and must observe certain operational limits. |
| · | A Brazilian financial institution may not own real estate, except for properties it occupies and subject to certain limitations imposed by the CMN. If a financial institution receives real estate, for example, in satisfaction of a debt, such property must be sold within one year, unless otherwise authorized by the Brazilian Central Bank. |
| · | Brazilian financial institutions must comply with the principles of selectivity, guarantee, liquidity and risk diversification. |
| · | A Brazilian financial institution cannot lend more than 25% of its Regulatory Capital (Patrimônio de Referência) to a single person or group. |
| · | A Brazilian financial institution cannot grant loans or advances to companies in which it participates with more than 10% of the company’s capital, to companies that it controls directly or indirectly and that are subject to common control with the financial institution in question or to individuals or companies which participate with more than 10% of the financial institution’s capital, in this last case unless specifically authorized by the Brazilian Central Bank. Also, loans or advances may not be granted to the executive officers, members of the board of directors or the fiscal council, to certain members of the families of such individuals, or to companies in which said individuals hold an interest of more than 10%. |
| · | The management of third-party assets must be segregated from other activities and must follow the regulations issued by the CVM. |
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| · | The total amount of the funds applied in permanent assets of the financial institutions cannot exceed 50% of their adjusted stockholders’ equity. |
| · | Brazilian financial institutions must comply with anti-money laundering and anti-corruption regulations. |
| · | Brazilian financial institutions must implement policies and internal procedures to control their systems of financial, operating and management information, as well as their conformity to all applicable regulations. |
| · | Brazilian financial institutions must implement a policy for remuneration of board members and executive officers that is compatible with their risk management policies. At least 50% of the variable remuneration must be paid in stock or instruments based on stock and at least 40% of the variable remuneration must be deferred for payment at least three years in the future. |
| · | The Law of Banking Reform and specific regulations enacted by the CMN provide for the imposition of penalties on financial institutions in certain situations where applicable requirements, controls and requisites have not been observed. In addition, the Brazilian Central Bank may cancel the financial institution’s authorization to operate if the Brazilian Central Bank identifies at any time, in relation to a given financial institution: (i) habitual non-performance of the transactions considered to be essential for financial institutions, (ii) operational inactivity, (iii) non-establishment at the address provided to the Brazilian Central Bank, (iv) non-remittance to the Brazilian Central Bank for a period of more than four months, without acceptable justification, of the consolidated financial statements required by the applicable regulations, and (v) non-accomplishment of the business plan. The cancellation of an authorization for operation of a financial institution may only occur upon the establishment and processing of the appropriate administrative proceeding by the Brazilian Central Bank. |
Additionally, as part of Santander Group and due to the global nature of our organization we are subject to related international rules.
Capital Adequacy and Leverage – Basel
Current Requirements
The Brazilian Central Bank supervises the Brazilian banking system in accordance with the Basel Committee on Banking Supervision (“Basel Committee”) guidelines and other applicable regulations, including the Basel II Accord (“Basel II”), which was recently implemented in Brazil, and the Basel III Accord (“Basel III”), which supplements and amends Basel II and is in the process of being implemented. For this purpose, banks provide the Brazilian Central Bank with the information necessary for it to perform its supervisory functions, which include supervising the changes in the solvency and the capital adequacy of banks.
The main principle that guides the directives set forth in Basel II and Basel III is that a bank’s own resources must cover its principal risks, including credit risk, market risk and operational risk.
Brazilian financial institutions are subject to capital measurement and standards based on a weighted risk-asset ratio. The parameters of this methodology resemble the international framework for minimum capital measurements adopted by Basel II, except for certain differences (for instance, Basel II requires banks to have a capital to risk-weighted assets ratio of at least 8.0%, while current Brazilian rules require minimum capital of 11.0% of risk weighted assets). Brazilian financial institutions’ regulatory capital is composed of two tiers. Tier I capital is represented by stockholders’ equity plus certain reserves, earned income and hybrid debt and capital instruments authorized by the Brazilian Central Bank. Tier II capital is represented by revaluation reserves, contingency reserves, special profit reserves related to mandatory dividends not yet distributed, preferred cumulative stock, certain subordinated debt and hybrid instruments and non-realized earnings related to available-for-sale securities market value adjustments.
Basel III
On December 16, 2010, the Basel Committee issued the Basel III framework, which supplements and amends Basel II. Basel III includes higher minimum capital requirements and new conservation and counter cyclical buffers capital requirements, revised risk-based capital measures and the introduction of a new leverage ratio and two liquidity standards. As with other Basel directives, the Basel III framework will not be self-effectuating and will be
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implemented gradually by each country through legislation or regulation to be imposed upon that country’s home banks. Basel III is currently being implemented in Brazil and its implementation is expected to conclude on January 1, 2022, according to the agreed international timeframe.
Regulatory capital will continue to be composed of two tiers.
Tier I capital will have to reach a minimum index of 6.0% (according to the schedule established by the Brazilian Central Bank), divided into two portions: (i) Principal Capital consisting mainly of corporate capital and profit reserves (shares, units of ownership, reserves and earned income) of at least 4.5%, and (ii) Supplementary Capital consisting mainly of hybrid securities and capital instruments authorized by the Brazilian Central Bank (but excluding amounts relating to funding instruments issued by other local or foreign financial institutions) and any of our own shares purchased by us and the integration of which into the Supplementary Capital is permitted. To improve the quality of the capital of financial institutions, Basel III restricts the acceptance of financial instruments that fail to demonstrate effective capability of absorbing losses and requires the reduction of assets that in certain situations could jeopardize the financial institution’s capital value due to the instruments’ low liquidity, dependence on future profits for realization or difficulty of value measurement.
Current hybrid instruments and subordinated debt approved by the Brazilian Central Bank as additional capital requirements or Tier II are expected to be maintained if they also comply with requirements introduced by Basel III, including the mandatory conversion clauses into equity or write-off upon the occurrence of triggering events provided for in the regulations. The instruments that do not comply with Basel III rules have been gradually reduced since January 1, 2013 and shall continue to be so reduced until they do not consist of any portion of our regulatory capital as from January 1, 2022.
In accordance with the Basel III standards, the Brazilian Central Bank created the Premium Principal Capital (Adicional de Capital Principal), which corresponds to additional capitals (buffers) that create additional capital reserves to be used in periods of stress. In accordance with CMN regulation, the Brazilian Central Bank is entitled to establish the percentage of the Premium Principal Capital within certain minimum and maximum limits previously set forth by the CMN, the final minimum and maximum limits being 2.5% and 5%, respectively, of the weighted risk-asset ratio.
On December 29, 2014, the Brazilian Central Bank established that the amount of the Premium Principal Capital shall start at 0.625% of the weighted risk-asset ratio as of January 1, 2016, and shall increase to 1.25% on January 1, 2017, 1.875% on January 1, 2018 and 2.5% on January 1, 2019.
In 2015, the CMN and the Brazilian Central Bank enacted a set of rules which determine that the Premium Principal Capital will be equivalent to the sum of the Capital Conservation Buffer (Adicional de Conservação de Capital Principal), the Countercyclical Buffer (Adicional Contracíclico de Capital Principal), and the Systemic Relevance Premium Principal Capital (Adicional de Importância Sistêmica de Capital Principal). The regulation establishes the minimum requirements and methods to calculate each of them separately. The Conservation Buffer and the Countercyclical Buffer will compose the Premium Principal Capital of all financial institutions and institutions authorized to operate by the Brazilian Central Bank (except for those expressly waived from complying with regulatory capital requirements). The Systemic Relevance Premium Principal Capital will only apply to multiple banks, commercial banks, investment banks and saving banks (caixas econômicas).
The Basel III minimum capital index will increase from the current 11% to a maximum of 13%. The total index will be calculated as the sum of two parts: the Regulatory Capital and the Premium Principal Capital.
The Basel III rules also provide for the implementation of a leverage ratio calculated by the division of the Tier I capital by a bank’s total exposure. In early 2015, the Brazilian Central Bank issued a new regulation governing the calculation and reporting of the leverage ratio of Brazilian financial institutions in line with the Basel III rules which became effective in October 2015.
In 2015, the CMN and the Brazilian Central Bank also issued a set of rules for the implementation in Brazil of the liquidity coverage ratio or “LCR,” a short-term liquidity index. The purpose of the LCR is to demonstrate that financial institutions have sufficient liquid assets to make it through a stress scenario lasting one month. According to the recently enacted rules, the largest Brazilian banks have been required to maintain an LCR of at least 60% since October 2015. This ratio will increase 10% annually until it reaches 100% in 2019. The Brazilian Central Bank also released in 2015 the local methodology for calculating the LCR so as to align the existing rules with the
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guidelines of the document “Basel III: The Liquidity Coverage Ratio and liquidity risk monitoring tools” issued by the Bank for International Settlements on January 2013.
Further, in accordance with the international “phase-in” schedule for implementation of Basel III, the Brazilian Central Bank will also establish a long-term liquidity index to further control banks’ cash positions and its implementation is recommended as from 2018. In addition, in January 2017, the Brazilian Central Bank enacted a new rule amending the calculation method and procedures for disclosure of LCR information. The new regulation establishes a new possible stress scenario and for purposes of LCR retail includes spot and forward deposits.
LCR is a short-term liquidity ratio for a 30-day stress scenario. It represents the result of the division of the high quality liquidity assets by net outflows. High Quality Liquidity Assets are composed mainly by Brazilian federal government bonds and reserve requirements returns. Net Outflows are mainly composed by losses of deposits, offset in part by Inflows, which are mainly credits. In the months ending on October 31, November 30 and December 31, 2016, Santander Brasil had a surplus (difference between net assets and net cash outflows) of R$32.1 billion, which resulted in an LCR of 174%, above the regulatory requirement of 70%.
The following table presents an estimate of the implementation schedule of the main changes related to capital adequacy and leverage expected as a result of Basel III, as established by the Brazilian Central Bank:
| Parameters | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | As from 2019 | |||||||||||||||||||||
| Common equity | 4.5 | % | 4.5 | % | 4.5 | % | 4.5 | % | 4.5 | % | 4.5 | % | 4.5 | % | ||||||||||||||
| Tier I | 5.5 | % | 5.5 | % | 6.0 | % | 6.0 | % | 6.0 | % | 6.0 | % | 6.0 | % | ||||||||||||||
| Regulatory capital | 11.0 | % | 11.0 | % | 11.0 | % | 9.9 | % | 9.3 | % | 8.6 | % | 8.0 | % | ||||||||||||||
| Capital conservation buffer | — | — | — | 0.6 | % | 1.3 | % | 1.9 | % | 2.5 | % | |||||||||||||||||
| Countercyclical buffer | — | up to 0.6 | % | up to 1.3 | % | up to 1.9 | % | up to 2.5 | % | up to 2.5 | % | up to 2.5 | % | |||||||||||||||
In addition, in order to enable the implementation of the Basel III framework in Brazil, certain legislative changes were made. Among others, Law No 12,838 enacted on July 9, 2013, granted powers to the Brazilian Central Bank to limit the payment of dividends by financial institutions in case of non-compliance with the prudential capital requirements defined by the CMN.
Systemically Important Financial Institutions
The assessment of the global systemic importance of financial institutions (“IAISG”) comprises the index of systemic importance (“ISG”) and the aggregate of ancillary indexes established by regulations issued by the Brazilian Central Bank, which take into account, among other things, amounts relating to certain current and long-term liabilities, deposits, financial transactions and revenues. The Brazilian Central Bank adopted the same components set out by the Basel Committee to calculate the ISG, including (i) size; (ii) interconnectedness; (iii) lack of readily available substitute or financial institution infrastructure for the services provided; (iv) global or cross-jurisdictional activity; and (v) complexity, with each of these components receiving an equal weight in the assessment.
This assessment should be carried out by banks with total exposure in excess of R$500 billion, individually or at the consolidated enterprise level (conglomerado prudencial), as the case may be. Our controlling shareholder Santander Spain is considered a global systemically important financial institution in accordance with the Basel Committee rules. In Brazil, we are considered a systemically important financial institution pursuant to regulations issued by the Brazilian Central Bank.
Other Applicable Laws and Regulations
Consolidated Enterprise Level (conglomerado prudencial)
Since January 2014, financial institutions must submit to the Brazilian Central Bank, monthly and semi-annually, consolidated financial statements based on the “consolidated enterprise level” (conglomerado prudencial) of which the financial institution is a member, which serve as the basis for calculation of the required regulatory capital of the Brazilian institutions. The “consolidated enterprise level” (conglomerado prudencial) includes data relative to the financial institutions and other institutions authorized to operate by the Brazilian Central Bank, administrators of consortia, payment institutions and credit factoring companies, including real estate credit, or of
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credit rights, such as mercantile foment companies, securitization companies and specific purpose companies, located in Brazil or abroad, as well as other legal entities headquartered in Brazil that have equity participation in the mentioned entities as their exclusive business purpose.
Compulsory Reserve Requirements
Currently, the Brazilian Central Bank imposes a series of compulsory reserves requirements. Financial institutions must deposit these reserves with the Brazilian Central Bank. The Brazilian Central Bank uses these reserve requirements as a mechanism to control the liquidity of the Brazilian financial system for both monetary policy and risk mitigation purposes. Reserves imposed on time deposits, demand deposits and saving accounts represent almost the entirety of the amount that must be deposited at the Brazilian Central Bank.
Time Deposits (CDBs). The Brazilian Central Bank imposes a reserve requirement of 25.0% in relation to time deposits. Financial institutions must deposit an amount equivalent to the surplus of (i) R$3 billion for financial institutions with consolidated Tier 1 capital under R$2 billion; (ii) R$2 billion for financial institutions with consolidated Tier 1 capital between R$2 billion and R$5 billion; (iii) R$1 billion for financial institutions with consolidated Tier 1 capital between R$5 billion and R$15 billion; and (iv) zero for financial institutions with Regulatory Capital higher than R$15 billion. As from the end of April 2017, the reserve requirement on time deposits will be increased to 36.0% and the surplus will be calculated based on the following metrics: (i) R$3 billion for financial institutions with consolidated Tier 1 capital under R$3 billion; (ii) R$2 billion for financial institutions with consolidated Tier 1 capital between R$3 billion and R$10 billion; (iii) R$1 billion for financial institutions with consolidated Tier 1 capital between R$10 billion and R$15 billion; and (iv) zero for financial institutions with consolidated Tier 1 capital higher than R$15 billion.
Demand Deposits. As a general rule, the Brazilian Central Bank imposes a reserve requirement of 45% in relation to demand deposits.
Savings Deposits. The Brazilian Central Bank imposes a reserve requirement of 24.5% in relation to general savings deposits and 15.5% in relation to rural savings deposits. For financial institutions with consolidated Tier 1 capital under R$5 billion on December 31, 2014 such as us the result of the application of the reserve requirement rate must be discounted by R$100 million as from the calculation period of January 2 to January 6 of 2017 until the calculation period from January 2 to December 29 of 2017. In addition, a minimum of 65.0% of the total amount of deposits in savings accounts must be used to finance the housing sector.
Additional Deposit Requirements. The Brazilian Central Bank also stipulates an additional reserve requirement on deposits raised by full service banks, investment banks, commercial banks, development banks, finance, credit and investment companies, real estate credit companies and savings and loan associations, as amended in early January, 2017. These institutions are required to deposit on a weekly basis the sum of the following amounts: (i) 0% of the mathematical average of funds from time deposits and other specific amounts, subject to the reserve requirement; and (ii) 5.5% of the mathematical average of funds from savings accounts subject to the reserve requirement. These amounts must be discounted by: (i) R$3 billion for financial institutions with consolidated Tier 1 capital under R$3 billion; (ii) R$2 billion for financial institutions with consolidated Tier 1 capital between R$3 billion and R$10 billion; (iii) R$1 billion for financial institutions with consolidated Tier 1 capital between R$10 billion and R$15 billion; and (iv) zero for financial institutions with Regulatory Capital higher than R$15 billion. At the close of each day, the balance of such account should be equivalent to 100% of the additional reserve requirement.
Asset Composition Requirements
Permanent assets (defined as property and equipment other than commercial leasing operations, unconsolidated investments and deferred charges) of Brazilian financial institutions may not exceed 50% of their adjusted net equity, calculated in accordance with the criteria established by the Brazilian Central Bank.
Brazilian financial institutions may not have more than 25.0% of their Regulatory Capital allocated to credit and leasing transactions and guarantees extended to the same customer or group of customers acting jointly or representing the same economic interest. In addition, Brazilian financial institutions must comply with an exposure limit of 25.0% of their Regulatory Capital in connection with underwriting for or investments in securities of the same entity, its affiliates, or controlled or controlling companies. Repurchase transactions executed in Brazil are subject to operational capital limits based on the financial institution’s Regulatory Capital, as adjusted in accordance
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with Brazilian Central Bank regulations. A financial institution may carry out repurchase transactions in an amount of up to 30 times its Regulatory Capital. Within that limit, repurchase transactions involving private securities may not exceed five times the Regulatory Capital. Limits on repurchase transactions involving securities backed by Brazilian governmental authorities vary in accordance with the type of security involved in the transaction and the perceived risk of the issuer as determined by the Brazilian Central Bank.
The regulation issued by the Brazilian Central Bank with respect to the classification and valuation of securities and derivative financial instruments—including government securities—owned by financial institutions, based on the investment strategy of the financial institution, determined that securities and derivatives are to be classified into three categories: (i) trading; (ii) available for sale; and (iii) held to maturity.
In September 2016, the CMN enacted a new rule, which amends the regulation on repurchase transactions involving fixed-income securities. The recent changes to the regulation amend the list of the types of securities that may be subject to repurchase transactions by expressly including obligations issued by the International Finance Corporation and certain securities issued by leasing companies (Letras de Arrendamento Mercantil). It also removes the possibility of the Brazilian Central Bank adding to the list any securities not expressly listed in the regulation.
“Trading” and “available for sale” securities are to be marked-to-market with effects in income and stockholders’ equity, respectively. Securities classified as “held to maturity” are recorded at amortized cost. Derivatives are marked-to-market and recorded as assets and liabilities in the balance sheet. Changes in the market value of derivatives are generally recognized in income with certain modifications, if these are designated as hedges and qualify for hedge accounting under the regulations issued by the Brazilian Central Bank. Securities and derivatives in the “held to maturity” portfolio may be hedged for accounting purposes but their increase or decrease in value as derived from the marked-to-market accounting method should not be taken into account.
Brazilian Payment and Settlement System
The rules for the settlement of payments in Brazil are based on the guidelines adopted by the Bank of International Settlements, or “BIS,” and the current Brazilian Payment and Settlement System (Sistema Brasileiro de Pagamentos e Compensação or the “SPB”). The Brazilian Central Bank and CVM (in relation to transactions with securities) have the power to regulate and supervise this system. SPB is composed of systems for the clearing of checks, clearing and settlement of debit and credit electronic orders, transfer of funds and other financial assets, clearing and settlement of transactions involving securities, clearing and settlement of transactions carried out in commodities and futures, and others, collectively designated as Financial Market Infrastructures, as well as the payment arrangements and payment institutions.
Within the scope of SPB, the Brazilian Central Bank operates the Reserves Transfer System (“STR”) and the SELIC. STR is a system of transfer of funds with real-time gross settlement, which means that transfers are made at the processing time, one by one, and are subject to the existence of outstanding balance in the account. STR is composed of financial institutions, clearing and settlement houses and the National Treasury Office. SELIC is a system intended for custody of book-entry securities issued by the National Treasury Office and for the registration and settlement of transactions involving such securities.
The interbank transfers of funds are not only settled by STR but also by the Funds Transfer System (Sitraf), the Deferred Settlement System for Interbank Credit Orders (Siloc) and the Centralizer Clearance for Checks (Compe), which are also part of SPB.
Treatment of Overdue Debts
The Brazilian Central Bank requires financial institutions to classify credit transactions in accordance with their level of credit risk and to make provisions according to the level attributed to each transaction. Such credit classifications shall be determined in accordance with criteria set forth from time to time by the Brazilian Central Bank, relating to the conditions of the debtor and the guarantor and the transaction terms. Where there are several credit transactions involving the same customer, economic group or group of companies, the credit risk must be determined by analyzing the particular credit transaction of such customer or group that represents the greatest credit risk to the financial institution.
Credit transactions of up to R$50,000 may be classified either by the financial institution’s own evaluation method or according to the number of days such transaction is past due, whichever is the more stringent. Credit
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classifications are required to be reviewed (i) monthly, in the event of a delay in the payment of any installment of principal or interest, in accordance with the maximum risk classifications; (ii) every six months, in the case of transactions involving the same customer, economic group or group of companies, the amount of which exceeds 5% of the adjusted net worth of the financial institution in question; and (iii) once every 12 months, in all circumstances, except in the case of credit transactions with a customer whose total liability is lower than R$50,000, the classification of which may be reviewed as provided above. Such R$50,000 limit may be amended by the Brazilian Central Bank from time to time.
The provisions set forth above are not applicable to our IFRS consolidated financial statements, which are based on the criteria described under “Item 5. Operating and Financial Review and Prospects—A. Operating Results—Critical Accounting Policies—Impairment Losses on Financial Assets.”
Credit Performance Information – Positive Registration
Brazilian law regulates databases containing credit performance information of individuals and legal entities. Dissemination of information from these databases is subject to the express request or authorization of the institution’s corresponding clients.
In September 2016, the CMN enacted a new rule in order to include in the roll of databases allowed to receive credit performance information those managed by a group of entities that jointly have net equity equal or higher than R$70 million (excluding any amounts relating to the interest holding among such entities).
Collection of Bank Fees
The collection of bank fees and commissions is extensively regulated by the rules that seek standardization of the collection of bank fees and of the costs of credit transactions for individuals. According to these rules, bank services to individuals are divided into the following four groups: (i) essential services; (ii) priority services; (iii) special services; and (iv) specific or differentiated services. Banks are not able to collect fees in exchange for supplying essential services to individuals with regard to checking accounts, such as (i) supplying a debit card; (ii) supplying 10 checks per month to accountholders who meet the requirements to use checks, as per the applicable rules; (iii) supplying a second debit card (except in cases of loss, theft, damage and other reasons not caused by the bank); (iv) up to four withdrawals per month, which can be made at a branch of the bank, using checks or in ATM terminals; (v) supplying up to two statements describing the transactions during the month, to be obtained through ATM terminals; (vi) inquiries over the internet; (vii) up to two transfers of funds between accounts held by the same bank, per month, at a branch, through ATM terminals or over the internet; (viii) clearing checks; and (ix) supplying a consolidated statement describing, on a month-by-month basis, the fees charged over the preceding year with regard to checking accounts and savings accounts.
Certain services rendered to individuals with regard to savings accounts also fall under the category of essential services and therefore are exempt from the payment of fees. CMN prohibits banks from charging fees for supplying essential services in connection with deposit and savings accounts where clients agree to access and use their accounts by electronic means only. In the case of these exclusively electronic deposit and savings accounts, banks are authorized to charge fees for supplying essential services only when the client voluntarily elects to obtain personal service at the banks’ branches or client service locations.
Priority services are those rendered to individuals with regard to checking accounts, transfers of funds, credit transactions, leasing, standard credit cards, over-the-counter exchange transactions for the purchase or sale of foreign currency in respect of international travel, and records, and are subject to the collection of fees by the financial institutions only if the service and its nomenclature are listed in its regulations. Commercial banks must also offer to their individual clients a “standardized package” of priority services, whose content is defined, as well as the clients’ option to acquire individual services instead of adhering to the package.
The collection of fees in exchange for the supply of special services (including, among others, services relating to rural credit, currency exchange market and on-lending of funds from the real estate financial system) is governed by the specific provisions found in the laws and regulations relating to such services. The regulation authorizes financial institutions to charge fees for the performance of specific services, provided either that the account holder or user is informed of the conditions for use and payment or that the fee and charging method are defined in the contract. Some of the specific services, among others, are (i) approval of signatures; (ii) management of investment
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funds; (iii) rental of safe deposit boxes; (iv) courier services; (v) custody and brokerage services, (vi) endorsement of clients debts (aval, or guarantee); and (vii) foreign currency exchange.
It is worth pointing out: (i) the prohibition against charging fees in cases of adhesion contracts amendments, except in the cases of asset replacement in leasing transactions, early liquidation or amortization, cancelation or termination; (ii) the prohibition against including services related to credit cards and other services not subject to fees in service packages that include priority, special and/or differentiated services; (iii) the requirement that subscription to service packages must be through a separate contract; (iv) the requirement that information given to the customer with respect to a service package must include the value of each service included in the package, the number of times that each service may be utilized per month, and the total price of the package; (v) the requirement that a customer’s annual banking statement must separately identify default interest, penalties and other costs charged on loans and leasing transactions; (vi) the requirement that registration fees cannot be cumulatively charged; and (vii) the requirement that overdraft fees can be charged, at most, once over the course of 30 days.
In addition, CMN regulations establish that all debits related to the collection of fees must be charged to a bank account only if there are sufficient funds to cover such debits in such account and thus forbid overdrafts caused by the collection of banking fees. Furthermore, a minimum of 30 days’ notice must precede any increase or creation of fees (except if related to credit card services, when a minimum of 45 days’ notice is required), while fees related to priority services and the “standardized package” can be increased only after 180 days from the date of the last increase (except if related to credit card services, when a minimum of 365 days’ notice is required) whereas reductions can take place at any time.
Late Payment Fees
In 2017, the CMN enacted a new rule on default payment fees charged by financial institutions, consumer credit companies (financeiras), and leasing companies which expressly limits the late payment fees charged by such entities to compensatory interest per day on the amount that is overdue, interest on arrears and fines on arrears. The new regulation will become effective in September 2017, and will be applicable only to transactions taking place after it becomes effective.
Credit Cards
The banking regulations also have specific rules relative to the charging of credit card fees, the publication of information in the card invoices and the obligation to provide a package of basic services upon offering credit cards to clients. Credit card holders must pay monthly at least 15% of outstanding credit card balances. This minimum payment does not apply to credit cards with payment by means of direct payroll deductions.
In January 2017, the CMN issued a new rule on revolving credit for financing of credit card bills which determines certain conditions and limitations to this type of financing. The regulation determines that revolving credit for financings of credit card bills may only be extended to clients until the due date of the following credit card bill. After this term, financial institutions must offer customers another type of financing with conditions more favorable than the ones typically found in the credit card market. Furthermore, the new regulation prohibits banks from offering this type of credit to clients who have already contracted one revolving credit for financing of credit card bills which was not repaid in a timely manner. The new regulation will become effective in April 2017.
Payment Agents and Payment Arrangements
In 2013, a legal and regulatory framework for the payment industry was established in Brazil, pursuant to which the CMN and the Brazilian Central Bank now have powers to regulate payment mechanisms, players and transactions.
The regulation issued by the Brazilian Central Bank, which became effective in May 2014, determines, among other aspects: (i) consumer protection and anti-money laundering compliance and risk prevention systems that should be observed by payment agents and payment arrangers; (ii) the procedures for incorporation, organization, authorization and operation of payment agents, as well transfer of shareholding control, subject to the Brazilian Central Bank’s prior approval; (iii) capital requirements; (iv) definition of arrangements excluded from the SPB; and (v) rules related to payment accounts, which are divided into prepaid and post-paid accounts and require the allocation of the totality of their balance to a special account at the Brazilian Central Bank or investment in government bonds.
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Portability of Credit Transactions
In 2013, the Brazilian Central Bank regulated the possibility of financial institutions’ customers transferring their credit transactions from one institution to another. The regulation, which became effective in May 2014, established specific rules for such transfers, including, among others, the requirement that the amount and term of the transaction in the receiving financial institution must not be higher than the amount due and term of the original transaction.
Digitalization of Documents and Record Keeping
In March 2016, CMN enacted a new rule establishing a new regulation on digitalization of documents of operations and transactions carried out by financial institutions and other institutions authorized to operate by the Brazilian Central Bank. The new regulation authorizes those institutions to keep on their records digital documents instead of physical documents, provided that certain requirements to ensure the documents authenticity and validity are met such as recording if the physical document that originated the digital version was an original or a copy, the parameters to validate the document and select the technology used to ensure the security of the electronic documents, as well as the parameters to select the documents that will continue being kept as hard documents on the institution’s files.
Anti-Money Laundering Regulations
Under the Brazilian Anti-Money Laundering Law, it is a crime to conceal or dissimulate the nature, origin, location, availability, transaction or ownership of assets, rights or amounts resulting, directly or indirectly, from any criminal offense, as well as their use in economic or financial activity and the participation in a group, association or office while being aware that its principal or secondary activities are directed towards the practice of such acts.
The Brazilian Anti-Money Laundering Law also created the Conselho de Controle de Atividades Financeiras (the Council of Control of Financial Activities, or “COAF”), which operates under the jurisdiction of the Ministry of Finance. The purpose of the COAF is to investigate, examine, identify and impose administrative sanctions in respect of any suspicious occurrences of illicit activities related to money laundering in Brazil. The COAF is composed of individuals with recognized competence in this area, appointed by the Minister of Finance, all of whom are nominated by each of the following entities: (i) the Brazilian Central Bank; (ii) the CVM; (iii) the SUSEP; (iv) the National Treasury Attorney-General’s Office; (v) the Brazilian Federal Revenue; (vi) the Federal Intelligence Agency; (vii) Ministry of Foreign Affairs; (viii) the Ministry of Justice; (ix) the Federal Police Department; (x) the Ministry of Social Security; and (xi) the General Comptroller’s Office, one of whom will be the president, which shall be appointed by the President of Brazil on the basis of recommendations by the Minister of Finance.
Brazilian anti-money laundering legislation and applicable regulation issued by the CMN and the Brazilian Central Bank established that financial institutions must, among others:
| · | keep up-to-date records regarding their permanent customers (including registration data, statements of purpose and nature of transactions, their financial capacity, as well as the verification of characterization of customers as politically-exposed individuals); |
| · | adopt policies, procedures and internal controls; |
| · | record transactions involving Brazilian and foreign currency, securities, metals or any other asset which may be converted into money, including specific registries of issuances or recharging of prepaid cards; |
| · | keep records of transactions or groups of turnover of funds carried out by individuals or entities belonging to the same group or financial conglomerate, in a total amount that exceeds R$10,000 in a calendar month or which reveal a pattern of activity, amount or form that suggests a scheme to avoid identification, control and registration; |
| · | review transactions or proposals the features of which may indicate criminal intentions; and |
| · | keep records of every transfer of funds related to, among others (a) deposits, wire transfers and checks, and (b) the issuance of checks and payment orders, in amounts that exceed R$1,000. |
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Brazilian financial institutions must inform COAF in the manner established by the Brazilian Central Bank, by the day following the date on which any of the following transactions, proposed or carried out, were verified:
| · | transactions carried out or services provided, whose amount equals or is greater than R$10,000 and for which, considering the parties involved, the amounts, the forms of execution, the instrument used or the lack of economic or legal bases could characterize the existence of evidence of the crimes provided for in the Brazilian Anti-Money Laundering Law; |
| · | transactions carried out or services rendered that, based on their frequency, amount or form, could be aimed at deceiving the identification, control and record mechanisms; |
| · | transactions carried out by or services rendered to, regardless of their amount, the persons that recognizably have perpetrated or attempted to perpetrate terrorist acts or have participated in them or facilitated their practice, as well as the existence of funds that belong to or are directly or indirectly controlled by them or by entities that belong or are directly or indirectly controlled by such persons, as well as by persons and entities acting on their behalf or under their orders; and |
| · | any acts that are believed to be financing terrorism. |
These communications must be made without providing knowledge thereof to the parties involved.
The records referred to above must be kept for five to ten years, depending on the nature of the information, from the end of the relationship with the customer.
Failure to comply with any of the obligations indicated above can subject the financial institution and its officers and directors to penalties that range from fines (not above 200% of the transaction amount or the real profit obtained or that would be obtained by carrying out the transaction or the amount of R$20 million) to the declaration of its officers and directors as ineligible to exercise any position at a financial institution and/or the cancellation of the financial institution’s operating license.
Government officials and auditors from the Brazilian Federal Revenue Service may also inspect an institution’s documents, books and financial registry in certain circumstances.
Financial institutions must also maintain specific records of the transactions in cash (deposit, withdrawal, withdrawal by means of a prepaid card or request of provision for withdrawal) so as to enable the identification of a deposit in cash, withdrawal in cash, withdrawal in cash by means of a prepaid card, or request of provision for withdrawal, of an amount equal to or greater than R$100,000 or that presents evidence of concealment or dissimulation of the nature, of the origin, of the location, of the disposal, of the movement or of the ownership of assets, rights and valuables, as well as issuance of cashier’s checks, TED (Electronic Available Transfer) or of any other instrument of transfer of funds upon payment in cash, for an amount equal to or greater than R$100,000.
Brazilian Anti-Corruption Law
Law No. 12,846 of August 1, 2013, Brazil’s new anti-corruption law (“Brazilian Anti-Corruption Law”) entered into force on January 29, 2014. This law aims at fulfilling international commitments assumed by Brazil as a result of the ratification of various anti-corruption treaties, as well as meeting the population’s demands for the creation of more effective mechanisms to fight corruption at the public administration level. The Brazilian Anti-Corruption Law establishes that legal entities will have strict liability regardless of fault or willful misconduct for acts against the public administration carried out in their interest or for their benefit. Although known as the Anti-Corruption Law, this Law encompasses not only performance of acts of corruption but also performance of other injurious acts contrary to the Brazilian or foreign public administration.
Corporations that violate the Brazilian Anti-Corruption Law’s provisions will be subject to heavy penalties, some of which may be imposed through administrative proceedings and others solely through judicial channels. The Brazilian Anti-Corruption Law also creates a leniency program under which self-disclosure of violations and cooperation by corporations might result in the reduction of fines and other sanctions.
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Politically Exposed Individuals
Financial institutions and other institutions authorized by the Brazilian Central Bank to operate must take certain actions and have certain controls in order to establish business relationships with and to follow up financial transactions of customers who are deemed to be politically exposed individuals. The internal procedures developed and implemented for this purpose by financial institutions must be structured in such a way as to enable the identification of politically exposed individuals, as well as the origin of the funds involved in the transactions of such customers. One option is to verify the compatibility between the customer’s transactions and the net worth stated in such customer’s file.
Politically exposed individuals are public agents and their immediate family members, spouses, life partners and stepchildren who occupy or have occupied a relevant public office or position over the past five years in Brazil or other countries, territories and foreign jurisdictions.
Bank Secrecy
Brazilian financial and payment institutions shall also maintain the secrecy of their banking operations and services provided to their customers. The only circumstances in which information about customers, services or transactions of Brazilian financial and payment institutions may be disclosed to third parties are the following:
| · | the disclosure of information with the express consent of the interested parties; |
| · | the exchange of information between financial institutions for record purposes; |
| · | the supplying to credit reference agencies of information based on data from the records of issuers of bank checks drawn on accounts without sufficient funds and defaulting debtors; and |
| · | the occurrence or suspicion that criminal or administrative illegal acts have been performed, in which case the financial institutions and the credit card companies may provide the pertinent authorities with information relating to such criminal acts when necessary for the investigation of such acts. |
Complementary Law 105/01 also allows the Brazilian Central Bank or the CVM to exchange information with foreign governmental authorities, provided that a specific treaty has previously been executed.
The government of the Federal Republic of Brazil and the government of the United States of America executed an agreement on March 20, 2007, by means of which these governments established rules for the exchange of information relating to tax (“2007 Agreement”). Under the 2007 Agreement, the Brazilian tax authority would be able to send information it receives by virtue of Section 5 of the Bank Secrecy Law to the U.S. tax authority.
Auditing Requirements
The legislation and regulations issued by the CMN, CVM and BM&FBOVESPA determine that the periodic financial statements of financial institutions must be audited by independent auditors (individuals or legal entities) that are registered with CVM and who meet the minimum requirements set forth by the Brazilian Central Bank, and that the financial statements must be presented together with an independent auditor’s report. Our financial statements are audited in accordance with International Standards on Auditing with regard to Brazilian GAAP and also on the standards of the Public Company Accounting Oversight Board with regard to IFRS as issued by the IASB, as required by the SEC.
As result of the auditing work, the independent auditor must prepare the following reports: (i) audit report, issuing an opinion regarding the accounting statements and the respective explanatory notes, including regarding the compliance with financial regulations issued by the CMN and the Brazilian Central Bank; (ii) internal control system quality and adequacy evaluation report, including regarding electronic data processing and risk management systems, evidencing any identified deficiencies; (iii) legal and regulatory provisions non-compliance report, regarding those which have, or may have, material impacts on the financial statements or on the audited financial institution’s operations; (iv) limited assurance report, analyzing Santander Brasil’s Annual and Sustainability Report pursuant to the guidelines and requirements of the Global Reporting Initiative (“GRI”); and (v) any other reports required by the Brazilian Central Bank, CVM and BM&FBOVESPA. The reports issued by independent auditors must be available for consultation upon request by the overseeing authorities.
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Independent auditors and the fiscal council when established, individually or jointly, must formally notify the Brazilian Central Bank of the existence or evidence of error or fraud, within three business days of the identification of the respective occurrence, including:
| · | non-compliance with legal rules and regulations which places the continuity of the audited entity at risk; |
| · | frauds of any amount perpetrated by the management of the institution; |
| · | material frauds perpetrated by the institution’s employees or third parties; and |
| · | errors that result in major incorrectness in the financial statements of the audited entity. |
The executive office of the financial institution must inform the independent auditor and the fiscal council, when established, if any of the above situations occur.
CMN Regulation also requires financial institutions and certain other entities holding regulatory capital equal to or greater than R$1 billion to create a corporate body designated as the “audit committee.”
To obtain more information concerning the audit committee, see “Item 6. Directors, Senior Management and Employees—C. Board Practices—Board Advisory Committees—Audit Committee.”
For purposes of the financial statements prepared according to Brazilian GAAP, as from January 2017 all financial institutions and other institutions authorized to operate by the Brazilian Central Bank are required to create provisions for all losses related to financial guarantees issued by them.
Socio-Environmental Responsibility Policy
On April 25, 2014, the CMN enacted a new regulation establishing the guidelines for the implementation of socio-environmental responsibility policies at Brazilian financial institutions (each, a “Responsibility Policy”). The Responsibility Policy must guide the social and environmental actions of Brazilian financial institutions in conducting their businesses, their relationship with their clients and other users of their products and services. The Responsibility Policy must also guide the financial institution’s relationship with its personnel and with any others affected by the financial institution’s activities. In addition, the Responsibility Policy must provide for the management of social and environmental risks (which, according to the Brazilian Central Bank, represent one of the several categories of risk to which financial institutions are exposed). Financial institutions were required to have a Responsibility Policy, and an action plan to guide its implementation, in place by February 28, 2015, for financial institutions required to implement the Internal Process for the Assessment of Capital Adequacy (Processo Interno de Avaliação da Adequação de Capital, or “Icaap”) or up to July 31, 2015 for the remaining financial institutions.
We, as a financial institution required to implement the Icaap, have already developed our new Socio-Environmental Responsibility Policy in accordance with the guidelines established by the CMN for Brazilian financial institutions, as mentioned above.
Policy for Succession of Financial Institutions Managers
In November 2016, CMN enacted a new rule providing that Brazilian financial institutions and other institutions authorized to operate by the Brazilian Central Bank shall implement and maintain internal policies for succession of managers, applicable to higher levels of the institution’s management. According to such resolution, the internal policy shall encompass the procedures related to recruitment, promotion, appointment and retention of managers in accordance with the institution’s rules for identification, evaluation, training and selection of the candidates to management offices.
The policy must be approved by the Board of Directors (and in the absence of a Board of Directors, by the Executive Office), that is also responsible for supervising and controlling the procedures for planning, operationalization, maintenance and review of the policy (which will occur at least every five years). CMN granted a term of 180 days for the institutions to implement this policy.
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Consumer Protection
Relationships between consumers and financial institutions are governed by Law 8,078, dated September 11, 1990 (“Brazilian Consumer Protection Code”), which grants consumers certain rights and sets forth measures to be observed by suppliers, which must be complied with by financial institutions. The Brazilian Consumer Protection Code sets forth as consumer rights, among others, the assistance/facilitation in the defense of consumer’s rights, including through reverse burden of proof in their favor, and possibility of judicial review of contractual provisions deemed abusive.
Furthermore, banking regulation establishes procedures that financial institutions must observe when contracting any transactions, as well as when rendering services. We may highlight the following as examples of said procedures:
| · | to timely provide the necessary information to allow client’s and user’s free choice and decision-making process, including rights, duties, responsibilities, costs or advantages, penalties and possible risks when carrying out a transaction or rendering a service; |
| · | to timely provide, to the client or user, agreements, receipts, statements, advices and other documents related to the transactions and services, as well as the possibility of timely cancellation of the agreements; |
| · | formalization of an adequate instrument setting forth the rights and obligations for opening, using and maintaining a post-paid payment account; |
| · | to forward a payment instrument to the client’s or user’s residence or to enable the respective instrument only upon express request or authorization; and |
| · | identification of end users’ beneficiaries for payments or transfer in statements and bills of the payer, including in situations in which the payment service involves institutions participating in different payment arrangements. |
In April 2016, the CMN amended the abovementioned regulation in order to exclude financial institutions operating exclusively via digital means from the scope of certain aspects of the regulation.
Policy for Relationship with Customers and Users of Financial Products and Services
In November 2016, CMN enacted a new rule providing the principles for Brazilian financial institutions and other institutions authorized to operate by the Brazilian Central Bank to deal with customers and users of financial products and services. According to this regulation, such entities shall comply with the principles of ethics, liability, transparency and diligence promoting the convergence of interests and the consolidation of the institutional image of credibility, security and expertise.
The policy must be approved by the Board of Directors (and in the absence of the Board of Directors, by the Executive Office) that is also responsible for the periodic review of the policy. CMN provided for a term of 360-days for the effectiveness of such new resolution.
Ombudsman
Financial institutions and other entities which are authorized to operate by the Brazilian Central Bank must have an ombudsman office. In 2015, the CMN and the Brazilian Central Bank updated the regulatory framework that regulates the ombudsman office of the entities authorized to operate by the Brazilian Central Bank.
The new framework aims at establishing a more effective and transparent ombudsman office that is able to provide better assistance to the financial institutions’ customers. An ombudsman office has the following attributions according the new regulation:
| · | to provide last resort assistance in connection with customer claims that have not been resolved through the conventional customer service channels (including the banking correspondents and the Customer Service Attendance channel – SAC); |
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| · | to act as a communication channel between the financial institutions and their customers, including for dispute resolution; and |
| · | to keep management informed of its activities. |
The new regulatory framework is already in force. Financial institutions must fully implement the new requirements by June 2016.
Institutions that are part of a financial group are allowed to establish one ombudsman department to service the whole group. The officer in charge of the ombudsman office must prepare a report every six months, which must be provided to the management and auditing bodies, as well as be available to the Brazilian Central Bank for a period of at least five years.
Investment Funds Industry Regulation
Investment funds are subject to the regulation and supervision of the CMN and the CVM and, in certain specific matters, the Brazilian Central Bank. Investment funds may be managed by full-service banks, commercial banks, savings banks, investment banks, credit, financing and investment companies and brokerage and dealer companies within certain operational limits.
Investment funds may invest in any type of financial instrument available in the financial and capital markets, including for example, fixed income instruments, stocks, debentures and derivative products, provided that, in addition to the denomination of the fund, a reference to the relevant type of fund is included.
Investment funds may not:
| · | have more than 10% of their net worth invested in securities of a single issuer that is a publicly-held company (and that is not a financial institution), its controlling shareholders, subsidiaries and affiliates, or another investment fund; |
| · | have more than 20% of their net worth invested in securities issued by a financial institution (including the fund manager), its controlling shareholders, subsidiaries and affiliates; and |
| · | have more than 5% of their net worth invested in securities issued by an individual or private legal entity that is neither a publicly-held company nor a financial institution authorized to operate by the Brazilian Central Bank. |
Broker-Dealer Regulation
Broker and dealer firms are part of the national financial system and are subject to CMN, Brazilian Central Bank and CVM regulation and supervision. Brokerage firms must be chartered by the Brazilian Central Bank and are the only institutions in Brazil authorized to trade on stock exchanges. Both brokers and dealers may act as underwriters in the public placement of securities and engage in the brokerage of foreign currency in any exchange market.
Broker and dealer firms may not execute operations that may be qualified as the granting of loans to their customers, including the assignment of rights with limited exceptions; collect commissions from their customers related to transactions of securities during the primary distribution; acquire real estate which is not for their own use; or obtain loans from financial institutions, except for (i) loans for the acquisition of goods for use in connection with the firm’s corporate purpose or (ii) loans the amount of which does not exceed two times the relevant firm’s net worth.
Foreign Exchange Market
Transactions involving the sale and purchase of foreign currency in Brazil may be conducted only by institutions duly authorized by the Brazilian Central Bank to operate in the foreign exchange market. There is no current limit to long or short positions in foreign currency for banks authorized to carry out transactions on the foreign exchange market. Other institutions within the national financial system are not allowed to have short positions in foreign currency, although there are no limits with respect to foreign exchange long positions.
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The Brazilian Central Bank imposes a limit on the total exposure in foreign currency transactions and transactions subject to foreign exchange fluctuation undertaken by Brazilian financial institutions, including branches abroad, and their direct and indirect affiliates. The limit is currently equivalent to 30.0% of the financial institution’s regulatory capital (Patrimônio de Referência), on a consolidated basis. The CMN, the Brazilian Central Bank and the Brazilian government may change the regulation applicable to foreign currency and foreign exchange transactions undertaken by Brazilian financial institutions in accordance with Brazil’s economic policy (including its foreign exchange policy).
In 2013, the Brazilian Central Bank issued two rules that have revoked and replaced the Regulation of Foreign Exchange and International Capital Market (Regulamento do Mercado de Câmbio e Capitais Internacionais, or the “RMCCI”) of the Brazilian Central Bank. These rules are intended to optimize and simplify regulation involving the foreign exchange market, Brazilian capital abroad and foreign capital in Brazil previously contemplated by the RMCCI. The new foreign exchange rules also aim to cover situations that were not contemplated in the prior regulations.
Foreign Investment in Brazilian Financial Institutions
According to the Brazilian constitution, the acquisition of equity interests by foreign individuals or legal entities in the capital stock of Brazilian financial institutions is forbidden, unless permitted by bilateral international treaties or by the Brazilian government by means of a Presidential decree. A Presidential decree issued on November 13, 1997, issued in respect of Banco Meridional do Brasil S.A. (our legal predecessor) allows 100% foreign participation in our capital stock. Foreign investors may acquire the shares issued by Santander Brasil as a result of this decree. In addition, foreign investors may acquire publicly traded non-voting shares of Brazilian financial institutions traded on a stock exchange or securities depositary receipts offered abroad representing shares without specific authorization.
In addition, the Brazilian constitution prohibits foreign financial institutions from establishing new branches or subsidiaries in Brazil except when duly authorized by the President of Brazil and by the Brazilian Central Bank. A foreign financial institution duly authorized to operate in Brazil through a branch or a subsidiary is subject to the same rules, regulations and requirements that are applicable to any Brazilian financial institution.
Banking Correspondents
Financial institutions are allowed to provide specific services to clients, including customer services, through other entities. These entities are called “bank correspondents” and the relationship between the financial institution and the bank correspondent is ruled by a specific regulation published by CMN and is subject to the supervision of the Brazilian Central Bank.
Regulation of Branches
Authorization by the Brazilian Central Bank is required for operations of branches or subsidiaries of Brazilian financial institutions, upon the compliance with certain term, capital and equity requirements, as well as the submission of an economic and financial feasibility analysis.
The Brazilian Central Bank’s prior authorization is also required in order to: (i) allocate new funds to branches or subsidiaries abroad; (ii) subscribe capital increases, directly or indirectly, in subsidiaries abroad; (iii) increase equity participation, directly or indirectly, in subsidiaries abroad; and/or (iv) merge or spin off, directly or indirectly, subsidiaries abroad.
The Brazilian Central Bank determines that financial institutions can install the following establishments in Brazil: (i) branches, (ii) teller booths, (iii) automatic teller machines, and (iv) segregated administrative units, provided that, for items (i) to (iii), conformity with requirements of minimum capital and operating limits are necessary.
Cayman Islands Banking Regulation
We have a branch in the Cayman Islands with its own staff and representative officers. The Banco Santander (Brasil) S.A. – Cayman Islands branch is licensed under The Banks and Trust Companies Law (2013 Revision), or the “Banks and Trust Companies Law,” as a Category “B” Bank and it is duly registered as a Foreign Company with
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the Registrar of Companies in Grand Cayman, Cayman Islands. The branch, therefore, is duly authorized to carry on banking business in the Cayman Islands. The branch was authorized by the local authorities to act as its own registered office and it is located at the Waterfront Centre Building, 28, North Church Street – 2nd floor, George Town, Grand Cayman, Cayman Islands, P.O. Box 10444 – KYI-1004, Phone: 1-345-769-4401 and Fax: 1-345-769-4601.
Our Cayman Islands branch is currently engaged in the business of sourcing funds in the international banking and capital markets to provide credit lines for us, which are then extended to our customers for working capital and trade-related financings. It also takes deposits in foreign currency from corporate and individual clients and extends credit to Brazilian and non-Brazilian clients, mainly to support trade transactions with Brazil. The results of the operations of the Cayman Islands branch are consolidated in our consolidated financial statements.
Banks and trust companies wishing to conduct business from within the Cayman Islands must be licensed by the Cayman Islands Monetary Authority under the Banks and Trust Companies Law (2009 Revision) (“Banks and Trust Companies Law”), independent of whether the business is to be actually conducted in the Cayman Islands.
Under the Banks and Trust Companies Law, there are two main categories of banking license: a category “A” license, which permits unrestricted domestic and offshore banking business, and a category “B” license, which permits principally offshore banking business. The holder of a category “B” license may have an office in the Cayman Islands and conduct business with other licensees and offshore companies but, except in limited circumstances, may not do banking business locally with the public or residents of the Cayman Islands. We have an unrestricted category “B” license.
There are no specific ratio or liquidity requirements under the Banks and Trust Companies Law, but the Cayman Islands Monetary Authority will expect observance of prudent banking practices, and the Banks and Trust Companies Law imposes a minimum net worth requirement of an amount equal to CI$400,000 (or, in the case of licensees holding a restricted category “B” or a restricted trust license, CI$20,000). As of December 31, 2016, CI$1 was equivalent to R$3.9745, according to the Brazilian Central Bank.
Foreign Subsidiary
We established an independent subsidiary in Spain, Santander EFC, in order to complement our foreign trade strategy for corporate clients, which are composed of large Brazilian companies and their operations abroad. This allows us to provide financial products and services by means of an offshore entity which is not established in a “tax haven,” such as our Cayman Islands branch, in accordance with Law No. 12,249, of June 11, 2010, and Brazilian Federal Revenue Normative Ruling No. 1,037, of June 4, 2010.
The establishment of our foreign subsidiary was approved by the Brazilian Central Bank on September 26, 2011, by the Spanish Ministerio de Economia y Hacienda on February, 6, 2012 and by the Bank of Spain on March 28, 2012. The remittance of resources to pay up the share capital of the subsidiary was carried out on March 5, 2012, totaling €748 million. Santander EFC has been operational since March 2012.
U.S. Banking Regulation
Volcker Rule
Section 13 of the U.S. Bank Holding Company Act of 1956, as amended, and its implementing rules (collectively, the “Volcker Rule”) prohibit “banking entities” from engaging in certain forms of proprietary trading or from sponsoring or investing in “covered funds,” in each case subject to certain exceptions. The Volcker Rule limits the ability of banking entities and their affiliates to enter into certain transactions with covered funds with which they or their affiliates have certain relationships. The Volcker Rule also contains exclusions and certain exemptions for market-making, hedging, underwriting, trading in U.S. government and agency obligations, as well as certain foreign government obligations, and trading solely outside the United States, and also permits certain ownership interests in certain types of funds to be retained. Banking entities such as Santander Brasil must bring their activities and investments into compliance with the requirements of the Volcker Rule by the end of the conformance period applicable to each requirement. In general, all banking entities were required to conform to the requirements of the Volcker Rule, except for provisions related to certain funds, and to implement a compliance program by July 21, 2015. In December 2014, the Board of Governors of the U.S. Federal Reserve (“Federal Reserve Board”) issued an order extending the Volcker Rule’s general conformance period until July 21, 2016 for
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investments in and relationships with covered funds and certain foreign funds that were in place on or prior to December 31, 2013 (“legacy covered funds”). In July 2016, the Federal Reserve Board granted a final one-year extension of the general conformance period to July 21, 2017 for banking entities to conform ownership interests in and relationships with legacy covered funds. Banking entities such as Santander Spain must bring their activities and investments worldwide into compliance with the requirements of the Volcker Rule by the end of the conformance period. Santander Spain has assessed how the Volcker Rule affects its businesses, including Santander Brasil, and has brought its activities into compliance, with the exception of certain legacy covered funds activities. Santander Spain has further adopted the necessary measures to bring these legacy covered funds activities into compliance prior to July 21, 2017. Santander Brasil has adopted processes to establish, maintain, enforce, review and test the compliance program designed to achieve and maintain compliance with the Volcker Rule. Santander Spain’s non-U.S. banking organizations, including Santander Brasil, are largely able to continue their activities outside the United States in reliance on the “solely outside the U.S.” exemptions from the Volcker Rule.
Regulation of Swaps
Title VII of the Dodd-Frank Act provides for an extensive U.S. regulatory framework for OTC derivatives contracts, including swaps, security-based swaps and mixed swaps (generically referred to in this paragraph as “swaps”). Among other things, Title VII provides the Commodity Futures Trading Commission, or CFTC, and the SEC, with jurisdiction and regulatory authority over swaps, establishes a comprehensive registration and regulatory framework applicable to swap dealers, security-based swap dealers and other major market participants in swaps (referred to as “major swap participants” or “major security-based swap participants”), imposes clearing and execution requirements on many types of swaps, requires swap market participants to report all swaps transactions to swap data repositories and security-based swap data repositories and requires or will require higher margin payments for uncleared swaps as the uncleared swap margin rules are phased in from 2016 through 2020. Entities that are swap dealers, security-based swap dealers, major swap participants or major security-based swap participants are required to register with the CFTC or the SEC, or both, and are or will be subject to capital, margin, business conduct, recordkeeping, clearing, execution, reporting, and other requirements. The specific parameters of these requirements have been or will be implemented through CFTC, SEC and bank regulator rulemakings.
U.S. Anti-Money Laundering, Anti-Terrorist Financing, and Foreign Corrupt Practices Act Regulations
Santander Brasil, as a foreign private issuer whose securities are registered under the U.S. Securities Exchange Act of 1934, is subject to the U.S. Foreign Corrupt Practices Act (the “FCPA”). The FCPA generally prohibits such issuers and their directors, officers, employees and agents from using any means or instrumentality of U.S. interstate commerce in furtherance of any offer or payment of money to any foreign official or political party for the purpose of influencing a decision of such person in order to obtain or retain business. It also requires that the issuer maintain books and records and a system of internal accounting controls sufficient to provide reasonable assurance that accountability of assets is maintained and accurate financial statements can be prepared. Penalties, fines and imprisonment of Santander Brasil’s officers and/or directors can be imposed for violations of the FCPA.
Furthermore, Santander Brasil is subject to a variety of U.S. anti-money laundering and anti-terrorist financing laws and regulations, such as the Bank Secrecy Act of 1970, as amended, and the USA PATRIOT ACT of 2001, as amended, and a violation of such laws and regulations may result in substantial penalties, fines and imprisonment of Santander Brasil’s officers and/or directors.
Antitrust Regulation
According to the Brazilian antitrust law, actions which concentrate market share must be previously submitted to CADE for approval if the following criteria are met: (i) at least one of the groups involved in the deal has posted annual gross revenues or volume of business equal to or over R$750 million, in Brazil, in the year prior to the transaction; and (ii) at least another group has posted annual gross revenues or volume of business equal to or over R$75 million, in Brazil, in the year prior to the transaction. Closing of a transaction without CADE’s approval will subject the parties to fines ranging from R$60 thousand to R$60 million.
The Brazilian Central Bank will also examine certain corporate reorganizations and other acts involving two or more financial institutions not only considering their potential effects on the financial system and its stability but also any potential impacts regarding market concentration and competition. Upon approval of the transaction, the Brazilian Central Bank may establish certain restrictions and require that the financial institutions execute an
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agreement of market concentration control, pursuant to which the terms and conditions of the sharing of the efficiency gain resulting from the act shall be set forth.
Insolvency Laws Concerning Financial Institutions
Financial institutions are subject to the proceedings established by Law 6,024 of March 13, 1974 (“Law 6024”), which establishes the applicable provisions in the event of intervention or extra-judicial liquidation by the Brazilian Central Bank, as well as to bankruptcy proceedings.
Intervention and extra-judicial liquidation occur when the Brazilian Central Bank has determined that the financial institution is in bad financial condition or upon the occurrence of events that may impact the creditors’ situation. Such measures are imposed by the Brazilian Central Bank in order to avoid the bankruptcy of the entity.
Intervention
An intervention can be carried out at the discretion of the Brazilian Central Bank in the following cases:
| · | risk to the creditors due to mismanagement; |
| · | consistent violation of Brazilian banking laws or regulations; or |
| · | if the intervention is a feasible alternative to the liquidation of the financial institution. |
As of the date on which it is ordered, the intervention will automatically suspend the enforceability of the payable obligations; prevent early termination or maturity of any previously contracted obligations; and freeze deposits existing on the date on which the intervention is decreed.
The intervention will cease if interested parties undertake to continue the economic activities of the financial institution, by presenting the necessary guarantees, as determined by the Brazilian Central Bank, when the situation of the entity is regularized as determined by the Brazilian Central Bank; or when extra-judicial liquidation or bankruptcy of the entity is ordered.
Intervention may also be ordered upon the request of a financial institution’s management.
Extra-judicial Liquidation
Extra-judicial liquidation is an administrative proceeding decreed by the Brazilian Central Bank (except that it is not applicable to financial institutions controlled by the Brazilian federal government) and conducted by a liquidator appointed by the Brazilian Central Bank. This extraordinary measure aims at terminating the activities of the affected financial institution, liquidating its assets and paying its liabilities, as in a judicially decreed bankruptcy. The Brazilian Central Bank will extra-judicially liquidate a financial institution if:
| · | the institution’s economic or financial situation is at risk, particularly when the institution ceases to meet its obligations as they become due, or upon the occurrence of an event that could indicate a state of insolvency under the rules of the Bankruptcy Law; |
| · | management seriously violates Brazilian banking laws, regulations or rulings; |
| · | the institution suffers a loss which subjects its unprivileged and unsecured creditors to severe risk; and/or |
| · | upon revocation of the authorization to operate, the institution does not initiate ordinary liquidation proceedings within ninety days or, if initiated, the Brazilian Central Bank determines that the pace of the liquidation may harm the institution’s creditors. |
A request for liquidation procedures can also be filed on reasonable grounds by the officers of the respective financial institution or by the receiver appointed by the Brazilian Central Bank in the receivership procedure.
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The decree of extra-judicial liquidation will: (i) suspend the actions or foreclose on rights and interests relating to the estate of the entity being liquidated, while no other actions or executions may be brought during the liquidation; (ii) accelerate the obligations of the entity; and (iii) interrupt the statute of limitations with regard to the obligations assumed by the institution.
Extra-judicial liquidation procedures may be terminated:
| · | by discretionary decision of the Brazilian Central Bank if the parties involved undertake the administration of the financial institution after having provided the necessary guarantees; or |
| · | when the final accounts of the receiver are delivered and approved and subsequently registered in the relevant public records; or |
| · | when converted into ordinary liquidation; or |
| · | when a financial institution is declared bankrupt. |
Temporary Special Administration Regime (Regime de Administração Especial Temporária or “RAET”)
In addition to the intervention procedures described above, the Brazilian Central Bank may also establish a RAET, under Law 9447, dated March 14, 1997 combined with Law 6,024/74, which is a less severe form of the Brazilian Central Bank intervention in private and non-federal public financial institutions that allows institutions to continue to operate normally. The RAET may be ordered in the case of an institution which:
| · | continually enters into recurrent operations which are against economic or financial policies set forth in federal law; |
| · | faces a shortage of assets; |
| · | fails to comply with the compulsory reserves rules; |
| · | reveals the existence of hidden liabilities; |
| · | experiences the occurrence of situations that cause receivership pursuant to current legislation; |
| · | has reckless or fraudulent management; or |
| · | carries out activities which call for an intervention. |
The main objective of a RAET is to assist the recovery of the financial condition of the institution under special administration and thereby avoid intervention and/or liquidation. Therefore, a RAET does not affect the day-to-day business, operations, liabilities or rights of the financial institution, which continues to operate in the ordinary course of business. Measures which may be adopted by the institution include the transfer of assets, rights and obligations to other entities, and corporate restructuring of these entities, with a view to the continuity of the institution’s business or activities.
There is no minimum term for a RAET, which ceases upon the occurrence of any of the following events: (i) acquisition by the Brazilian federal government of control of the financial institution, (ii) corporate restructuring, merger, spin-off, amalgamation or transfer of the controlling interest of the financial institution, (iii) decision by the Brazilian Central Bank, or (iv) declaration of extra-judicial liquidation of the financial institution.
Bankruptcy Law
Law No. 11,101 (“Bankruptcy Law”) regulates judicial reorganizations, out-of-court reorganizations and the bankruptcy of individuals and corporations that have occurred since 2005 and applies to financial institutions only with respect to the matters not specifically regulated by the intervention and extra-judicial liquidation regimes described above.
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Repayment of Creditors in a Liquidation or Bankruptcy
In the event of extra-judicial liquidation or bankruptcy of a financial institution, creditors are paid pursuant to their priorities and privileges. Pre-petition claims are paid on a ratable basis in the following order: labor credits; secured credits; tax credits; credits with special privileges; credits with general privileges; unsecured credits; contractual fines and pecuniary penalties for breach of administrative or criminal laws, including those of a tax nature; and subordinated credits.
The current law confers immunity from attachment of compulsory deposits maintained by financial institutions with the Brazilian Central Bank. Such deposits may not be attached in actions by a bank’s general creditors for the repayment of debts and require that the assets of any insolvent bank funded by loans made by foreign banks under trade finance lines be used to repay amounts owing under such lines in preference to those amounts owing to the general creditors of such insolvent bank.
Recovery Plans for Systematically Important Financial Institutions
In June 2016, the CMN enacted stricter guidelines for the recovery plans (planos de recuperação) for systemically important Brazilian financial institutions. The new rule, which incorporate recommendations from the Financial Stability Board, aims to reestablish adequate levels of capital and liquidity and to preserve the viability of such institutions. The measures require, among others, that recovery plans identify their critical functions for the National Financial System, adopt stress-testing scenarios, define clear and transparent governance procedures, assess possible barriers to the entity’s recovery, as well as implement effective communication plans with key stakeholders. Financial institutions have until December 2017 to adapt their recovery plans to the new requirements.
Deposit Insurance - FGC
The purpose of the FGC is to guarantee the payment of funds deposited with financial institutions in case of intervention, liquidation, bankruptcy or insolvency. The FGC is funded by ordinary contributions made by the financial institutions in the amount of up to 0.0125% of the total amount of outstanding balances of the accounts corresponding to guaranteed obligations, and certain special contributions as determined. Delay in performing such contributions is subject to a penalty of 2% over the amount of the contribution.
The total amount of credit in the form of demand deposits, savings deposits, time deposits, deposits maintained in accounts blocked for transactions with checks (for the registration and control of funds relating to the rendering of services of payment of salaries, earnings, pensions), bills of exchange, real estate bills, mortgage bills, real estate credit bills and repurchase and resale agreements which object are instruments issued after March 8, 2012 by a company of the same group due to each customer by a financial institution (or by financial institutions of the same financial group) will be guaranteed by the FGC for up to a maximum of R$250,000 per customer. When the assets of the FGC reach 2% of the total amounts they guarantee, the CMN may temporarily suspend or reduce the contribution of financial institutions to the FGC. As from February 2016, credits of financial institutions and other institutions authorized to operate by the Brazilian Central Bank, complementary welfare entities, insurance companies, capitalization companies, investment clubs and investment funds, as well as those representing any interest in or financial instrument held by such entities, are not protected by the ordinary guarantee of FGC.
Taxation
Corporate Income Tax (IRPJ) and Social Contribution Tax (CSLL)
The IRPJ is calculated at a rate of 15.0%, plus a surtax of 10.0% which is levied on profits exceeding the amount of R$240,000 per year and the CSLL is calculated at a rate of 20.0% for financial institutions and 9.0% for companies, after adjustments determined by the tax legislation.
Deferred tax assets and liabilities are computed based on temporary differences between the book basis and tax basis of assets and liabilities, tax losses, and adjustments to fair value of securities and derivatives.
According to the requirements in the current regulations, the expected realization of deferred tax assets is based on projections of future results and a technical study approved by the Directors of Santander Brasil.
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The changes introduced by Law 11,638/2007 and by Law 11,941/2009 (articles 37 and 38), which modified the criteria for recognizing revenues, costs and expenses computed in the determination of net income, had no effect for purposes of determining the taxable profit for a legal entity which opted for the Transitional Tax Regime (“RTT”), being used for tax purposes the regulations in effect on December 31, 2007. The tax effects on the adoption of such rules are recorded, for accounting purposes, in the corresponding deferred assets and liabilities.
The RTT expired in 2015 by virtue of Law 12,973.
Tax on Services (ISS)
Each of the Municipalities of Brazil and the Federal District are responsible for establishing the applicable ISS rate which is charged on the value of services provided by us where we have branches or administrative centers. The rates vary from 2.0% to 5.0% and depend on the nature of the service.
On December 30, 2016, Complementary Law No. 157/2016 was enacted. This new legislation establishes a minimum rate of 2.0% for these types of taxes (without any reductions or deductions being permitted). Brazilian municipalities have until the end of 2017 to implement this law.
PIS and COFINS Tax Rates
PIS and COFINS (respectively, the profit participation contribution and the social security financing contribution, both of which are social contributions due on some revenues net of some expenses) payable by financial institutions and similar entities, as defined by law, are due at the rate of 0.65% and 4%, respectively. They are levied cumulatively on gross revenue billed, understood as the total revenues earned by the legal entity, net of certain expenses, such as funding costs.
The non-financial entities are taxed at the rates of 1.65% and 7.6% of PIS and COFINS, respectively, and are subject to non-cumulative incidence, which consists of deduction of certain expenses from the tax base as allowed by law.
Recent Amendments to the Brazilian Federal Tax Legislation
On May 14, 2014, Law No. 12,973 (the “2014 Tax Law”) was enacted, amending federal tax legislation with respect to IRPJ, CSLL, PIS and COFINS. The 2014 Tax Law governs the following matters, among others:
| · | the tax effects connected with IFRS; |
| · | the revocation of the Transitory Tax Regime – RTT, which was implemented to temporarily neutralize the tax effects related to IFRS until the 2014 Tax Law was enacted; |
| · | the valuation of controlled companies using the equity accounting method, including new provisions for the tax treatment applicable to goodwill or to the discount paid upon the investment in those entities; |
| · | the tax regime applicable to profits, dividends and interest on net equity paid by Brazilian companies; |
| · | creation of a new regime for controlled foreign companies – CFC rules – and the consequent tax effects arising from income earned abroad by Brazilian subsidiaries or affiliates; and |
| · | a new tax base for PIS and COFINS for financial institutions that includes the revenues from core activities of these companies. |
Tax on Financial Transactions (IOF)
IOF is a tax levied on credit, currency exchange, insurance and securities transactions and it is imposed on the following transactions and at the following rates:
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| Transaction(1) | Maximum Legal Rate | Present Rate | ||
| Credit extended by financial institutions and non-financial entities | 1.5% or 3% | 0.0041% per day for loans contracted by legal entities and 0.0082% per day for individuals capped at 365 days. An additional 0.38% rate is applicable in both cases. | ||
| Transactions relating to securities(2) | 1.5% per day | 0.5% per day for certain investment funds. | ||
| 0% on transactions with equity securities and certain debt securities, such as debentures and real estate receivables and agribusiness (CRI / CRA). | ||||
| 1% per day on transactions with fixed income derived from federal, state, or municipal public and private bonds, and fixed income investment funds limited to certain percentages of the income raised from investment. This rate is reduced to zero from the 30th day following the acquisition date of the investment and on repurchase agreements carried out by financial institutions and other institutions authorized by the Brazilian Central Bank with debentures issued by institutions belonging to the same group (Decree 8,731/2016). | ||||
| 0% on the assignment of securities to permit the issuance of Depositary Receipts abroad. | ||||
| Transactions relating to derivatives | 25.0% | 0% on the notional value of the adjusted purchase, sale or maturity of financial derivative contract in the country that individually result in an increased foreign exchange exposure on a short position. | ||
| 0% on derivative contracts to hedge risks inherent to the price fluctuation of foreign exchange resulting from export contracts signed by an individual or legal entity resident or domiciled in the country. | ||||
| 0% other transactions with derivative contracts not expressly mentioned by the tax law. | ||||
| Insurance transactions entered into by insurance companies | 25% | 2.38% for health insurance. | ||
| 0.38% for life insurance. | ||||
| 7.38% for other types of insurance. | ||||
| Foreign exchange transactions(2) | 25% | 0.38% (general rule). | ||
| 6.38% on credit card transactions as from April 27, 2011. | ||||
| 6.38% on withdrawals abroad using credit or debit cards as from December 28, 2013. | ||||
| 6.38% on purchase of travelers checks or loading of international prepaid card as from December 28, 2013. | ||||
| 0% for outflow of funds related to the payment of principal and interest in connection with foreign loans and financings. |
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| Transaction(1) | Maximum Legal Rate | Present Rate | ||
| 6% for the inflow of funds into Brazil, related to foreign loans subject to registration before the Brazilian Central Bank whose average maturity term is equal or less than 180 days. | ||||
| 0% for the inflow of funds into Brazil, related to foreign loans subject to registration before the Brazilian Central Bank whose average maturity term is higher than 180 days. | ||||
| 0% for interbank transactions. | ||||
| 0% for exchange transactions in connection with the outflow of proceeds from Brazil for the remittance of interest on net equity and dividends to be received by foreign investors. | ||||
| 0% for exchange transactions, including by means of simultaneous foreign exchange transactions, for the inflow of funds by foreign investors in the Brazilian financial and capital markets. | ||||
| 0% for exchange transactions, including by means of simultaneous foreign exchange transactions, for the inflow of funds by foreign investors for purposes of initial or additional margin requirements in connection with transactions in stock exchanges. | ||||
| 0% for exchange transactions for the outflow of funds invested by foreign investors in the Brazilian financial and capital markets. | ||||
| 0% for exchange transactions for the inflow and outflow of funds invested by foreign investors, including by means of simultaneous foreign exchange transactions, in certificates of deposit of securities, known as BDRs. | ||||
| 0.38% for simultaneous exchange transactions, for the inflow of funds by foreign investors derived from the conversion of direct investments in Brazil made pursuant to Law 4,131/62 into investments in stock tradable in stock exchanges. | ||||
| 0% for revenues related to the export of goods and services transactions. | ||||
| The applicable rate is 1.10% for acquisitions of foreign currency (Decree 8,731/2016). |
| (1) | The transactions mentioned in the table are for illustration purposes and do not reflect an exhaustive list of transactions subject to the IOF. |
| (2) | There are some exemptions or specific cases in which the applicable rate is zero. |
FATCA
The Foreign Account Tax Compliance Act (“FATCA”) became law in the U.S. on March 18, 2010. The legislation requires Foreign Financial Institutions (“FFIs”) (such as Santander Brasil) to enter into an FFI agreement and agree to identify and provide the U.S. Internal Revenue Service (“IRS”) with information on accounts held by U.S. persons and certain U.S.-owned foreign entities, or otherwise face 30% withholding tax on certain U.S. source
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withholdable payments. In addition, FFIs that have entered into an FFI agreement will be required to withhold on such payments made to FFIs that have not entered into an FFI agreement, account holders who fail to provide sufficient information to classify an account as a U.S. or non-U.S. account, and U.S. account holders who do not agree to the FFI reporting their account to the IRS.
On September 23, 2014, Brazil and the United States announced that they have entered into an intergovernmental agreement (“IGA”), which became effective in Brazil by virtue of Decree 8,506 as of August 24, 2015. The aim of the IGA is to improve international tax compliance and implement FATCA. The IGA establishes an automatic annual bilateral exchange of information with the U.S. tax authorities. Under this agreement, Brazilian financial institutions will generally be required to provide certain information about their U.S. account holders to the Brazilian tax authorities (Receita Federal do Brasil), which will share that information with the IRS.
Complying with the required identification, withholding and reporting obligations requires significant investment in an FFI’s compliance and reporting framework. We are continuing to follow developments regarding FATCA closely and are coordinating with all relevant authorities.
Common Reporting Standard
On December 28, 2016, Normative Ruling No.1,680 was enacted, introducing the Common Reporting Standard in Brazil. The Common Reporting Standard provides for certain account reporting obligations similar to those existing under FATCA. It was created in the context of the Organization for Economic Co-operation and Development’s Base Erosion and Profit Shifting project, which is aimed at reducing tax avoidance. Normative Ruling No. 1,680 applies to legal entities required to present the e-Financeira pursuant to Normative Ruling No. 1,571, dated July 2, 2016.
On the same date, the Normative Ruling No. 1,681 was enacted providing for the obligation to annually deliver the “Country to Country Statement,” an ancillary obligation also arising from the discussions under the BEPS Project, before the Brazilian Federal Revenue Service (“RFB”) as a measure to expand information exchange and improve the level of international tax transparency. This new regulation should not have any impact on Santander Brasil, since, as it is controlled by a legal entity resident in Spain, it is not required by the Brazilian regulation to present such statement.
Alterations Related to the Service Tax
On December 30, 2016, Complementary Law No. 157/2016 was enacted. This new legislation establishes a minimum rate of 2.0% for these types of taxes (without any reductions or deductions being permitted). Brazilian municipalities have until the end of 2017 to implement this law.
Tax Amnesty Program
On January 13, 2016, the Brazilian federal government enacted Law 13,254, complemented by Normative Ruling No. 1,627 of March 15, 2016, which introduced an amnesty program aiming at encouraging Brazilian taxpayers to voluntarily disclose to the tax authorities the Brazilian Central Bank unreported assets held abroad (the-so called Regime Especial de Regularização Cambial e Tributária, or “RERCT”) until December 31, 2014.
Under the RERCT, taxpayers that declare previously unreported foreign assets to the competent authorities (without the need to bring these back to Brazil) will (i) be subject to the payment of income tax and a fine in the total amount of 30% on the total tax amount due and (ii) benefit from an amnesty in relation to any potential related criminal proceeding, provided that the assets are of legal origin. In order to benefit from the RERCT, the interested taxpayers had to file specific forms with the Brazilian tax authorities and the Brazilian Central Bank. According to IN 1,627/2016, the deadline to apply for participation in the RERCT expired on October 31, 2016.
In March 2016, the Brazilian Central Bank issued a regulation establishing the necessary operational procedures to implement the RERCT, which include amendments to the foreign exchange rules in order to allow the necessary remittance of funds to implement the RERCT. The Brazilian National Congress is currently discussing a reopening of these programs.
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Income Tax Levied on Capital Gains
On September 22, 2015, the Brazilian federal government enacted Provisional Measure No. 692/2015 (“MP 692”), recently converted into Law 13,259, of March 16, 2016 (“Law 13,259/16”), which introduced the application of progressive tax rates for income taxation over capital gains recognized by Brazilian individuals and by holders that are not domiciled in Brazil for purposes of Brazilian taxation (“Non-Resident Holders”) on the disposition of assets in general. Under Law 13,259/16, the income tax rates applicable to capital gains realized by these investors would be: (i) 15% for the part of the gains up to R$5 million, (ii) 17.5% for the part of the gain that exceeds R$5 million but does not exceed R$10 million, (iii) 20% for the part of the gain that exceeds R$10 million but does not exceed R$30 million, and (iv) 22.5% for the part of the gain that exceeds R$30 million.
The provisions of Law 13,259/16 apply to Non Resident Holders pursuant to CMN Resolution 4,373, provided such Non Resident Holders are not located in a Tax Haven. However, Non Resident Holders (whether they are considered to be Non-Resident Holders as a result of CMN Resolution 4373 or otherwise) located in a Tax Haven are subject to a specific tax regulation and will continue to be taxed at a rate of 25.0%.
The tax must be withheld and paid by the buyer or, in cases where the buyer and seller are domiciled abroad, a legal representative of buyer shall be designated for the payment of the tax.
Segmentation for the proportional application of the prudential regulation
In January 2017, the CMN enacted a resolution establishing segmentation for financial institutions, financial institution groups, and other institutions authorized to operate by the Brazilian Central Bank for proportional application of the prudential regulation, considering the size, international activity and risk profile of members of each segment. According to such resolution, the segments are qualified as follows:
(i) Segment 1 comprises multiservice banks, commercial banks, investment banks, FX banks and savings bank with (a) an asset base equivalent or superior to 10% of Brasil’s GDP; or (b) perform relevant international activities, independently from the magnitude of the institution;
(ii) Segment 2 comprises multiservice banks, commercial banks, investment banks, FX banks and savings banks with (a) an asset base lower than 10% of Brasil’s GDP; and (b) other institutions with an asset base equivalent to or greater than 1% of Brasil’s GDP;
(iii) Segment 3 comprises institutions with an asset base lower than 1% and equivalent to or greater than 0.1% of Brasil’s GDP;
(iv) Segment 4 comprises institutions with an asset base lower than 0.1% of Brazil’s GDP; and
(v) Segment 5 comprises (a) institutions with an asset base lower than 0.1% of Brazil’s GDP that applies a simplified optional method for the verification of reference equity’s minimum requirements, except for multiservice banks, commercial banks, investment banks, FX banks and savings bank; and (b) institutions not subject to the verification of reference equity.
We have been categorized by the Brazilian Central Bank in segment 1, the highest level for application of regulation for banks in Brazil.
Secured Real Estate Bill
In 2015, Law No. 13,097 was issued to create the secured real estate bill (Letra Imobiliária Garantida - LIG), a new debt instrument for funding Brazilian financial institutions that follows the covered bonds structure. The law provides that the CMN shall regulate the provisions of Law No. 13,097, including as regards issuing conditions and terms, financial institutions authorized to issue LIGs, conditions of redemption and early maturity of LIGs, eligibility requirements, composition, sufficiency, maturity and liquidity of the related portfolio of assets, conditions of replacement and reinforcement of such assets, requirements for financial institutions to act as fiduciary agent and the assumptions, conditions and manner of their removal or replacement and its attributions.
In January 2017, the Brazilian Central Bank began a public consultation in relation to a draft of the rule regulating the provisions of Law No. 13,097.
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Regulation of Risk and Capital Management Structure
In February 2017, the CMN enacted a new rule which unifies and expands the Brazilian regulation on risk and capital management for Brazilian financial institutions and other institutions authorized to operate by the Brazilian Central Bank. The new rule is also an effort to incorporate into Brazilian regulation new recommendations from the Basel Committee on Banking Supervision. The rule provides that risk management must be conducted through an integrated effort by the relevant entity (i.e., not only must risks be analyzed on an individual basis, but financial institutions and other institutions authorized to operate by the Brazilian Central Bank must also control and mitigate the adverse effects caused by the interaction between different risks). It also expands the rules and requirements on risk management governance and the competence and duties of the risk management officer.
The rule sets out different structures for risk and capital management which are applicable for different risk profiles, based on the risks profiles set out in the applicable regulation. This means a financial institution of smaller systemic importance can have a simplified structure of management, while institutions of larger complexity have to follow stricter protocols and implement the new rules until a closer deadline (180 days). Certain provisions of the new rule became effective on the date it was published and others will become effective within 360 days of such date.
Disclosure pursuant to Section 219 of the Iran threat reduction and Syria Human Rights Act
Pursuant to Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012, which added Section 13(r) to the Exchange Act, an issuer is required to disclose in its annual or quarterly reports, as applicable, whether it or any of its affiliates knowingly engaged in certain activities, transactions or dealings relating to Iran or with individuals or entities designated pursuant to certain Executive Orders. Disclosure is generally required even where the activities, transactions or dealings were conducted in compliance with applicable law.
Santander Brasil has no direct exposure to Iran. As we are part of the Santander Group, we must disclose the exposure of other entities of the Santander Group to Iran. The following activities are disclosed in response to Section 13(r) with respect to affiliates of Santander UK plc (“Santander UK”), one of the affiliates within the Santander Group. During the period covered by this annual report:
(a) Santander U.K. holds two savings accounts and one current account for two customers resident in the U.K. who are currently designated by the U.S. under the Specially Designated Global Terrorist (“SDGT”) sanctions program. Revenues and profits generated by Santander U.K. on these accounts in the year ended December 31, 2016 were negligible relative to the overall revenues and profits of Santander Spain.
(b) Santander U.K. held a savings account for a customer resident in the U.K. who is currently designated by the U.S. under the SDGT sanctions program. The savings account was closed on July 26, 2016. Revenue generated by Santander U.K. on this account in the year ended December 31, 2016 was negligible relative to the overall revenues of Santander Spain.
(c) Santander U.K. held a current account for a customer resident in the U.K. who is currently designated by the U.S. under the SDGT sanctions program. The current account was closed on December 22, 2016. Revenue generated by Santander U.K. on this account in the year ended December 31, 2016 was negligible relative to the overall revenues of Santander Spain.
(d) Santander U.K. holds two frozen current accounts for two U.K. nationals who are designated by the U.S. under the SDGT sanctions program. The accounts held by each customer have been frozen since their designation and have remained frozen through the year ended December 31, 2016. The accounts are in arrears (£1,844.73 in debit combined) and are currently being managed by Santander U.K. Collections & Recoveries department. Revenues and profits generated by Santander U.K. on these accounts in the year ended December 31, 2016 were negligible relative to the overall revenues and profits of Santander Spain.
(e) In addition, during the year ended December 31, 2016, Santander U.K. had an OFAC match on a power of attorney account. The power of attorney listed on the account is currently designated by the U.S. under the SDGT and Iranian Financial Sanctions Regulations (IFSR) sanctions program. The power of attorney was removed from the account on July 29, 2016. During the year ended December 31, 2016, revenues and profits generated by Santander U.K. were negligible relative to the overall revenues and profits of Santander Spain.
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(f) An Iranian national, resident in the U.K., who is currently designated by the U.S. under the Iranian Financial Sanctions Regulations and the Non-Proliferation of Weapons of Mass Destruction (NPWMD) designation, held a mortgage with Santander U.K. that was issued prior to such designation. The mortgage account was redeemed and closed on April 13, 2016. No further drawdown has been made (or would be allowed) under this mortgage although we continued to receive repayment instalments prior to redemption. Revenues generated by Santander U.K. on this account in the year ended December 31, 2016 were negligible relative to the overall revenues of Banco Santander S.A. The same Iranian national also held two investment accounts with Santander ISA Managers Limited. The funds within both accounts were invested in the same portfolio fund. The accounts remained frozen until the investments were closed on May 12, 2016 and bank checks issued to the customer. Revenues generated by Santander U.K. on these accounts in the year ended December 31, 2016 were negligible relative to the overall revenues of Santander Spain.
(g) In addition, during the year ended December 31, 2016, Santander U.K. held a basic current account for an Iranian national, resident in U.K., previously designated under the OFAC Iran designation. The account was closed in September 2016. Revenues generated by Santander U.K. on this account in the year ended December 31, 2016 were negligible relative to the overall revenues of Santander Spain.
In addition, the Santander Group has an outstanding legacy export credit facility with Bank Mellat. In 2005 Santander Spain participated in a syndicated credit facility for Bank Mellat of €15.5 million, which matured on July 6, 2015. As of December 31, 2016, the Group was owed €0.1 million not paid at maturity under this credit facility, corresponding to the 5% that was not covered by official export credit agencies.
Santander Spain has not been receiving payments from Bank Mellat under this or other credit facilities in recent years. Santander Spain has been and expects to continue to be repaid any amounts due by official export credit agencies. No funds have been extended by Santander under this facility since it was granted.
The Santander Group also has certain legacy performance guarantees for the benefit of Bank Sepah and Bank Mellat (stand-by letters of credit to guarantee the obligations – either under tender documents or under contracting agreements – of contractors who participated in public bids in Iran) that were in place prior to April 27, 2007.
In the aggregate, all of the transactions described above resulted in gross revenues and net profits in the year ended December 31, 2016, which were negligible relative to the overall revenues and profits of Santander Spain. The Santander Group has undertaken significant steps to withdraw from the Iranian market such as closing its representative office in Iran and ceasing all banking activities therein, including correspondent relationships, deposit taking from Iranian entities and issuing export letters of credit, except for the legacy transactions described above. The Santander Group is not contractually permitted to cancel these arrangements without either (i) paying the guaranteed amount (in the case of the performance guarantees), or (ii) forfeiting the outstanding amounts due to it (in the case of the export credits). As such, the Santander Group intends to continue to provide the guarantees and hold these assets in accordance with company policy and applicable laws.
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SELECTED STATISTICAL INFORMATION
The following information for Santander Brasil is included for analytical purposes and is derived from, and should be read in conjunction with, the consolidated financial statements and related notes contained elsewhere herein, as well as “Item 5. Operating and Financial Review and Prospects.”
Average annual balance sheet data has been calculated based upon the average of the monthly balances at 13 dates: as of December 31 of the prior year and each of the month-end balances of the 12 subsequent months. Average income statement and balance sheet data and other related statistical information have been prepared on a consolidated annual basis.
The selected statistical information set forth below includes information at and for the years ended December 31, 2016, 2015, 2014, 2013 and 2012 extracted from the audited financial statements prepared in conformity with IFRS as issued by the IASB. See “Presentation of Financial and Other Information” and “Item 3. Key Information—A. Selected Financial Data.”
Average Balance Sheet and Interest Rates
The following tables show our average balances and interest rates for each of the periods presented. With respect to the tables below and the tables under “—Changes in Net Interest Income – Volume and Rate Analysis” and “—Assets—Earning Assets – Yield Spread,” (i) we have stated average balances on a gross basis, before netting impairment losses, except for the total average asset figures, which include such netting, and (ii) all average data have been calculated using month-end balances, which is not significantly different from having used daily averages. We stop accruing interest on loans once they are more than 60 days past due. All our non-accrual loans are included in the table below under “Other assets.”
| For the year ended December 31, | ||||||||||||||||||||||||||||||||||||
| 2016 | 2015 | 2014 | ||||||||||||||||||||||||||||||||||
| Average Balance | Interest | Average Rate | Average Balance | Interest | Average Rate | Average Balance | Interest | Average Rate | ||||||||||||||||||||||||||||
| (in millions of R$, except percentages) | ||||||||||||||||||||||||||||||||||||
| Assets and Interest Income | ||||||||||||||||||||||||||||||||||||
| Cash and balances with the Brazilian Central Bank | 99,374 | 7,316 | 7.4 | % | 67,261 | 4,625 | 6.9 | % | 58,129 | 5,952 | 10.2 | % | ||||||||||||||||||||||||
| Loans and amounts due from credit institutions | 33,982 | 7,473 | 22.0 | % | 41,622 | 5,076 | 12.2 | % | 34,933 | 4,115 | 11.8 | % | ||||||||||||||||||||||||
| Loans and advances to customers | 239,762 | 43,978 | 18.3 | % | 245,749 | 41,845 | 17.0 | % | 215,524 | 37,084 | 17.2 | % | ||||||||||||||||||||||||
| Debt instruments | 128,105 | 14,783 | 11.5 | % | 122,137 | 14,872 | 12.2 | % | 88,968 | 10,419 | 11.7 | % | ||||||||||||||||||||||||
| Other interest – earning assets | — | 3,593 | — | — | 3,451 | — | — | 1,354 | — | |||||||||||||||||||||||||||
| Total interest – earning assets | 501,222 | 77,143 | 15.4 | % | 476,769 | 69,870 | 14.7 | % | 397,554 | 58,924 | 14.8 | % | ||||||||||||||||||||||||
| Equity instruments | 2,195 | 259 | 11.8 | % | 2,729 | 143 | 5.2 | % | 3,314 | 222 | 6.7 | % | ||||||||||||||||||||||||
| Investments in associates | 878 | — | — | 903 | — | — | 1,073 | — | — | |||||||||||||||||||||||||||
| Total earning assets | 504,296 | 77,401 | 15.3 | % | 480,401 | 70,013 | 14.6 | % | 401,940 | 59,146 | 14.7 | % | ||||||||||||||||||||||||
| Cash and balances with the Brazilian Central Bank | 2,995 | — | — | 3,056 | — | — | 3,088 | — | — | |||||||||||||||||||||||||||
| Loans and amounts due from credit institutions | 1,737 | — | — | 1,463 | — | — | 1,638 | — | — | |||||||||||||||||||||||||||
| Impairment losses | (15,539 | ) | — | — | (14,212 | ) | — | — | (13,750 | ) | — | — | ||||||||||||||||||||||||
| Other assets | 75,540 | — | — | 64,048 | — | — | 49,301 | — | — | |||||||||||||||||||||||||||
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| For the year ended December 31, | ||||||||||||||||||||||||||||||||||||
| 2016 | 2015 | 2014 | ||||||||||||||||||||||||||||||||||
| Average Balance | Interest | Average Rate | Average Balance | Interest | Average Rate | Average Balance | Interest | Average Rate | ||||||||||||||||||||||||||||
| (in millions of R$, except percentages) | ||||||||||||||||||||||||||||||||||||
| Tangible assets | 6,786 | — | — | 6,881 | — | — | 6,725 | — | — | |||||||||||||||||||||||||||
| Intangible assets | 29,832 | — | — | 30,222 | — | — | 29,625 | — | — | |||||||||||||||||||||||||||
| Total average assets | 605,646 | 77,401 | 12.8 | % | 571,860 | 70,013 | 12.2 | % | 478,560 | 59,146 | 12.4 | % | ||||||||||||||||||||||||
| Liabilities and Interest Expense | ||||||||||||||||||||||||||||||||||||
| Deposits from the Brazilian Central Bank and Deposits from credit institutions | 68,761 | 3,370 | 4.9 | % | 67,375 | 4,584 | 6.8 | % | 42,563 | 3,216 | 7.6 | % | ||||||||||||||||||||||||
| Customer deposits | 229,645 | 25,693 | 11.2 | % | 217,653 | 20,666 | 9.5 | % | 195,177 | 18,079 | 9.3 | % | ||||||||||||||||||||||||
| Marketable debt securities | 95,760 | 12,213 | 12.8 | % | 84,118 | 10,048 | 11.9 | % | 67,376 | 6,347 | 9.4 | % | ||||||||||||||||||||||||
| Subordinated debts | 13,901 | 1,233 | 8.9 | % | 16,070 | 1,523 | 9.5 | % | 13,523 | 1,319 | 9.8 | % | ||||||||||||||||||||||||
| Other interest-bearing liabilities | — | 3,759 | — | — | 1,308 | — | — | 2,415 | — | |||||||||||||||||||||||||||
| Total interest-bearing liabilities | 408,067 | 46,269 | 11.3 | % | 385,215 | 38,129 | 9.9 | % | 318,639 | 31,377 | 9.8 | % | ||||||||||||||||||||||||
| Noninterest bearing demand deposits | 15,393 | — | — | 14,792 | — | — | 13,568 | — | — | |||||||||||||||||||||||||||
| Other liabilities | 97,283 | — | — | 89,820 | — | — | 67,536 | — | — | |||||||||||||||||||||||||||
| Non-controlling interests | 638 | — | — | 557 | — | — | 344 | — | — | |||||||||||||||||||||||||||
| Stockholders’ Equity | 84,283 | — | — | 81,475 | — | — | 78,474 | — | — | |||||||||||||||||||||||||||
| Total average liabilities and equity | 605,646 | 46,269 | 7.6 | % | 571,860 | 38,129 | 6.7 | % | 478,560 | 31,377 | 6.6 | % | ||||||||||||||||||||||||
Changes in Net Interest Income – Volume and Rate Analysis
The following tables present the changes in our net interest income allocated between changes in average volume and changes in average rate for the year ended December 31, 2016, compared to the year ended December 31, 2015, and for the year ended December 31, 2015 compared to the year ended December 31, 2014. We have calculated volume variances based on movements in average balances over the period and rate variance based on changes in interest rates on average interest-earning assets and average interest-bearing liabilities. We have allocated variances caused by changes in both volume and rate to volume. You should read the following tables and the footnotes thereto in light of our observations noted in “—Average Balance Sheet and Interest Rates.”
| For the years ended 2016/2015 | For the years ended 2015/2014 | |||||||||||||||||||||||
| Increase (decrease) due to changes in | ||||||||||||||||||||||||
| Volume | Rate | Net change | Volume | Rate | Net change | |||||||||||||||||||
| (in millions of R$) | ||||||||||||||||||||||||
| Interest and Similar Income | ||||||||||||||||||||||||
| Interest-earning assets | ||||||||||||||||||||||||
| Cash and balances with the Brazilian Central Bank | 2,344 | 346 | 2,690 | 836 | (2,162 | ) | (1,326 | ) | ||||||||||||||||
| Loans and amounts due from credit institutions | (1,071 | ) | 3,468 | 2,397 | 811 | 149 | 961 | |||||||||||||||||
| Loans and advances to customers | (1,038 | ) | 3,172 | 2,133 | 5,150 | (389 | ) | 4,761 | ||||||||||||||||
| Debt instruments | 708 | (798 | ) | (90 | ) | 4,024 | 429 | 4,453 | ||||||||||||||||
| Other interest-earning assets | 142 | — | 142 | 2,097 | — | 2,097 | ||||||||||||||||||
| Total interest-earning assets | 1,085 | 6,188 | 7,273 | 12,919 | (1,973 | ) | 10,946 | |||||||||||||||||
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| For the years ended 2016/2015 | For the years ended 2015/2014 | |||||||||||||||||||||||
| Increase (decrease) due to changes in | ||||||||||||||||||||||||
| Volume | Rate | Net change | Volume | Rate | Net change | |||||||||||||||||||
| (in millions of R$) | ||||||||||||||||||||||||
| Equity Instruments | (33 | ) | 148 | 116 | (35 | ) | (44 | ) | (79 | ) | ||||||||||||||
| Total earning assets | 1,052 | 6,336 | 7,388 | 12,884 | (2,017 | ) | 10,866 | |||||||||||||||||
| Interest Expense and Similar Charges | ||||||||||||||||||||||||
| Interest-bearing liabilities | ||||||||||||||||||||||||
| Deposits from the Brazilian Central Bank and Deposits from credit institutions | 93 | (1,307 | ) | (1,214 | ) | 1,715 | (347 | ) | 1,368 | |||||||||||||||
| Customer deposits | 1,187 | 3,840 | 5,027 | 2,125 | 462 | 2,587 | ||||||||||||||||||
| Marketable debt securities | 1,454 | 711 | 2,165 | 1,781 | 1,920 | 3,700 | ||||||||||||||||||
| Subordinated liabilities | (197 | ) | (93 | ) | (289 | ) | 242 | (38 | ) | 204 | ||||||||||||||
| Other interest-bearing liabilities | 2,451 | — | 2,451 | (1,107 | ) | — | (1,107 | ) | ||||||||||||||||
| Total interest-bearing liabilities | 4,988 | 3,152 | 8,140 | 4,756 | 1,996 | 6,752 | ||||||||||||||||||
Assets
Earning Assets – Yield Spread
The following table analyzes our average earning assets, interest income and dividends on equity securities and net interest income and shows gross yields, net yields and yield spread for each of the periods indicated. You should read this table and the footnotes thereto in light of our observations noted in “—Average Balance Sheet and Interest Rates.”
| For the year ended December 31, | ||||||||||||
| 2016 | 2015 | 2014 | ||||||||||
| (in millions of R$, except percentages) | ||||||||||||
| Average earning assets | 504,296 | 480,401 | 401,940 | |||||||||
| Interest and dividends on equity securities(1) | 77,401 | 70,013 | 59,146 | |||||||||
| Net interest income | 31,133 | 31,884 | 27,769 | |||||||||
| Gross yield(2) | 15.3 | % | 14.6 | % | 14.7 | % | ||||||
| Net yield(3) | 6.2 | % | 6.6 | % | 6.9 | % | ||||||
| Yield spread(4) | 4.0 | % | 4.7 | % | 4.9 | % | ||||||
| (*) | Yield information does not give effect to changes in fair value that are reflected as a component of stockholder’s equity. |
| (1) | Total earning assets plus dividends from companies accounted for by the equity method (equity instruments). |
| (2) | Gross yield is the amount of “Interest and dividends on equity securities” divided by “Average earning assets.” |
| (3) | Net yield is the amount of “Net interest income” divided by “Average earning assets.” |
| (4) | Yield spread is the difference between the average rate of “Total earning asset” and the average rate of “Total interest-bearing liabilities.” |
Return on Equity and Assets
The following table presents our selected financial ratios for the periods indicated.
| For the year ended December 31, | ||||||||||||
| 2016 | 2015 | 2014 | ||||||||||
| ROAA: Return on average total assets | 1.2 | % | 1.7 | % | 1.2 | % | ||||||
| ROAE: Return on average stockholders’ equity | 8.9 | % | 12.1 | % | 7.3 | % | ||||||
| ROAE (adjusted) (1) | 13.3 | % | 18.5 | % | 11.3 | % | ||||||
| Average stockholders’ equity as a percentage of average total assets | 13.9 | % | 14.2 | % | 16.4 | % | ||||||
| Payout(2) | 71.6 | % | 63.4 | % | 27.1 | % | ||||||
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| (1) | “Average stockholders’ equity excluding goodwill as a percentage of average total assets excluding goodwill” is a non-GAAP financial measure which adjusts “Return on average stockholders’ equity” to exclude the goodwill arising from the acquisition of Banco Real in 2008. See “Item 3. Key Information—A. Selected Financial Data—Selected Consolidated Ratios” for a reconciliation of “Average stockholders’ equity excluding goodwill as a percentage of average total assets excluding goodwill” to “Return on average stockholders’ equity.” |
| (2) | Dividend payout ratio (dividends declared per preferred share divided by net income per preferred share). |
Interest-Earning Assets (other than Loans)
The following table shows the percentage mix of our average interest-earning assets for the years indicated. You should read this table in light of our observations noted in “—Average Balance Sheet and Interest Rates.”
| For the year ended December 31, | ||||||||||||
| 2016 | 2015 | 2014 | ||||||||||
| Cash and balances with the Brazilian Central Bank | 19.8 | % | 14.1 | % | 14.6 | % | ||||||
| Loans and amounts due from credit institutions | 6.8 | % | 8.7 | % | 8.8 | % | ||||||
| Loans and advances to customers | 47.8 | % | 51.5 | % | 54.2 | % | ||||||
| Debt instruments | 25.6 | % | 25.6 | % | 22.4 | % | ||||||
| Total interest-earning assets | 100.0 | % | 100.0 | % | 100.0 | % | ||||||
Loans and Amounts Due from Credit Institutions
The following table shows our short-term funds deposited with other banks at each of the dates indicated.
| For the year ended December 31, | ||||||||||||
| 2016 | 2015 | 2014 | ||||||||||
| (in millions of R$) | ||||||||||||
| Time deposits | 2,070 | 3,627 | 4,819 | |||||||||
| Reverse repurchase agreements | 848 | 153 | 2,408 | |||||||||
| Escrow deposits | 9,836 | 9,493 | 8,170 | |||||||||
| Cash and foreign currency investments | 13,195 | 24,058 | 12,398 | |||||||||
| Other accounts | 2,014 | 5,271 | 1,264 | |||||||||
| Total | 27,964 | 42,601 | 29,059 | |||||||||
Investment Securities
As of December 31, 2016 and 2015, the book value of investment securities was R$146 billion and R$118 billion, respectively (representing 23.0% and 19.5% of our total assets as of such dates). Brazilian government securities totaled R$123 billion, or 84.2% and R$93 billion, or 78.8% of our investment securities as of December 31, 2016 and 2015, respectively. For a discussion of how our investment securities are valued, see notes 6 and 7 to our consolidated financial statements.
The following table shows the carrying amounts of our investment securities by type and residence of the counterparty at each of the indicated dates:
| As of December 31, | ||||||||||||
| 2016 | 2015 | 2014 | ||||||||||
| (in millions of R$) | ||||||||||||
| Debt securities | ||||||||||||
| Government securities—Brazil | 122,972 | 93,440 | 103,598 | |||||||||
| Debentures and promissory notes | 12,923 | 11,967 | 13,428 | |||||||||
| Other debt securities | 7,931 | 10,307 | 3,685 | |||||||||
| Total domestic/debt securities | 143,825 | 115,714 | 120,711 | |||||||||
| 94 |
| As of December 31, | ||||||||||||
| 2016 | 2015 | 2014 | ||||||||||
| (in millions of R$) | ||||||||||||
| Equity securities | ||||||||||||
| Shares of Brazilian companies | 1,186 | 1,168 | 1,339 | |||||||||
| Shares of foreign companies | 4 | 11 | 8 | |||||||||
| Investment fund units and shares | 1,237 | 961 | 1,601 | |||||||||
| Total equity securities | 2,426 | 2,141 | 2,948 | |||||||||
| Total investment securities | 146,251 | 117,855 | 123,659 | |||||||||
As of December 31, 2016 and 2015, we held no securities of single issuers or related groups of companies whose aggregate book or market value exceed 10.0% of our stockholders’ equity, other than the Brazilian government securities, which represented 145% and 117%, respectively, of our stockholders’ equity. As of December 31, 2016 and 2015, the total value of our debt securities was approximately 170% and 145%, respectively, of stockholders’ equity.
The following table analyzes the maturities and weighted average yields of our debt investment securities (before impairment allowance) as of December 31, 2016. Yields on tax-exempt obligations have not been calculated on a tax equivalent basis because the effect on such calculation is not significant.
| Maturing
within 1 year | Maturing
between 1 and 5 years | Maturing between 5 and 10 years | Maturing
after 10 years | Total | ||||||||||||||||
| (in R$ millions) | ||||||||||||||||||||
| Debt securities | ||||||||||||||||||||
| Government securities—Brazil | 27,711 | 56,144 | 27,851 | 11,266 | 122,972 | |||||||||||||||
| Other debt securities | 9,218 | 9,727 | 1,709 | 199 | 20,853 | |||||||||||||||
| Total debt investment securities | 36,928 | 65,871 | 29,560 | 11,465 | 143,825 | |||||||||||||||
The average rate for debt investment securities is 13.4%.
Domestic and Foreign Currency
The following table shows our assets and liabilities by domestic and foreign currency, on December 31, 2016, 2015, and 2014:
| As of December 31, | ||||||||||||||||||||||||
| 2016 | 2015 | 2014 | ||||||||||||||||||||||
| Domestic currency | Foreign currency | Domestic currency | Foreign currency | Domestic currency | Foreign currency | |||||||||||||||||||
| (in millions of R$) | ||||||||||||||||||||||||
| Assets | ||||||||||||||||||||||||
| Cash and Balances With The Brazilian Central Bank | 110,430 | 175 | 88,909 | 234 | 55,694 | 209 | ||||||||||||||||||
| Debt instruments | 134,038 | 9,788 | 109,837 | 5,877 | 114,257 | 6,454 | ||||||||||||||||||
| Equity instruments | 2,426 | — | 2,141 | — | 2,948 | — | ||||||||||||||||||
| Loans and amounts due from credit institutions, gross | 25,421 | 2,542 | 18,631 | 23,970 | 15,470 | 13,590 | ||||||||||||||||||
| Loans and advances to customers, gross | 257,170 | 11,267 | 264,491 | 2,775 | 208,353 | 40,127 | ||||||||||||||||||
| Total Assets | 529,485 | 23,772 | 484,009 | 32,857 | 397,353 | 60,380 | ||||||||||||||||||
| Liabilities | ||||||||||||||||||||||||
| Financial Liabilities at Amortized Cost | ||||||||||||||||||||||||
| Deposits from Brazilian Central Bank and credit institutions | 51,340 | 27,294 | 33,056 | 36,395 | 39,520 | 24,154 | ||||||||||||||||||
| Customer deposits | 247,445 | — | 232,344 | 10,699 | 211,188 | 9,457 | ||||||||||||||||||
| Marketable debt securities | 92,132 | 7,711 | 82,507 | 12,151 | 59,870 | 10,485 | ||||||||||||||||||
| Subordinated debts | 466 | — | 8,097 | — | 7,294 | — | ||||||||||||||||||
| 95 |
| As of December 31, | ||||||||||||||||||||||||
| 2016 | 2015 | 2014 | ||||||||||||||||||||||
| Domestic currency | Foreign currency | Domestic currency | Foreign currency | Domestic currency | Foreign currency | |||||||||||||||||||
| (in millions of R$) | ||||||||||||||||||||||||
| Debt Instruments Eligible to Compose Capital | 8,312 | — | 9,959 | — | 6,773 | — | ||||||||||||||||||
| Other financial liabilities | 36,879 | — | 32,073 | — | 23,446 | — | ||||||||||||||||||
| Total Liabilities | 436,574 | 35,005 | 398,036 | 59,245 | 392,186 | 44,096 | ||||||||||||||||||
Loan Portfolio
As of December 31, 2016, our total loans and advances to customers were R$268.4 billion (42.3% of our total assets). Net impairment losses, loans and advances to customers were R$252 billion as of December 31, 2016 (39.7% of our total assets). In addition to loans, we had outstanding as of December 31, 2016, 2015, 2014, 2013 and 2012, R$91.2 billion, R$91.9 billion, R$98.6 billion, R$100.5 billion and R$106.8 billion respectively, of loan commitments drawable by third parties.
Types of Loans by Type of Customer
Substantially all of our loans are to borrowers domiciled in Brazil and are denominated in reais. The table below analyzes our loans and advances to customers (including securities purchased under agreements to resell), by type of customer loan, at each of the dates indicated. For each category of loan, we maintain specific risk management policies in line with the standards of the Santander Group and as managed and monitored by our board of officers through the credit committee. Our credit approval processes for each category of loan are structured primarily around our business segments. See “Item 11. Quantitative and Qualitative Disclosures about Risk—Credit Risk” for details on our credit approval policies for retail and wholesale lending.
We have a diversified loan portfolio with no specific concentration exceeding 10% of our total loans. Furthermore, currently, 2% of our loan portfolio is allocated to our largest debtor and 10% to our next 10 largest debtors.
As of December 31, | ||||||||||||||||||||
2016 | 2015 | 2014 | 2013 | 2012 | ||||||||||||||||
| (in millions of R$) | ||||||||||||||||||||
| Commercial and industrial(1) | 140,993 | 150,881 | 133,087 | 113,571 | 103,206 | |||||||||||||||
| Real estate – (2) | 36,650 | 36,852 | 31,864 | 25,555 | 20,110 | |||||||||||||||
| Installment loans to individuals(3) | 88,702 | 77,407 | 81,893 | 84,312 | 83,243 | |||||||||||||||
| Lease financing(4) | 2,093 | 2,126 | 2,266 | 2,768 | 4,182 | |||||||||||||||
| Loans and advances to customers, gross(5) | 268,438 | 267,266 | 249,111 | 226,206 | 210,741 | |||||||||||||||
| Impairment losses | (16,435 | ) | (15,233 | ) | (13,421 | ) | (13,472 | ) | (13,967 | ) | ||||||||||
| Loans and advances to customers, net | 252,003 | 252,033 | 235,690 | 212,734 | 196,774 | |||||||||||||||
| (1) | Includes primarily loans to small and medium-size businesses, or SMEs in our Commercial Banking segment, and to GCB, corporate and business enterprise customers in our Wholesale Global Banking segment. The principal products offered to SMEs in this category include revolving loans, overdraft facilities, installment loans, working capital and equipment finance loans. Credit approval for SMEs is based on customer income, business activity, collateral coverage and internal and external credit scoring tools. Collateral on commercial and industrial lending to SMEs generally includes receivables, liens, pledges, guarantees and mortgages, with coverage generally ranging from 100.0% to 150.0% of the loan value depending on the risk profile of the loan. Our Wholesale Global Banking customers are offered a range of loan products ranging from typical corporate banking products (installment loans, working capital and equipment finance loans) to more sophisticated products (derivative and capital markets transactions). As Wholesale Global Banking customers tend to be larger businesses, credit approval is based on customer credit quality as evaluated by a specialized team of risk analysts taking account of, among other things, business revenues and credit history of each customer. |
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Underwriting policies for this category of loan to our Wholesale Global Banking customers are focused on the type of guarantee or collateral provided. Certain loans (BNDES products) are generally secured by liens on financed machinery and equipment, though guarantees may be provided as additional security.
| (2) | Includes loans on residential real estate to individuals. Credit approval policies in this category are determined by reference to the type of lending product being offered, the type and location of the real estate, the revenue or income of the business or customer, respectively, requesting the loan and internal and external credit scoring information. All loans granted under this category are secured by the financed real estate. Loan-to-value ratios for loans in this category are generally limited to 80.0% and the average loan to value ratio for new loans is approximately between 54.0% and 60.0%. Moreover, real estate also includes construction loans made principally to real estate developers that are SMEs and corporate customers in our Wholesale Global Banking Segment. Loans in this category are generally secured by mortgages and receivables, though guarantees may be provided as additional security. |
| (3) | Consists primarily of unsecured and secured personal installment loans (including loans the payments for which are automatically deducted from a customer’s payroll), revolving loans, overdraft facilities, consumer finance facilities and credit cards. Credit approval in this category is based on individual income, debt-to-income ratio and internal and external credit scoring models. Credit approval for many of these types of loans is based on automatic scoring models, with pre-set lending limits based on credit scores. For example, the maximum lending amount on revolving loans and overdraft facilities may vary from between 60.0% to 240.0% of an individual’s monthly income, depending on the specific product and credit score of the individual. |
| (4) | Includes primarily automobile leases and loans to individuals and other leases to corporate customers. Credit approval is based both on an automatic scoring model using external credit scores and on evaluation by our branch personnel following our risk management policies. The vehicle financed acts as collateral for the particular loan granted. |
| (5) | Includes commercial credit, credit granted by us, money market operations, lease financing, other time credits and impaired assets. |
Maturity
The following table sets forth an analysis by maturity of our loans and advances to customers by type of loans on December 31, 2016.
| Maturity | ||||||||||||||||||||||||||||||||
| Less than one year | One to five years | Over five years | Total | |||||||||||||||||||||||||||||
| Balance | %
of Total Loans | Balance | %
of Total Loans | Balance | %
of Total Loans | Balance | %
of Total Loans | |||||||||||||||||||||||||
| (in millions of R$, except percentages) | ||||||||||||||||||||||||||||||||
| Commercial and industrial | 99,657 | 62.0 | 35,789 | 45.0 | 5,547 | 20.0 | 140,993 | 52.5 | ||||||||||||||||||||||||
| Real estate | 8,649 | 5.3 | 11,761 | 14.8 | 16,240 | 59.2 | 36,650 | 13.7 | ||||||||||||||||||||||||
| Installment loans to individuals | 52,206 | 32.3 | 30,868 | 38.9 | 5,628 | 20.5 | 88,702 | 33.0 | ||||||||||||||||||||||||
| Lease financing | 1,152 | 0.7 | 938 | 1.2 | 2 | 0.0 | 2,093 | 0.8 | ||||||||||||||||||||||||
| Loans and advances to customers, gross | 161,664 | 100 | 79,356 | 100 | 27,417 | 100 | 268,438 | 100 | ||||||||||||||||||||||||
Fixed and Variable Rate Loans
The following table sets forth a breakdown of our fixed and variable rate loans by maturity as of December 31, 2016.
| Fixed and variable rate loans with maturity | ||||||||||||||||||||||||||||||||
| Less than one year | One to five years | Over five years | Total | |||||||||||||||||||||||||||||
| Balance | % of Total | Balance | % of Total | Balance | % of Total | Balance | % of Total | |||||||||||||||||||||||||
| (in millions of R$, except percentages) | ||||||||||||||||||||||||||||||||
| Fixed rate | 123,542 | 76.4 | 47,332 | 59.6 | 7,356 | 26.8 | 178,231 | 66.4 | ||||||||||||||||||||||||
| Variable rate | 38,122 | 23.6 | 32,024 | 40.4 | 20,061 | 73.2 | 90,207 | 33.6 | ||||||||||||||||||||||||
| Total | 161,664 | 100 | 79,356 | 100 | 27,417 | 100 | 268,438 | 100 | ||||||||||||||||||||||||
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Cross-Border Outstandings
The following table presents, at each balance sheet date indicated, the aggregate amount of our cross-border outstandings (which consist of loans, interest-bearing deposits with other banks, acceptances and other monetary assets denominated in a currency other than the home-country currency of the office where the item is booked). Cross-border outstandings do not include local currency loans made by subsidiary banks in other countries to the extent that such loans are funded in the local currency or hedged. As a result, they do not include the majority of the loans made by our Cayman Islands branch, which are fully hedged.
| As of December 31, | ||||||||||||||||||||||||
| 2016 | 2015 | 2014 | ||||||||||||||||||||||
| Balance | %
of Total Assets | Balance | %
of Total Assets | Balance | %
of Total Assets | |||||||||||||||||||
| (in millions of R$, except percentages) | ||||||||||||||||||||||||
| OECD countries(1) | ||||||||||||||||||||||||
| Austria | 168 | 0.0 | — | — | 36 | — | ||||||||||||||||||
| Spain | 1,495 | 0.2 | 240 | — | 217 | — | ||||||||||||||||||
| United States | 1,692 | 0.3 | 2,686 | 0.4 | 8,094 | 1.6 | ||||||||||||||||||
| Netherlands | 6,595 | 1.0 | 5,474 | 0.9 | 12,556 | 2.4 | ||||||||||||||||||
| Other OECD countries(2) | 1,042 | 0.2 | 374 | 0.1 | 626 | 0.1 | ||||||||||||||||||
| Total OECD | 10,992 | 1.7 | 8,774 | 1.4 | 21,529 | 4.1 | ||||||||||||||||||
| Non-OECD countries | ||||||||||||||||||||||||
| Latin American countries(2) | 55 | 0.0 | 522 | 0.1 | 128 | — | ||||||||||||||||||
| Cayman Islands | 1,301 | 0.2 | 4,372 | 0.7 | 825 | 0.2 | ||||||||||||||||||
| Other(2) | 463 | 0.1 | 574 | 0.1 | 267 | 0.1 | ||||||||||||||||||
| Total non-OECD | 1,819 | 0.3 | 5,468 | 0.9 | 1,220 | 0.2 | ||||||||||||||||||
| Total | 12,811 | 2.0 | 14,242 | 2.4 | 22,749 | 4.4 | ||||||||||||||||||
| (1) | The Organization for Economic Cooperation and Development. |
| (2) | Aggregate outstandings in any single country in this category do not exceed 0.75% of our total assets. |
The following table presents the amounts of our cross-border outstandings as of December 31, 2016, 2015 and 2014 by type of borrower where outstandings in the borrower’s country exceeded 0.75% of total assets.
| Government | Banks
and Other Financial Institutions | Commercial and Industrial | Other Loans | Total | ||||||||||||||||
| (in millions of R$) | ||||||||||||||||||||
| 2014 | ||||||||||||||||||||
| United States | — | 8,023 | 71 | — | 8,094 | |||||||||||||||
| Netherlands | — | 21 | 12,535 | — | 12,556 | |||||||||||||||
| Cayman Islands | — | — | 510 | 53 | 563 | |||||||||||||||
| Total | — | 8,044 | 13,116 | 53 | 21,213 | |||||||||||||||
| 2015 | ||||||||||||||||||||
| United States | — | 2,621 | 59 | — | 2,680 | |||||||||||||||
| Netherlands | — | — | 5,474 | — | 5,474 | |||||||||||||||
| Cayman Islands | — | 2,265 | — | — | 2,265 | |||||||||||||||
| Total | — | 4,886 | 5,533 | — | 10,419 | |||||||||||||||
| 2016 | ||||||||||||||||||||
| United States | — | 2,621 | 23 | 43 | 1,692 | |||||||||||||||
| Netherlands | — | — | 6,595 | — | 6,595 | |||||||||||||||
| Austria | — | 168 | — | — | 168 | |||||||||||||||
| Cayman Islands | — | 778 | — | — | 778 | |||||||||||||||
| Total | — | 2,572 | 6,618 | 43 | 9,233 | |||||||||||||||
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Changes in Allowances for Impairment Losses on the Balances of “Loans and receivables”
The following tables analyze changes in our allowances for impairment losses for the periods indicated. For further discussion of movements in the allowances for impairment losses, see “Item 5. Operating and Financial Review and Prospects—A. Operating Results—Results of Operations for the Year Ended December 31, 2016 Compared to the Year Ended December 31, 2015—Impairment Losses on Financial Assets (Net)” and “—Results of Operations for the Year Ended December 31, 2015 Compared to the Year Ended December 31, 2014—Impairment Losses on Financial Assets (Net).”
| As of December 31, | ||||||||||||||||||||
| 2016 | 2015 | 2014 | 2013 | 2012 | ||||||||||||||||
| (in millions of R$) | ||||||||||||||||||||
| Balance at beginning of year | 15,412 | 13,563 | 13,641 | 14,042 | 11,180 | |||||||||||||||
| Impairment losses charged to income for the year | 14,383 | 13,723 | 12,049 | 14,356 | 18,004 | |||||||||||||||
| Write-off of impaired balances against recorded impairment allowance | (11,605 | ) | (11,874 | ) | (12,126 | ) | (14,757 | ) | (15,142 | ) | ||||||||||
| Balance at end of year | 18,191 | 15,412 | 13,563 | 13,641 | 14,042 | |||||||||||||||
| Of which: | ||||||||||||||||||||
| Loans and advances to customers | 16,435 | 15,233 | 13,421 | 13,472 | 13,967 | |||||||||||||||
| Loans and amounts due from credit institutions | 201 | 179 | 142 | 168 | 75 | |||||||||||||||
| Debt Instruments | 1,555 | 144 | — | — | — | |||||||||||||||
| Recoveries of loans previously written off(1) | 994 | 757 | 855 | 456 | 1,528 | |||||||||||||||
| (1) | Impairment losses on financial assets, net, as reported in our consolidated financial statements, reflect net provisions for credit losses less recoveries of loans previously written off. |
Allowance by Type of Borrower
The table below shows a breakdown of recoveries, net provisions and write-offs against credit loss allowance by type of borrower for the periods indicated.
| For the year ended December 31, | ||||||||||||||||||||
| 2016 | 2015 | 2014 | 2013 | 2012 | ||||||||||||||||
| (in millions of R$) | ||||||||||||||||||||
| Recoveries of loans previously written off(1) | 994 | 757 | 855 | 456 | 1,528 | |||||||||||||||
| Commercial and industrial | 563 | 294 | 185 | 123 | 456 | |||||||||||||||
| Real estate | 103 | 86 | 81 | 78 | 64 | |||||||||||||||
| Installment loans to individuals | 314 | 348 | 560 | 215 | 960 | |||||||||||||||
| Lease finance | 14 | 29 | 29 | 41 | 48 | |||||||||||||||
| Impairment losses charged to income for the year(1) | 14,383 | 13,723 | 12,048 | 14,356 | 18,004 | |||||||||||||||
| Commercial and industrial | 6,523 | 6,634 | 4,875 | 5,186 | 5,776 | |||||||||||||||
| Real estate – mortgage | 369 | 91 | 38 | 126 | 149 | |||||||||||||||
| Installment loans to individuals | 7,617 | 6,766 | 6,867 | 8,803 | 11,795 | |||||||||||||||
| Lease finance | (125 | ) | 232 | 268 | 241 | 284 | ||||||||||||||
| Write-off of impaired balances against recorded impairment allowance | (11,605 | ) | (11,874 | ) | (12,126 | ) | (14,757 | ) | (15,142 | ) | ||||||||||
| Commercial and industrial | (4,553 | ) | (4,953 | ) | (4,494 | ) | (3,195 | ) | (4,992 | ) | ||||||||||
| Real estate | (190 | ) | (77 | ) | (97 | ) | (177 | ) | (48 | ) | ||||||||||
| Installment loans to individuals | (6,811 | ) | (6,622 | ) | (7,337 | ) | (11,093 | ) | (9,855 | ) | ||||||||||
| Lease finance | (51 | ) | (222 | ) | (199 | ) | (292 | ) | (247 | ) | ||||||||||
| (1) | Impairment losses on financial assets, net, as reported in our consolidated financial statements, reflect net provisions for credit losses less recoveries of loans previously written off. |
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The table below shows a breakdown of allowances for credit losses by type of borrowers and the percentage of loans in each category as a share of total loans at the date indicated.
| As of December 31, | ||||||||||||||||||||||||
| 2016 | %
of Total Loans | 2015 | %
of Total Loans | 2014 | %
of Total Loans | |||||||||||||||||||
| (in millions of R$, except percentages) | ||||||||||||||||||||||||
| Borrowers | ||||||||||||||||||||||||
| Commercial and industrial | 10,555 | 58.0 | 8,586 | 55.7 | 6,905 | 50.9 | ||||||||||||||||||
| Real estate | 364 | 2.0 | 184 | 1.2 | 170 | 1.3 | ||||||||||||||||||
| Installment loans to individuals | 7,226 | 39.7 | 6,420 | 41. 7 | 6,276 | 46.3 | ||||||||||||||||||
| Lease financing | 46 | 0.3 | 222 | 1.4 | 212 | 1.6 | ||||||||||||||||||
| Total | 18,191 | 100 | 15,412 | 100.0 | % | 13,563 | 100.0 | % | ||||||||||||||||
Internal Risk Rating
The following table presents a breakdown of our portfolio by internal risk rating, at the dates indicated:
| As
of December 31, | ||||||||||||
| 2016 | 2015 | 2014 | ||||||||||
| (in millions of R$) | ||||||||||||
| Internal Risk Rating (1) | ||||||||||||
| Low | 207,890 | 211,645 | 199,201 | |||||||||
| Medium-low | 32,104 | 29,501 | 27,044 | |||||||||
| Medium | 10,941 | 8,639 | 7,935 | |||||||||
| Medium-high | 6,977 | 8,552 | 5,899 | |||||||||
| High | 10,526 | 8,929 | 9,032 | |||||||||
| Loans and advances to customers, gross | 268,438 | 267,266 | 249,111 | |||||||||
For further information on our internal risk rating levels and their corresponding probability of default, see “Item 11. Quantitative and Qualitative Disclosures about Risk—Credit Risk—Credit Monitoring.”
Renegotiation Portfolio
The renegotiation portfolio for the year ended on December 31, 2016 amounted to R$12 billion, compared to R$11.4 billion for the same period in 2015, an increase of R$597 million or 5.2%. This portfolio includes loans and advances to customers that were extended and/or modified to facilitate repayment under conditions agreed upon with customers.
The renegotiation portfolio was covered by allowances for impairment losses of 51.9% as of December 31, 2016 and 50.4% as of December 31, 2015. These levels are considered appropriate for the characteristics of these loans and advances to customers.
The following table presents a breakdown of our renegotiation portfolio by type of customer, allowances for impairment losses and our coverage ratio at the dates indicated:
| 2016 | 2015 | 2014 | ||||||||||
| (in millions of R$, except percentages) | ||||||||||||
| Renegotiation Portfolio by type of customer | ||||||||||||
| Commercial and industrial | 5,763 | 5,158 | 5,944 | |||||||||
| Real Estate | — | — | — | |||||||||
| Installment loans to individuals | 6,130 | 6,173 | 6,650 | |||||||||
| Financial leasing | 99 | 64 | 56 | |||||||||
| Total | 11,992 | 11,395 | 12,650 | |||||||||
| Allowances for impairment losses | 6,226 | 5,740 | 5,784 | |||||||||
| Coverage ratio | 51.92 | % | 50.4 | % | 45.7 | % | ||||||
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Balances are deemed to be impaired when there are reasonable doubts as to their full recovery and/or the collection of the related interest for the amounts on the dates indicated in the loan agreement, after taking into account the collateral guarantees received to secure (fully or partially) collection of the related balances.
In relation to renegotiated products, we, through our internal renegotiation policy, require at least a minimum amount of payment of quotas for any renegotiated products to be considered performing (note that the classification of such transactions as renegotiated operations will remain even after such payments). Renegotiated loans that are more than 60 days late than due date are also accounted for as impaired.
Since 2015, we increased our efforts regarding the collection of loans that are less than 60 days past due and also in relation to written off loans. We are also continuing with our strategy (in place since 2012) of granting loans to persons with low risk profile and higher levels of collaterals and guarantees.
Impaired Assets
The following table shows our impaired assets, excluding country risk.
| As of December 31, | ||||||||||||||||||||
| 2016 | 2015 | 2014 | 2013 | 2012 | ||||||||||||||||
| (in millions of R$, except percentages) | ||||||||||||||||||||
| Impaired assets | ||||||||||||||||||||
| Past due and other impaired assets(1) | 18,887 | 18,599 | 14,011 | 14,022 | 16,057 | |||||||||||||||
| Impaired assets as a percentage of total loans | 7.0 | % | 7.0 | % | 5.6 | % | 6.2 | % | 7.6 | % | ||||||||||
| Net loan charge-offs as a percentage of total loans | 4.3 | % | 4.4 | % | 4.9 | % | 6.5 | % | 7.2 | % | ||||||||||
| Net loan charge-offs as a percentage of average total loans | 4.5 | % | 4.5 | % | 5.3 | % | 6.8 | % | 7.5 | % | ||||||||||
| (1) | Includes as of December 31, 2016, R$5,576 million of doubtful loans (R$5,549 million in 2015, R$3,959 million in 2014, R$1,744 million in 2013 and R$1,087 million in 2012) that were not past-due. |
Evolution of Impaired Assets
Our impaired assets increased by 1.6%, or R$289 million, to R$18,888 million as of December 31, 2016, compared to R$18,559 million as of December 31, 2015. Provisions for impairment losses, including total recoveries of loans previously charged off, increased 18%, or R$2,779 million, to R$18,191 million as of December 31, 2016, compared to R$15,412 million as of December 31, 2015. Offsetting these effects were recoveries of R$994 million on loans previously written off as of December 31, 2016 and R$757 million as of December 31, 2015.
Santander Brasil believes the provisions it has taken were adequate to cover all known or reasonably probable losses or incurred losses in the credit portfolio of loans and other assets as of December 31, 2016 and as of the date of this annual report.
The following table shows the changes in our impaired assets at the dates indicated:
| As of December 31, | ||||||||||||||||||||
| 2016 | 2015 | 2014 | 2013 | 2012 | ||||||||||||||||
| (in millions of R$) | ||||||||||||||||||||
| Balance at beginning of year | 18,599 | 14,011 | 14,022 | 16,057 | 13,073 | |||||||||||||||
| Net additions | 11,893 | 16,462 | 12,114 | 12,722 | 18,126 | |||||||||||||||
| Write-offs | (11,605 | ) | (11,874 | ) | (12,127 | ) | (14,757 | ) | (15,142 | ) | ||||||||||
| Balance at end of year | 18,887 | 18,599 | 14,011 | 14,022 | 16,057 | |||||||||||||||
The amount of “net additions” for any period is assets that became impaired in that period less assets that were impaired but became performing in that period. The main addition in 2015 was debt of the companies of the gas sector. In 2016, better options to restructure debts decreased the “net additions” to impaired assets, keeping the amount relatively stable.
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Impaired Assets by Type of Customer
The following table shows the amount of our impaired assets by type of customers at the dates indicated:
| As of December 31, | ||||||||
| 2016 | 2015 | |||||||
| (in millions of R$) | ||||||||
| Commercial and industrial | 11,629 | 10,749 | ||||||
| Real estate | 719 | 829 | ||||||
| Installment loans to individuals | 6,488 | 6,970 | ||||||
| Lease financing | 52 | 52 | ||||||
| Total | 18,887 | 18,599 | ||||||
Commercial and Industrial
Impaired assets in the portfolio of commercial and industrial loans amounted to R$11,629 million as of December 31, 2016, an increase of R$880 million, or 8.2%, compared to R$10,749 million as of December 31, 2015. The increase in impaired assets in this portfolio was mainly caused by the slowdown in the Brazilian economy observed in the last two years, affecting our commercial and industrial portfolio. Due to an increase in impaired assets, Santander Brasil kept its measures to manage impaired assets, especially collection practices with respect to our borrowers whereby we offered certain customers the chance to negotiate a restructuring of their debts.
Real Estate
Impaired assets in the real estate lending portfolio totaled R$719 million on December 31, 2016, a decrease of R$111 million, or 13.27%, compared to R$829 million as of December 31, 2015. The decrease in impaired assets was primarily due to better management of this portfolio: with improved options for customers to restructure their debt causing the default rate to decrease to 1.96%, compared to 2.25% as of December 31, 2015, even with a slowdown in the Brazilian economy, which resulted in higher unemployment rates, affecting the ability of our customers to honor their debts.
Installment Loans to Individuals
Impaired assets in the installment loans to individuals lending portfolio totaled R$6,488 million as of December 31, 2016, with a decrease of R$482 million, or 6.9%, compared to 2015. This decrease in impaired assets reflects the measures adopted by Santander Brasil since late 2012 to manage default rates in this portfolio, which included the adaptation of credit limits for new customers, the development of new loan models with “predictive scoring” enhancements and recovery campaigns to offer to delinquent customers loan terms adjustments to help them meet their payment obligations.
Lease Financing
Impaired assets in the lease financing lending portfolio totaled R$52 million on December 31, 2016, remaining stable compared to the same period last year. This was primarily due to the stability in lending in this portfolio, which decreased by R$33 million, or 1.5%, from R$2,126 million on December 31, 2015 to R$2,093 million on December 31, 2016.
Methodology for Impairment Losses
We evaluate all loans regarding the provision for impairment losses from credit risk. Loans are either individually evaluated for impairment, or, for loans accounted as amortized cost, collectively evaluated by grouping similar risk characteristics. Loans that are individually evaluated for impairment losses are not evaluated collectively.
To measure the impairment loss on loans individually evaluated for impairment, we consider the conditions of the borrowers, such as their economic and financial situation, level of indebtedness, ability to generate income, cash flow, management, corporate governance and quality of internal controls, payment history, industry expertise, contingencies and credit limits, as well as the characteristics of assets, such as their nature and purpose, type,
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sufficiency and liquidity level guarantees and total amount of credit, as well as based on historical experience of impairment and other circumstances known at the time of evaluation.
To measure the impairment loss on loans collectively evaluated for impairment, we segregate financial assets into groups considering the characteristics and similarity of credit risk, or in other words, according to segment, the type of assets, guarantees and other factors associated such as the historical experience of impairment and other circumstances known at the time of assessment.
The loss parameters used to calculate the provisions also consider the type of exposure risk, recovery history and payment of renegotiated portfolio, as well as the probability of default of these operations, which are usually higher when compared to operations which have not been renegotiated.
The impairment loss is calculated using statistical models that consider the following factors:
| · | Exposure at default or “EAD” is the amount of risk exposure at the date of default by the borrower. In accordance with IFRS as issued by the IASB, the exposure at default used for this calculation is the current exposure, as reported in the balance sheet. |
| · | Probability of default or “PD” is the probability of the borrower failing to meet its principal and/or interest payment obligations. PD is measured using a time horizon of one year; that is, it quantifies the probability of the borrower defaulting in the coming year. A loan is in default if either the principal or interest is past due by ninety days or more or the loan is current but there are doubts as to the solvency of the counterparty (subjective doubtful assets). |
| · | Loss given default, or “LGD,” is the loss arising in the event of default. In addition to examining the PD, we manage our portfolio looking for loans in which the borrowers will provide higher volumes of guarantees relating to operations and who will also act to constantly strengthen the area of loan recovery. These and other actions combined are responsible for ensuring the adequacy of the LGD parameters (loss resulting from the event of default by the borrower to honor the principal and/or interest payments). The LGD calculation is based on the net charge-offs on defaulted loans, taking into account the guarantees/collateral associated with the loans, the income and expenses associated with the recovery process and the timing of delinquency. |
| · | Loss identification period, or “LIP,” is the time period between the occurrence of a loss event and the identification of an objective evidence of this loss by us. In other words, it represents the time horizon from the credit loss occurrence until the effective confirmation of such loss. |
Moreover, prior to charging off past due loans (which is only done after we have completed all recovery efforts), we record provisions to the remaining balance of the loan so our allowance for impairment losses fully covers our losses. Thus, we understand that our allowance for impairment losses methodology has been developed to fit its risk metrics and capture loans that could potentially become impaired.
Loans Past Due for Less Than 90 Days But Not Classified as Impaired
The following table shows the loans past due for less than 90 days but not classified as impaired at the dates indicated:
| As of December 31, | ||||||||||||||||
| 2016 | % of total | 2015 | % of total | |||||||||||||
| (in millions of R$, except percentages) | ||||||||||||||||
| Commercial and industrial | 4,141 | 23.8 | 5,072 | 24.3 | ||||||||||||
| Mortgage loans | 5,202 | 29.9 | 7,552 | 36.1 | ||||||||||||
| Installment loans to individuals | 7,957 | 45.7 | 8,236 | 39.4 | ||||||||||||
| Lease financing | 109 | 0.6 | 41 | 0.2 | ||||||||||||
| Total (*) | 17,409 | 100.0 | % | 20,900 | 100.0 | % | ||||||||||
| (*) | Refers only to loans past due between 1 and 90 days. |
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Impaired Asset Ratios
Our credit risk exposure portfolio decreased by approximately R$9.1 billion from R$310.9 billion as of December 31, 2015 to R$301.7 billion as of December 31, 2016. Our impaired assets increased by approximately R$289 million in the same period, from R$18.6 billion to R$18.9 billion. The default rate increased by 30 basis points in 2016 in comparison to 2015. The increase in provisions for impairment losses was mainly caused by the slowdown in the Brazilian economy in the last two years, which adversely affected our portfolio, in particular our commercial and industrial portfolio. Because of this increase in provisions for impaired assets, we have improved our efforts to better manage our impaired assets and provisions for impairment losses, especially in the commercial and industrial portfolio, by offering certain customers the chance to negotiate and restructure their debts.
The following table shows the ratio of our impaired assets to total credit risk exposure and our coverage ratio at the dates indicated.
| As of December 31, | ||||||||||||||||||||
| 2016 | 2015 | 2014 | 2013 | 2012 | ||||||||||||||||
| (in millions of R$ except percentages) | ||||||||||||||||||||
| Loans and advances to customers, gross | 268,438 | 267,266 | 249,111 | 226,206 | 210,741 | |||||||||||||||
| Impaired assets | 18,887 | 18,599 | 14,011 | 14,022 | 16,057 | |||||||||||||||
| Provisions for impairment losses | 18,191 | 15,412 | 13,563 | 13,641 | 14,042 | |||||||||||||||
| Credit risk exposure Non-GAAP – customers (1) | 301,703 | 310,877 | 288,445 | 257,420 | 238,807 | |||||||||||||||
| Ratios | ||||||||||||||||||||
| Impaired assets to credit risk exposure | 6.3 | % | 6.0 | % | 4.9 | % | 5.4 | % | 6.7 | % | ||||||||||
| Coverage ratio(2) | 96.3 | % | 82.9 | % | 96.8 | % | 97.3 | % | 87.5 | % | ||||||||||
| Impairment losses | (13,390 | ) | (12,966 | ) | (11,193 | ) | (13,900 | ) | (16,476 | ) | ||||||||||
| Losses on other financial instruments not measured at fair value(3) | 88 | (524 | ) | (78 | ) | (218 | ) | — | ||||||||||||
| Impairment losses on financial assets (net)(4) | (13,301 | ) | (13,634 | ) | (11,272 | ) | (14,118 | ) | (16,476 | ) | ||||||||||
| (1) | Credit risk exposure is a non-GAAP financial measure. Credit risk exposure is the sum of the amortized cost amounts of loans and advances to customers (including impaired assets) amounting to R$268,438 million as of December 31, 2016 and guarantees and documentary credits amounting to R$33,265 million as of December 31, 2016. We include off-balance sheet information in this measure to better demonstrate our total managed credit risk. |
| (2) | Provisions for impairment losses as a percentage of impaired assets. |
| (3) | Corresponds to the registration of losses of a permanent character in the realization value of bonds and securities classified as “securities available for sale” currently accounted for in “earnings on financial assets (net).” |
| (4) | As of December 31, 2016 impairment losses on financial assets (net) included R$1,555 million relating to debt instruments. |
| 104 |
The following chart shows our impaired assets to credit risk ratio from 2011 through 2016:
Non-current assets held for sale
The following table shows the movement in non-current assets held for sale at the dates indicated.
| As of December 31, | ||||||||||||
| 2016 | 2015 | 2014 | ||||||||||
| (in millions of R$, except percentages) | ||||||||||||
| Balance at beginning of year | 1,310 | 978 | 324 | |||||||||
| Foreclosures loans and other assets transferred | 835 | 293 | 338 | |||||||||
| Capital increase in companies held for sale | 10 | 355 | — | |||||||||
| Change in the scope of consolidation (1) | (498 | ) | — | 419 | ||||||||
| Sales | (239 | ) | (317 | ) | (103 | ) | ||||||
| Final balance, gross | 1,418 | 1,310 | 978 | |||||||||
| Impairment losses | (80 | ) | (73 | ) | (48 | ) | ||||||
| Impairment as a percentage of foreclosed assets | 5.7 | % | 5.5 | % | 4.9 | % | ||||||
| Balance at end of year | 1,338 | 1,237 | 930 | |||||||||
| (1) | In 2014, as a result of our strategy, investments in certain wind energy entities (BW Guirapá I S.A. and its subsidiaries) up for sale were transferred to this line item in compliance with IFRS 5. In 2016, as a result of there being no expectation of sale of these wind energy entities in existing market conditions, it was decided to transfer these to the line “Investments in affiliates and subsidiaries in the country.” |
Liabilities
Deposits
The principal components of our deposits are customer demand, time and notice deposits, and international and domestic interbank deposits. Our retail customers are the principal source of our demand, time and notice deposits.
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The following tables analyze our deposits at the dates indicated.
| As of December 31, | ||||||||||||
| 2016 | 2015 | 2014 | ||||||||||
| (in millions of R$) | ||||||||||||
| Deposits from the Brazilian Central Bank and Credit Institutions | ||||||||||||
| Time deposits | 49,549 | 55,795 | 42,045 | |||||||||
| Demand deposits | 314 | 145 | 162 | |||||||||
| Repurchase agreements | 28,771 | 13,511 | 21,468 | |||||||||
| of which: | ||||||||||||
| Backed operations with Private Securities(1) | 446 | 85 | 961 | |||||||||
| Backed operations with Public Securities | 28,324 | 13,427 | 20,507 | |||||||||
| Total deposits of the Brazilian Central Bank and Credit Institutions | 78,634 | 69,451 | 63,674 | |||||||||
| Customer deposits | ||||||||||||
| Current accounts | 15,868 | 15,580 | 15,507 | |||||||||
| Savings accounts | 36,051 | 35,985 | 37,939 | |||||||||
| Time deposits | 94,478 | 89,986 | 91,552 | |||||||||
| Repurchase agreements | 101,047 | 101,492 | 75,645 | |||||||||
| of which: | ||||||||||||
| Backed operations with Private Securities(1) | 59,460 | 61,174 | 46,699 | |||||||||
| Backed operations with Public Securities(1) | 41,586 | 40,318 | 28,946 | |||||||||
| Total Customer deposits | 247,445 | 243,043 | 220,644 | |||||||||
| Total deposits | 326,079 | 312,494 | 284,318 | |||||||||
| (1) | Refers primarily to repurchase agreements backed by debentures of own issue. |
The following table shows the maturity of time deposits (excluding inter-bank deposits) in denominations of U$100,000 or more at the dates indicated. Large denomination customer deposits may be a less stable source of funds than demand and savings deposits.
| As of December 31, 2016 | ||||||||
| Domestic | International | |||||||
| (in millions of R$) | ||||||||
| Under 3 months | 2,956 | 2,563 | ||||||
| 3 to 6 months | 18,135 | 436 | ||||||
| 6 to 12 months | 4,602 | 277 | ||||||
| Over 12 months | 10,358 | 475 | ||||||
| Total | 36,051 | 3,752 | ||||||
Short-Term Borrowings
The following table shows our short-term borrowings consisting of government securities that we sold under agreements to repurchase for purpose of funding our operations.
| As of December 31, | ||||||||||||||||||||||||
| 2016 | 2015 | 2014 | ||||||||||||||||||||||
| Amount | Average Rate | Amount | Average Rate | Amount | Average Rate | |||||||||||||||||||
| (in millions of R$, except percentages) | ||||||||||||||||||||||||
| Securities sold under agreements to repurchase | ||||||||||||||||||||||||
| As of December 31 | 131,016 | 13.60 | % | 115,003 | 14.15 | % | 97,113 | 10.7 | % | |||||||||||||||
| Average during the period (1) | 124,705 | 14.11 | % | 89,046 | 14.24 | % | 80,337 | 10.7 | % | |||||||||||||||
| Maximum month-end balance | 131,016 | 103,105 | 96,844 | |||||||||||||||||||||
| 106 |
| As of December 31, | ||||||||||||||||||||||||
| 2016 | 2015 | 2014 | ||||||||||||||||||||||
| Amount | Average Rate | Amount | Average Rate | Amount | Average Rate | |||||||||||||||||||
| (in millions of R$, except percentages) | ||||||||||||||||||||||||
| Total short-term borrowings at year end | 131,016 | 115,003 | 97,113 | |||||||||||||||||||||
| (1) | The average annual balance sheet data has been calculated based upon the average of the monthly balances at 13 dates: at December 31 of the prior year and for each of the month-end balances of the 12 subsequent months. |
| 4C. | Organizational Structure |
Santander Group controls Santander Brasil directly and indirectly through Santander Spain, Sterrebeeck B.V. (“Sterrebeeck”) and Grupo Empresarial Santander, S.L. which are controlled subsidiaries of the Santander Group. As of December 31, 2016, Santander Spain held, directly and indirectly, 88.8% of our voting stock (not including the shares held by Banco Madesant - Sociedade Unipessoal).
Santander Spain ended December 2016 as the largest bank in the euro zone, with a market capitalization of approximately €72,314 million. As of December 31, 2016, Santander Spain’s attributable profit totaled €6,621 million, 0.8% higher than the previous year, and the total shareholder remuneration on account of the earnings for the 2016 financial year is €0.41 per share. The Santander Group operates principally in Spain, the United Kingdom, other European countries, Brazil and other Latin American countries and the United States, offering a wide range of financial products. In Latin America, the Santander Group has majority shareholdings in financial institutions in Argentina, Brazil, Chile, Mexico, Peru, Puerto Rico and Uruguay. As of December 31, 2016, Santander Brasil contributed 21% of the profit attributable to the Santander Group.
The following table presents the name, country of incorporation or residence and proportion of ownership interest of our main subsidiaries in accordance with the criteria for consolidation pursuant to IFRS:
| Ownership Interest | ||||||||||||
| Activity | Country
of Incorporation | Direct | Total
Direct and Indirect | |||||||||
| Direct and Indirect subsidiaries of Banco Santander (Brasil) S.A. | ||||||||||||
| Banco Bandepe S.A. | Bank | Brazil | 100.00 | % | 100.00 | % | ||||||
| Santander Leasing S.A. Arrendamento Mercantil | Leasing | Brazil | 78.57 | % | 99.99 | % | ||||||
| Aymoré Crédito, Financiamento e Investimento S.A. | Financial | Brazil | 100.00 | % | 100.00 | % | ||||||
| Santander Brasil Administradora de Consórcio Ltda. | Buying club | Brazil | 100.00 | % | 100.00 | % | ||||||
| Santander Microcrédito Assessoria Financeira S.A. | Microcredit | Brazil | 100.00 | % | 100.00 | % | ||||||
| Santander Brasil Advisory Services S.A. | Other Activities | Brazil | 96.58 | % | 96.58 | % | ||||||
| Atual Companhia Securitizadora de Créditos Financeiros. | Securitization | Brazil | 100.00 | % | 100.00 | % | ||||||
| Santander Corretora de Câmbio e Valores Mobiliários S.A. | Broker | Brazil | 99.99 | % | 100.00 | % | ||||||
| Santander Participações S.A. | Holding | Brazil | 100.00 | % | 100.00 | % | ||||||
| GetNet Adquirência e Serviços para Meios de Pagamento S.A.(1) | Payment Institution | Brazil | 88.50 | % | 88.50 | % | ||||||
| Sancap Investimentos e Participações S.A. | Holding | Brazil | 100.00 | % | 100.00 | % | ||||||
| Santander Brasil, EFC | Financial | Spain | 100.00 | % | 100.00 | % | ||||||
| Santander S.A. Serviços Técnicos, Administrativos e de Corretagem de Seguros | Insurance Broker | Brazil | 60.65 | % | 60.65 | % | ||||||
| Controlled by Santander Serviços | ||||||||||||
| Webcasas S.A. | Other Activities | Brazil | — | 100.00 | % | |||||||
| 107 |
| Ownership Interest | ||||||||||||
| Activity | Country
of Incorporation | Direct | Total
Direct and Indirect | |||||||||
| Controlled by Sancap | ||||||||||||
| Santander Capitalização S.A. | Savings and annuities | Brazil | — | 100.00 | % | |||||||
| Evidence Previdência S.A. | Social Securities | Brazil | — | 100.00 | % | |||||||
| Controlled by GetNet | ||||||||||||
| Auttar HUT Processamento de Dados Ltda. | Other Activities | Brazil | — | 100.00 | % | |||||||
| Integry Tecnologia e Serviços A.H.U Ltda. | Other Activities | Brazil | — | 100.00 | % | |||||||
| Toque Fale Serviços de Telemarketing Ltda. | Other Activities | Brazil | — | 100.00 | % | |||||||
| Controlled by Aymoré CFI | ||||||||||||
| Super Pagamentos e Administração de Meios Eletrônicos S.A.(2). | Other Activities | Brazil | — | 100.00 | % | |||||||
| Banco Olé Bonsucesso Consignado S.A. (Current Name of Banco Bonsucesso Consignado S.A.)(3). | Bank | Brazil | — | 60.00 | % | |||||||
| Banco PSA Finance Brasil S.A. (6) | Bank | Brazil | — | 50.00 | % | |||||||
| Controlled by Banco Olé Bonsucesso Consignado | ||||||||||||
| BPV Promotora de Vendas e Cobrança Ltda. | Other Activities | Brazil | — | 100.00 | % | |||||||
| Bonsucesso Tecnologia Ltda. | Other Activities | Brazil | — | 100.00 | % | |||||||
| Controlled by Santander Leasing | ||||||||||||
| Santander Finance Arrendamento Mercantil S.A (Current Company Name of PSA Finance Arrendamento Mercantil S.A) (6). | Leasing | Brazil | — | 100.00 | % | |||||||
| Controlled by Santander Participações | ||||||||||||
| BW Guirapá I S.A.(4). | Holding | Brazil | — | 86.81 | % | |||||||
| Controlled by BW Guirapá I S.A. (4) | ||||||||||||
| Central Eólica Angical S.A.(4). | Wind Energy | Brazil | — | 100.00 | % | |||||||
| Central Eólica Caititu S.A.(4). | Wind Energy | Brazil | — | 100.00 | % | |||||||
| Central Eólica Coqueirinho S.A.(4). | Wind Energy | Brazil | — | 100.00 | % | |||||||
| Central Eólica Corrupião S.A.(4). | Wind Energy | Brazil | — | 100.00 | % | |||||||
| Central Eólica Inhambu S.A.(4). | Wind Energy | Brazil | — | 100.00 | % | |||||||
| Central Eólica Tamanduá Mirim S.A.(4). | Wind Energy | Brazil | — | 100.00 | % | |||||||
| Central Eólica Teiu S.A.(4). | Wind Energy | Brazil | — | 100.00 | % | |||||||
| Santander FIC FI Contract I Referenciado DI | Investment Fund | Brazil | — | (a) | ||||||||
| Santander Fundo de Investimento Unix Multimercado Crédito Privado | Investment Fund | Brazil | — | (a) | ||||||||
| Santander Fundo de Investimento Diamantina Multimercado Crédito Privado de Investimento no Exterior | Investment Fund | Brazil | — | (a) | ||||||||
| Santander Fundo de Investimento Amazonas Multimercado Crédito Privado de Investimento no Exterior | Investment Fund | Brazil | — | (a) | ||||||||
| Santander Fundo de Investimento SBAC Referenciado DI Crédito Privado | Investment Fund | Brazil | — | (a) | ||||||||
| Santander Fundo de Investimento Guarujá Multimercado Crédito Privado de Investimento no Exterior | Investment Fund | Brazil | — | (a) | ||||||||
| 108 |
| Ownership Interest | ||||||||||||
| Activity | Country
of Incorporation | Direct | Total
Direct and Indirect | |||||||||
| Santander Fundo de Investimento Financial Curto Prazo | Investment Fund | Brazil | — | (a) | ||||||||
| Santander Fundo de Investimento Capitalization Renda Fixa | Investment Fund | Brazil | — | (a) | ||||||||
| Santander Paraty QIF PLC (5) | Investment Fund | Brazil | — | (a) | ||||||||
| Santander FI Hedge Strategies Fund (5) | Investment Fund | Brazil | — | (a) | ||||||||
| BRL V - Fundo de Investimento Imobiliário-FII (7) | Investment Fund | Brazil | — | (a) | ||||||||
| (a) | Company to which we are exposed, or have rights to variable returns and have the ability to affect those returns by making certain decisions in accordance with IFRS 10 - Consolidated Financial Statements. We and/or our subsidiaries hold 100% of the shares of these investment funds. |
| (1) | In May 2016, Super received approval from the Brazilian Central Bank to operate as a payment institution. |
| (2) | On January 4, 2016, Aymoré CFI informed the sellers of its decision to exercise the call option for the shares representing the remaining 50% of Super’s total voting capital owned by the sellers, for a value of approximately R$113 million. The transaction was completed on March 10, 2016, following receipt of approval from the Brazilian Central Bank. |
| (3) | At an extraordinary general meeting held on March 3, 2016 the change from the name of Banco Bonsucesso Consignado S.A. to Banco Olé Bonsucesso Consignado S.A. was approved. This name change received approval from the Brazilian Central Bank on June 1, 2016. At the ESM of November 1, 2016, the capital increase of Banco Olé Bonsucesso Consignado in the amount of R$50,000, from the current R$350,000 to R$400,000 was approved, through the issuance of 28,509,708 new nominated ordinary shares, without nominal value. The process of the increase was approved by the Brazilian Central Bank in November 22, 2016. |
| (4) | Investments transferred from the non-current assets held for sale caption in September 2016. |
| (5) | Santander Brasil, through its subsidiaries, holds the risks and benefits of Santander Paraty QIF PLC and the sub-fund Santander FI Hedge Strategies Fund, both of which are based in Ireland and since August 2016 are fully consolidated into Santander Brasil’s financial statements. Santander Paraty QIF PLC does not hold any investments itself, acting instead through Santander FI Hedge Strategies Fund. |
| (6) | Investment acquired on August 1, 2016. |
| (7) | This fund was established and became consolidated from August 2016. It is a structure in which Santander Brasil is the creditor of certain debts guaranteed by real estate. The real estate provided as guarantee was converted into capital contributions to the fund. Simultaneously with this, the shares in the fund were transferred to Santander Brasil. |
4D. Property, Plant and Equipment
We operate four major administrative operational centers, all of which are owned properties. Additionally, we own 426 properties for the activities of our banking network and rent 1,613 properties for the same purpose. Furthermore, in 2014, we opened and concluded the migration of our operation to the new data center located in Campinas, which also is an owned property. For further information about the location of our branches, see “—Item 4. Information on the Company—B. Business Overview—Distribution Network.” Our headquarters are located at Av. Presidente Juscelino Kubitschek, 2,041 and 2,235 (Torre São Paulo)–Bloco A, Vila Olímpia, São Paulo, State of São Paulo, Brazil.
ITEM 4A. UNRESOLVED STAFF COMMENTS
Not applicable.
| 109 |
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
| 5A. | Operating Results |
The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements for the years ended December 31, 2016, 2015 and 2014 and the related notes thereto, and with the financial information presented under the section entitled “Item 3. Key Information—A. Selected Financial Data” included elsewhere in this annual report. The preparation of the consolidated financial statements referred to in this section required the adoption of assumptions and estimates that affect the amounts recorded as assets, liabilities, revenue and expenses in the years and periods presented and are subject to certain risks and uncertainties. Our future results may vary substantially from those indicated as a result of various factors that affect our business, including, among others, those mentioned in the sections “Forward-Looking Statements” and “Item 3. Key Information—D. Risk Factors,” and other factors discussed elsewhere in this annual report. Our consolidated financial statements for the years ended December 31, 2016, 2015 and 2014, prepared in accordance with IFRS as issued by the IASB and the report of our independent registered public accounting firm are included in “Item 18. Financial Statements.”
Brazilian Macroeconomic Environment
In 2012, in a challenging market environment, the economy slowed down substantially (with real GDP growth of 1.9%), which resulted in a direct impact on credit quality in Brazil. As a consequence, the financial system suffered an increase in overall delinquency ratios, driven mainly by lending to individuals. The efforts of the government and the Brazilian Central Bank to increase liquidity and boost the economy continued in 2012, with additional measures such as reducing reserve requirements on time deposits and demand deposits and channeling liquidity to smaller banks.
In 2013, the pace of economic growth accelerated (with real GDP growth of 3.0%), and the credit quality in Brazil had improved, especially in lending to individuals. The delinquency ratio decreased, in a reversal from the trend of an increasing delinquency ratio in 2012 as compared to 2011, reaching 2.8% as of December 31, 2013 as compared to 3.5% in 2012, and unemployment reached historically low rates.
In 2014, the economy slowed down substantially (with real GDP growth of 0.5%. However, the downward trend of the economy did not result in a direct impact on credit quality in Brazil. The improvement in credit quality throughout 2012 and 2013 did not result in a change in overall delinquency ratios, despite a slowdown of the economy. The delinquency ratio reached 2.7% as of December 31, 2014 as compared to 2.8% in 2013, and unemployment reached historically low rates.
In 2015, the economy deteriorated further and government policy adjustments resulted in further tightening of monetary policy, tightening of federal government spending and tax increases, the depreciation of the real against the dollar and a realignment of public tariff prices. These factors contributed to a decrease in disposable income, which further slowed down the economy. Despite all the economic adjustments implemented throughout the year, the fiscal imbalance widened and the GDP contracted by 3.8% during 2015, which led to Brazil being downgraded to non-investment grade status by S&P in September 2015, Fitch Ratings in December 2015 and Moody’s in February 2016. Various major Brazilian companies were also downgraded. Such downgrades have further worsened the conditions of the Brazilian economy and the financial condition of Brazilian companies, especially those relying on foreign investments.
The recession continued throughout 2016, with GDP contracting 3.6%. However, market conditions improved markedly after a turbulent first quarter: inflation started to fall and ended the year within the official target band (at 6.3%), the currency strengthened, and the Central Bank started cutting the overnight interest rate. Fiscal deficits remained high, but a broad reform agenda, including the imposition of a freeze in government spending in real terms (already approved by the Congress) and a proposed social security reform helped to put the debt/GDP ratio on a more sustainable path, which appeared to have a positive impact on markets.
Other Factors Affecting Our Financial Condition and Results of Operations
As a Brazilian bank, we are significantly affected by the general economic environment in Brazil. The following table presents key data of the Brazilian economy for the periods indicated:
| 110 |
| For the year ended December 31, | ||||||||||||
| 2016 | 2015 | 2014 | ||||||||||
| GDP growth(1) | (3.6 | )% | (3.8 | )% | 0.5 | % | ||||||
| CDI rate(2) | 14.0 | % | 13.2 | % | 10.8 | % | ||||||
| TJLP(3) | 7.50 | % | 7.00 | % | 5.0 | % | ||||||
| SELIC rate(4) | 13.75 | % | 14.25 | % | 11.75 | % | ||||||
| Increase (decrease) in real rate against the U.S. dollar | (17 | )% | 47.0 | % | 13.4 | % | ||||||
| Selling exchange rate (at period end) R$ per U.S.$1.00 | 3.26 | 3.90 | 2.66 | |||||||||
| Average exchange rate R$ per U.S.$1.00(5) | 3.49 | 3.33 | 2.35 | |||||||||
| Inflation (IGP-M)(6) | 7.2 | % | 10.5 | % | 3.7 | % | ||||||
| Inflation (IPCA)(7) | 6.3 | % | 10.7 | % | 6.4 | % | ||||||
Sources: BNDES, Brazilian Central Bank, FGV and IBGE.
| (1) | Revised series. Source: IBGE. |
| (2) | The overnight interbank deposit rate (Certificado de Depósito Interbancário), or “CDI” is the average daily interbank deposit rate in Brazil (at the end of each month and annually). This is the average rate for the given year. |
| (3) | Represents the interest rate applied by the BNDES for long-term financing (at the end of the period). |
| (4) | The benchmark interest rate payable to holders of some securities, such as treasury financial letters, issued by the Brazilian government and traded on the SELIC. |
| (5) | Average of the selling exchange rate for the business days during the period. |
| (6) | The inflation rate is the general index of market prices (Índice Geral de Preços-Mercado, or “IGP-M”), as calculated by FGV. |
| (7) | The inflation rate is the consumer price index (Índice de Preços ao Consumidor – Amplo, or “IPCA”), as calculated by the IBGE. |
Interest Rates
The persistence of uncertainty in international markets and the first signs of a slowdown in domestic activity led the Brazilian Central Bank to begin monetary easing in August 2011. Thus, the SELIC rate was cut by 525 basis points between August 2011 and December 2012. On October 10, 2012, the SELIC rate reached an annual rate of 7.25%, the lowest level in history. In 2013, the Brazilian Central Bank began a monetary tightening cycle due to rising inflation (in the 6% range), the depreciation of the real, and a perception of the recovery of certain economic activity. The SELIC rate was increased by 275 basis points, reaching 10% on November 27, 2013 at the last monetary policy committee meeting of the year. The SELIC rate continued to increase in 2014, reaching 11.75% in December, 2014. On January 21, 2015, the SELIC rate was increased to 12.25%, reaching 12.75% on March 3, 2015. In April 2015, the SELIC rate was 13.25%. The monetary tightening cycle was extended until July 2015, when the SELIC rate reached 14.25%. In October 2016, the Brazilian Central Bank reduced the SELIC rate to 13.75% as of December 31, 2016 and has reached 12.25% as of the date of this annual report. A decrease in the SELIC rate may have a positive impact on our operations by promoting volume growth, even though it may also create pressure on asset-side spreads, while liability spreads should remain stable or even improve.
The following table presents the low, high, average and period-end SELIC rate since 2012, as reported by the Brazilian Central Bank:
| Low | High(1) | Average(2) | Period-End | |||||||||||||
| Year | ||||||||||||||||
| 2012 | 7.25 | 10.50 | 8.46 | 7.25 | ||||||||||||
| 2013 | 7.25 | 10.00 | 8.44 | 10.00 | ||||||||||||
| 2014 | 10.00 | 11.75 | 11.02 | 11.75 | ||||||||||||
| 2015 | 11.75 | 14.25 | 13.58 | 14.25 | ||||||||||||
| 2016 | 13.75 | 14.25 | 14.15 | 13.75 | ||||||||||||
| 2017 (through March 24) | 12.25 | 13.00 | 12.50 | 12.25 | ||||||||||||
| (1) | Highest month-end rate. |
| (2) | Average of month-end rates during the period. |
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Our assets are predominantly fixed rate and our liabilities are predominantly floating. The resulting exposure to increases in market rates of interest is modified by our use of cash flow hedges to convert floating rates to fixed, but we maintain an exposure to interest rate movements. As of December 31, 2016, a 100 basis point increase in the yield curve would have resulted in R$385 million decline in the net interest income over a one-year period.
Credit Volume and Quality in Brazil
In 2012, with the economic activity slowdown, the household debt burden (defined as the percentage of monthly available family income owed to service debt) increased to 22.5%, and the level of non-performing loans to individuals was approximately 5.2%. The annual growth of outstanding credit decreased to 16.4%. The slowdown in credit growth continued through 2013 and 2014, even with a remarkable expansion of credit supply by state-owned banks. The total outstanding credit increased 14.5% and 11.3% in 2013 and 2014, respectively. The level of non-performing loans decreased to 3.7%, and the household debt burden decreased to 21.9% at the end of 2014. The slowdown in credit growth continued through 2015, with an annual growth of outstanding credit of 6.7%, a ratio of non-performing loans to individuals increased to 4.2% and a decrease of the household debt burden to 21.2%. In 2016, outstanding credit contracted 3.5% in nominal terms, but delinquency continued to fall: the ratio of non-performing loans to individuals reached 3.9%.
The total outstanding credit to GDP ratio increased from 34.7% in December 2007 to 54.5% in December 2015 and fell to 49% in 2016.
| 2016 | 2015 | 2014 | ||||||||||
| (in billions of R$) | ||||||||||||
| Total Credit Outstanding (*) | 3,107 | 3,217 | 3,017 | |||||||||
| Earmarked credit | 1,550 | 1,582 | 1,441 | |||||||||
| Non-earmarked based credit | 1,557 | 1,635 | 1,577 | |||||||||
| of which: | ||||||||||||
| Corporate | 747 | 832 | 793 | |||||||||
| Individuals (retail) | 809 | 803 | 783 | |||||||||
(*) Some figures may be subject to revision by the Brazilian Central Bank.
Source: Brazilian Central Bank.
Foreign Exchange Rates
Our policy is to maintain limited foreign exchange rate exposure by seeking to match foreign currency denominated assets and liabilities as closely as possible, including through the use of derivative instruments. In 2016, we recorded foreign exchange revenues of R$4,575 million. In 2015, we recorded foreign exchange revenues of R$10,084 million. In 2014, we recorded foreign exchange losses of R$3,636 million. These results are due to the variation of the U.S. dollar against the real on our assets and liabilities positions in U.S. dollar denominated instruments during these years. These foreign exchange gains and losses were offset in large part in each year by a corresponding loss or gain on derivatives entered into to hedge this exposure. Such losses and gains are recorded under “Exchange differences (net).”
The Brazilian currency has, during the last decades, experienced frequent and substantial variations in relation to the U.S. dollar and other foreign currencies. Most recently, the real was R$1.566 per U.S.$1.00 in August 2008. Primarily as a result of the crisis in the global financial markets, the real depreciated 31.9% against the U.S. dollar, reaching R$2.337 per U.S.$1.00 at year end 2008. In 2009 and 2010, the real appreciated against the U.S. dollar and reaching R$1.666 per U.S.$1.00 at year end 2010. During 2011, the real depreciated and on December 31, 2011 the exchange rate was R$1.876 per U.S.$1.00. During 2012, 2013 and 2014, the real continued to depreciate and on December 31, 2014, the exchange rate was R$2.656 per U.S.$1.00. During 2015, the real depreciated significantly mainly as a result of deteriorating economic conditions in Brazil, including Brazil being downgraded to non-investment grade status by S&P and Fitch Ratings, and a decrease in global commodities prices, and on December 31, 2015, the exchange rate was R$3.9048 per U.S.$1.00. During 2016, the real appreciated 17% against the U.S. dollar as a result of improved macroeconomic conditions in Brazil. On December 31, 2016, the exchange rate was R$3.26 per U.S.$1.00.
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Inflation
The adoption of inflation targeting in 1999 resulted in a significant reduction in inflation rates in Brazil (measured by the IPCA, Consumer Price Index, the official inflation rate provided by the IBGE). In recent years, inflation has been oscillating around the target, which is set by the CMN. The target, which is still in effect, has been set at 4.5% since 2005 with a tolerance interval of 2% above and below this target. The tolerance interval for 2017 inflation was reduced to 1.5% in 2015, and this narrower band was also adopted in the following year for 2018.
In 2012, consumer price inflation showed a mild reduction to 5.8%, mainly due to the impact of reductions in the taxes applicable to durable goods. The inflation rate was 5.9% in 2013 due to inflation in the price of services of 8.7% combined with strong inflation in the price of food of 8.5%, which was partially offset by low inflation in certain price-regulated sectors, such as urban transport fares and electricity and telecommunication tariffs. However, in 2014, regulated prices inflation increased, bringing the overall rate of consumer inflation to 6.4%. In 2015, as a result of the indexation of a significant portion of contracts for services to the inflation levels of the previous years, the impact of adjustment of tariffs and the impact of the depreciation of the real on prices, the inflation rate reached a level of 10.7%, the highest on record since May 2005 and well above the Brazilian Central Bank’s inflation target of 4.5%. In 2016, inflation fell substantially as a result of the consistent efforts of the Brazilian Central Bank to reduce the inflation rate, ending the year at 6.3% (twelve-month accumulated rate).
Reserve and Lending Requirements
The requirements set by the Brazilian Central Bank for reserves and credit has a significant impact on the operational results of the financial institutions in Brazil. Increases or decreases in such requirements may have an impact on our operational results by limiting or expanding the amounts available for commercial credit transactions.
The table below shows the requirements for reserves and credit to which we are subject for each financing category:
| Product | As
of December 31, 2016 | As
of December 31, 2015 | Form
of Required Reserve | Yield | ||||||||
| Demand deposits | ||||||||||||
| Rural credit loans(1) | 34.0 | % | 34.0 | % | Loans | Cap rate: 9.5% p.a. | ||||||
| Microcredit loans(2) | 2.0 | % | 2.0 | % | Loans | Cap rate: 2.0% p.m. | ||||||
| Reserve requirements | 45.0 | % | 45.0 | % | Cash | Zero | ||||||
| Additional reserve requirements | 0.0 | % | 0.0 | % | Cash | SELIC | ||||||
| Free funding(3) | 19.0 | % | 19.0 | % | ||||||||
| Savings accounts | ||||||||||||
| Mortgage loans | 65.0 | % | 65.0 | % | Loans | Cap of TR + 12.0% p.a. | ||||||
| TR + 6.17% p.a., or | ||||||||||||
| Reserve requirements(4) | 24.5 | % | 24.5 | % | Cash | TR + 70.0% of the target SELIC | ||||||
| Additional reserve requirements | 5.5 | % | 5.5 | % | Cash | SELIC | ||||||
| Free funding(3) | 5.0 | % | 5.0 | % | ||||||||
| Time deposits | ||||||||||||
| Reserve requirements | 25.0 | % | 25.0 | % | ||||||||
| In cash or other instruments(5) | 15.0 | % | 15.0 | % | Cash or other instruments | SELIC for Cash | ||||||
| In cash | 10.0 | % | 10.0 | % | Cash | SELIC | ||||||
| Additional reserve requirements | 11.0 | % | 11.0 | % | Cash | SELIC | ||||||
| Free funding(3) | 64.0 | % | 64.0 | % | ||||||||
| (1) | Rural credits are credits granted to farmers in the amount of R$9.0 billion and R$6.1 billion on December 31, 2016 and December 31, 2015, respectively. |
| (2) | Micro-credit is a credit granted to very small businesses, with an open position of R$317.1 million and R$299.5 million on December 31, 2016 and December 31, 2015, respectively. |
| (3) | Interest-free financing is the amount to be used on a free of interest basis for other purposes in each financing category. |
| (4) | Up to 18% of the reserve requirement can be deducted using real estate financing according to SFH. |
| (5) | Other instruments include motorcycle and vehicles financing, working capital and certain assets (mainly loan portfolios and Treasury Bills) from eligible financial institutions in accordance with regulations on reserve requirements on time deposits. |
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Taxes
See “Item 4. Information on the Company—B. Business Overview—Regulation and Supervision—Taxation.”
Hedging in Foreign Investments
We operate a branch in the Cayman Islands and a subsidiary named Santander Brasil Establecimiento Financiero de Credito, EFC, or “Santander EFC” (an independent wholly-owned subsidiary in Spain) which is used primarily for sourcing funds in the international banking and capital markets to provide credit lines for us that are extended to our customers for working capital and trade-related financings. Under Brazilian income tax rules, the gains or losses resulting from the impact of appreciation or devaluation of the real on foreign investments is non-taxable. This tax treatment results in volatility of the income tax line item in our income statement. This asymmetry is offset through a derivative position in U.S. dollar futures, which generates gains or losses dependent on any devaluation or appreciation of the real, which is our strategy to protect our after-tax results. The reconciliation of our effective tax rate to the statutory tax rate is set forth in note 23b to our consolidated financial statements as of and for the year ended December 31, 2016.
Goodwill of Banco Real
We generated goodwill of R$27 billion as a result of our acquisition of Banco Real in 2008. Under IFRS, we are required to analyze goodwill for impairment at least annually or whenever there are indications of impairment. In 2016, 2015 and 2014, the recoverable goodwill amounts are determined from “value in use” calculations. For this purpose, we estimate cash flow for a period of five years. We prepare cash flow estimates considering several factors, including: (i) macroeconomic projections, such as interest rates, inflation and exchange rates, among others, (ii) the performance and growth estimates of the Brazilian financial system, (iii) increased costs, returns, synergies and investment plans, (iv) the behavior of customers, and (v) the growth rate of, and long-term adjustments to, cash flows. These estimates rely on assumptions regarding the likelihood of future events, and changing certain factors could result in different outcomes. The estimate of cash flows is based on valuations prepared by an independent research company, which is reviewed and approved by the board of directors. Therefore, amortization of goodwill related to tax generates a permanent difference and no record of the deferred tax liability.
The following table shows the main assumptions for the basis of valuation as of the dates indicated.
| 2016 | 2015 | 2014 | ||||||||||
| (Value in use: cash flows) | ||||||||||||
| Main Assumptions(*) | ||||||||||||
| Basis of valuation | ||||||||||||
| Period of the projections of cash flows(1) | 5 years | 5 years | 5 years | |||||||||
| Growth rate(2) | 8.0 | % | 7.5 | % | 7.0 | % | ||||||
| Discount rate(3) | 15.2 | % | 15.2 | % | 14.4 | % | ||||||
| (1) | The projections of cash flow are prepared using internal budget and growth plans of management, based on historical data, market expectations and conditions such as industry growth, interest rate and inflation. |
| (2) | The growth rate is calculated based on a real growth rate of 3.3% p.a. plus annual long-term inflation in 2016. |
| (3) | The discount rate is calculated based on the capital asset pricing model. The discount rate before tax is 20.23% in 2016 and 20.11% in 2015. |
| (*) | The recoverability test base date is December 31, 2016. Goodwill is tested for impairment at the end of each reportable period or whenever there is any indication of a potential impairment. |
We performed a sensitivity test in the goodwill impairment analysis considering the main assumptions that could reasonably be expected to possibly change, as required by the IFRS. Accordingly, we applied such a test considering the discount rate as the main assumption subject to reasonably possible change and we did not identify any impairment to goodwill.
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Factors Affecting the Comparability of Our Results of Operations
Sale of SSS DTVM
On June 19, 2014, we executed preliminary documents containing the main terms and conditions of the sale of our qualified custody business and the sale of our subsidiary SSS DTVM, which renders third party fund administration services, to a holding company owned by Santander Spain and a group of private equity funds managed by Warburg Pincus. Following the sale, we will continue to act as the administrator of the funds, as per CVM Instruction No. 306, dated as of May 5, 1999, as amended.
The closing of the transaction occurred on August 31, 2015, when all of our shares in SSS DTVM were formally transferred to Santander Securities Brasil and SSS DTVM acquired our qualified custody business. We received R$859 million at the closing of the transaction which generated gains of R$751 million before taxes recorded in the “Other non-financial gains/losses” line.
Plans to Optimize our Capital Structure
On September 26, 2013, we announced that, in order to optimize our capital structure, our board of directors submitted a proposal to optimize the composition of our regulatory capital to our shareholders for their approval (“PR Optimization Plan”). The aim was to establish a more efficient capital structure, consistent with recent capital rules and aligned with our business strategy and asset growth plan. The PR Optimization Plan was composed of the following items: (i) an equity distribution to the shareholders of Santander Brasil in the total amount of R$6 billion, with no reduction in the number of shares; (ii) the issuance abroad of capital instruments to compose Tier I and Tier II of our regulatory capital; and (iii) a bonus share program and an adjustment in the composition of the Units, followed by a reverse share split (inplit), with the purpose of eliminating trading in cents of reais.
Equity Distribution
On November 1, 2013, the proposal for equity distribution to shareholders was approved at a shareholders’ meeting. In January 2014, the conditions for us to be able to effect the equity distribution (i.e., end of the period of opposition from unsecured creditors, approval by the Brazilian Central Bank and filing of the minutes of the meeting at the JUCESP) were satisfied. The equity distribution to shareholders occurred on January 29, 2014, and our shares and Units have been traded ex-rights to the equity distribution since January 15, 2014.
Issuance of Notes
On January 14, 2014, our board of directors approved the issuance of U.S. Dollars – denominated notes outside of Brazil in an amount of R$6 billion (the “Notes”). The issuance of the Notes occurred on January 29, 2014. The specific characteristics of the Notes issued to compose the Tier I capital are:
| · | Notional value: U.S.$1.247 billion, equivalent to R$3 billion; |
| · | Interest rate: 7.375% p.a.; |
| · | Maturity: the Tier I Notes shall be perpetual; |
| · | Frequency of interest payment: interest will be paid quarterly from April 29, 2014; |
| · | Discretion: Santander Brasil may cancel the distribution of interest at any time, for an unlimited period, with no accumulation rights and this suspension shall not be considered as a default event; and |
| · | Subordination: in the case of insolvency, the Notes’ financial settlement is subordinated to all Tier II capital instruments. |
| · | The specific characteristics of the Notes issued to form the Tier II capital are: |
| · | Notional value: U.S.$1.247 billion, equivalent to R$3 billion; |
| · | Interest rate: 6.0% p.a.; |
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| · | Maturity: the Tier II Notes will mature on January 29, 2024; and |
| · | Frequency of interest payment: interest payable semi-annually from July 29, 2014. |
On April 15, 2014, the Brazilian Central Bank approved the issued notes to compose the Tier I and Tier II of Bank’s regulatory capital since the issuance date.
Bonus Shares and Reverse Share Split (Inplit)
With the purpose of eliminating the trading in cents of SANB3 (common) and SANB4 (preferred) shares, increasing liquidity and reducing the transaction costs thereof, our shareholders approved on March 18, 2014 (i) a bonus share issue of 19,002,100,957 preferred shares to our shareholders, at the ratio of 0.047619048 preferred shares for each common share (SANB3) or preferred share (SANB4), which resulted in a bonus share issue of five preferred shares for each Unit (SANB11), through the capitalization of reserves in the amount of approximately R$172 million; and (ii) a reverse share split (inplit) of the totality of our common shares and preferred shares at a ratio of 1:55, so that each fifty-five common shares and fifty-five preferred shares would thereafter correspond to one common share and one preferred share, respectively. As a result, each Unit (ticker SANB11) came to be comprised of one common share and one preferred share. The bonus share issue and reverse share split were implemented on June 2, 2014.
Exchange Offer
On April 29, 2014, our indirect controlling shareholder, Santander Spain, announced its intention to launch the Brazilian Exchange Offer and the U.S. Exchange Offer. As a result of the transaction, we continued to be a listed company, although we changed from the Level 2 Segment to the basic listing segment of the BM&FBOVESPA.
On June 9, 2014, an Extraordinary General Meeting was held, at which the following items were approved: (a) the exit of the Bank from the Level 2 Segment; and (b) the appointment of NM Rothschild & Sons (Brasil) Ltda. (“Rothschild”) to prepare a valuation report for the purposes of the Brazilian Exchange Offer and the U.S. Exchange Offer and the consequent exit from the Level 2 Segment.
On June 13, 2014, Santander Brasil announced to the market that the valuation report prepared by Rothschild had been duly filed on that date with (i) the CVM; (ii) the BM&FBOVESPA; and (iii) the SEC. On the same date, Santander Brasil also announced to the market that an application for registration of the Brazilian Exchange Offer had been duly filed with the CVM on that same date.
On October 2, 2014, Santander Brasil’s board of directors issued an opinion regarding the Brazilian Exchange Offer and the U.S. Exchange Offer, and Santander Brasil filed with the SEC its position with respect to the proposed transaction by means of a Schedule 14D-9. On October 16, 2014, Santander Spain and Santander Brasil disclosed to the market an adjustment of the exchange ratio referred to in the public notice (edital) published on September 18, 2014. The exchange ratio, and consequently the amount of BDRs to which each subscription receipt was entitled, was adjusted from 0.70 BDR for each Unit, and 0.35 BDR for each share, either ordinary or preferred, to 0.7152 BDR for each Unit and 0.3576 BDR for each share, either ordinary or preferred, in view of the compensation declared by Santander Spain on October 16, 2014, under the “Santander Dividendo Elección” program, with a recorded date of October 17, 2014.
The Brazilian Exchange Offer and the U.S. Exchange Offer were concluded on October 30, 2014. On October 31, 2014, Santander Brasil together with Santander Spain announced to the market the results of the Brazilian Exchange Offer and the U.S. Exchange Offer, pursuant to which Santander Spain acquired 1,640,644 shares and 517,827,702 Units, representing, together, 13.65% of the share capital of Santander Brasil, thereby increasing the Santander Group’s stake in Santander Brasil to 88.30% (not including the shares held by Banco Madesant - Sociedade Unipessoal) of Santander Brasil’s total share capital (88.87% of its common shares and 87.71% of its preferred shares, also considering the ADRs, representing Units acquired in the United States). As a consequence of the Brazilian Exchange Offer and the U.S. Exchange Offer, Santander Brasil’s shares are no longer listed on the Level 2 Segment of the BM&FBOVESPA, and are now listed in the basic listing segment of BM&FBOVESPA.
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Merger of GetNet Tecnologia em Captura e Processamento de Transações H.U.A.H. S.A. into GetNet Adquirência e Serviços para Meios de Pagamento S.A.
On July 31, 2014, we completed the acquisition of the operations of GetNet, which had been announced on April 4, 2014.
At the Extraordinary Shareholders’ Meeting of August 31, 2014, the shareholders of the companies approved the merger of GetNet into SGS under the terms of the Merger Protocol of GetNet into SGS (the “Protocol”) dated as of August 29, 2014.
Pursuant to the Protocol, SGS received the book value of all assets, rights and obligations of GetNet totaling R$42.9 thousand, which was extinguished and succeeded by SGS GetNet in all rights and obligations via a merger of GetNet into SGS. Considering that all the shares issued by GetNet were held by SGS, no increase of the capital of SGS was made following the approval of the merger, and the net assets of GetNet were registered by SGS GetNet in its investment account.
The implementation of the GetNet merger represented an important step in the simplification, integration and consolidation of the capture and processing activities of the Santander Group’s acquiring business in Brazil. The structure provides a higher flexibility to manage business with a new and more complete commercial approach and increasing operational leverage with economies of scale.
The GetNet merger was undertaken based on the balance sheet of GetNet as of July 31, 2014 which was prepared specifically for purposes of the merger. Any variations occurred between August 1, 2014 to August 31, 2014 were appropriated by SGS GetNet.
Sale of the Investment Fund Management and Managed Portfolio Operations
On December 17, 2013, we concluded the sale of our asset management business, by way of disposal of all of the shares of Santander Brasil Asset Management Distribuidora de Títulos e Valores Mobiliários S.A. (“Santander Brasil Asset”), a company then controlled by us. The asset management activities then performed by Santander Brasil Asset were segregated into a new asset manager created for that purpose. The sales price was R$2,243 million, generating a post-tax capital gain of R$1,205 million.
We remain the administrator of the funds and in charge of distribution activities, receiving remuneration in line with market practices. As the administrator of the funds, we will continue to oversee the management of the funds, perform services related directly or indirectly to the functioning and maintenance of the funds. Additionally, we will also continue to engage in sales and distribution activities. We will not manage the funds invested or make investment decisions with respect thereto, which duties are performed by the new asset manager.
The transaction was part of a worldwide partnership between Santander Spain and two of the world’s leading private equity companies, Warburg Pincus and General Atlantic. As part of this alliance, Santander Spain now holds 50% of a holding company called Santander Asset Management, which integrates the asset management businesses of the Santander Group in eleven countries (including Brazil), with the remaining 50% of shares in Santander Asset Management being held by Warburg Pincus and General Atlantic. In 2016, the Santander Group reached an agreement with Warburg Pincus and General Atlantic pursuant to which the Santander Group will acquire their 50% share in Santander Asset Management. This transaction on completion will bring Santander Asset Management back to the 100% ownership of Santander Group.
Net income derived from our asset management business amounted to R$74 million in 2011, R$55 million in 2012, and approximately R$55 million in 2013 through the date of sale.
Critical Accounting Policies
Our consolidated financial statements have been prepared in accordance with IFRS as issued by the IASB.
General
Our principal accounting policies are described in note 2 to our audited consolidated financial statements. The following discussion describes those areas that require the most judgment or involve a higher degree of complexity
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in the application of the accounting policies, and estimates that currently affect our financial condition and operational results. The accounting estimates made in these contexts require management to make assumptions about matters that are highly uncertain. In this regard, if management decides to change these estimates, or even if changes in these estimates occur from period to period, these accounting estimates could have a material impact on our financial condition and operational results.
Management bases its estimates and judgments on historical experience and on various other factors and circumstances, which are believed to be reasonable. Actual results may differ from these estimates if assumptions and conditions change. Judgments or changes in assumptions are submitted to the audit committee and to our regulatory authorities and are disclosed in the notes to our consolidated financial statements.
Fair Value of Financial Instruments
We record financial assets and liabilities as financial instruments that are classified at fair value through profit or loss, available-for-sale securities, and all derivatives at fair value on the balance sheet. The fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, regardless of whether that price is directly observable or estimated using another valuation technique.
In estimating the fair value of an asset or a liability, we take into account the characteristics of the asset or liability if market participants would take those characteristics into account when pricing the asset and liability at the measurement date. That assumed transaction establishes the price to sell the asset or to transfer the liability. In the absence thereof, the price is established on the basis of valuation techniques commonly used by the financial markets.
We use derivative financial instruments for both trading and non-trading activities. The principal types of derivatives used are interest rate swaps, future rate agreements, interest rate options and futures, foreign exchange forwards, foreign exchange futures, foreign exchange options, foreign exchange swaps, cross-currency swaps, equity index futures, equity options and equity swaps. The fair value of exchange traded derivatives is calculated based on published price quotations. The fair value of over-the-counter derivatives is calculated as the sum of the expected future cash flows arising from the instrument, discounted to present value at the date of measurement (“present value” or “theoretical close”) using valuation techniques commonly used by the financial markets as follows:
| · | The present value method for valuing financial instruments permitting static hedging (principally, forwards and swaps) and loans and advances. Expected future cash flows are discounted using the interest rate curves of the applicable currencies. The interest rate curves are generally observable market data. |
| · | The Black-Scholes model for valuing financial instruments requiring dynamic hedging (principally structured options and other structured instruments). Certain observable market inputs are used in the Black-Scholes model to generate variables such as the bid-offer spread, exchange rates, volatility, correlation between indexes and market liquidity, as appropriate. |
| · | Each of the present value methods and the Black-Scholes models are used for valuing financial instruments exposed to interest rate risk, such as interest rate futures, caps and floors. The main inputs used in these models are principally observable market data, including appropriate interest rate curves, volatilities, correlations and exchange rates. |
| · | We use dynamic models similar to those used in the measurement of interest rate risk for measuring credit risk of linear instruments (such as bonds and fixed-income derivatives). In the case of non-linear instruments, if the portfolio is exposed to credit risk (such as credit derivatives), the joint probability of default is determined using the Standard Gaussian Copula model. The main inputs used to determine the underlying cost of credit for credit derivatives are quoted credit risk spreads, and the correlation between quoted credit derivatives of various issuers. |
| · | The determination of fair value requires us to make certain estimates and assumptions. If quoted market prices are not available, fair value is calculated using widely accepted pricing models that consider contractual prices of the underlying financial instruments, yield curves, contract terms, observable market |
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data and other relevant factors. The use of different estimates or assumptions in these pricing models could lead to a different valuation being recorded in our consolidated financial statements.
See note 2d (iii) to our consolidated financial statements for additional information on valuation techniques used by us and details of the principal assumptions and estimates used in these models and the sensitivity of the valuation of financial instruments to changes in the principal assumptions used.
Impairment Losses on Financial Assets
Definition
A financial asset is considered impaired when there is objective evidence of any of the following:
| · | significant financial difficulties affecting the issuer, borrower or other similar obligor; |
| · | it becoming probable that the issuer, borrower or other similar obligor will enter bankruptcy or other financial reorganization; |
| · | a breach of contract, such as a default or delinquency in interest or principal payments; |
| · | a breach of certain other clauses or terms of the documentation underlying the transaction; |
| · | the disappearance of an active market for that financial asset because of financial difficulties; or |
| · | observable data indicating that there is a measurable decrease in the estimated future cash flows from financial assets since the initial recognition of those assets (even though such decrease is yet to materialize), including: (i) adverse changes in the payment status of issuers, borrowers or other similar obligors in the group; or (ii) national or local economic conditions that correlate with defaults on the assets. |
As a general rule, when any of the events listed above occurs, the carrying amount of impaired financial assets is adjusted by recording a provision for losses on debts expense as “Losses on financial assets (net)” in the consolidated income statement. The reversal of previously recorded losses is recognized in the consolidated income statement in the period in which the impairment and decrease can be related objectively to an event of recovery.
Financial assets are deemed to be impaired, and the interest accrual suspended, when there are reasonable doubts as to their full recovery and/or the collection of the related interest for the amounts and on the dates indicated in the loan agreement after taking into account the collateral guarantees received to secure (fully or partially) collection of the related balances.
For all non-performing past due assets, any collections relating to impaired loans and advances are used to recognize the accrued interest and the remainder, if any, is applied to reduce the principal amount outstanding.
Debt Instruments Carried at Amortized Cost
The amount of an impairment loss incurred for determination of the recoverable amount on a debt instrument measured at amortized cost is equal to the difference between its carrying amount and the present value of its estimated future cash flows (excluding future credit losses that have not been incurred), discounted to the original effective interest rate of the financial asset (or the effective interest rate computed at initial recognition), and is presented as a reduction of the asset balance and recorded on income statements.
In estimating the future cash flows of debt instruments, the following factors are taken into account:
| · | All the amounts that are expected to be obtained over the remaining life of the instrument, in this case, the provided guarantees. The impairment loss takes into account the likelihood of collecting accrued interest receivable. |
| · | The various types of risk to which each instrument is subject; and |
| · | The circumstances in which collections will foreseeably be made. |
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These cash flows are subsequently discounted using the instrument’s effective interest rate.
With regard to recoverable amount losses resulting from a materialization of the insolvency risk of the obligors (credit risk), a debt instrument is impaired due to insolvency when there is evidence of a deterioration in the obligor’s ability to pay, either because such obligor is in arrears or for other reasons.
We have certain policies, methods and procedures for minimizing our exposure to counterparty insolvency. These policies, methods and procedures are applied in the granting, examination and documentation of debt instruments, and contingent liabilities and commitments, the identification of their recoverable amount and the calculation of the amounts necessary to cover the related credit risk.
The procedures employed in the identification, measurement, control and reduction of exposure to credit risk, are applied on an individual basis or by grouping similar credit risk characteristics.
| · | Customers with individual management: Wholesale segment customers, financial institutions and certain companies. Risk management is performed through an analysis complemented by tools to support decision-making model-based risk assessment internal procedure. |
| · | Customers with standardized management: individuals and companies not classified as individual clients. Risk management models based on automated decision-making and risk assessment procedure, complemented, when the model is not comprehensive or accurate enough, by teams of analysts specializing in this type of risk. The credits related to standardized customers are usually considered not recoverable when they have historical loss experience and delay greater than 90 days. |
Methodology for Impairment Losses
We evaluate all loans in respect of the provision for impairment losses from credit risk. Loans are either individually evaluated for impairment, or, for loans accounted as amortized cost, collectively evaluated by grouping similar risk characteristics. Loans that are individually evaluated for impairment losses are not evaluated collectively.
To measure the impairment loss on loans individually evaluated for impairment, we consider the conditions of the borrowers, such as their economic and financial situation, level of indebtedness, ability to generate income, cash flow, management, corporate governance and quality of internal controls, payment history, industry expertise, contingencies and credit limits, as well as the characteristics of assets, such as their nature and purpose, type, sufficiency and liquidity level guarantees and total amount of credit, as well as based on historical experience of impairment and other circumstances known at the time of evaluation.
To measure the impairment loss on loans collectively evaluated for impairment, we segregate financial assets into groups considering the characteristics and similarity of credit risk, or in other words, according to segment, the type of assets, guarantees and other factors associated such as the historical experience of impairment and other circumstances known at the time of assessment.
The impairment loss is calculated using statistical models that consider the following factors:
| · | Exposure at default or “EAD” is the amount of risk exposure at the date of default by the borrower. In accordance with IFRS as issued by the IASB, the exposure at default used for this calculation is the current exposure, as reported in the balance sheet. |
| · | Probability of default or “PD” is the probability of the borrower failing to meet its principal and/or interest payment obligations. PD is measured using a time horizon of one year; that is, it quantifies the probability of the borrower defaulting in the coming year. A loan is in default if either the principal or interest is past due by ninety days or more or the loan is current but there are doubts as to the solvency of the counterparty (subjective doubtful assets). |
| · | Loss given default, or “LGD,” is the loss arising in the event of default. In addition to examining the PD, we manage our portfolio looking for loans in which the borrowers will provide higher volumes of guarantees relating to operations and who will also act to constantly strengthen the area of loan recovery. These and other actions combined are responsible for ensuring the adequacy of the LGD parameters (loss |
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resulting from the event of default by the borrower to honor the principal and/or interest payments). The LGD calculation is based on the net charge-offs on defaulted loans, taking into account the guarantees/collateral associated with the loans, the income and expenses associated with the recovery process and the timing of delinquency.
| · | Loss identification period, or “LIP,” is the time period between the occurrence of a loss event and the identification of an objective evidence of this loss by Santander Brasil. In other words, it represents the time horizon from the credit loss occurrence until the effective confirmation of such loss. |
Moreover, prior to charging off past due loans (which is only done after we have completed all recovery efforts), we record provisions to the remaining balance of the loan so our allowance for impairment losses fully covers our losses. Thus, we understand that our allowance for impairment losses methodology has been developed to fit its risk metrics and capture loans that could potentially become impaired.
Impairment
Certain assets, such as intangible assets, including goodwill, equity method investments, financial assets not carried at fair value through profit or loss and other assets are subject to impairment review. We record impairment charges when we believe there is objective evidence of impairment, or that the cost of the assets may not be recoverable.
The assessment of what constitutes an impairment is based on the following models:
We test goodwill for impairment on an annual basis, or more frequently if events or changes in economic circumstances, such as an adverse change in Santander Brasil’s business condition or observable market data, indicate that these assets may be impaired. The recoverable amount determination used in the impairment assessment requires prices of comparable businesses, present value or other valuation techniques, or a combination thereof, requiring management to make subjective judgments and assumptions. Events and factors that may significantly affect the estimates include, among other things, competitive forces, customer behaviors and attrition, changes in revenue growth trends, cost structures and technology, and changes in discount rates and specific industry or market sector conditions. If an impairment loss is recognized for goodwill, it may not be reversed in a subsequent period. The recognition of impairment is applicable when significant changes occur in the main estimates used to evaluate the recoverable amounts of the cash-generating unit recoverable amount below the carrying amount. Based on the assumptions described above, no impairment of goodwill in 2016 and 2015 was identified.
Given the level of uncertainty related to these assumptions, our officers carry out sensitivity analysis using reasonably possible changes in the key assumptions on which the recoverable amount of the cash-generating units are based in order to confirm that the recoverable amounts still exceed the carrying amounts.
All debt and equity securities (other than those carried at fair value through profit or loss) are subject to impairment testing every reporting period. The carrying value is reviewed in order to determine whether an impairment loss has been incurred.
Evaluation for impairment includes both quantitative and qualitative information. For debt securities, such information includes actual and estimated incurred credit losses indicated by payment default, market data on (estimated) incurred losses and other current evidence that the issuer may not pay amounts when due. Equity securities are impaired when management believes that, based on a significant or prolonged decline of fair value below the acquisition price, there is sufficient reason to believe that the acquisition cost may not be recovered. “Significant” and “prolonged” are interpreted on a case-by-case basis for specific equity securities.
Upon impairment of either debt or equity instruments, the amount considered as effective loss is recognized in profit or loss. In addition, we did not identify any impairment of tangible assets in 2016 and 2015(see notes 14, 13 and 12, respectively, to our audited consolidated financial statements).
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Post-employment Benefit Plan
The Post-employment benefits plans include the following obligations undertaken by us: (i) to supplement the public social security system benefits, and (ii) medical assistance in the event of retirement, permanent disability or death for eligible employees and their direct beneficiaries.
Defined Contribution Plan
A defined contribution plan is the post-employment benefits plan for which we and our controlled entities as employer entities pay pre-determined contributions to a separate entity and will have no legal or constructive obligation to pay further contributions if the separate entity does not hold sufficient assets to honor all benefits relating to the service rendered in the current and prior periods.
These contributions are recognized as personnel expenses in the consolidated income statement.
Defined Benefit Plans
A defined benefit plan is the post-employment benefit plan which is not a defined contribution plan and is shown in note 21 to our audited consolidated financial statements. For this type of plan, the sponsoring entity’s obligation is to provide the agreed benefits to employees, assuming the potential actuarial risk that benefits will cost more than expected.
The amendment of IAS 19 established fundamental changes in the accounting for and disclosure of employee post-employment benefits such as removing the mechanism of the corridor approach for recording of the obligation of the plans, as well as changes in the criteria for recognition of conventional interest of plan assets (valuation based on the discount rate actuarial liability).
The adoption of this accounting policy involved, fundamentally, full recognition of liabilities on account of actuarial losses (actuarial deficit) not recognized previously, against the stockholders’ equity (Statements of Comprehensive Income).
Main Definitions:
| · | The present value of the defined benefit obligation is the present value of expected future payments required to settle the obligation resulting from employee service in the current and past periods, without deducting any plan assets. |
| · | Deficit or surplus is: (a) the present value of the defined benefit obligation, less (b) the fair value of plan assets. |
| · | The sponsoring entity may recognize the plan’s assets in the balance sheet when they meet the following characteristics: (i) the assets of the fund are sufficient to meet all employee benefit plan or sponsor obligations; or (ii) the assets are returned to the sponsoring entity in order to reimburse it for employee benefits already paid. |
| · | Actuarial gains and losses are changes in present value of defined benefit obligation resulting from: (a) adjustments due to experience (the effects of differences between the actuarial assumptions adopted and what has actually occurred); and (b) effects of changes in actuarial assumptions. |
| · | Current service cost is the increase in the present value of the defined benefit obligation resulting from employee service in the current period. |
| · | The past service cost is the change in present value of defined benefit obligation for employee service in prior periods resulting from a change in the plan or reductions in the number of employees covered. |
Post-employment benefits are recognized in the income statement in the lines of “Interest expense and similar charges” and “Provisions (net).”
The defined benefit plans are recorded based on an actuarial study, conducted annually by an external consultant, at the end of each year to be effective for the subsequent period.
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Results of Operations for the Year Ended December 31, 2016 Compared to the Year Ended December 31, 2015
Highlights
For the year ended December 31, 2016, we reported a consolidated profit of R$7,465 million, a decrease of R$2,369 million as compared to the year ended December 31, 2015. This decrease was mainly due to non-recurring results before taxes of R$7.9 billion related to a reversal of tax provision regarding COFINS and R$765 million of tax reimbursement related to COFINS that did not occur in 2016.
Our impaired assets to credit risk ratio was stable at 7.0% for the year ended December 31, 2016 and 7.0% for the year ended December 31, 2015, mainly due to our collection practices with respect to our borrowers whereby we offered certain customers the chance to negotiate a restructuring of their debts.
The coverage ratio (provisions for impairment losses as a percentage of impaired assets) was 96.3% in the year ended December 31, 2016, a 13.4 p.p. increase as compared to 82.9% in the year ended December 31, 2015.
Our total loan portfolio increased by 0.4%, from R$267.2 billion on December 31, 2015 to R$268.4 billion on December 31, 2016. Loans to large corporate customers decreased by R$5,120 million, a decrease which was offset by an increase of R$6,617 million in loans to individuals, during the year ended December 31, 2016 as compared to the year ended December 31, 2015.
Growth in lending to individuals was driven by an increase of 27.5% in payroll loans and 4.5% in mortgages. Our reduction in lending to our large corporate customers of 4.5% was a consequence of market conditions, reflecting the exchange rate variation and a decrease mainly in our working capital portfolio.
Deposits from the Brazilian Central Bank and deposits from credit institutions plus customer deposits increased by 4.3% to R$326.1 billion on December 31, 2016 from R$312.5 billion on December 31, 2015.
Our efficiency ratio was 30.6% in December 2016, a 16.6p.p. decrease from 47.1% in December 2015. Our Basel capital adequacy ratio, calculated in accordance with the regulations and guidance of the Brazilian Central Bank, was 16.3% as of December 31, 2016.
Results of Operations
The following table presents our consolidated results of operations for the year ended December 31, 2016 as compared to the year ended December 31, 2015:
| For the year ended December 31 | ||||||||||||||||
| 2016 | 2015 | % Change | Change | |||||||||||||
| (in millions of R$, except percentages) | ||||||||||||||||
| Net interest income | 30,586 | 31,337 | (2.4 | )% | (751 | ) | ||||||||||
| Income from equity instruments | 259 | 143 | 81.0 | % | 116 | |||||||||||
| Income from companies accounted for by the equity method | 48 | 116 | (59.1 | )% | (69 | ) | ||||||||||
| Net fees and commissions | 10,978 | 9,484 | 15.8 | % | 1,494 | |||||||||||
| Gains/losses on financial assets and liabilities (net) and exchange differences (net) | 7,591 | (9,918 | ) | 176.5 | % | 17,509 | ||||||||||
| Other operating income (expenses) | (625 | ) | (347 | ) | (79.9 | )% | (277 | ) | ||||||||
| Total income | 48,837 | 30,814 | 58.5 | % | 18,022 | |||||||||||
| Administrative expenses | (14,920 | ) | (14,515 | ) | 2.8 | % | (405 | ) | ||||||||
| Depreciation and amortization | (1,483 | ) | (1,490 | ) | 0.5 | % | 7 | |||||||||
| Provisions (net) | (2,725 | ) | (4,001 | ) | 31.9 | % | 1,277 | |||||||||
| Impairment losses on financial assets (net) | (13,301 | ) | (13,634 | ) | 2.4 | % | 333 | |||||||||
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| For the year ended December 31 | ||||||||||||||||
| 2016 | 2015 | % Change | Change | |||||||||||||
| (in millions of R$, except percentages) | ||||||||||||||||
| Impairment losses on other assets (net) | (114 | ) | (1,221 | ) | 90.6 | % | 1,106 | |||||||||
| Other non-financial gains/losses | 91 | 831 | (89.1 | )% | (740 | ) | ||||||||||
| Operating profit before tax | 16,384 | (3,216 | ) | 609.5 | % | 19,600 | ||||||||||
| Income taxes | (8,919 | ) | 13,050 | n.d. | (21,969 | ) | ||||||||||
| Net profit from continuing operations | 7,465 | 9,834 | (24.1 | )% | (2,369 | ) | ||||||||||
| Discontinued operations | — | — | ||||||||||||||
| Consolidated Profit for the Year | 7,465 | 9,834 | (24.1 | )% | (2,369 | ) | ||||||||||
Summary
Our consolidated profit for the year ended December 31, 2016 was R$7.5 billion, a 24.1% decrease as compared to the year ended December 31, 2015 for which our consolidated profit was R$9.8 billion.
This decrease in our consolidated profit for the year was mainly due to an increase of R$21,969 million in the “Income taxes” line item for the year ended December 31, 2016 as compared to the year ended December 31, 2015. This increase can be principally attributed to:
| · | gains of R$2.7 billion related to the reversal of tax provisions and a tax reimbursement related to COFINS in 2015 which did not occur in 2016; |
| · | an increase from 15% to 20% in the CSLL tax rate in the fourth quarter of 2015; and |
| · | tax expenses of R$17,059 million in the year ended December 31, 2016 arising out of the effects of foreign exchange rate variations affecting certain of our foreign branches and the associated hedging instruments, which was offset by gains in the same amount on financial assets and liabilities (net) and exchange differences (net). For further information, see “—Other Factors Affecting Our Financial Condition and Results of Operations—Hedging in Foreign Investments.” |
Net Interest Income
Net interest income for the year ended December 31, 2016 was R$30,586 million, a 2.4%, or R$751 million, decrease from R$31,337 million for the year ended December 31, 2015. This decrease was principally due to a non-recurring reversal of tax provision and a tax reimbursement in relation to COFINS in an amount of R$2.4 billion in 2015 that did not occur in 2016. For further information, please see note 24.c.1 and note 25 to our audited consolidated financial statements included in this annual report. Despite such decrease, revenues from deposits and others products related to our funding operations increased 31.1% or R$723 million, as compared to the year ended December 31, 2015, as a result of our focus on customer loyalty and active liability management.
Average total earning assets in 2016 were R$504.3 billion, a 5.0% or R$23.9 billion increase from R$480.4 billion in 2015. The principal drivers of this increase were an increase of R$32.1 billion, or 47.7%, in the average of cash and balances with the Brazilian Central Bank partially offset by a decrease of R$7.6 billion, or 18.4%, in the average of loans and amounts due from credit institutions. Net yield (the net interest income divided by average earning assets) was 6.2% in 2016, compared to 6.6% in 2015, a decrease of 0.4 p.p.
Average total interest bearing liabilities in 2016 were R$408.1 billion, a 5.9% or R$22.9 billion increase from R$385.2 billion in 2015. The main drivers of this growth were an increase of R$12.0 billion in customer deposits, an increase of R$11.6 billion in marketable debt securities and an increase of R$1.4 billion in deposits from the Brazilian Central Bank and deposits from credit institutions offset by R$2.2 billion in other interest bearing liabilities.
Finally, the yield spread (the difference between gross yield on earning assets and the average cost of interest-bearing liabilities) in 2016 was 4.0%, 0.7 p.p. lower than in 2015, which was 4.7%.
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Income from Equity Instruments
Income from equity instruments for the year ended December 31, 2016 totaled R$259 million, a R$116 million increase from R$143 million for the year ended December 31, 2015. This increase was mainly due to an increase in dividends from investments registered in available for sale financial assets.
Income from Companies Accounted for by the Equity Method
Income from companies accounted for by the equity method for the year ended December 31, 2016 was R$48 million, a R$69 million decrease from R$116 million for the year ended December 31, 2015. This decrease was mainly due to losses at Banco RCI Brasil S.A, a jointly-controlled company.
Net Fees and Commissions
Net fees and commissions for the year ended December 31, 2016 reached R$10,978 million, a 15.8%, or R$1,494 million, increase from R$9,484 million for the year ended December 31, 2015. This increase was mainly due to an increase of R$512 million in revenues from credit and debit cards, R$430 million in revenues from banking fees and R$285 million in revenues from insurance and capitalization products.
Net fees and commissions from credit and debit cards totaled R$3,022 million for the year ended December 31, 2016, an increase of 20.4% compared to the year ended December 31, 2015, mainly owing to higher interchange fees due to an increase in transaction volumes. Our credit card base decreased 2.8% although our number of issued debit cards increased 8.5% for the year ended December 31, 2016, reaching a total 62.5 million issued cards.
Net fees and commissions from banking fees totaled R$3,001 million for the year ended December 31, 2016, an increase of 16.7% compared to the year ended December 31, 2015 primarily due to an increase in fees charged to our clients.
Net fees and commissions from insurance and capitalization products totaled R$2,478 million for the year ended December 31, 2016, a 13.0% increase compared to the year ended December 31, 2015. This increase was mainly due to the marketing campaigns conducted in the branch network during the first half of 2016.
The following table reflects the breakdown of net fee and commission income for the years ended December 31, 2016 and 2015:
| For the year ended December 31 | ||||||||||||||||
| 2016 | 2015 | % Change | Change | |||||||||||||
| (in millions of R$, except percentages) | ||||||||||||||||
| Banking fees | 3,001 | 2,570 | 16.7 | % | 430 | |||||||||||
| Collection and payment services | 957 | 816 | 17.3 | % | 141 | |||||||||||
| Insurance and Capitalization | 2,478 | 2,192 | 13.0 | % | 285 | |||||||||||
| Asset Management and Pension Funds | 1,174 | 1,028 | 14.2 | % | 146 | |||||||||||
| Credit and debit cards | 3,022 | 2,509 | 20.4 | % | 512 | |||||||||||
| Capital markets | 590 | 501 | 17.8 | % | 89 | |||||||||||
| Trade finance | 855 | 701 | 22.0 | % | 154 | |||||||||||
| Tax on services | (515 | ) | (401 | ) | 28.3 | % | (113 | ) | ||||||||
| Others | (584 | ) | (433 | ) | 35.0 | % | (151 | ) | ||||||||
| Total | 10,978 | 9,484 | 15.8 | % | 1,494 | |||||||||||
Gains/losses on Financial Assets and Liabilities (net) and Exchange Differences (net)
Gains/losses on financial assets and liabilities (net) and exchange differences (net) for the year ended December 31, 2016 were gains of R$7,591 million, a R$17,509 million increase from losses of R$9,918 million for the year ended December 31, 2015. This variation is mainly explained by an increase of R$17,059 million from derivatives transactions, as a consequence of our results of hedging on investments abroad, which was offset by losses in the same amount in income taxes. For further information see “—Other Factors Affecting Our Financial Condition and Results of Operations—Hedging in Foreign Investments.”
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Other Operating Income/Expenses
Other operating income/expenses for the year ended December 31, 2016 were expenses of R$625 million, an increase of R$277 million compared to expenses of R$347 million for the year ended December 31, 2015, primarily due to the reversal of losses related to the private pension plan which occurred during the year ended December 31, 2015 that did not occur in the year ended December 31, 2016, and an increase in operational losses relating to fraud.
Administrative Expenses
Administrative expenses for the year ended December 31, 2016 were R$14,920 million, a R$405 million increase compared to administrative expenses of R$14,515 million for the year ended December 31, 2015.
Personnel expenses increased R$578 million for the year ended December 31, 2016 compared to the same period in 2015, due principally to higher wage and salaries and the R$155 million lump-sum bonus in connection with the renegotiation of our collective bargaining agreement in October 2016.
The following table reflects our personnel expenses as of the periods indicated:
| For the year ended December 31 | ||||||||||||||||
| 2016 | 2015 | % Change | Change | |||||||||||||
| (in millions of R$, except percentages) | ||||||||||||||||
| Wages and salaries | 5,377 | 4,655 | 15.5 | % | 722 | |||||||||||
| Social security costs | 1,273 | 1,316 | (3.3 | )% | (43 | ) | ||||||||||
| Benefits | 1,278 | 1,184 | 7.9 | % | 94 | |||||||||||
| Training | 63 | 93 | (32.7 | )% | (30 | ) | ||||||||||
| Other personnel expenses | 386 | 550 | (29.8 | )% | (164 | ) | ||||||||||
| Total | 8,377 | 7,799 | 7.4 | % | 578 | |||||||||||
The efficiency ratio decreased to 30.6% in the year ended December 31, 2016, as compared to 47.1% for the year ended December 31, 2015. Our adjusted efficiency ratio, which excludes the effect of profit-neutral tax hedging (see “—Hedging in Foreign Investments” and “Selected Financial Data—Selected Consolidated Non-GAAP Ratios”) increased from 34.8% in 2015 to 34.9% in 2016.
Other administrative expenses decreased R$173 million from R$6,716 million for the year ended December 31, 2015 to R$6,543 million for the year ended December 31, 2016. This decrease was primarily due to lower expenses from specialized and technical services, advertising and per diems and travel expenses.
The following table sets forth other administrative expenses for each of the periods indicated:
| For the year ended December 31 | ||||||||||||||||
| 2016 | 2015 | % Change | Change | |||||||||||||
| (in millions of R$, except percentages) | ||||||||||||||||
| Specialized and technical services | 1,745 | 1,821 | (4.2 | )% | (76 | ) | ||||||||||
| Property, fixtures and supplies | 1,279 | 1,268 | 0.8 | % | 10 | |||||||||||
| Technology and systems | 1,247 | 1,193 | 4.6 | % | 54 | |||||||||||
| Advertising | 487 | 523 | (7.0 | )% | (37 | ) | ||||||||||
| Communications | 489 | 481 | 1.6 | % | 8 | |||||||||||
| Per diems and travel expenses | 133 | 160 | (16.9 | )% | (27 | ) | ||||||||||
| Surveillance and cash courier services | 622 | 615 | 1.3 | % | 8 | |||||||||||
| Other administrative expenses | 542 | 655 | (17.3 | )% | (114 | ) | ||||||||||
| Total | 6,543 | 6,716 | (2.6 | )% | (173 | ) | ||||||||||
Depreciation and Amortization
Depreciation and amortization for the year ended December 31, 2016 was R$1,483 million, a R$7 million decrease from R$1,490 million for the year ended December 31, 2015.
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Provisions (Net)
Provisions principally include provisions for tax, civil, and especially labor claims. Provisions (net) totaled R$2,725 million for the year ended December 31, 2016, a decrease of R$1,277 million compared to R$4,001 million for the year ended December 31, 2015. This decrease was mainly due to a decrease in provisions related to tax and civil contingencies.
Impairment Losses on Financial Assets (Net)
Impairment Losses on Financial Assets (Net) for the year ended December 31, 2016 were R$13.3 billion, a R$333 million decrease compared to R$13.6 billion for the year ended December 31, 2015 principally due to:
| · | An increase of 2.1%, or R$280 million, in impairment losses for loans and receivables from R$13.1 billion as of December 31, 2015 to R$13.4 billion on December 31, 2016. The increase in impairment losses for loans and receivables was mainly caused by the slowdown in the Brazilian economy observed in the last two years, which affected our portfolio generally and in particular our commercial and industrial portfolio. As a result of the increase in impaired assets, we maintained in place our measures to manage impaired assets and provisions for impairment losses, especially collection practices with respect to our borrowers whereby we offered certain customers the chance to negotiate a restructuring of their debts. |
| · | A decrease of R$612 million to revenues of R$88 million for the year ended December 31, 2016 in other financial instruments not measured at fair value compared to a loss of R$524 million for the year ended December 31, 2015, was mainly due to provisions made in 2015 that did not occur in 2016. |
Our credit risk exposure portfolio decreased by approximately R$9.174 billion from R$310.9 billion as of December 31, 2015 to R$301.7 billion as of December 31, 2016. Our impaired assets increased by approximately R$289 million in the same period from R$18.6 billion to R$18.9 billion (see “—Impaired Assets by Type of Loan”). The default rate on all loans and other financial assets increased by 30 basis points in 2016 in comparison to 2015.
The following table shows the ratio of our impaired assets to total credit risk exposure and our coverage ratio as of December 31, 2016 and December 31, 2015.
| For the year ended December 31 | ||||||||||||||||
| 2016 | 2015 | % Change | Change | |||||||||||||
| (in millions of R$, except percentages) | ||||||||||||||||
| Loans and advances to customers, gross | 268,438 | 267,266 | 0.44 | % | 1,172 | |||||||||||
| Impaired assets | 18,888 | 18,599 | 1.55 | % | 289 | |||||||||||
| Provisions for impairment losses | 18,191 | 15,412 | 18.03 | % | 2,779 | |||||||||||
| Credit risk exposure – customers(1) | 301,703 | 310,877 | (2.95 | )% | (9,174 | ) | ||||||||||
| Ratios | ||||||||||||||||
| Impaired assets to credit risk exposure | 6.3 | % | 6.0 | % | — | 0.3p.p. | ||||||||||
| Coverage ratio(2) | 96.3 | % | 82.9 | % | — | 26.69p.p. | ||||||||||
| Impairment losses on loans and receivables | (13,390 | ) | (13,110 | ) | 2.1 | % | (280 | ) | ||||||||
| Impairment losses on other financial instruments not measured at fair value through profit for loss(3) | 88 | (524 | ) | (116.9 | )% | 612 | ||||||||||
| Total of Impairment losses on financial assets (net)(4) | (13,301 | ) | (13,634 | ) | (2.4 | )% | 333 | |||||||||
| (1) | Credit risk exposure is a non-GAAP financial measure. Credit risk exposure is the sum of the amortized cost amounts of loans and advances to customers (including impaired assets) amounting to R$268,438 million and guarantees and documentary credits amounting to R$33,265 million. We include off-balance sheet information in this measure to better demonstrate our total managed credit risk. |
| (2) | Provisions for impairment losses as a percentage of impaired assets. |
| (3) | Corresponds to registration of losses of a permanent character in the realization value of bonds and securities classified as “Securities available for sale” currently accounted for “Earnings on financials assets (net).” |
| (4) | As of December 31, 2015 and December 31, 2016, our total of impairment losses on financial instruments included R$144 million and R$1,555 million, respectively, relating to debt instruments. |
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The following chart shows our impaired assets to credit risk ratio (impairment losses divided by loans and advances to customers, gross) from 2011 through 2016:
Impaired Assets by Type of Loan
The following table shows our impaired assets by type of loan as of December 31, 2016 and December 31, 2015.
| For
the year ended December 31, | ||||||||||||||||
| 2016 | 2015 | %
Change | Change | |||||||||||||
| (in millions of R$) | ||||||||||||||||
| Commercial and industrial | 11,629 | 10,749 | 8.2 | % | 880 | |||||||||||
| Real estate | 719 | 829 | (13.3 | )% | (111 | ) | ||||||||||
| Installment loans to individuals | 6,488 | 6,970 | (6.9 | )% | (482 | ) | ||||||||||
| Lease financing | 52 | 52 | n/d | 0 | ||||||||||||
| Total | 18,887 | 18,599 | 1.5 | % | 288 | |||||||||||
For a discussion of the evolution in impairment in our lending portfolios and our methodology for loan loss allowances with respect to the following lending portfolios, see “Item 4. Information on the Company—B. Business Overview—Selected Statistical Information—Assets—Impaired Assets—Methodology for Impairment Losses.” See also “Item 3. Key Information—D. Risk Factors—Risks Relating to Brazil and Macroeconomic and Political Conditions in Brazil and Globally—Ongoing investigations relating to corruption and diversion of public funds that are being conducted by the Brazilian federal police as well as other Brazilian and non-Brazilian regulators and law enforcement officials may adversely affect the growth of the Brazilian economy and could have a material adverse effect on us” and “Item 3. Key Information—D. Risk Factors—Risks Relating to Brazil and Macroeconomic and Political Conditions in Brazil and Globally—The financial problems faced by our customers could adversely affect us.”
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Commercial and Industrial
Impaired assets in the portfolio of commercial and industrial loans amounted to R$11,629 million as of December 31, 2016, an increase of R$880 million, or 8.2%, compared to R$10,749 million as of December 31, 2015. The increase in impaired assets in this portfolio was mainly caused by the slowdown in the Brazilian economy in the last two years, affecting our commercial and industrial portfolio. For further information, please see “Item 4. Information on the Company—B. Business Overview—Selected Statistical Information—Assets—Impaired Assets—Methodology for Impairment Losses.”
Real Estate
Impaired assets in the real estate lending portfolio totaled R$719 million on December 31, 2016, a decrease of R$111 million compared to R$829 million as of December 31, 2015. The decrease in impaired assets was primarily due to better management of this portfolio, with improved options for customers to restructure their debt. For further information, please see “Item 4. Information on the Company—B. Business Overview—Selected Statistical Information—Assets—Impaired Assets—Methodology for Impairment Losses.”
Installment loans to individuals
Impaired assets in the installment loans to individuals lending portfolio totaled R$6,488 million on December 31, 2016, with a decrease of R$482 million, or 6.9%, compared to 2015. The decrease in impaired assets reflects the measures adopted by us since late 2012 to manage default rates in this portfolio, with improved options for customers to restructure their debt. For further information, please see “Item 4. Information on the Company—B. Business Overview—Selected Statistical Information—Assets—Impaired Assets—Methodology for Impairment Losses.”
Financial Leasing
Impaired assets in the financial leasing lending portfolio were stable in the period of comparison, totaling R$52 million as of December 31, 2016 and R$52 million as of December 31, 2015. For further information, please see “Item 4. Information on the Company—B. Business Overview—Selected Statistical Information—Assets—Impaired Assets—Methodology for Impairment Losses.”
Impairment Losses on Other Assets (Net)
Impairment losses on other assets (net) for the year ended December 31, 2016 amounted to losses of R$114 million, a decrease of R$1,106 million as compared to 2015, mainly due to expenses of R$675 million related to the impairment of software and expenses of R$534 million related to the impairment of payroll services related assets in 2015 that did not recur in 2016.
Other Non-Financial Gains/Losses
Other non-financial gains/losses were gains of R$91 million during the year ended December 31, 2016, a R$740 million decrease from gains of R$831 million during the year ended December 31, 2015, mainly due to a non-recurring gain of R$751 million from the sale of SSS DTVM in 2015. For further information, see “Item 4. Information on the Company—A. History and Development of the Company—Important Events—Sale of Santander Securities Services Brasil DTVM S.A.”
Income Taxes
Income taxes expense includes income tax, social contribution, PIS and COFINS (which are social contributions due on certain revenues net of some expenses). Income taxes amounted to expenses of R$8,919 million for the year 2016, a R$21,969 million change from a R$13,050 million of tax benefit for the year 2015. This change is principally attributable to the following events: (i) negative variation of R$17,059 million as a consequence of the effects of foreign exchange rate variations affecting certain of our foreign branches, and the associated hedging instruments, affecting the “Gains (losses) on financial assets and liabilities (net)” line, (ii) gains of R$2.7 billion related to the reversal of a tax provision and a tax reimbursement related to the COFINS in 2015 that did not occur in 2016, and (iii) the recognition of tax credits derived from the increase of the CSLL tax rate from 15% to 20% in August 2015.
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Results of Operations by Segment for the Year Ended December 31, 2016 Compared to the Year Ended December 31, 2015
The following tables show our results of operations for the years ended December 31, 2016 and 2015, for each of our operating segments.
Commercial Banking
| For the year ended December 31 | ||||||||||||||||
| 2016 | 2015 | % Change | Change | |||||||||||||
| (in millions of R$, except percentages) | ||||||||||||||||
| Net interest income | 27,366 | 27,041 | 1.2 | % | 325 | |||||||||||
| Income from equity instruments | 259 | 143 | 81.0 | % | 116 | |||||||||||
| Income from companies accounted for by the equity method | 48 | 116 | (59.1 | )% | (69 | ) | ||||||||||
| Net fee and commission income | 9,580 | 8,241 | 16.3 | % | 1,339 | |||||||||||
| Gains/losses on financial assets and liabilities (net) and exchange differences (net) | 5,619 | (9,069 | ) | (162.0 | )% | 14,688 | ||||||||||
| Other operating income (expenses) | (611 | ) | (335 | ) | 82.2 | % | (276 | ) | ||||||||
| Total income | 42,261 | 26,136 | 61.7 | % | 16,124 | |||||||||||
| Personnel expenses | (7,638 | ) | (7,123 | ) | 7.2 | % | (515 | ) | ||||||||
| Other administrative expenses | (6,273 | ) | (6,450 | ) | (2.7 | )% | 177 | |||||||||
| Depreciation and amortization | (1,382 | ) | (1,361 | ) | 1.5 | % | (20 | ) | ||||||||
| Provisions (net) | (2,685 | ) | (4,013 | ) | (33.1 | )% | 1,328 | |||||||||
| Impairment losses on financial assets (net) | (11,607 | ) | (12,365 | ) | (6.1 | )% | 758 | |||||||||
| Impairment losses on other assets (net) | (114 | ) | (1,220 | ) | (90.6 | )% | 1,106 | |||||||||
| Other nonfinancial gain (losses) | 91 | 831 | (89.1 | )% | (740 | ) | ||||||||||
| Operating profit before tax | 12,652 | (5,565 | ) | (327.3 | )% | 18,217 | ||||||||||
| Discontinued Operations | — | — | — | — | ||||||||||||
Operating profit before tax attributed to the Commercial Banking segment for the year ended December 31, 2016 was R$12.6 billion, a R$18.2 billion increase from losses of R$5.6 billion for the year ended December 31, 2015.
This variation was mainly due to:
| · | An increase of R$14,688 million in gains/losses on financial assets and liabilities (net) and exchange differences (net) for the year ended December 31, 2016, compared to the year ended December 31, 2015, mainly due an increase of R$17,059 million from derivatives transactions, as a consequence of our results of hedging on investments abroad. For further information see “—Other Factors Affecting Our Financial Condition and Results of Operations—Hedging in Foreign Investments.” |
| · | A decrease of R$1,328 million in provisions (net) for the year ended December 31, 2016, compared to the year ended December 31, 2015, mainly due to a decrease in provisions expenses principally related to tax and civil contingencies. |
| · | An increase of R$1,339 million in net fee and commission income for the year ended December 31, 2016, compared to the year ended December 31, 2015, mainly due to an increase in revenues from banking fees, revenues from credit and debit cards and an increase in revenues from insurance and capitalization products. |
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Global Wholesale Banking
| For the year ended December 31 | ||||||||||||||||
| 2016 | 2015 | % Change | Change | |||||||||||||
| (in millions of R$, except percentages) | ||||||||||||||||
| Net interest income | 3,221 | 4,297 | (25.0 | )% | (1,076 | ) | ||||||||||
| Net fee and commission income | 1,397 | 1,243 | 12.4 | % | 155 | |||||||||||
| Gains/losses on financial assets and liabilities (net) and exchange differences (net) | 1,972 | (849 | ) | (332.1 | )% | 2,821 | ||||||||||
| Other operating income (expenses) | (14 | ) | (12 | ) | 14.5 | % | (2 | ) | ||||||||
| Total income | 6,576 | 4,678 | 40.6 | % | 1,898 | |||||||||||
| Personnel expenses | (739 | ) | (675 | ) | 9.4 | % | (64 | ) | ||||||||
| Other administrative expenses | (270 | ) | (267 | ) | 1.3 | % | (4 | ) | ||||||||
| Depreciation and amortization | (101 | ) | (129 | ) | (21.6 | )% | 28 | |||||||||
| Provisions (net) | (39 | ) | 12 | (439.4 | )% | (51 | ) | |||||||||
| Impairment losses on financial assets (net) | (1,694 | ) | (1,269 | ) | 33.5 | % | (425 | ) | ||||||||
| Impairment losses on other assets (net) | (0 | ) | (0 | ) | n.d. | 0 | ||||||||||
| Operating profit before tax | 3,732 | 2,349 | 58.9 | % | 1,383 | |||||||||||
| Discontinued Operations | — | — | — | — | ||||||||||||
Profit before tax attributed to the Global Wholesale Banking segment for the year ended December 31, 2016 was R$3.7 billion, a 58.9%, or R$1,383 million, increase from R$2.3 billion for the year ended December 31, 2015.
This variation was mainly due to:
| · | an increase of R$2,821 million in gains on financial assets and liabilities (net) and exchange differences (net), mainly explained by an increase in gains from derivatives and market positions. |
This variation was partially offset by:
| · | a decrease of R$1,076 million in net interest income, mainly related to losses on market positions offset in part by gains on financial assets and liabilities (net) and exchange differences (net); and |
| · | an increase of R$425 million in impairment losses on financial assets (net), as a result of additional allowances for certain corporations that were adversely affected by the weak macroeconomic environment. |
Results of Operations for the Year Ended December 31, 2015 Compared to the Year Ended December 31, 2014
Highlights
For the year ended December 31, 2015, we reported a consolidated profit for the year of R$9.8 billion, an increase of R$4.1 billion as compared to the year ended December 31, 2014. This increase principally reflects non-recurring results before taxes of (i) R$7.9 billion related to a reversal of tax provision regarding COFINS, (ii) R$765 million of tax reimbursement related to COFINS, and (iii) gains of R$751 million from the sale of SSS DTVM to Santander Securities Brasil.
Our impaired assets to credit risk ratio increased by 1.4p.p, from 5.6% for the year ended December 31, 2014 to 7.0% in the year ended December 31, 2015, mainly due to the slowdown in the Brazilian economy, Brazil’s current political crisis which adversely affected a number of companies from the oil and gas, construction and infrastructure sectors.
The coverage ratio was 82.9% in the year ended December 31, 2015, a 13.9 p.p. decrease as compared to 96.8% in the year ended December 31, 2014.
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Our total loan portfolio increased by 7.3%, from R$249.1 billion on December 31, 2014 to R$267.3 billion on December 31, 2015. Loans to individuals and large corporate customers showed increases of R$6,769 million and R$11,324 million, respectively, during the year ended December 31, 2015 as compared to the year ended December 31, 2014.
Growth in lending to individuals was driven by an increase of 15.4% in mortgage loans. The growth in lending to our large corporate customers of 10.7% was positively impacted by the exchange rate variation.
Deposits from the Brazilian Central Bank and deposits from credit institutions plus customer deposits increased by 9.9% to R$312.5 billion on December 31, 2015 from R$284.3 billion on December 31, 2014.
Our efficiency ratio was 47.1% in December 2015, a 7.8 p.p. increase from 39.9% in December 2014. Our Basel capital adequacy ratio, in accordance with the Brazilian Central Bank, was 15.7% as of December 31, 2015.
Results of Operations
The following table shows the main components of our net income for 2015 and 2014:
| For the year ended December 31 | ||||||||||||||||
| 2015 | 2014 | % Change | Change | |||||||||||||
| (in millions of R$, except percentages) | ||||||||||||||||
| Net interest income | 31,337 | 27,229 | 15.1 | % | 4,109 | |||||||||||
| Income from equity instruments | 143 | 222 | (35.7 | )% | (79 | ) | ||||||||||
| Income from companies accounted for by the equity method | 116 | 91 | 27.7 | % | 25 | |||||||||||
| Net fees and commissions | 9,484 | 8,766 | 8.2 | % | 718 | |||||||||||
| Gains/losses on financial assets and liabilities (net) and exchange differences (net) | (9,918 | ) | (887 | ) | n.d. | (9,031 | ) | |||||||||
| Other operating income (expenses) | (347 | ) | (470 | ) | (26.2 | )% | 123 | |||||||||
| Total income | 30,814 | 34,950 | (11.8 | )% | (4,136 | ) | ||||||||||
| Administrative expenses | (14,515 | ) | (13,942 | ) | 4.1 | % | (573 | ) | ||||||||
| Depreciation and amortization | (1,490 | ) | (1,362 | ) | 9.4 | % | (128 | ) | ||||||||
| Provisions (net) | (4,001 | ) | (2,036 | ) | 96.5 | % | (1,965 | ) | ||||||||
| Impairment losses on financial assets (net) | (13,634 | ) | (11,272 | ) | 21.0 | % | (2,362 | ) | ||||||||
| Impairment losses on other assets (net) | (1,221 | ) | 4 | n.d. | (1,224 | ) | ||||||||||
| Other non-financial gains/losses | 831 | 101 | n.d. | 730 | ||||||||||||
| Operating profit before tax | (3,216 | ) | 6,443 | (149.9 | )% | (9,659 | ) | |||||||||
| Income taxes | 13,050 | (736 | ) | n.d. | 13,785 | |||||||||||
| Net profit from continuing operations | 9,834 | 5,708 | 72.3 | % | 4,126 | |||||||||||
| Discontinued operations | — | — | — | — | ||||||||||||
| Consolidated Profit for the Year | 9,834 | 5,708 | 72.3 | % | 4,126 | |||||||||||
Our consolidated profit for the year ended December 31, 2015 was R$9.8 billion, a 72.3% increase as compared to the year ended December 31, 2014 for which our consolidated profit was R$5.7 billion.
This variation in our consolidated profit for the year was mainly due to an increase of R$13,785 million, in the “Income taxes” line item for the year ended December 31, 2015 as compared to the year ended December 31, 2014. This increase can be principally attributed to the following non-recurring events: (i) gains of R$2.7 billion related to the reversal of tax provisions and tax reimbursement regarding COFINS, and (ii) gains of R$10.9 billion in the year ended December 31, 2015 as a consequence of the effects of foreign exchange rate variations affecting certain of our foreign branches and the associated hedging instruments.
These increases were partially offset by an increase of R$9,031 million in losses on financial assets and liabilities (net) and exchange differences for the year ended December 31, 2015, compared to the year ended December 31, 2014. This variation was mainly due to losses of R$10.9 billion on derivatives transactions, as a consequence of our results of hedging the tax effect on investments abroad, which losses were offset by gains of the same amount in income taxes). For further information, see “—Other Factors Affecting Our Financial Condition and Results of Operations—Hedging in Foreign Investments.”
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Net Interest Income
Net interest income for the year ended December 31, 2015 was R$31,337 million, a 15.1%, or R$4,109 million, increase from R$27,229 million for the year ended December 31, 2014. Revenues from lending activities increased R$2.1 billion, or 11.4%, during the year mainly explained by a 7.3% increase in the size of our loan portfolio, principally in the large corporates segment. In addition, we also benefitted from a non-recurring reversal of tax provisions and a tax reimbursement in relation to COFINS in an amount of R$2.4 billion. For further information, see notes 2.1.b and 31 to our audited consolidated financial statements.
Average total earning assets in 2015 were R$480.4 billion, a 19.5% or R$78 billion increase from R$401.9 billion in 2014. The principal drivers of this increase were an increase of R$33.2 billion, or 37.3%, in the average of debt instruments and an increase of R$6.7 billion, or 19.1%, in the average of loans and amounts due from credit institutions and of R$30.2 billion, or 14.0%, in loans and advances to customers. Net yield (the net interest income divided by average earning assets) was 6.6% in 2015, compared to 6.9% in 2014, a decrease of 0.3p.p.
Average total interest bearing liabilities in 2015 were R$385.2 billion, a 20.9% or R$66.6 billion increase from R$318.6 billion 2014. The main drivers of this growth were an increase of R$24.8 billion in deposits from credit institution, R$22.4 billion in customer deposits and an increase of R$16.7 billion in marketable debt securities.
Finally, the yield spread (the difference between gross yield on earning assets and the average cost of interest-bearing liabilities) in 2015 was 4.7%, 0.2p.p. lower than in 2014, which was 4.9%.
Income from Equity Instruments
Income from equity instruments for the year ended December 31, 2015 totaled R$143 million, a R$79 million decrease from R$222 million for the year ended December 31, 2014. This decrease was mainly due to a decrease in dividends from investments registered in other financial instruments at fair value through profit or loss.
Income from Companies Accounted for by the Equity Method
Income from companies accounted for by the equity method for the year ended December 31, 2015 was R$116 million, a R$25 million increase from R$91 million for the year ended 2014. This increase was mainly due to the positive results of operations of Banco RCI Brasil S.A. (formerly, Companhia de Crédito, Financiamento e Investimento RCI Brasil), a jointly-controlled company. This increase was partially offset by the negative results of operations of TECBAN—Tecnologia Bancária S.A., a jointly-controlled company.
Net Fee and Commission Income
Net fee and commission income for the year ended December 31, 2015 reached R$9,484 million, an 8.2%, or R$718 million, increase from R$8,766 million for the year ended December 31, 2014. This increase was mainly due to an increase of R$224 million in revenues from trade finance, R$196 million in revenues from credit and debit cards and an increase of R$193 million in revenues from insurance and capitalization products.
Revenues from credit and debit cards totaled R$2,509 million for the year ended December 31, 2015, an increase of 8.5% compared to the year ended December 31, 2014, mainly due to the increase in the volume of credit and debit card transactions and the GetNet acquisition. Our credit card base decreased 6.8% although our number of issued debit cards increased 8.3% for the year ended December 31, 2015, reaching a total 59.0 million issued cards.
Revenues from insurance and capitalization products totaled R$2,192 million for the year ended December 31, 2015, a 9.7% increase compared to the year ended December 31, 2014. This increase was primarily due to an increase in revenues from life and personal injury insurance products in our SMEs segment.
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The following table reflects the breakdown of net fee and commission income for the year ended December 31, 2015 and 2014:
| For the year ended December 31 | ||||||||||||||||
| 2015 | 2014 | % Change | Change | |||||||||||||
| (in millions of R$, except percentages) | ||||||||||||||||
| Banking fees | 2,570 | 2,428 | 5.9 | % | 142 | |||||||||||
| Collection and payment services | 816 | 741 | 10.1 | % | 75 | |||||||||||
| Insurance and Capitalization | 2,192 | 1,999 | 9.7 | % | 193 | |||||||||||
| Asset Management and Pension Funds | 1,028 | 973 | 5.6 | % | 54 | |||||||||||
| Credit and debit cards | 2,509 | 2,314 | 8.5 | % | 196 | |||||||||||
| Capital markets | 501 | 494 | 1.4 | % | 7 | |||||||||||
| Trade finance | 701 | 476 | 47.1 | % | 224 | |||||||||||
| Tax on services | (401 | ) | (375 | ) | 6.9 | % | (26 | ) | ||||||||
| Others | (433 | ) | (285 | ) | 52.0 | % | (148 | ) | ||||||||
| Total | 9,484 | 8,766 | 8.2 | % | 718 | |||||||||||
Gains/losses on Financial Assets and Liabilities (net) and Exchange Differences (net)
Gains/losses on financial assets and liabilities (net) and exchange differences (net) for the year ended December 31, 2015 were losses of R$9,918 million, a R$9,031 million increase from losses of R$887 million for the year ended December 31, 2014. This variation is explained by losses of R$10.9 billion from derivatives transactions, as a consequence of our results of hedging on investments abroad, (loss which were offset by gains in the same amount in income taxes). For further information see “—Other Factors Affecting Our Financial Condition and Results of Operations—Hedging in Foreign Investments.”
Other Operating Income/Expenses
Other operating income/expenses for the year ended December 31, 2015 were expenses of R$347 million, a decrease of R$123 million compared to expenses of R$470 million for the year ended December 31, 2014, primarily due to gains from our private pension plan business which occurred during the year ended December 31, 2015.
Administrative Expenses
Administrative Expenses for the year ended December 31, 2015 were R$14,515 million, a R$573 million increase compared to expenses of R$13,942 million for the year ended December 31, 2014.
Personnel expenses increased R$595 million for the year ended December 31, 2015, due principally to higher wage and salaries, and social security and benefits expenses related to the consolidation of GetNet and Bonsucesso into Santander Brasil and the impact of our collective bargaining agreement.
| For the year ended December 31 | ||||||||||||||||
| 2015 | 2014 | % Change | Change | |||||||||||||
| (in millions of R$, except percentages) | ||||||||||||||||
| Wages and salaries | 4,655 | 4,512 | 3.2 | % | 143 | |||||||||||
| Social security costs | 1,316 | 1,203 | 9.4 | % | 113 | |||||||||||
| Benefits | 1,184 | 1,093 | 8.3 | % | 91 | |||||||||||
| Training | 93 | 99 | (6.1 | )% | (6 | ) | ||||||||||
| Other personnel expenses | 550 | 296 | 85.8 | % | 254 | |||||||||||
| Total | 7,799 | 7,203 | 8.3 | % | 595 | |||||||||||
Other administrative expenses decreased R$22 million from R$6,738 million for the year ended December 31, 2014 to R$6,716 million for the year ended December 31, 2015. The decrease was primarily due to lower expenses from specialized and technical services, partially offset by technology and systems expenses.
The efficiency ratio, which we calculate as total administrative expenses divided by total income, increased to 47.1% in the year ended December 31, 2015, as compared to 39.9% for the year ended December 31, 2014.
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The following table sets forth other administrative expenses for each of the periods indicated:
| For the year ended December 31 | ||||||||||||||||
| 2015 | 2014 | % Change | Change | |||||||||||||
| (in millions of R$, except percentages) | ||||||||||||||||
| Specialized and technical services | 1,821 | 2,005 | (9.2 | )% | (185 | ) | ||||||||||
| Property, fixtures and supplies | 1,268 | 1,209 | 4.9 | % | 59 | |||||||||||
| Technology and systems | 1,193 | 1,106 | 7.8 | % | 86 | |||||||||||
| Advertising | 523 | 467 | 12.0 | % | 56 | |||||||||||
| Communications | 481 | 501 | (3.9 | )% | (20 | ) | ||||||||||
| Per diems and travel expenses | 160 | 141 | 13.6 | % | 19 | |||||||||||
| Surveillance and cash courier services | 615 | 574 | 7.1 | % | 41 | |||||||||||
| Other administrative expenses | 655 | 735 | (10.8 | )% | (79 | ) | ||||||||||
| Total | 6,716 | 6,738 | (0.3 | )% | (22 | ) | ||||||||||
Depreciation and Amortization
Depreciation and amortization for the year ended December 31, 2015 was R$1,490 million, a R$128 million increase from R$1,362 million for the year ended December 31, 2014, principally due to the amortization of our properties, fixtures and supplies.
Provisions (Net)
Provisions principally include provisions for tax, civil, and especially labor claims. Provisions (net) totaled R$4,001 million for the year ended December 31, 2015, an increase of R$1,965 million compared to R$2,036 million for the year ended December 31, 2014. This increase was mainly due to gains related to the installment program and cash payment of tax and social security debts generated for the year ended December 31, 2014 of R$568 million that did not occur in 2015, expenses of R$301 million related to the Efficiency and Productivity Fund and an increase in complementary provisions expenses.
Impairment Losses on Financial Assets (Net)
Our credit risk exposure portfolio increased by R$22.4 billion, or 7.8%, on December 31, 2015, compared to the year-end 2014, while our impaired assets increased by 32.7%, or R$4.6 billion. The default rate had an increase of 110 basis points in 2015, compared to the same period of the prior year. The provisions for impairment losses on financial assets (net) in 2015 increased by 21.0%, or R$2.4 billion, compared to 2014 (R$11.3 billion), accounting for R$13.0 billion on December 31, 2015, mainly due to the slowdown in the Brazilian economy and political crisis, that have negatively impacted certain major companies active in the oil and gas, construction and infrastructure sectors to which we have extended credit.
The following table shows the ratio of our impaired assets to total credit risk exposure and our coverage ratio as of December 31, 2015 and December 31, 2014.
| At December 31, | ||||||||||||||||
| 2015 | 2014 | % Change | Change | |||||||||||||
| (in millions of R$, except percentages) | ||||||||||||||||
| Loans and advances to customers, gross | 267,266 | 249,111 | 7.3 | % | 18,155 | |||||||||||
| Impaired assets | 18,599 | 14,011 | 32.7 | % | 4,588 | |||||||||||
| Provisions for impairment losses | 15,412 | 13,563 | 13.6 | % | 1,849 | |||||||||||
| Credit risk exposure – customers(1) | 310,877 | 288,445 | 7.8 | % | 22,432 | |||||||||||
| Ratios | ||||||||||||||||
| Impaired assets to credit risk exposure | 6.0 | % | 4.9 | % | — | 1.1 p.p. | ||||||||||
| Coverage ratio(2) | 82.9 | % | 96.8 | % | — | (13.9) p.p. | ||||||||||
| Impairment losses on loans and receivables | (13,110 | ) | (11,194 | ) | 17.1 | % | (1,916 | ) | ||||||||
| Impairment losses on other financial instruments not measured at fair value through profit for loss (3) | (524 | ) | (78 | ) | n.d. | (446 | ) | |||||||||
| Impairment losses on financial assets (net)(4) | (13,634 | ) | (11,272 | ) | 21.0 | % | (2,362 | ) | ||||||||
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| (1) | Credit risk exposure is a non-GAAP financial measure. Credit risk exposure is the sum of the amortized cost amounts of loans and advances to customers (including impaired assets) amounting to R$267,266 million as of December 31, 2015 and guarantees and documentary credits amounting to R$43,611 million as of December 31, 2015. We include off-balance sheet information in this measure to better demonstrate our total managed credit risk. |
| (2) | Provisions for impairment losses as a percentage of impaired assets. |
| (3) | Corresponds to registration of losses of a permanent character in the realization value of bonds and securities classified as “Securities available for sale” currently accounted for “Earnings on financials assets (net).” |
| (4) | As of December 31, 2015, our total net expenses included R$144 million relating to debt instruments. |
The following chart shows our impaired assets to credit risk ratio from 2011 through 2015:
Impaired Assets by Type of Customer
The following table shows our impaired assets by type of loan as of December 31, 2015 and December 31, 2014.
| For
the year ended December 31, | ||||||||
| 2015 | 2014 | |||||||
| (in millions of R$) | ||||||||
| Commercial and industrial | 10,749 | 6,737 | ||||||
| Real estate | 829 | 375 | ||||||
| Installment loans to individuals | 6,970 | 6,839 | ||||||
| Lease financing | 52 | 60 | ||||||
| Total | 18,599 | 14,011 | ||||||
For a discussion of the evolution in impairment in our lending portfolios and our methodology for loan loss allowances with respect to the following lending portfolios, see “Item 4. Information on the Company—B. Business Overview—Selected Statistical Information—Assets—Impaired Assets—Methodology for Impairment Losses.”
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Commercial and Industrial. Impaired assets in the portfolio of commercial and industrial loans amounted to R$10,749 million on December 31, 2015, an increase of R$4,012 million, or 59.6%, compared to 2014. The increase in impaired assets in this portfolio was mainly caused by the slowdown in the Brazilian economy, for which the GDP decreased by 3.8%. For further information, please see “Item 4. Information on the Company—B. Business Overview—Selected Statistical Information—Assets—Impaired Assets—Methodology for Impairment Losses.”
Real Estate. Impaired assets in the real estate lending portfolio totaled R$829 million on December 31, 2015, an increase of R$454 million compared to 2014. The increase in impaired assets was primarily due to the growth of this credit portfolio, which grew by 15.7% in 2015. For further information, please see “Item 4. Information on the Company—B. Business Overview—Selected Statistical Information—Assets—Impaired Assets—Methodology for Impairment Losses.”
Installment loans to individuals. Impaired assets in the installment loans to individuals lending portfolio totaled R$6,970 million on December 31, 2015, with increase of R$131 million, or 1.9%, compared to 2014. The stability in impaired assets reflects the measures adopted by Santander Brasil since late 2012 to manage default rates in this portfolio. For further information, please see “Item 4. Information on the Company—B. Business Overview—Selected Statistical Information—Assets—Impaired Assets—Methodology for Impairment Losses.”
Financial Leasing. Impaired assets in the financial leasing lending portfolio totaled R$52 million on December 31, 2015, with a reduction of 13.3%, or R$8 million, compared to 2014, primarily due to the reduction in lending in this portfolio. For further information, please see “Item 4. Information on the Company—B. Business Overview—Selected Statistical Information—Assets—Impaired Assets—Methodology for Impairment Losses.”
Impairment Losses on Other Assets (Net)
Impairment losses on other assets (net) for the year ended December 31, 2015 amounted to losses of R$1,221 million, an increase of R$1,224 million as compared to 2014, mainly due to expenses of R$675 million related to the impairment of software and expenses of R$534 million related to the impairment of payroll services related assets.
Other Non-Financial Gains/Losses
Other non-financial gains/losses were gains of R$831 million during the year ended December 31, 2015, a R$730 million increase from gains of R$101 million during the year ended December 31, 2014, mainly due to a non-recurring gain of R$751 million from the sale of SSS DTVM to Santander Securities Brasil. For further information, see “Item 4. Information on the Company—A. History and Development of the Company—Important Events—Sale of Santander Securities Services Brasil DTVM S.A. (current corporate name of CRV Distribuidora de Títulos e Valores Mobiliários S.A.).”
Income Taxes
Income taxes expense includes income tax, social contribution, PIS and COFINS (which are social contributions due on some revenues net of some expenses). Income taxes totaled gains of R$13,050 million for the year of 2015, a R$13,785 million increase from losses of R$736 million for the year 2014. This increase can be principally attributed to the following non-recurring events: (i) gains of R$2.7 billion related to the reversal of tax provisions and a tax reimbursement relating to COFINS (for further information, see notes 2.1.b and 31 to our audited consolidated financial statements), and (ii) gains of R$10.9 billion in the year ended December 31, 2015 as a consequence of the effects of foreign exchange rate variations affecting certain of our foreign branches and the associated hedging instruments, registered in “Gains (losses) on financial assets and liabilities (net).” The effective tax rate is set forth in note 23b to our consolidated financial statements.
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Results of Operations by Segment for the Year ended December 31, 2015 Compared to the Year ended December 31, 2014
The following tables show our results of operations for the years ended December 31, 2015 and 2014, for each of our operating segments.
Commercial Banking
| For the year ended December 31 | ||||||||||||||||
| 2015 | 2014 | % Change | Change | |||||||||||||
| (in millions of R$, except percentages) | ||||||||||||||||
| Net interest income | 27,041 | 25,042 | 8.0 | % | 1,998 | |||||||||||
| Income from equity instruments | 143 | 222 | (35.7 | )% | (79 | ) | ||||||||||
| Income from companies accounted for by the equity method | 116 | 91 | 27.7 | % | 25 | |||||||||||
| Net fee and commission income | 8,241 | 7,749 | 6.3 | % | 492 | |||||||||||
| Gains/losses on financial assets and liabilities (net) and exchange | ||||||||||||||||
| differences (net) | (9,069 | ) | (1,480 | ) | n.d. | (7,589 | ) | |||||||||
| Other operating income (expenses) | (335 | ) | (451 | ) | (25.6 | )% | 116 | |||||||||
| Total income | 26,136 | 31,173 | (16.2 | )% | (5,037 | ) | ||||||||||
| Personnel expenses | (7,123 | ) | (6,598 | ) | 8.0 | % | (526 | ) | ||||||||
| Other administrative expenses | (6,450 | ) | (6,493 | ) | (0.7 | )% | 43 | |||||||||
| Depreciation and amortization | (1,361 | ) | (1,226 | ) | 11.0 | % | (135 | ) | ||||||||
| Provisions (net) | (4,013 | ) | (2,030 | ) | 97.6 | % | (1,983 | ) | ||||||||
| Impairment losses on financial assets (net) | (12,365 | ) | (10,710 | ) | 15.4 | % | (1,655 | ) | ||||||||
| Impairment losses on other assets (net) | (1,220 | ) | 14 | n.d. | (1,234 | ) | ||||||||||
| Other nonfinancial gain (losses) | 831 | 101 | n.d. | 730 | ||||||||||||
| Operating profit before tax | (5,565 | ) | 4,231 | (231.5 | )% | (9,796 | ) | |||||||||
| Discontinued Operations | — | — | — | — | ||||||||||||
Operating profit before tax attributed to the Commercial Banking segment for the year ended December 31, 2015 were losses of R$5.6 billion, a R$9.7 billion decrease from R$4.2 billion for the year ended December 31, 2014.
This variation was mainly due to:
| · | An increase of R$7,589 million in losses on financial assets and liabilities (net) and exchange differences (net) for the year ended December 31, 2015, compared to the year ended December 31, 2014, mainly due to losses of R$10.9 billion on derivative transactions, as a consequence of our results of hedging on investments abroad, which was partially offset by foreign exchange-related gains arising from the depreciation of the real against the U.S. dollar. For further information see “—Other Factors Affecting Our Financial Condition and Results of Operations—Hedging in Foreign Investments.” |
| · | An increase of R$1,983 million in provisions (net) for the year ended 2015, compared to the year ended December 31, 2014, mainly due to gains related to REFIS program (a program allowing companies to pay sums owed to the Brazilian federal revenue in instalments) and the cash payment of tax and social security debts of R$568 million that did not occur in 2015, expenses of R$301 million related to our Efficiency and Productivity Fund and an increase in complementary provisions expenses. |
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Global Wholesale Banking
| For the year ended December 31 | ||||||||||||||||
| 2015 | 2014 | % Change | Change | |||||||||||||
| (in millions of R$, except percentages) | ||||||||||||||||
| Net interest income | 4,297 | 2,186 | 96.5 | % | 2,110 | |||||||||||
| Net fee and commission income | 1,243 | 1,017 | 22.2 | % | 226 | |||||||||||
| Gains/losses on financial assets and liabilities (net) and exchange differences (net) | (849 | ) | 593 | (243.3 | )% | (1,442 | ) | |||||||||
| Other operating income (expenses) | (12 | ) | (20 | ) | (39.6 | )% | 8 | |||||||||
| Total income | 4,678 | 3,777 | 23.9 | % | 901 | |||||||||||
| Personnel expenses | (675 | ) | (606 | ) | 11.5 | % | (70 | ) | ||||||||
| Other administrative expenses | (267 | ) | (245 | ) | 8.7 | % | (21 | ) | ||||||||
| Depreciation and amortization | (129 | ) | (136 | ) | (5.3 | )% | 7 | |||||||||
| Provisions (net) | 12 | (6 | ) | (299.5 | )% | 17 | ||||||||||
| Impairment losses on financial assets (net) | (1,269 | ) | (561 | ) | 126.1 | % | (708 | ) | ||||||||
| Impairment losses on other assets (net) | (0 | ) | (10 | ) | n.d. | 10 | ||||||||||
| Operating profit before tax | 2,349 | 2,212 | 6.2 | % | 137 | |||||||||||
| Discontinued Operations | — | — | — | — | ||||||||||||
Profit before tax attributed to the Global Wholesale Banking segment for the year ended December 31, 2015 was R$2.3 billion, an 6.2%, or R$137 million, increase from R$2.2 billion for the year ended December 31, 2014.
This variation was mainly due to:
| · | an increase of 96.5%, or R$2,110 million, in net interest income from lending activities, mainly explained by a 7.3% increase in the size of our loan portfolio, primarily in the large corporates segment. |
| · | This variation was partially offset by: |
| · | an increase of R$1,442 million in losses on financial assets and liabilities (net) and exchange differences (net), mainly due to losses from derivative transactions in our treasury activities. |
| · | an increase of R$708 million in impairment losses on financial assets (net), mainly due to an increase in our allowances for impairment losses reflecting non-recurring effects in connection with certain customers. |
New Accounting Pronouncements
The new accounting standards which will come into force after December 31, 2016 are mentioned in our audited consolidated financial statements included in this annual report. For further information, see note 1b to our audited consolidated financial statements.
All accounting policies and measurement bases with a material effect on the consolidated financial statements for 2016 were applied in the preparation of such financial statements.
| 5B. | Liquidity and Capital Resources |
Our asset and liability management strategy is set by the asset and liability committee, which operates under strict guidelines and procedures established by the Santander Group. The asset and liability committee establishes, among other policies, our funding strategy, and the target positioning with respect to structural balance sheet risk.
Pursuant to the Santander Group’s model, all subsidiaries have to be self-funded in terms of liquidity and capital. In addition, our general asset and liability management policy is to maintain a close match of maturity, interest rate and currency exposures. Subject to our internal risk management policies we aim to maintain adequate liquidity to meet our present and future financial obligations and to capitalize on business and market opportunities as they arise.
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Most of our liquidity is raised in the local market and we maintain a portfolio of high quality public bonds for liquidity management. Legal reserve requirements consume a significant amount of funding in Brazil, see “Item 4. Information on the Company—B. Business Overview—Regulation and Supervision—Other Applicable Laws and Regulations—Compulsory Reserve Requirements.”
Due to our stable and diversified sources of funding, which include a large client deposit base in the local market and a large number of correspondent banks with long-standing relationships, historically we have not experienced liquidity problems. In our opinion, our current levels of liquidity and working capital are sufficient for our present requirements.
See also “Item 4. Information on the Company—B. Business Overview—Selected Statistical Information.”
Liquidity and Funding
Market conditions and prospects, as well as the Brazilian Central Bank requirements for compulsory deposits and stress tests determine our minimum liquidity levels. We control, manage and review our liquidity analyzing current and expected levels of liquidity, structuring the sources of financing to achieve an optimal diversification in terms of maturities, instruments, currencies, markets, as well as setting forth contingency plans. The objective is to ensure that we have sufficient liquidity to honor our commitments in light of market conditions, our institutional needs and market opportunities.
Due to our stable and diversified funding sources, which include a large base of customer deposits as detailed in below, we have historically had no liquidity deficiencies.
As part of our liquidity risk management, we have a formal plan with measures to be taken in the event of a systemic liquidity crisis and/or for liquidity concerns arising from possible reputational risk. Our liquidity contingency plan contains defined thresholds, preventive measures and actions to be taken when a liquidity deficiency occurs and our reserves fall below certain levels.
The following resources and strategies may be used as sources of financing for working capital and for investments in non-current assets and to cover liquidity deficiencies: (i) increase of customer deposits; (ii) securities issuances; (iii) repurchase agreements; (iv) a review of transfer pricing practices; and (v) establishment of more restrictive credit policies.
The following tables present the composition of our consolidated funding at the dates indicated.
| As of December 31, | ||||||||||||
| 2016 | 2015 | 2014 | ||||||||||
| (in millions of R$) | ||||||||||||
| Customer deposits | 247,445 | 243,043 | 220,644 | |||||||||
| Current accounts | 15,868 | 15,580 | 15,507 | |||||||||
| Savings accounts | 36,051 | 35,985 | 37,939 | |||||||||
| Time deposits | 94,479 | 89,986 | 91,552 | |||||||||
| Repurchase agreements | 101,047 | 101,492 | 75,645 | |||||||||
| Backed operations with Private Securities(1) | 59,460 | 61,174 | 46,699 | |||||||||
| Backed operations with Public Securities(1) | 41,586 | 40,318 | 28,946 | |||||||||
| Deposits from the Brazilian Central Bank and credit institutions | 78,634 | 69,451 | 63,674 | |||||||||
| Demand deposits | 314 | 145 | 162 | |||||||||
| Time deposits(2) | 49,549 | 55,795 | 42,045 | |||||||||
| Repurchase agreements | 28,771 | 13,512 | 21,468 | |||||||||
| Backed operations with Private Securities(1) | 446 | 85 | 961 | |||||||||
| Backed operations with Public Securities(1) | 28,324 | 13,427 | 20,507 | |||||||||
| Total deposits | 326,079 | 312,494 | 284,318 | |||||||||
| Marketable debt securities | 99,843 | 94,658 | 70,355 | |||||||||
| Agribusiness Credit Notes | 6,981 | 2,097 | 1,903 | |||||||||
| Treasury Bills | 61,157 | 55,301 | 33,998 | |||||||||
| Real Estate Credit Notes | 23,983 | 23,795 | 22,669 | |||||||||
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| As of December 31, | ||||||||||||
| 2016 | 2015 | 2014 | ||||||||||
| (in millions of R$) | ||||||||||||
| Bonds and other securities | 7,722 | 13,465 | 11,785 | |||||||||
| Debt Instruments Eligible to Compose Tier 1 and Tier 2 Capital | 8,312 | 9,959 | 6,773 | |||||||||
| Subordinated liabilities | 466 | 8,097 | 7,294 | |||||||||
| Total Funding | 434,700 | 425,209 | 368,740 | |||||||||
| (1) | Refers primarily to repurchase agreements backed by debentures of own issue. |
| (2) | This includes transactions with credit institutions in connection with export and import financing lines, BNDES and FINAME on-lending and abroad on other credit lines abroad. |
Deposits
Customer Deposits
Our balance of customer deposits was R$247.4 billion on December 31, 2016, R$243.0 billion on December 31, 2015, and R$220.6 billion on December 31, 2014, representing 56.9%, 57.2% and 59.8% of our total funding, respectively.
Current Accounts
Our balance of current accounts was R$15.9 billion on December 31, 2016, R$15.6 billion on December 31, 2015 and R$15.5 billion on December 31, 2014, representing 4.9%, 5.0%, and 5.5% of total deposits, respectively.
Customer Savings Deposits
Our balance of customer savings deposits was R$36.0 billion on December 31, 2016, R$36.0 billion on December 31, 2015 and R$37.9 billion on December 31, 2014, representing 11.1%, 11.5% and 13.3% of total deposits, respectively.
Customer Time Deposits
Our balance of customer time deposits was R$94.5 billion on December 31, 2016, R$90.0 billion on December 31, 2015 and R$91.6 billion on December 31, 2014, representing 29.0%, 28.8% and 32.2% of total deposits, respectively.
Customer Deposits – Repurchase Agreements
We maintain a portfolio of Brazilian public and private sector debt instruments used to obtain overnight funds from other financial institutions or investment funds by selling such securities and simultaneously agreeing to repurchase them. Due to the short-term (overnight) nature of this funding source, such transactions are volatile and composed, generally, of Brazilian public securities and of repurchase agreements linked to debentures. Securities sold under repurchase agreements decreased to R$101.0 billion on December 31, 2016 from R$101.5 billion on December 31, 2015 and R$75.6 billion on December 31, 2014, representing 31.0%, 32.5% and 26.6% of total deposits, respectively.
Deposits from the Brazilian Central Bank and Credit Institutions
Our balance of deposits from the Brazilian Central Bank and credit institutions was R$78.6 billion on December 31, 2016, R$69.4 billion on December 31, 2015 and R$63.7 billion on December 31, 2014, representing 24.1%, 22.2% and 22.4% of total deposits, respectively.
Our balance of deposits includes mainly borrowings and domestic onlendings:
| · | Borrowings. We have relationships with banks all over the world, providing credit lines as foreign currency-linked (either to the U.S. dollar or to a basket of foreign currencies). We apply the proceeds from |
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these transactions mainly to U.S. dollar-linked lending operations and in particular to trade finance operations.
| · | Domestic Onlendings. We onlend from public institutions, mainly BNDES and FINAME, for which we act as a financial agent. Funding from these sources in Brazil represents a method of providing long-term loans with attractive average interest rates to certain sectors of the economy. Loans from these funds are allocated by BNDES through banks to specific sectors targeted for economic development. This type of lending is known as “repassing” or “onlending.” Under this arrangement, we borrow funds from BNDES or FINAME, the equipment financing subsidiary of BNDES, and pass the funds to the targeted sector of the economy. These loans are generally granted at rates below the average market rates and have an average maturity of up to five years. Because the repassed funds are generally matched and/or funded by loans from a federal government agency, we take no interest rate or maturity mismatch risk nor charge interest at a fixed margin over the cost of funds. We, however, retain the commercial credit risk of the borrower and therefore have discretion in the lending decision and application of the credit criteria. This type of funding is not affected by compulsory deposit requirements. The onlending is generally secured or guaranteed, although this is not required by the terms of the onlending. |
Other Funding
Marketable Debt Securities
Our balance of marketable debt securities was R$99.8 billion on December 31, 2016, R$94.7 billion on December 31, 2015 and R$70.4 billion on December 31, 2014, representing 23.0%, 22.3% and 19.1% of our total funding, respectively.
Agribusiness credit notes (Letra de Crédito do Agronegócio), which are credit notes that are freely negotiable and represent an unconditional promise of payment in cash, are issued exclusively by financial institutions and related to credit rights originated from transactions conducted between rural producers and their cooperatives and agents of the agribusiness production chain and the exchange acceptances, reached R$6.9 billion on December 31, 2016, R$2.1 billion on December 31, 2015, and R$1.9 billion on December 31, 2014.
Treasury bill instruments (Letras financeiras) are a funding alternative available to banks that can be characterized as senior or eligible to compose the Regulatory Capital. Pursuant to CMN Resolution 4,123 of August 23, 2012, its minimum term must be 24 months and it must be issued for a minimum amount of R$300,000 for subordinated transactions and R$150,000 for senior transactions. Our balance of treasury bills instruments totaled R$61.2 billion as of December 31, 2016, a 10.6% increase from December 2015.
Real estate credit notes (Letras de Crédito Imobiliário) increased 0.8%, from R$23.8 billion on December 31, 2015 to R$23.9 billion on December 31, 2016.
We undertake issuances of securities, including under our U.S.$10,000,000,000 Global Medium Term Notes Program. Our balance of bonds and other securities was R$13.5 billion on December 31, 2015 and R$7.7 billion on December 31, 2016. This change was principally due to the non-replacement of certain debt instruments reaching maturity.
Debt Instruments Eligible to Compose Tier 1 and Tier 2 Capital
We have issued U.S. dollar-denominated Notes that constitute Tier 1 and Tier 2 regulatory capital as part of our plan to optimize our capital structure. As of December 31, 2016 the balance for both Tier 1 and Tier 2 debt instruments was R$8.3 billion, compared to R$10.0 billion as of December 31, 2015. This variation was caused by the depreciation of the U.S. dollar against the real.
For further information in relation to the Tier 1 and Tier 2 Notes, please see “—A. Operating Results—Factors Affecting the Comparability of Our Results of Operations—Plans to Optimize our Capital Structure” and “Item 7. Major Shareholders and Related Party Transactions—A. Major Shareholders—Subscription of Tier 1 and Tier 2 Notes.”
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Subordinated Liabilities
As of December 31, 2016, our subordinated liabilities amounted to a total of R$0.5 billion of certificates of deposit issued by us in the local market in various issuances at average interest rates indexed to CDI or IPCA, a decrease of R$7.6 billion from the amount of subordinated liabilities as of December 31, 2015. This decrease is due to the maturity of the abovementioned instruments which were not replaced.
Capital Management
Our capital management is based on conservative principles and continuous monitoring of the items that affect our solvency level. We are required to comply with Brazilian capital adequacy regulations under Brazilian Central Bank rules. In October 2013, the new regulations implementing the capital and the regulatory capital requirements of the Basel Committee on Banking Supervision (Basel III) came into effect in Brazil. The minimum regulatory capital requirements is currently at 11%. The Tier I requirement is 6.0%, divided into core capital of at least 4.5%, consisting mainly of corporate capital and profit reserves, including shares, units of ownership, reserves and earned income, and additional capital consisting mainly of certain reserves, revenue earned and hybrid securities and instruments as capital authorized by the Brazilian Central Bank.
According to the new rules on regulatory capital in Brazil, the value of goodwill for the calculation of capital base was deducted from the capital base according to the “phase-in” for implementation of Basel III in Brazil, which will be completed by January 1, 2019. The following table sets forth the percentage of required goodwill deduction for each year up to 2019:
| Basel III Phase in | ||||||||||||||||||||||
| 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | |||||||||||||||||
| 0 | % | 20 | % | 40 | % | 60 | % | 80 | % | 100 | % | |||||||||||
Source: Brazilian Central Bank; Resolution No. 4,192 of the Brazilian Central Bank of March 2013.
If Basel III requirements were fully implemented as of the date hereof, we would continue to maintain an adequate regulatory capital ratio under Basel III and Brazilian Central Bank rules.
Our Basel capital adequacy ratio, calculated in accordance with the regulations and guidance of the Brazilian Central Bank was 16.3% as of December 31, 2016. For more information, see “Item 4. Information on the Company—B. Business Overview—Regulation and Supervision—Capital Adequacy and Leverage—Basel.”
| As of December 31, | ||||||||||||
| 2016(1) | 2015(1) | 2014(2) | ||||||||||
| (in millions of R$, except percentages) | ||||||||||||
| Tier I Regulatory Capital | 56,264.0 | 52,785.0 | 58,592.4 | |||||||||
| CET 1 Common Equity Tier I | 52,136.8 | 47,840.2 | 55,228.7 | |||||||||
| Supplementary Capital | 4,127.2 | 4,944.9 | 3,363.7 | |||||||||
| Tier II Regulatory Capital | 4,280.8 | 5,182.1 | 4,971.0 | |||||||||
| Regulatory Capital (Tier I and II) | 60,544.9 | 57,967.1 | 63,563.4 | |||||||||
| Required Regulatory Capital | 36,669.6 | 40,531.2 | 40,010.1 | |||||||||
| Portion of Credit Risk(3) | 31,309.9 | 36,355.9 | 35,527.9 | |||||||||
| Market Risk Portions(4) | 2,388.6 | 2,301.0 | 2,807.8 | |||||||||
| Operational Risk Portion | 2,971.0 | 1,874.3 | 1,674.4 | |||||||||
| Tier I Ratio | 15.2 | % | 14.3 | % | 16.1 | % | ||||||
| Basel Principal Capital | 14.0 | % | 13.0 | % | 15.2 | % | ||||||
| Basel Ratio | 16.3 | % | 15.7 | % | 17.5 | % | ||||||
| (1) | Amounts calculated based on the applicable consolidated prudential conglomerate definition, which took effect as of January 2015. |
| (2) | Amounts calculated based on our consolidated financial statements. |
| (3) | To calculate the capital allocation for credit risk we considered Brazilian Central Bank Circular No. 3,714 of August 20, 2014, which amends Circular No. 3,644 of March 4, 2013. |
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| (4) | Includes portions for market risk exposures subject to variations in rates of foreign currency coupons, or “PJUR2,” price indexes, or “PJUR3,” and interest rate, or “PJUR1/PJUR4,” the price of commodities, or “PCOM,” the price of shares classified as trading portfolios, or “PACS,” and portions for gold exposure and foreign currency transactions subject to foreign exchange, or “PCAM.” |
| 5C. | Research and Development, Patents and Licenses, etc. |
We do not have any significant policies or projects relating to research and development, and we own no relevant patents or licenses.
| 5D. | Trend Information |
The following list sets forth, in our view, the most important trends, uncertainties and events that are reasonably likely to continue to have a material effect on our revenues, income from continuing operations, profitability, liquidity and capital resources, or that may cause reported financial information to be not necessarily indicative of future operating results or financial condition:
| · | The ongoing economic and political crisis in Brazil may adversely affect the performance of the Brazilian economy. As a result, our credit portfolio, which is focused on Brazil, may not grow or could decrease and our provisions for loan losses would increase; |
| · | Financial problems in certain countries in Europe could lead to another international financial crisis. If this occurs, Brazilian GDP growth in future periods may be depressed and, as a result, our credit portfolio may not grow or could decrease and our provisions for loan losses would increase; |
| · | Potential inflation increases that could cause an increase in interest rates and lower growth in lending activities; |
| · | Continued market volatility and instability that could affect our revenues; |
| · | Restrictive regulations or government intervention in the banking business, which could affect our margins and/or growth in lending activities; |
| · | Regulatory capital changes towards more restrictive rules as a response to any potential financial crisis or general macroeconomic conditions; |
| · | Decreased liquidity in domestic capital markets; |
| · | Tax policies that could decrease our profitability; |
| · | Currency fluctuation and exchange rate controls that could have an adverse impact on international investors; and |
| · | In contrast to all the points mentioned above, a recovery in the Brazilian economy, with new reforms underway (such as the pension reform and the foreign trade reform), and ongoing control of inflation, could have a positive effect on the economic environment and, therefore, impact our business. |
For more information, see “Item 3. Key Information—D. Risk Factors” where we present the risks we face in our business that may affect our commercial activities, operating results or liquidity.
| 5E. | Off-Balance Sheet Arrangements |
We have entered, in the normal course of business, into several types of off-balance sheet arrangements, including lines and letters of credit and financial guarantees.
Lending-Related Financial Instruments and Guarantees
We utilize lines and letters of credit and financial guarantee instruments to meet the financing needs of our customers. The contractual amount of these financial instruments represents the maximum possible credit risk
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should the counterparty draw down the commitment or we fulfill our obligation under the guarantee, and the counterparty subsequently fails to perform according to the terms of the contract. Most of these commitments and guarantees expire without the counterparty drawing on the credit line or a default occurring. As a result, the total contractual amount of these instruments does not represent our future credit exposure or funding requirements. Further, certain commitments, primarily related to consumer financing are cancelable, upon notice, at our option.
The “maximum potential amount of future payments” represents the notional amount that could be lost if there were a total default by the guaranteed parties, without consideration of possible recoveries from collateral held or pledged, or recoveries under recourse provisions. There is no relationship between these amounts and probable losses on these guarantees. In fact, the maximum potential amount of future payments significantly exceeds inherent losses.
The following table sets forth the maximum potential amount of future payments under credit and financial guarantees.
| As of December 31, | ||||||||||||
| 2016 | 2015 | 2014 | ||||||||||
| (millions of R$) | ||||||||||||
| Contingent liabilities | ||||||||||||
| Guarantees and other sureties | 32,630 | 42,836 | 38,386 | |||||||||
| Documentary credits | 635 | 774 | 948 | |||||||||
| Total contingent liabilities | 33,265 | 43,611 | 39,334 | |||||||||
We also manage certain funds that are not recorded on our balance sheet as detailed below for the periods indicated:
| As of December 31, | ||||||||||||
| 2016 | 2015 | 2014 | ||||||||||
| (millions of R$) | ||||||||||||
| Funds under management | 1,534 | 2,542 | 4,592 | |||||||||
| Total | 1,534 | 2,542 | 4,592 | |||||||||
Finally, we hold certain third-party securities in custody which are not recorded on our balance sheet. As of December 31, 2016, 2015 and 2014, we held in custody debt securities and equity instruments entrusted to Santander Brasil by third parties totaling R$27.8 million, R$38.4 million and R$398.5 million, respectively.
| 5F. | Contractual Obligations |
Our contractual obligations as of December 31, 2016 are summarized as follows:
| As of December 31, 2016 | ||||||||||||||||||||
| Total | Less
than 1 year | 1-3 years | 3-5 years | More
than 5 years | ||||||||||||||||
| (in millions of R$) | ||||||||||||||||||||
| Contractual Obligations | ||||||||||||||||||||
| Deposits from the Brazilian Central Bank and credit institutions | 78,634 | 64,666 | 8,215 | 2,818 | 2,934 | |||||||||||||||
| Customer deposits | 247,445 | 193,579 | 39,630 | 14,004 | 232 | |||||||||||||||
| Marketable debt securities | 99,843 | 78,472 | 20,620 | 312 | 439 | |||||||||||||||
| Debt Instruments Eligible to Compose Capital(1) | 8,312 | 114 | — | — | 8,198 | |||||||||||||||
| Subordinated liabilities | 466 | — | 466 | — | — | |||||||||||||||
| Contractual Interest payments(2) | 62,088 | 23,033 | 18,495 | 9,414 | 11,066 | |||||||||||||||
| Total | 496,708 | 359,865 | 87,427 | 26,548 | 22,869 | |||||||||||||||
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| (1) | The table above excludes the notional and any interest payments relating to our perpetual Tier I bonds which interests are discretionary as described in Item 5A. |
| (2) | Calculated for all Deposits from credit institutions, Customer Deposits, Marketable debt securities, Subordinated liabilities and Debt Instruments Eligible to Compose Capital (Tier II) assuming a constant interest rate based on data as of December 31, 2016 over time for all maturities, and those obligations with maturities of more than five years have an average life of ten years. |
The above table does not reflect amounts that we may have to pay on derivative contracts. The amounts ultimately payable will depend upon movements in the financial markets. The net fair value position of our derivative contracts as of December 31, 2016 reflected assets of R$4,466 million, compared to assets of R$1,533 million as of December 31, 2015.
In addition, we lease many properties under standard real estate lease contracts, which can be canceled at our option and include renewal options and escalation clauses. Total future minimum payments of non-cancelable operating leases as of December 31, 2016 was R$2,933.2 million, of which R$646.8 million matures in up to one year, R$1,789.7 million from one year to up to five years and R$496.8 million after five years. Additionally, we have contracts with indeterminate maturities totaling R$0.1 million per month.
| 5G. | Safe Harbor |
See “Forward-Looking Statements.”
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
| 6A. | Board of Directors and Board of Executive Officers |
Pursuant to our By-Laws, we are managed by a board of directors (conselho de administração) and a board of executive officers (diretoria executiva). The board of directors is our supervisory board as set out in our By-Laws and in applicable legislation. Our board of executive officers is responsible for our day-to-day management.
Our board of directors is composed of a minimum of five (5) members and a maximum of twelve (12) members. A minimum of twenty percent (20.0%) of the members of the board of directors must be independent members. The board of directors has a Chairman and a Vice-Chairman, each elected at the general shareholders’ meeting by majority vote.
Our board of executive officers is composed of a minimum of two (2) members and a maximum of seventy-five (75) members, one of them being appointed as the Chief Executive Officer, and the others may be appointed as senior vice president executive officers, vice president executive officers, investor relations officer, executive officers and officers without specific designation. Certain of our executive officers are also members of the boards of executive officers and/or boards of directors of our subsidiaries.
Pursuant to Brazilian law, the election of each member of the board of directors and board of executive officers must be approved by the Brazilian Central Bank.
The following table presents the names, positions and dates of birth of the current members of our board of directors and board of executive officers:
Members of the Board of Directors:
| Name | Position | Date of Birth | ||
| Álvaro Antonio Cardoso de Souza | Chairman | September 5, 1948 | ||
| Sergio Agapito Lires Rial | Vice-Chairman | July 28, 1960 | ||
| Conrado Engel | Member | May 30, 1957 | ||
| José Antonio Álvarez Álvarez | Member | January 6, 1960 | ||
| José Maria Nus Badía | Member | February 9, 1950 | ||
| José de Paiva Ferreira | Member | March 1, 1959 | ||
| Celso Clemente Giacometti | Independent Member | October 13, 1943 |
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| Name | Position | Date of Birth | ||
| Deborah Patricia Wright | Independent Member | September 4, 1957 | ||
| José Luciano Duarte Penido | Independent Member | March 8, 1948 | ||
| Viviane Senna Lalli | Independent Member | June 14, 1957 |
Members of the Board of Executive Officers:
| Name | Position | Date of Birth | ||
| Sergio Agapito Lires Rial | Chief Executive Officer | July 28, 1960 | ||
| Conrado Engel | Senior Vice President Executive Officer | May 30, 1957 | ||
| José de Paiva Ferreira | Senior Vice President Executive Officer | March 1, 1959 | ||
| Angel Santodomingo Martell | Vice President Executive Officer and Investor Relations Officer | November 16, 1965 | ||
| Alexandre Silva D’Ambrosio | Vice President Executive Officer | August 1, 1962 | ||
| Antonio Pardo de Santayana Montes | Vice President Executive Officer | November 5, 1971 | ||
| Carlos Rey de Vicente | Vice President Executive Officer | February 20, 1974 | ||
| Jean Pierre Dupui | Vice President Executive Officer | September 23, 1968 | ||
| João Guilherme de Andrade So Consiglio | Vice President Executive Officer | December 7, 1968 | ||
| Juan Sebastián Moreno Blanco | Vice President Executive Officer | December 17, 1964 | ||
| Manoel Marcos Madureira | Vice President Executive Officer | December 30, 1951 | ||
| Vanessa de Souza Lobato Barbosa | Vice President Executive Officer | December 24, 1968 | ||
| Jose Alberto Zamorano Hernandez | Executive Officer | May 9, 1962 | ||
| José Roberto Machado Filho | Executive Officer | August 25, 1968 | ||
| Maria Eugênia Andrade Lopez Santos | Executive Officer | January 23, 1966 | ||
| Alexandre Grossmann Zancani | Officer | October 14, 1977 | ||
| Amancio Acúrcio Gouveia | Officer | March 31, 1963 | ||
| Ana Paula Nader Alfaya | Officer | August 7, 1971 | ||
| André de Carvalho Novaes | Officer | April 14, 1969 | ||
| Cassio Schmitt | Officer | April 23, 1971 | ||
| Cassius Schymura | Officer | February 19, 1965 | ||
| Ede Ilson Viani | Officer | September 5, 1967 | ||
| Felipe Pires Guerra de Carvalho | Officer | May 10, 1978 | ||
| Flávio Tavares Valadão | Officer | July 1, 1963 | ||
| Gilberto Duarte de Abreu Filho | Officer | August 7, 1973 | ||
| Igor Mario Puga | Officer | November 10, 1981 | ||
| Luis Guilherme Mattos de Oliem Bittencourt | Officer | December 4, 1973 | ||
| Luiz Masagão Ribeiro Filho | Officer | January 1, 1976 | ||
| Marcelo Malanga | Officer | May 18, 1969 | ||
| Marcelo Zerbinatti | Officer | February 5, 1974 | ||
| Marino Alexandre Calheiros Aguiar | Officer | May, 14, 1971 | ||
| Mario Adolfo Libert Westphalen | Officer | July 9, 1968 | ||
| Nilton Sergio Silveira Carvalho | Officer | January 1, 1957 | ||
| Rafael Bello Noya | Officer | October 19, 1977 | ||
| Ramón Sanchez Díez | Officer | October 29, 1968 | ||
| Reginaldo Antonio Ribeiro | Officer | May 19, 1969 | ||
| Roberto de Oliveira Campos Neto | Officer | June 28, 1969 | ||
| Robson de Souza Rezende | Officer | January 24, 1967 | ||
| Ronaldo Wagner Rondinelli | Officer | August 2, 1973 | ||
| Sergio Gonçalves | Officer | August 7, 1956 | ||
| Thomas Gregor Ilg | Officer | September 12, 1968 | ||
| Ulisses Gomes Guimarães | Officer | March 14, 1971 |
Below are the biographies of the members of our board of directors and board of officers.
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Members of the Board of Directors:
Álvaro Antonio Cardoso de Souza. Mr. Souza is Portuguese and was born on September 5, 1948. He holds a degree in Economics and Business Administration from the Pontifícia Universidade Católica de São Paulo, and attended several specialization courses from a number of American universities, such as the University of Pittsburgh and The Wharton Business School of the University of Pennsylvania. Currently, he is an Officer of AdS – Gestão, Consultoria e Investimentos Ltda.; Chairman of the board of directors of Fundo Brasileiro para a Biodiversidade (FUNBIO) and a member of the boards of directors of the following companies and organizations: WWF International Board of Trustees, WWF-Brasil, Duratex S.A., AMBEV and Grupo Libra. He is a Certified Officer, an accreditation granted to him by Instituto Brasileiro de Governança Corporativa. He was General Officer of Banco de Investimentos Crefisul and Chief Executive Officer of Citibank / Brazil. He was also Chairman of the board of directors of Citibank in Switzerland, Chairman of the board of directors of Banco Crefisul and Credicard in Brazil, besides participating in the board of directors of Citibank Equity Investments (Argentina). He also worked as Senior Advisor for Latin America at Citibank until his retirement in September 2003. He was President of Banco ABC-Roma, an affiliate to Grupo Globo and was member of the board of directors of several Brazilian companies, such as Celbrás, Ultraquímica, SPCI Computadores, Signature Lazard, Banco Triângulo, CSU Cardsystems and Gol Linhas Aéreas. He was also member of the board of directors of MasterCard International and President of the American Chamber of Commerce in São Paulo. Currently, he is the Chairman of our board of directors and the coordinator of our Risk and Compliance Committee, Compensation Committee and Nomination and Governance Committee.
Conrado Engel. Mr. Engel is Brazilian and was born on May 30, 1957. He holds a degree in Aeronautical Engineering from the Instituto Tecnológico de Aeronáutica - ITA. He started his career in 1981 as management trainee of Citibank S.A., where he worked for seven years. From 1992 to 1997 he was the responsible Officer for the businesses related to credit cards for Banco Nacional-Unibanco. In 1998 he was elected Chief Executive Officer of Financeira Losango. In October 2003 he became responsible for the retail business of HSBC in Brazil and was a member of its executive committee until the end of 2006. From January 2007 to May 2009 he was responsible for the retail business and was a member of the directive committee of HSBC in the Asian-Pacific region, in Hong Kong. In May 2008 he was appointed group general manager and took office as Chief Executive Officer of HSBC Brasil in June 2009, where he remained until March 2012. As one of our Senior Vice President Executive Officers, he is responsible for the Wealth Management & Specialized Businesses Vice Presidency, including Auto Joint Ventures and is member of our Board of Directors. He is also a member of the Risk and Compliance Committee of Santander Brasil, Chief Executive Officer and a member of the board of directors of Santander Leasing S.A. Arrendamento Mercantil, Vice President Officer of Banco Bandepe S.A., Chief Executive Officer of Aymoré CFI, a deputy director of Banco RCI Brasil S.A., a member of the board of directors of Getnet Adquirência e Serviços para Meios de Pagamento S.A., a member of the advisory committee of Santander Brasil Gestão de Recursos Ltda., Chief Executive Officer of Santander Finance Arrendamento Mercantil S.A. and Chairman of the boards of directors of Webmotors and Banco Olé Bonsucesso Consignado.
José Antonio Álvarez Álvarez. Mr. Álvarez is Spanish and was born on January 6, 1960. He holds a bachelor’s degree in Administration and Business Economics from Universidad Santiago de Compostela in Spain and an MBA from the University of Chicago’s Graduate School of Business. He started at Santander Spain in 2002 as the head of finance management and in November 2004 he was elected as Chief Financial Officer. He served as Head of the Finance Division of Banco Bilbao Vizcaya Argentaria, S.A. in Spain from 1999 to 2002 and as Financial Officer of Corporación Bancaria de España, S.A. (Argentaria) from 1995 to 1999. He was also Chief Financial Officer of Banco Hipotecario, S.A. in Spain from 1993 to 1995 and vice president of Finanpostal Gestión Fondos de Inversión y Pensiones from 1990 to 1993, and held roles at Banco de Crédito Industrial and Instituto Nacional de Industria. He was a member of the board of directors of Banco de Crédito Local S.A. from 2000 to 2002 and President of the European Banking Federation’s Banking Supervision Committee from 2009 to 2012. Currently, he is the Chief Executive Officer of the Santander Group, a member of the board of directors of Santander Consumer Finance, S.A., a member of the Supervisory Board of Banco Zachodni WBK S.A., a member of the Supervisory Board of Santander Consumer Bank AG and Santander Consumer Holding GmbH and a member of the Supervisory Board of Santander Holdings USA, Inc. until January 2015. He has been a member of our board of directors since 2009.
José Maria Nus Badía. Mr. Badía is Spanish and was born on February 9, 1950. He serves as Chief Risk Officer at Banco Santander, S.A. and has been its Senior Executive Vice President since January 19, 2015. Mr. Badía served as an Executive Vice President of Risk, Head of Strategic Planning of Risk Division from March 2014 to January 2015. He also served as the Executive Vice President of Santander UK Operations at Banco Santander, S.A. and as the Chief Risk Officer and Executive Director at Santander UK plc from March 17, 2011 to March 1,
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2014. He was also the Executive Vice President for Risk at Argentaria and Bankinter, and a member of the board of directors of Banco de Vitoria, Banco de Negocios Argentaria, Banco de Credito Local and Banco de Alicante. He also served as an Executive Director and Chief Risk Officer of Banco Banesto. Previously, he was Chief Risk Officer at Banco Español de Credito, S.A., where he was a member of the board of directors and the board of officers. He has been an Executive Director at Alliance & Leicester plc since March 17, 2011. He is also a member of the board of Societat Catalana d’Economia. He has been a member of our board of directors since 2015.
José de Paiva Ferreira. Mr. Paiva is Portuguese and was born on March 1, 1959. He has a specialization degree in Business Administration from the Fundação Getúlio Vargas, and an MBA from the Wharton School of Business at the University of Pennsylvania. He has worked in the financial markets for more than 40 years. He started at Banco Bradesco in 1973 and occupied several different positions. Afterwards, he joined Banco Geral do Comércio, Noroeste and Santander Brasil, where he was Vice President Executive Officer, responsible for the Business, Human Resources, Operations, Technology, Property, Products, Marketing, Credit Cards, Insurance, Leasing and Branch Network. From 2000 to 2001 he occupied the position of e-Business Officer for Latin America, for the American Division of Santander Central Hispano. At the end of 2001, he came back to Brazil in order to work at Banco Banespa as Vice President Executive Officer, responsible for the Operational Resources department. In 2003, he became Vice President Executive Officer responsible for Marketing, Products and Retail Business for Santander Brasil. In 2008, he became the Chief Executive Officer of Santander Brasil, a position that he occupied until the merger with Banco Real, when he became Senior Vice President Executive Officer, responsible for the Retail Business. In March 2011 he became Director of Santander Brasil’s board of directors, and joined the Board business group based in Los Angeles, California, USA, where his main activities involved technological innovations. Currently, he is a member of our board of directors, and since July 2013 he also acted as Senior Vice President Executive Officer, responsible for the Human Resources, Organization, Property, Proceedings, Operations, Technology and Costs. He is also Chairman of the board of directors of Santander Leasing S.A. Arrendamento Mercantil, a member of the board of directors of TECBAN – Tecnologia Bancária, a member of the boards of directors of Getnet Adquirência e Serviços para Meios de Pagamento S.A. and a member of our Risk and Compliance Committee.
Sergio Agapito Lires Rial. Mr. Rial is Brazilian and was born on July 28, 1960. He was Chief Executive Officer of Marfrig Global Foods S.A. His professional career includes the posts of Vice-President Executive Officer and World Chief Financial Officer of Cargill. He was also a member of the board of directors of Cargill for nine years. He was a Managing Director of Bear Stearns & Co., in New York, Officer of ABN AMRO Bank and a member of the board of directors of ABN AMRO Bank in the Netherlands, as well as a member of the board of directors of Mosaic Fertilizers. He has a degree in Law for the Universidade Federal do Rio de Janeiro and in Economics for Universidade Gama Filho, and also has an MBA from IBMEC in São Paulo, as well as specializations from Harvard Business School, the Wharton School of Business at the University of Pennsylvania and INSEAD, in France. Currently he is Vice-Chairman of the board of directors and the Chief Executive Officer of Santander Brasil, Chairman of the board of directors of Getnet Adquirência e Serviços para Meios de Pagamento S.A. and Universia Brasil S.A. and Chief Executive Officer of Santander Cultural.
Celso Clemente Giacometti. Mr. Giacometti is Brazilian and was born on October 13, 1943. He holds a degree in Business Administration from the Faculdade de Economia São Luís and graduated with an accounting sciences degree from the Faculdade de Ciências Econômicas de Ribeirão Preto. He started his career in 1960 as trainee and reviewer at Citibank. From 1963 to 2001 he worked at Arthur Andersen, becoming a partner in 1974 and acting as CEO of Brazilian operations from 1985 to 2000. He served on the board of directors and audit committees of Lojas Marisa S.A., Tarpon Investments, TIM Participações, Sabó Autopeças and Votorantim Indústrias. He was a member of the Fiscal Council of CTEEP/ISA - Transmissão Paulista. He was also the CEO of Souto Vidigal, a holding company and family office, from 2004 to 2006. On February 3, 2010, he was elected as an independent member of our board of directors, a body which he presided over between October 2011 and June 2013 and between August 2013 and March 2015. He is President of the Fiscal Council and member of the Audit Committee of Ambev S. A. He is the manager partner of Giacometti Serviços Profissionais Ltda. Mr. Giacometti is also one of the co-founders and former board member of IBGC (Brazilian Institute of Corporate Governance) and a current member of its Governance and Nomination Commission. He is a member of the CAF (Comitê de Fusões e Aquisições). Currently, he is an independent member of our board of directors, as well as member of our Compensation Committee and Nomination and Governance Committee.
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Deborah Patricia Wright. Mrs. Wright is Brazilian and was born on September 4, 1957. She holds a Business Administration degree from the São Paulo School of Business Administration (EAESP-FGV). Mrs. Wright started her career in 1980 at Kibon's Marketing Department, where she remained until 1989. In 1989, she joined Unilever as Marketing Manager and worked in the food division. In 1991, she returned to Kibon as Marketing Director, becoming Commercial Vice-President in 1994. In 1995 she became the General Manager of Kraft Suchard Foods. In 1997, she reached the position of General Manager of Kibon. At ICI/Paints, she was the General Manager for Tintas Coral Brasil from 1997 to 1999, and subsequently the Regional Manager for ICI. She was also General Officer at Parmalat Brasil in 1999, and Chief Executive Officer of Pão de Açúcar's Group Internet Division from 2000 to 2002. From 2002 to 2007, she was Corporate Vice-President/Commercial Vice-President in the area of Sales and Corporate Marketing of the Abril Group. From 2009 to 2010, she was Chief Executive Officer/Country Manager of Ipsos Brasil, a market research firm. She has been acting as board member since 2001. From 2001 to 2005, she was a member of the Escola Americana de São Paulo's board (Graded School). From 2005 to 2006, she was a member of the superior board of CONAR (National Board of Advertising Self-Regulation). From 2008 to 2014, she was member of Lojas Renner's board, as well as Chairwoman of the Sustainability Committee from 2012 to 2014. She was a member of the consultative council of Eurofarma from 2013 to 2016. Currently, she is associated with: WCD Brazilian Group (Women Corporate Directors); Strategy and Innovation Committee of the IBGC (Brazilian Institute of Corporate Governance); the Commission of Strategy and of the Group; and Gender Diversity - Women in Boards. Currently she is member of our Nomination and Governance Committee and Compensation Committee.
José Luciano Duarte Penido. Mr. Penido is Brazilian and was born on March 8, 1948. He holds a Mining Engineering degree from the Engineering School of Universidade Federal de Minas Gerais. He started his career at ICOMI – Indústria e Comércio de Minérios in the manganese mine of Serra do Navio, in Amapá, where he worked until August 1973. From September 1973 to 1988, he worked at SAMITRI, a mining company from the Belgo Mineira Group, where he played several mineral research, mining, and industrial project management roles. From 1989 to 2003, he worked for SAMARCO, where he started as Development Officer and was the Chief Executive Officer for 12 years. From 2004 to 2009, he was the Chief Executive Officer of VCP – Votorantim Celulose e Papel. Since 2009, Mr. Penido has been chairing the board of directors of Fibria Celulose. He is also an independent member of the boards of directors of COPERSUCAR, Química Amparo YPÊ and the ALGAR Group. Additionally, he is a member of the Instituto Votorantim’s board. Mr. Penido is Vice-Chairman of the Executive Board of WBCSD – World Business Council for Sustainable Development. In his socio-environmental activities, Mr. Penido acts as Chairman of the ACEVP – Paraíba River Valley’s Ecological Corridor Association and as a member of the Board of Directors of the Rede Cidadã NGO. Currently he is also a member of our Sustainability Committee.
Viviane Senna Lalli. Ms. Senna is Brazilian and was born on June 14, 1957. She holds a degree in Psychology from the Pontifícia Universidade Católica in São Paulo and she is specialist in Depth Psychology. From 1981 to 1996, she worked as a psychotherapist for adults and children, and as a trainer of therapists in Depth Psychology. In 1994 she founded the Ayrton Senna Institute, the mission of which is the production and application of a wide range of knowledge and innovation for the complete education of children and youth. Ms. Senna is also a member of the following boards of directors and committees: Council for Economic and Social Development (CDES); Advisory Council of FEBRABAN; Board of Education of CNI and FIESP; Energias do Brasil (EDP); ADVB; World Trade Center (WTC); “Todos pela Educação”; and guidance and social investment committees of Bank Itaú-Unibanco. Currently, she is an independent member of our board of directors and a member of our Sustainability Committee.
Members of the Board of Executive Officers:
Sergio Agapito Lires Rial. See “—Members of the Board of Directors.”
Conrado Engel. See “—Members of the Board of Directors.”
José de Paiva Ferreira. See “—Members of the Board of Directors.”
Angel Santodomingo Martell. Mr. Santodomingo is Spanish and was born on November 16, 1965. He holds a degree in Economics and Business with specialization in Finance from the ICADE University in Madrid and a CFA (Chartered Financial Analyst) from the CFA Society of the United States. As one of our Vice President Executive Officers, he holds the position of Chief Financial Officer and Investors’ Relations Officer. He started at the Santander Group in 2005 as Head of International Developments and Asset Management and then has become globally responsible for the investor relations area. He has worked as Officer of Grupo Fortis and Banesto Bolsa. Also worked at Usera y Morenés S.V.B. - Sociedade de Valores y Bolsa and Arthur Andersen (Deloitte). From 1996 to 2008, he occupied the position of Chief Executive Officer of CFA Society in Spain, where he acted as founding
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member of such nonprofit organization focused on serving the holders of financial analyst accreditation (CFA) and from 2009 to 2014 was Vice President of AERI’s (Asociación Española de Relaciones con Inversores) board of directors. He is also Executive Officer of Aymoré CFI, Chief Executive Officer of Santander Participações S.A., Executive Officer of Santander Cultural and a member of the boards of directors of Banco Olé Bonsucesso Consignado S.A., Banco RCI Brasil S.A., Santander Leasing S.A. Arrendamento Mercantil, Super Pagamentos e Administração de Meios Eletrônicos S.A. and Getnet Adquirência e Serviços para Meios de Pagamento S.A.
Alexandre Silva D’Ambrosio. Mr. D'Ambrosio is Brazilian and was born on August 1, 1962. He holds a Bachelor's degree in Law from the University of São Paulo Law School; Master of Laws from Harvard Law School and Master of Comparative Law from the National Law Center, George Washington University. As one of our Executive Vice-Presidents, he is responsible for the Company's Legal and Corporate Affairs department since May 2016. From January 2014 to April 2016, he was Global Executive Vice-President Officer, Legal and Governmental Affairs at Votorantim Cimentos S.A., the cement division of Votorantim Group. Still at the Votorantim Group, from June 2003 to January 2014, he served as Global Corporate Officer and General Counsel for Votorantim Industrial S.A., the holding company for all industrial activities of the Group worldwide, including cement, metals, mining, pulp and paper, orange juice, chemicals, steel, electrical power and trading activities. From 2001 to 2003, he served as Vice President, Legal and Corporate Affairs at Global Village Telecom Ltda. (GVT). Previously, from 1999 to 2001, he was Legal Officer, General Counsel and Secretary of the Board at Telemig Celular Participações S.A. (acquired by Vivo in 2008) and Tele Norte Celular Participações S.A. (acquired by Oi in 2008). He was Deputy General Counsel at the Odebrecht Group, from 1996 to 1999. Mr. D'Ambrosio practiced law as an attorney in the United States from 1985 through 1996. He was Counsel at Rogers & Wells in New York from 1994 through 1996. Previously, he was associate and partner at major law firms in Washington D.C. (Bishop & Wallace, Winston & Strawn and Patton Boggs Blow) from 1985 to 1994. He was a member of the Board of Directors of Citrosuco S.A. (2014 to 2016), of Companhia de Cimentos Itambé S.A. (2008 to 2016), and of Aracruz Celulose S/A and Fibria S.A. (2005 to 2014).
Antonio Pardo de Santayana Montes. Mr. Pardo is Spanish and was born on November 5, 1971. He holds a degree in Economics and Law from the ICADE school of the Universidade Pontifícia Comillas. As one of our Vice-President Executive Officers, he is responsible for risk management department, having held before the post of Officer responsible for the Risk Credit Recovery area and Officer of Wholesale Risks and Aymoré CFI. He was a consultant at PricewaterhouseCoopers from 1995 to 1998, senior risk analyst for Santander Central Hispano/Santander Investment from 1998 to 2000 and senior manager of Monitor Company from 2000 to 2005 and returned to the Santander Group in 2005 as Associate Officer in the Wholesale Risks area, where he remained until 2009, when he came to work in Brazil. He is also Executive Officer of Banco Bandepe S.A., Aymoré CFI, Santander Leasing S.A. Arrendamento Mercantil, Santander Capitalização S.A. and Santander Finance Arrendamento Mercantil S.A. and administrator of F. Café Prestadora de Serviços Ltda.
Carlos Rey de Vicente. Mr. Rey is Spanish and was born on February 20, 1974. He graduated in Law from the Universidad Complutense de Madrid, and he became a member of the Colégio de Abogados de Madrid in 1997. In 2010 he started at Santander Spain, where he was responsible for the strategy and planning of the banks Santander México, Chile, Argentina, Puerto Rico, Uruguay, Peru and Colombia. From 2001 to May 2010, Mr. Rey was a partner of McKinsey & Co., where he was responsible for heading several projects on strategic consulting. His activities were always concentrated on banking and insurance matters, besides acting on team management. Before, he worked as a lawyer in two different law firms, where at one of them he was partner and founder, dealing mainly with insurance and civil responsibility. Currently, Mr. Rey is our Vice President Executive Officer responsible for the Strategy, Quality and Corporate Matters department. He is also a member of the boards of directors of Santander Leasing S.A. Arrendamento Mercantil, Getnet Adquirência e Serviços para Meios de Pagamento S.A., Zurich Santander Brasil Seguros e Previdência S.A., Zurich Santander Brasil Seguros S.A. and Santander Brasil Establecimiento Financeiro de Crédito S.A., an Administrative Officer of Norchem Participações e Consultoria S.A. and Executive Officer of Santander Cultural.
Jean Pierre Dupui. Mr. Dupui is Brazilian and was born on September 23, 1968. He holds a bachelor’s degree in Economics and a specialization degree from Boston University. Currently he is responsible for Global Corporate Banking at Santander Brasil. From 1992 to 1998 he worked at the structured finance and trade finance department of Lloyds TSB Group in São Paulo and London. From 1998 to 2001 he worked at the structured finance department of Citigroup Brasil. From 2001 to 2004 he worked for BBVA Brasil in the debt capital markets
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department. From 2004 to 2006 he was a Corporate Finance Officer at Citigroup New York and São Paulo. He started his career in Santander Group in 2006, where he took charge of the Credit Markets department of Santander Brasil. From 2009 to 2012 he was responsible for Global Transaction Banking of Santander in Madrid. Mr. Dupui is also an Executive Officer of Santander Cultural.
João Guilherme de Andrade So Consiglio. Mr. Consiglio was born in São Paulo, on December 7, 1968. He holds a degree in Economics from Universidade de São Paulo and a Post Laurea from Universitá Degli Studi di Genova, Italy, Facoltá di Economia e Commercio. As an Executive Vice President Officer, he is responsible for the corporate segment. He was an economist at Bunge (Serfina S.A. Adm. e Participações) from 1990 to 1994, a manager of the economics department of Santista Corretora S.A. CVM from 1994 to 1995 and has been with Santander Brasil (ABN AMRO/Banco Real) since 1995. He started as a corporate banking manager, then assumed corporate development and private equity functions until 2005, when he became the Officer responsible for product management and development in Brazil. He became head of global transaction products in Brazil in 2008, and in 2010 assumed his current responsibilities as Corporate Vice President Officer. He served as a member of the board of directors of CBSS (Visa Vale) until 2008, and as a member of the board of directors of Câmara Interbancária de Pagamentos – CIP and a member of the Conselho Superior of FUNCEX until 2010.
Juan Sebastian Moreno Blanco. Mr. Moreno was born on December 17, 1964, in Spain. He graduated in Business Administration from the University of Houston, TX. From 1987 to 1994 he worked at Bankinter as Commercial Officer, responsible for the commercial area as well as for the Enterprises segment in Santander. From 1994 to 1997 he worked as Project Officer in the financial system of Mexico and Brazil, for Booz, Allen & Hamilton, in Mexico. He joined the Santander Group in 1997, where he served as Executive Officer of Companies and Institutions, after which he became Executive Officer of Business Development at Banco Santander Mexico, with responsibility for activities in the area of products of the bank. In 2006, he became responsible for the segments of Large Enterprises, Corporate, Institutional and High Income in Latin America, in addition to leading the product areas for the countries of Latin America (Comex, Cash Management, Payroll etc.). From 2008 to 2010, he performed the role of Chief Executive Officer of Banco Santander – Puerto Rico. As of 2010, he occupied the position of Vice President Officer of the Commercial area of Banco Santander Mexico, with responsibility for the business areas. At that time, he was also a member of the board of directors, steering committee, asset and liability committee, finance committee and risk committee. As a Vice President Executive Officer, he is responsible for our Retail and Commercial Branches. He is also a member of the board of directors of Getnet Adquirência e Serviços Para Meios de Pagamento S.A.
Manoel Marcos Madureira. Mr. Madureira is Brazilian and was born on December 30, 1951. He holds a bachelor’s degree in Mechanical Engineering from the Taubaté University in São Paulo and a degree in Administration from the Tokyo International Center in Japan. From 1976 to 2005 he worked in the automobile sector, as Institutional Relations and Communication Officer at Fiat Automóveis and Mercedes Benz do Brasil. From 1998 to 2005 he was also Vice President of the Associação de Fabricantes de Veículos Automotores and President of the Associação de Engenharia Automotora. In 2006 he was elected as Vice President of Corporate Affairs of Santander Brasil and in 2007 he was put in charge of the Vice Presidency of the Federação Brasileira de Bancos. In 2008 he was transferred to Santander Spain Group, as Communication Officer for Latin America, where he remained until September 2012. In October 2012 he returned to Brazil as Executive Officer to be in charge of the Corporate Communication and Institutional Relations Departments of Santander Brasil, and he is currently the Vice President Executive Officer responsible for the Communication, Marketing, Institutional Relations and Sustainability departments. Mr. Madureira is also Vice President Executive Officer of Santander Cultural and Executive Officer of Universia Brasil S.A.
Vanessa de Souza Lobato Barbosa. Ms. Lobato is Brazilian and was born on December 24, 1968. She holds a bachelor’s degree in Business Administration from Pontifícia Universidade Católica de Minas Gerais, and a specialization degree in Marketing at Universidade Federal de Minas Gerais. From 1992 to 1995 she served as Marketing Local Manager at Banco Nacional, with responsibility for the sponsorship budget and micro marketing activities focused on the retail network. She also worked at Unibanco, in Recife, from 1995 to 1999, where she was responsible for different branches in the city of Recife. In 1999 she started at Santander Brasil, where she worked as General Manager of the Recife branch office. From 2001 to 2006 she served as Local Superintendent, where she was responsible for one of the Retail’s Locals, with head office in Belo Horizonte, covering the states of Minas Gerais, Goiás, as well as Brasília, and the states of the Northeast Region. From 2006 to 2013, Ms. Lobato became an Executive Superintendent of our branch network, with responsibility for one of our retail branches in Brazil, specifically the “SPI Centro Sul” branch based in Campinas, State of São Paulo, covering important cities such as:
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Campinas, Jundiaí, Sorocaba, Piracicaba, Limeira and Americana. As one of our Vice President Executive Officers, she is currently responsible for the Human Resources department.
José Alberto Zamorano Hernandez. Mr. Zamorano is Spanish and was born on May 9, 1962. He holds a degree in Business Administration from the Universidad Complutense de Madrid. In 1991, he began his career in Santander Group as manager of the internal audit area from 1995 to 2002, where he was responsible for the credit risk audit in regional units of Galícia, Alicante and Castilla La Mancha. From 2002 to 2005, he was superintendent of internal audit of Santander Brasil and from 2005 to 2010, he was the Executive Officer responsible for internal audit in Grupo Financeiro Santander México. As one of our Executive Officers, Mr. Zamorano has been responsible for our internal audit area since 2011.
José Roberto Machado Filho. Mr. Machado is Brazilian and was born on August 25, 1968. He holds a degree in Electrical Engineering from Faculdade de Engenharia Industrial in São Paulo and has a master’s degree in business, economics and finance from the Universidade de São Paulo. He was an engineer for Keumkang Limited from 1990 to 1991, a foreign exchange manager from 1992 to 1995 and a manager of emerging markets trading desk from 1992 to 1996 of Banco CCF Brasil S.A. He was also an Executive Officer of Banco Rabobank Internacional Brasil S.A. from 1998 to 2003 and was an Executive Officer of Banco Real from 2003 to 2009. Currently, he is responsible for the Individuals Businesses area. He is also Executive Officer of Banco Bandepe S.A., Chairman of the board of directors of Super Pagamentos e Administração de Meios Eletrônicos S.A. and a member of the boards of directors of Zurich Santander Brasil Seguros e Previdência S.A., Zurich Santander Brasil Seguros S.A. and CETIP S.A. – Mercados Organizados.
Maria Eugênia Andrade Lopez Santos. Ms. Santos is Brazilian and was born on January 23, 1966. She holds a degree in Economics from the Universidade Federal da Bahia and a specialization degree from Fundação Getúlio Vargas. As one of our Officers, she is responsible for Private Segments (Private Banking, Select, Van Gogh and Individual), Investments and Insurance (Equity Management). She also serves as a Chief Executive Officer of Santander Brasil Advisory Services S.A.
Alexandre Grossmann Zancani. Mr. Zancani is Brazilian and was born on October 14, 1977. He holds a degree in Computer Engineering from the Escola Politécnica of Universidade de São Paulo. He started his professional career at Banco Real and from 2002 to 2004 he served as an analyst in different retail risks teams focused on portfolio monitoring and decision models development. From 2004 to 2006 he served as team manager responsible for the Basel II project. From 2006 to 2007, he was the Quantitative Methods Superintendent, with responsibility for the Basel project. In 2008, he was Risk Superintendent of Santander Brasil and served as project manager in the process for integration of different areas as part of the merger with Banco Real. From 2009 to 2012, he became the Cards Risks Superintendent and, then, the Individuals Portfolio Management’s Superintendent. Currently, Mr. Zancani is the Executive Officer of Individual Risks and oversees our portfolio management and credit approval activities. He also serves as a member of the board of directors of Banco PSA Finance Brasil S.A.
Amancio Acúrcio Gouveia. Mr. Gouveia is Brazilian and was born on March 31, 1963. He holds a degree in Accounting from the Universidade Santa Úrsula. As one of our Officers, he has been acting as a controller working in accounting and fiscal management of our companies since 2001. He was an audit manager for KPMG until 1991, accounting manager of Unibanco – União de Bancos Brasileiros S.A. from 1991 to 1999, assistant superintendent of BankBoston Banco Múltiplo S.A. from 1999 to 2001. He is also a member of the board of directors of BW Guirapá I S.A., Chief Executive Officer of Banco Bandepe S.A. and Executive Officer of Santander Leasing S.A. Arrendamento Mercantil, Atual Companhia Securitizadora de Créditos Financeiros S.A., Santander Capitalização S.A., Aymoré CFI, Evidence Previdência S.A., Santander Finance Arrendamento Mercantil S.A. and SANCAP Investimentos e Participações S.A. He is also administrator of Santander Brasil Administradora de Consórcio Ltda., member of the Fiscal Council of Companhia Energética de São Paulo and an effective member of the Fiscal Council of Redentor Energia S.A.
Ana Paula Nader Alfaya. Ms. Nader is Brazilian and was born on August 7, 1971. She holds a degree in Publicity and Advertising from the Universidade Paulista in São Paulo and a specialization degree in communications from the Escola Superior de Propaganda e Marketing. From 1996 to 1997, she served as Marketing and Internal Communication Manager, at Unibanco. She served as Credit Card’s Communication Manager from 1997 to 1998 at BankBoston and after that, as Strategy and Planning Marketing Manager, from 1998 to 2000, still at BankBoston. She served as Planning Manager and Research Manager, from 2000 to 2003 at ABN AMRO, and as Retail Marketing Manager, from 2003 to 2004, and in the same year she became a superintendent of Strategy
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Marketing Department for retail. From 2005 to 2010 she served as Executive Superintendent of the Brand, Research and Marketing Department, and, since 2011, as Senior Executive Superintendent of Brand and Marketing department and since 2012 as Officer of the Brand and Marketing department.
André de Carvalho Novaes. Mr. Novaes is Brazilian and was born on April 14, 1969. He holds a degree in Economics from the Universidade Federal Fluminense, and an executive MBA from BPS Business School (São Paulo and Toronto). From 1993 to 1997, he served as products coordinator in Santander Brasil, where he was responsible for credit proposals analysis, and in several areas at Aymoré CFI and in posts as Commercial Operator, Credit and Collection Chief. In 1996, he served as coordinator of products in São Paulo. From 1997 to 2001, he served as Commercial Manager. From 2002 to 2008, he served as Regional Manager. From 2008 to 2012, he served within Santander Brasil as the person responsible for Other Assets segment in Aymoré CFI. Since 2012, he has served as Executive Superintendent in Santander Brasil, with responsibility for Aymoré CFI’s Vehicle Partnerships. On December 2012, he became the commercial coordinator of Aymoré CFI, with responsibility for the Commercial and Partnerships team. Currently, Mr. Novaes is head of Aymoré CFI and reports to the Vice Presidency of Wealth Management & Specialized Businesses. He is also Executive Officer of Aymoré, administrator of Virtual Motors Páginas Eletrônicas Ltda., Vice-Chairman of the board of directors and Vice President Officer of Webmotors S.A. and a member of the board of directors and Institutional Relations Officer of Banco RCI Brasil S.A.
Cassio Schmitt. Mr. Schmitt is Brazilian and was born on April 23, 1971. He holds a degree in Economics from the Universidade Federal do Rio Grande do Sul, a Master’s Degree in Corporate Economics from the Fundação Getúlio Vargas in São Paulo and an MBA from the Sloan School of Business, Massachusetts Institute of Technology (MIT). He was treasury economist of Banco de Crédito Nacional S.A. from 1995 to 1996, and senior economist at UNIBANCO – União de Bancos Brasileiros S.A. from 1996 to 1999. He was an associate of the leveraged finance team of UBS Warburg in 2000, project finance superintendent of UNIBANCO from 2001 to 2003 and corporate banking superintendent of UNIBANCO Representative Office in New York from 2003 to 2004. He was a superintendent in the M&A/Project Finance team of Santander Brasil in 2004, and became responsible for project finance in Brazil in 2005 and also for the areas of acquisition finance and syndicated lending in 2010. From 2011 to 2012, he became responsible for the GCB clients Risk Department, and until 2014 he was responsible for the Global Transaction Banking. Currently he is the Officer responsible for Credit Recovery Businesses. He is also the Chief Executive Officer of Atual Companhia Securitizadora de Créditos Financeiros S.A. and a member of the board of directors of Banco Olé Bonsucesso Consignado S.A.
Cassius Schymura. Mr. Schymura is Brazilian and was born on February 19, 1965. He holds a degree in Electrical Engineering from the Pontifícia Universidade Católica of Rio de Janeiro and an MBA from the Fundação Dom Cabral. As one of our Officers, he is responsible for the Multichannel Platform, including call center and electronic channels. He was investment products analyst at Banco Nacional S.A. from 1989 to 1991, products and marketing manager of Cardway Processamento from 1991 to 1994, products manager of Cartão Nacional from 1994 to 1996, marketing and products supervisory manager of Unicard Banco Múltiplo S.A. from 1996 to 1999, senior associate at Booz Allen & Hamilton in 1999, a member of the board of directors and Chief Executive Officer of Ideiasnet S.A. from 2000 to 2001, general manager of SOFTCORP from 2001 to 2004 and has been part of Santander Group since 2004, with responsibility, until 2015, for our Cards and Merchant Acquisition segment. He is also a member of the board of directors of Super Pagamentos e Administração de Meios Eletrônicos S.A.
Ede Ilson Viani. Mr. Viani is Brazilian and was born on September 5, 1967. He holds a degree in Accounting and an MBA from Instituto de Ensino e Pesquisa - Insper. He was an auditor at Banco Itaú S.A. from 1986 to 1990, and a senior auditor at BankBoston S.A., where he worked for 17 years, acting in sequence as Officer of Loans and Products and Officer for the banking sector aimed at small and medium companies. He joined Santander Brasil in 2007 as Officer for Small and Medium Business Banking and was the Officer responsible for Retail Banking Risk Management from July 2010 to 2014. As one of our Officers, he is currently responsible for our Companies and Institutions segment.
Felipe Pires Guerra de Carvalho. Mr. Guerra is Brazilian and was born on May 10, 1978. He holds a degree in Production Engineering from Universidade Federal do Rio de Janeiro. He was Proprietary Trader, Market Maker and Trainee at Banco Citibank (Brasil) S.A. from 2001 to 2004; Executive of the Treasury F/X Desk from 2002 to 2004; Proprietary Desk Senior Trader from 2005 to 2010; Head Trader from 2011 to 2014; and GCB Treasurer since 2011 at Santander Brasil. Currently, he is an Officer and is responsible for our Markets Treasury Desk (Local and International Prop. Trading & Market Making) and for the ACPM, Analysis, Quants and Tools and Controls areas under the GCB Structure.
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Flávio Tavares Valadão. Mr. Valadão is Brazilian and was born on July 1, 1963. He holds a degree in Electrical Engineering from the Escola de Engenharia Mauá, an Accounting and Finance Degree from IBMEC and a Master’s Degree in Electrical Engineering from the University of Lille in France. He was Corporate Finance Officer of Banco Paribas from 1990 to 1998 and joined Banco ABN Amro Real in 1998. As one of our Officers, he is responsible for the Corporate Finance area at Santander Brasil.
Gilberto Duarte de Abreu Filho. Mr. Abreu is Brazilian and was born on August 7, 1973. He holds a degree in Industrial Engineering from the Universidade de São Paulo and MBA from the Massachusetts Institute of Technology, in Massachusetts. Before joining Santander Brasil, Mr. Abreu was a Senior Manager at McKinsey & Company, leading projects in both the financial and retail areas. As one of our Officers, he is currently responsible for the Mortgage, Insurances and Fund-raising Businesses and the Individuals segments. He is also the Chief Executive Officer of Webcasas S.A. and Sancap Investimentos e Participações S.A., Executive Officer of Banco Bandepe S.A., Vice President of ABECIP and a member of the boards of directors of CIBRASEC, Zurich Santander Brasil Seguros e Previdência S.A. and Zurich Santander Brasil Seguros S.A.
Igor Mario Puga. Mr. Puga is Brazilian and was born on November 10, 1981. He holds a degree in Social Communication from the Casper Líbero School of Social Communication and in statistics and applied research from the Institute of Mathematics and Statistics of the University of São Paulo. Currently, he is adjunct professor of the Alvares Penteado School of Commerce Foundation. After joining IG - Internet Group of Brazil (2000 to 2001) and Terra Networks (2002), he was JWT ‘s Digital Intelligence Manager from 2003 to 2004 and Africa Propaganda’ s digital media manager (from 2005 to 2006). From 2007 to 2014, as founding partner and general officer, he served in the ID\TBWA group. Between 2014 and 2016 he served as Chief Interactive Officer and then Vice President Officer of Integration and Innovation of the DM9DDB. Mr. Puga has joined Santander Brasil in 2016, as the Officer responsible for the Marketing department.
Luis Guilherme Mattos de Oliem Bittencourt. Mr. Bittencourt is Brazilian and was born on December 4, 1973. He holds a degree in Computer Engineering from the University of Campinas. He started his professional career in Banco Itaú-Unibanco serving in the areas of Business Intelligence, Electronic Channels and CRM, where he acquired 14 years of experience. From 2010 to 2012, in Banco HSBC Brasil, Mr. Bittencourt served in the areas of Distribution, Digital Channels and Customer Relationship Management, or “CRM.” Since 2013, Mr. Bittencourt serves in Santander Brasil, initially as Executive Superintendent of CRM, Digital Channels and Management Information System, Customers Intelligence and CRM and, currently, as Officer responsible for Commercial Intelligence and Trade Marketing.
Luiz Masagão Ribeiro Filho. Mr. Masagão is Brazilian and was born on September 1, 1976. He holds a degree in Business Administration from the Fundação Getúlio Vargas and from the LEAD Program from IE Business School. He started his career in 1997, serving as Operator of Interest Rates Options in Brazil at Banco Citibank S.A. until 2005. He was Senior Operator of Foreign Exchange Options from February 2005 to September 2005 in ING Bank N.V. Back to Banco Citibank S.A., he was Executive Manager from 2005 to 2008 and Superintendent from 2008 to 2009. He served as Executive Superintendent of Fixed Income Sales from 2009 to 2010 in Morgan Stanley and, then, joined Santander Brasil’s team, initially serving as Chief of the GCB/Corporate Sales team, from 2010 to 2014, and at last as Brazil’s Sales Executive Superintendent. Currently he is the Officer responsible for the departments of sales and management of the markets area products, including foreign exchange transactions, derivatives and fixed income products to all customers segments of Santander Brasil (retail, corporate and GCB).
Marcelo Malanga. Mr. Malanga is Brazilian and was born on May 18, 1969. He holds a degree in Business Administration from Universidade de São Paulo and a master’s degree in Finance and Accounting from Pontifícia Universidade Católica – PUC-SP. He has 25 years of experience in the financial markets. He served as Division Manager at Banco do Brasil S.A. from 1987 to 2001. From 1998 to 2001, he was the responsible for the Governments Business’ strategy in Brasília, serving as PROEX manager. In 2001, as Santander Brasil’s employee, he was responsible for building business relationships with state and local governments until 2004. From 2006 to 2009, he served as the superintendent responsible for the management and administration of several lines of business of Santander Brasil in the State of Rio de Janeiro. From 2009 to 2012 he was responsible for the overdue assets collection of Santander Brasil, Banco Real and Aymoré CFI, in the retail and wholesale segments. From 2012 to 2013, he was responsible for the Companies segment. Since 2013, he has served as a Branches Executive Superintendent.
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Marcelo Zerbinatti. Mr. Zerbinatti is Brazilian and was born on February 5, 1974. He holds a degree in Business Administration from Faculdades Metropolitanas Unidas, a specialization degree in Negotiation from Fundação Getúlio Vargas and holds a Master’s Degree in Planning from Pontifícia Universidade Católica de São Paulo. He worked at Banco Bradesco S.A. from 1988 to 1992 as Head of Service, at Bank Boston from 1992 to 1994 as Coordinator of Foreign Exchange, and at Banco Real from 1994 to 2006 as Project Superintendent. From 2006 to 2008 he served as our Senior Organization Executive Superintendent responsible for Process and Management of Changes. In 2008 he became responsible for the coordination of the Integration Office, and in 2011, he became an Officer, responsible for the Organization, Technology and Processes Department. As from October 2013, he became the Officer responsible for the Strategic Planning Department. As from 2015, he became the Officer responsible for the Quality and Customer Experience Department.
Marino Alexandre Calheiros Aguiar. Mr. Aguiar is Portuguese and was born on May 14, 1971. He graduated with a degree in Business Administration from the Technical University of Lisbon and an MBA in Information Technology and Internet. Mr. Aguiar started his career in 1994 as a systems analyst at Accenture in Portugal, responsible for Functional Design and Technical Computer Systems. From 1996 to 1999 he had the task of coordinator and in 1999 became manager responsible for providing consulting and technology services to banking institutions in Portugal and Brazil. He held the position of Senior Manager from 2002 to 2006, and was an Officer from 2006 to 2008, with responsibility for developing the commercial and relationship strategy of the insurance segment. Between 2008 and 2010, he worked for CPM Braxis as an Officer, with responsibility for the technology program of a major financial institution in Brazil. In 2010, he was a statutory officer at Accenture Brazil, with responsibility for technology services to the financial industry in Latin America. He is currently one of our Officers, and is responsible for our technology area in the Vice Presidency of Proceedings, Technology and Operations unit.
Mario Adolfo Libert Westphalen. Mr. Westphalen is Brazilian and was born on July 9, 1968. He holds degree in Electrical Engineering from the University of Brasília. He started his career at Telecommunications Market where he served for more than five years as Officer of Autotrac S.A., Qualcomm Inc. and Piquet Participações. In 1998, he served as Special Advisor to the Ministry of Development, Industry and Trade of Brazil. From 1999 to 2001, he held the role of Senior Consultant at K2 Achievements Consultoria. From 2001 to 2003 he served as Executive Officer and partner of Concrete Solutions, a company which provides IT services. In 2004, he joined Santander Brasil, where he served as Superintendent of the Property and Facilities area until 2007, and then as Senior Executive Superintendent of corporate resources, until 2009. From 2010 to 2013 he served as Officer of Operations at Santander Global Facilities, in the U.S., being responsible for the implementation and operation of that company in the U.S. As one of our Officers he is responsible for cost management, organization and efficiency departments.
Nilton Sergio Silveira Carvalho. Mr. Carvalho is Brazilian and was born on January 1, 1957. He holds a degree in Electric Production Engineering from the Faculdade de Engenharia Industrial. Mr. Carvalho has been engaged in the banking business since 1981. From 1981 to 2005 he worked at Unibanco in several departments. From 2005 to 2008, he served as Operations Officer of Olé Financiamentos. From 2008 to September 2009, he was responsible for the Organization department at Santander. From October 2009 to October 2012 he was responsible for the operations structure of Aymoré CFI. Currently, as an Officer of Santander Brasil, he is responsible for the Operations department, and he is also Executive Officer of Aymoré CFI, Banco Bandepe S.A., Santander Capitalização S.A., Santander Finance Arrendamento Mercantil S.A., Santander Leasing S.A. Arrendamento Mercantil and Evidence Previdência S.A., Deputy Director of Banco RCI Brasil S.A. and Tecnologia Bancária S.A. – TECBAN, a member of the board of directors of Webmotors S.A. and administrator of Santander Brasil Administradora de Consórcio Ltda.
Rafael Bello Noya. Mr. Noya is Brazilian and was born on October 19, 1977. He holds a degree in Business Administration from Universidade de São Paulo and from LEAD Program from IE Business School. He started his career in Citibank, in the division of commercial operations and finance, as analyst and negotiator, from 1996 to 2001, when he joined the local and international risk distribution area, with responsibility for the creation and implementation of new products during the period from 2001 to 2003. He then served as senior negotiator, from 2003 to 2005, and then as Superintendent from 2005 to 2007. He joined Santander Brasil in 2007, and was an Assistant Superintendent from 2007 to 2015, with responsibility for customer coverage in the following sectors: real estate, logistics, aviation, cellulose and paper, industry, cement, construction and infrastructure, steel, energy, petrochemistry and construction materials. Currently, he is an Officer with responsibility for generating local and international capital markets, risk syndication, projects and acquisitions financing and capital and assets structuring. He is also Chairman of the board of directors of BW Guirapá I S.A.
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Ramón Sanchez Díez. Mr. Díez is Spanish and was born on October 29, 1968. He holds a degree in Economics from the Universidad Autónoma de Madrid and has completed an Advanced Management Program at the Wharton School of Business at the University of Pennsylvania. He served as a Financial Analyst and Portfolio Manager for Santander Brasil’s New York branch from 1992 to 1997 and as an Officer for Strategy and Analysis for Latin American banks at Santander in Madrid from 1997 to 2003. He was an Officer for Strategy and Investor Relations for Santander Brasil from 2004 to 2006, Head of Customer Acquisition from 2007 to 2009, was in charge of our retail banking channels (call center, internet, mobile and ATM) from 2009 until 2011 and before his current position was the Head of Retail Commercial Planning and Communication. Mr. Díez was President of the Spanish Chamber of Commerce in Brazil, between 2006 and 2009. As one of our Officers, he is responsible for our compliance department. He also serves as Executive Officer of Banco Bandepe S.A.
Reginaldo Antonio Ribeiro. Mr. Ribeiro is Brazilian and was born on May 19, 1969. He holds a degree in Economics from the Universidade Estadual de Campinas, an Accounting degree from the Universidade Paulista and an MBA from the Fundação Instituto de Pesquisas Contábeis, Atuariais e Financeiras – FIPECAFI of the Universidade de São Paulo. He served as a manager for Arthur Andersen Consultoria Fiscal Financeira S/C Ltda. from 1990 to 2001. He was also a member of the Fiscal Council of Companhia Energética de São Paulo and AES Tietê from 2002 to 2006. As one of our Officers, he is responsible for tax issues, planning strategies and corporate reorganization processes. He also serves as Executive Officer of Santander S.A. – Serviços Técnicos, Administrativos e de Corretagem de Seguros, Aquanima Brasil Ltda., Atual Companhia Securitizadora de Créditos Financeiros S.A., Santander Participações S.A., Santander Brasil Advisory Services S.A. and Norchem Participações e Consultoria S.A.
Roberto de Oliveira Campos Neto. Mr. Campos is Brazilian and was born on June 28, 1969. He holds a degree in Economics and a specialization degree in Economics with a focus on Finance from the University of California, Los Angeles. He worked at Banco Bozano Simonsen from 1996 to 1999, where he served as Operator of Derivatives of Interest and Foreign Exchange (1996), Operator of External Debt (1997), Operator of the Area of Stock Exchanges (1998) and Head of the Area of International Fixed Income (1999). From 2000 to 2003 he served as Head of the International Area and Fixed Income in Santander Brasil. In 2004, he served as Portfolio Manager of Claritas. He joined Santander Brasil in 2005 as Operator and in 2006 he was Head of the Trading Desk. In 2010, he became responsible for the Proprietary Trading and Market Making Local & International. He is currently responsible for our treasury department.
Robson de Souza Rezende. Mr. Rezende is Brazilian and was born on January 24, 1967. He holds a degree in Statistics from Universidade Salgado de Oliveira – RJ. He started his career at Unibanco, where he served between 1985 and 1999 in the Management of the Formation and Development area focused on the Branches of Unibanco and Chief Manager of the Branch Network. Mr. Rezende joined Santander Brasil in 1999. From 1999 to 2003, he served as Human Resources Superintendent. From 2003 to 2008, he served as Regional Superintendent. From 2008 to 2010, he served as Commercial Model Superintendent, a period in which he participated in the Commercial Model Integration of Santander Brasil and Banco Real. Currently, he is responsible for the Rio de Janeiro and Espírito Santo branch networks, directly managing approximately 330 branches.
Ronaldo Wagner Rondinelli. Mr. Rondinelli is Brazilian and was born on August 2, 1973. He holds a degree in Economics from FAAP – Fundação Armando Álvares Penteado, and in Business Finance from FIA USP. From 1994 to 1996, he served in Banco Fenícia S.A. as Junior Information Analyst. Between 1996 and 1997, he served in Banco Santos as Analyst of Planning and Control – Managerial Information. In 1997, he served in Banco Real and ABN AMRO Bank as Senior Analyst of Managerial Information. Between 1997 and 1999, he served as Assistant to the Vice-President – Financial Control Coordination in Banco Real and ABN AMRO Bank, where he was responsible for the coordination of the finance areas in several countries of Latin America. Between 1999 and 2000, he served as Latin America Regional Controller for Banco Real and ABN Amro Bank. Between 2000 and 2004, he served as Planning and Control Superintendent at Banco Real and ABN AMRO Bank, where he was responsible for the management of the MIS area, local results reports and Head Office of Banco Real/ABN AMRO. In 2004, he served as Executive Superintendent of Strategic Decisions Support at Banco Real and ABN AMRO Bank, where he was responsible for the management of the areas of Planning, Budget, local Results Reports and Head Office of Banco Real/ABN AMRO. Between 2004 and 2008, he served as Presidency and COMEX Advisory Executive Superintendent in Banco Real and ABN AMRO Bank, where he served as Secretary of the Executive Committee and Executive Board of Officers of Banco Real and Assistant of the Chief Executive Officer of the bank. He joined Santander Brasil in 2008 and served as Executive Superintendent (Aymoré CFI) between 2008 and 2015, with responsibility for the management of the areas of Products, Prices, Segments, Auto Financing at the Branches of
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Santander Brasil, Planning and Partnerships with automobile manufacturers. Currently, he is responsible for our Universities segment and is an Executive Officer of Universia Brasil S.A.
Sérgio Gonçalves. Mr. Gonçalves is Brazilian and was born on August 7, 1956. He holds a degree in Economics from Fundação Armando Álvares Penteado, São Paulo, with an International Executive MBA degree from the Universidade de São Paulo. Since November 2000, he has been one of our Officers, and he is currently responsible for the Companies, Government & Institutions departments. He worked as Corporate Banking Officer for 16 years (from 1979 to 1994) at Banco Crefisul, associate of Citibank. From 1995 to 2000, he was Products Officer at Banco Nossa Caixa (now, Banco do Brasil S.A.).
Thomas Gregor Ilg. Mr. Ilg is Brazilian and was born on September 12, 1968. He holds a degree in Agricultural Engineering from the Universidade Estadual de Campinas, and a postgraduate diploma in Business Administration from the Fundação Getúlio Vargas. He has been engaged in the financial markets for almost 26 years, including 15 years with Santander Brasil and 10 years with The First National Bank of Boston, where he first joined as a Trainee in the Risks and Business areas. At Santander Brasil he was responsible for the Corporate Banking Business until the beginning of 2007 when he joined our Treasury Division to develop an area designed to distribute derivatives to the Middle Market, Private Banking and Retail Business in general. At the end of 2008 he moved to the Credit Division to manage the Corporate Banking Risk Area, and now, as an Officer, he is responsible for our retail risks function. He is also deputy director of Banco RCI Brasil S.A. and administrator of F. Café Prestadora de Serviços Ltda.
Ulisses Gomes Guimarães. Mr. Guimarães is Brazilian and was born on March 14, 1971. He holds a degree in Mechanical Engineering from ITA – Instituto Tecnológico de Aeronáutica and an Executive MBA in Finance from IBMEC. He started his career as trainee and, then, as an analyst at Citibank from 1994 to 1997. He was manager, then Executive Superintendent at Banco Real/ABN AMRO Bank from 1997 to 2007. Starting in 2007, he was an Officer of Santander Brasil, with responsibility for the Human Resources area from 2007 to 2012. From 2012 to 2015 he served in Santander Spain as Executive Superintendent in the area of compensation and mobility politics. Currently, back to Santander Brasil, he serves as one of our Officers, with responsibility for the implementation of the Finance transformation program.
We have no knowledge of any arrangement or understanding with major shareholders, customers, suppliers or any other person pursuant to which any person was selected as a director or executive officer. None of the members of our board of directors or of our board of executive officers have any family relationships with each other, or with any other members of our senior management.
| 6B. | Compensation |
Compensation of Directors, Executive Officers and Members of Audit Committee
Our shareholders establish the maximum annual aggregate compensation of our directors and officers at the annual shareholders’ meeting. Compensation of the members of our audit committee is established by our board of directors.
All members of the board of directors are entitled to a fixed compensation composed of monthly fees and benefits within the overall limit set by the annual compensation approved at our annual general shareholders’ meeting. In exceptional and fully justified cases, the chairman of our board of directors may also receive an annual variable compensation for his or her duties as determined by the compensation committee and the board of directors, within the annual limit set forth by the annual shareholders meeting. If granted, such variable compensation should consider the form of payment and the different deferral percentages, according to the level of variable compensation received in the year, and observe the Malus clause with the possibility of reducing up to 100% of the value of the variable compensation in the assumptions.
In the cases where a member of the board of directors is also a member of our audit committee, pursuant to the applicable regulations and the internal regulations of the audit committee, such member must choose to receive the remuneration package of only one of the bodies. Regarding the other advisory committees, if one of the members of the board of directors becomes a member of it, in addition to the corresponding remuneration as a member of the board of directors he or she will be entitled to an additional compensation per meeting held in the relevant advisory committee, approved by the compensation committee.
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The members of the board of executive officers are entitled to fixed compensation composed of monthly payments, benefits, pensions and variable remuneration, always within the overall limit of the annual remuneration approved at the annual general shareholders’ meeting.
The variable compensation shall be paid considering the different deferral percentages depending on the level of the variable compensation received in the year (includes amount of Long-Term Incentive - ILP in the year of grant, valued at the granting price), and observe the Malus clause with the possibility of reducing up to 100% of the value of the variable compensation in the assumptions.
The rule of payment is: (i) 30% in cash at the time of the award, (ii) 20% in cash in three equal subsequent instalments, (iii) 30% in units at the time of the award with a one year lock-up, and (iv) the remaining 20% in three separate tranches of units with a one-year lock-up each. If the amount of the variable compensation is between R$5.5 million and R$8 million, the deferral is 50%, 25% of each of which is deferred and paid in cash and 25% paid up until five tranches of units with a one-year lock-up each. If the variable compensation amount is equal to or greater than R$8 million, the deferral is 60%, 30% of each of which is deferred and paid in cash and 30% paid up until five tranches of units with a one-year lock-up each. In the case of the Chief Executive Officer, the deferral in this program is at least 50%, with at least 25% each of the items mentioned above.
Under Brazilian law, companies are required to disclose the highest, lowest and average compensation of our directors, members of the audit committee and officers without indicating any individual name. However, as members of the Brazilian Institute of Finance Executives (Instituto Brasileiro de Executivos de Finanças – IBEF) we were granted an injunction on March 2, 2010, allowing us not to disclose this information.
Shareholders at the general shareholders meeting held on April 29, 2016 set compensation for our directors and executive officers at a total of up to R$300 million and for our audit committee at a total of up to R$3.0 million for the 12-month period starting on January 1, 2016, as proposed by the board of directors at the meeting held on March 22, 2016. For the abovementioned twelve-month period, members of our board of directors and executive officers received a total of approximately R$246.5 million and members of our audit committee received a total of approximately R$2.3 million. The total amount of contributions for pension plans of our board of executive officers in 2016 was R$4 million.
The criteria for granting and paying variable compensation vary according to the activities performed by the different areas and, therefore, payment of the variable compensation may differ depending on the department and activities performed by each member. Pursuant to Brazilian law, variable compensation is required to be compatible with the financial institution’s own risk management policies. At least 50% of variable compensation must be paid in stock or stock-based instruments and at least 40% of variable compensation must be deferred for future payment by at least 3 years. These rules are effective as from January 1, 2012.
As approved by our board of directors at the meeting held on December 23, 2009, we indemnify our directors and executive officers and members of the audit committee from claims arising during the time they occupy their respective offices, exclusively related to court or administrative costs and attorneys’ fees, except in cases of bad faith, gross negligence, willful misconduct or mismanagement by our directors or executive officers. This indemnity was also granted to the members of the audit committee and the compensation committee.
Compensation Plan Overview
We have three programs for long-term compensation: the Deferral Program, the Local Long-Term Incentive Program (the Stock Option Plan, or “SOP” and the Performance Share Plan, or “PSP”) and the Global Long-Term Incentive Program (CRD-IV).
Executive officers and executives in key positions are eligible to participate in these plans. The plans last three years promoting our executive officers and executives’ commitment to our long-term results. Members of the board of directors can participate in these plans only if they are executive officers, otherwise, the board members are not eligible to participate in any of these plans.
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Deferral Program
Our deferral program is available to our statutory officers, officers in positions of management and certain other eligible employees. As part of the deferral program compensation, we defer between 40% and 60% of the variable compensation of an employee over a period of three to five years, depending on the employee’s level of responsibility.
Our deferral program aims to (i) align the program with the principles of the Financial Stability Board, or “FSB,” agreed upon at the G20; (ii) align our interests with those of the plan’s participants (to achieve sustainable and recurring growth and profitability of our businesses and to recognize the participants’ contributions); (iii) allow the retention of participants; and (iv) improve our performance and protect the interests of shareholders via a long-term commitment.
Pursuant to Brazilian law, payments made under the deferral program are subject to total or partial cancellation, or claw back, in cases of: (i) our unsatisfactory financial performance (financial results audited lower than defined in our business plan or loss in the period); (ii) failure to comply with internal policies, specially policies for risk management (with the need for reclassification of operations or revision of provisions); (iii) substantial change in our financial condition, unless arising from changes in accounting standards (damages, financial loss); or (iv) significant changes in our share capital or risk profile. If the board of directors deems it necessary, it may also take into account any change in the capital base of the Santander Group.
We renew and update our deferral program every year. As of December 31, 2016, we had three plans outstanding: one for each fiscal year: 2013, 2014 and 2015. As of December 31, 2016, we recorded total expenses of R$132.294 million in connection with our Deferral Program compared to total expenses of R$149.758 million in 2015.
Deferral Program – 2013
Our 2013 deferral program was divided in two programs:
• Collective Identified. Statutory officers and executives who take significant risks in Santander Brasil and are in charge of the control areas. Deferred compensation will be paid 50% in cash, indexed to 100% of the CDI, and 50% in Units.
• Collective Unidentified – Employees. Individuals eligible for this program include manager employees and certain of our employees. Deferred compensation will be paid 100% in cash, indexed to 110% of the CDI.
Deferral Program – 2014 and 2015
Our 2014 and 2015 deferral programs were divided in two programs:
• Collective Identified. Statutory officers and executives who take significant risks in Santander Brasil and are in charge of the control areas. Deferred compensation will be paid 50% in cash, indexed to 100% of the CDI, and 50% in Units.
• Collective Unidentified – Employees. Individuals eligible for this program include manager employees and certain of our employees. Deferred compensation will be paid 100% in cash, indexed to 100% of the CDI.
Local Long-Term Incentive Program
In the Local Long-Term Incentive Program, we have two plans for different beneficiaries, a stock option plan, or SOP, and a performance share plan, or PSP. The SOP is an option plan to purchase our Units for our top management, and the PSP is an incentive plan to compensate executives from all our areas. The objective of these plans is to retain our employees’ commitment to long-term results.
As of December 31, 2016, we incurred pro rata daily expenses of R$15.789 million, with respect to the SOP plan and R$9.798 million with respect to the PSP plan.
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Stock Option Plan – SOP
Our Stock Option Plan consists of three-year stock option plans to purchase our Units. The period for exercising the options is within two years of the vesting period. The volume equivalent to 40% of the Units resulting from the exercise of options cannot be sold by the participant during a period of one year from the exercise date. Plan participants must remain with us during the term of the plan in order to be eligible to exercise their options on their corresponding Units.
Incentive Plan Long-term – SOP 2013
On April 29, 2013, our shareholders approved the grant of the SOP 2013 plan, with an exercise period between June 30, 2016 and June 30, 2018. The number of Units exercisable by the participants was determined according to the total shareholder return, or “TSR” and reduced according to the result of the modifier return on risk-weighted assets, or “RoRWA,” based on a yearly comparison between realized and budgeted performance. The options issued under the plan have an option price of R$12.84 per Unit. Approximately 89.61% of the total number of Units available for delivery under the plan were delivered following the RoRWA-based adjustment described above once participants who lost the right to receive Units were excluded. On December 31, 2016, there were 2,216,479 outstanding options under the plan.
Performance Share Plan – PSP
Our PSP consists of share-based compensation, launched in a three-year cycle.
PSP – 2013
On April 29, 2013, our shareholders approved the PSP 2013 plan. Under this compensation plan, participants received 100% of the plan’s compensation in Units. The percentage of shares determined at the position of TSR may be reduced if the return on RoRWA is not achieved based on a comparison between realized and budgeted performance in each year, as determined by the board of directors. In July 2016, 1,512,966 Units were delivered, meaning that 89.61% of the total number of Units available under the plan were delivered following the RoRWA-based adjustment referred to in this paragraph.
Fair Value and Performance Parameters of SOP and PSP Plans
For the accounting of the local program’s plans, simulations were performed by an independent consultant, based on the Monte Carlo methodology, using the performance parameters used to calculate the shares to be granted. These parameters are associated with their respective probabilities of occurrence, which are updated at the closing of each period.
| TSR Ranking | SOP
and PSP 2013(1) | |||
| (% of Shares exercisable) | ||||
| 1 | 100 | % | ||
| 2 | 75 | % | ||
| 3 | 50 | % | ||
| 4 | 0 | % | ||
| (1) | The percentage of shares determined at the position of TSR is subject to reduction in accordance with the implementation of the reduction of Return on Risk-weighted Assets (RoRWA). |
Global Long-Term Incentive Program
First Long-Term Incentive Global Plan CRDIV – Grant 2014
In 2014, a long-term incentive plan was created for the overall group of executives included in the Collective Identified (“Global Plan CRDIV”). The indicator is used to measure the achievement of targets which will form a basis for comparison of the Total Shareholder Return (“TSR”) of the Santander Group with the TSR of the top 15 global competitors.
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The indicator is calculated in two stages: initially for program verification (2014) and subsequently in the annual payment of each installment (2015, 2016 and 2017).
For program verification purposes, the established achievement threshold is such that for 100% of the plan to be applied, it is necessary that the Santander Group be positioned above the average of global competitors, as shown below. This measurement will be performed considering the TSR between January and December 2014.
| TSR Position | % Applied | |||
| 1st to 8th | 100.0 | % | ||
| 9th to 12th | 50.0 | % | ||
| 13th to 16th | 0.0 | % | ||
For the payment of an installment of one third of the value determined, the TSR will be determined as shown below. The position of the Santander Group in the ranking of TSR will be measured considering the position accumulated until the year before each payment.
| TSR Position | % To Distribute | |||
| 1st to 4th | 100.0 | % | ||
| 5th | 87.5 | % | ||
| 6th | 75.0 | % | ||
| 7th | 62.5 | % | ||
| 8th | 50.0 | % | ||
| 9th to 16th | 0.0 | % | ||
Each executive has a target in reais, which was converted into shares of the Santander Group for a price of R$19.2893, which will be delivered in installments in 2016, 2017 and 2018, with a lock-up of one year after each delivery.
In the year ended December 31, 2016, there were no expenses related to the costs of the cycles of the first long-term incentive global program.
Second Long-Term Incentive Global Plan CRDIV – Grant 2015
In 2015, a second global long-term incentive plan was created for executives included in the Identified Collective (CRDIV Global Plan). The indicators that will be used to measure the attainment of the targets are presented below and will be used at two different stages: (i) to calculate the maximum target of each participant (2015-2016); and (ii) to calculate the amount of shares to be paid (2016, 2017 and 2018).
| 1. | RTA vs. Competitor |
| RTA
in 2015 ( % on the RTA 2015 budgeted) |
“Coefficient RTA 2015” | |
| ≥ 90% | 1 | |
| > 75% to < 90% | 0.75 – 1 (*) | |
| ≤ 75% | 0 |
| (*) | Linear increase of the RTA 2015 coefficient in function of the concrete percentage that the RTA 2015 represents on the budget of this scale line. |
| 2. | Rote Banco vs Budgeted |
| ROTE
in 2015 ( % on the ROTE 2015 budgeted) |
“Coefficient ROTE 2015” | |
| ≥ 90% | 1 | |
| > 75% to < 90% | 0.75 – 1 (*) | |
| ≤ 75% | 0 |
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| (*) | Linear increment of the ROTE 2015 coefficient in function of the concrete percentage that the ROTE 2015 represents on the budget of this scale line |
| 3. | Employees Satisfaction |
| Position among the best banks to work in 2017 | “Coefficient Employees” | |
| 1st to 3rd | 1 | |
| 4th or subsequent | 0 |
| 4. | Client satisfaction |
| Position among the best
banks according to client satisfaction index in 2017 |
“Coefficient Clients” | |
| 1st to 3rd | 1 | |
| 4th or subsequent | 0.5 – 1 (*) |
| 5. | Business bindings vs Budgeted |
| Clients
companies 1 and 2 linked (% on budget for the corresponding market) |
“Coefficient Companies” | |
| ≥ 100% | 1 | |
| > 90% and < 100% | 0.5 – 1 (*) | |
| ≤ 90% | 0 |
| (*) | Linear increment of the coefficient companies according to the concrete percentage, within these lines of each scale that the number of linked clients of each type represents on December 31, 2017 on the budgeted |
Each executive has a target in reais, which has been converted into Santander Group shares for a price of R$17.473 which will be delivered in 2019, with a lockup of one year after each delivery.
In the year ended December 31, 2016, “pro rata” expenses in an amount of R$8,873 million were recorded relating to costs on the respective dates of the cycles of the global program. The expenses related to the plans are recognized as “Other liabilities - Provision for share-based payments.”
Contract termination
Employment contracts have an undefined period. The termination of the employment relationship for non-fulfillment of obligations or voluntarily does not entitle executives to any financial compensation.
Pension and Retirement Benefits
Members of our board of directors and our executive officers may enroll in our retirement plan, SantanderPrevi, while they are affiliated with Santander Brasil. For further information on SantanderPrevi, please see “—D. Employees.”
| 6C. | Board Practices |
Our shareholders elect members of our board of directors at the Annual General Shareholders’ Meeting for two-year terms (members may be reelected). The board of directors appoints our Executive Officers for two-year terms (members may be reelected).
The current members of the board of directors were appointed during the Ordinary and Extraordinary Shareholders’ Meeting held on April 30, 2015 to serve until the Ordinary Shareholders’ Meeting to be held in 2017.
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The current Executive Officers were elected at the board of directors meetings held on May 28, 2015, August 26, 2015, December 7, 2015 and January 26, 2016, with terms of office until the first board of directors meeting occurring after the ordinary shareholders’ meeting to be held in 2017.
The board of directors meets regularly nine times a year and extraordinarily as often as required. The Executive Officers meet as often as required by the Chief Executive Officer or by the Executive Officer designated by him.
On January 26, 2016, our board of directors approved its Code of Regulations. Shareholders may access such code on the websites www.santander.com.br/ri and www.santander.com.br/acionistas, in the section entitled “Corporate Governance – Management – Regulations of the Board of Directors.”
Fiscal Council
According to Brazilian Corporate Law, the adoption of a permanent fiscal council by us as a publicly held company is voluntary. Our By-Laws provide for a nonpermanent fiscal council, which can be installed at the request of shareholders representing at least one-tenth of the voting shares or five percent of the nonvoting shares. Currently our fiscal council is not installed. The fiscal council is an independent body elected by shareholders to supervise the activities of managers and independent auditors. The responsibilities of the fiscal council are established by Brazilian Corporate Law and include oversight of management’s compliance with laws and By-Laws, the issuance of a report on the company’s annual and quarterly reports, certain matters submitted for shareholders’ approval, calling of shareholders’ meetings in some cases and reporting on specific matters arising at those meetings.
Board Advisory Committees
Audit Committee
According to Brazilian Central Bank regulations, an audit committee is a statutory board, separate from the board of directors, created by a shareholders’ resolution. The members of the audit committee may be members of the board of directors, provided that they meet certain independence requirements. All members of our audit committee meet such independence requirements. In addition, under Brazilian law, the function of hiring independent auditors is reserved for the board of directors. As a result, as specified in Section 3(a)(58) of the Exchange Act, our board of directors functions as our audit committee for the purpose of approving any engagement of our independent auditors for audit and non-audit services provided to our subsidiaries or to us. Except in these respects, our audit committee performs the functions of audit committees of U.S. companies. For more information see “Item 16D. Exemptions from the Listing Standards for Audit Committees.”
Our audit committee is composed of three to six members, elected by our board of directors, among persons, members of the board of directors and others, who meet all statutory and regulatory requirements for the exercise of their office, including any requirements to ensure their independent judgment who shall serve for a one-year term and may be reelected pursuant to applicable legislation for up to four consecutive times to a maximum five-year term of office. One of the members shall be designated as the audit committee’s coordinator, and at least one member must have proven knowledge in the areas of accounting and auditing (financial expert).
Our audit committee has as its main functions:
| · | to advise the board of directors on the engagement or replacement of the external auditor; |
| · | to assess the quality of the financial statements, the senior management reports, the explanatory notes and the independent auditor’s report, as well as other material financial information disclosed and sent to the regulatory bodies; |
| · | to evaluate the effectiveness of the independent and internal audits, including in regard to compliance with normative provisions applicable to us, in addition to internal regulation and codes; |
| · | to evaluate the fulfillment by our management of the recommendations made by the external or internal auditors; |
| · | to prepare, at the end of the six-month period ended on June 30 and December 31 every year, the report of the audit committee, meeting the applicable legal and regulatory provisions; and |
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| · | to receive and review the reports required by the regulatory bodies concerning the activities of the ombudsman, on the base dates of June 30 and December 31 or when a material event is identified. |
The current members of the audit committee are Luiz Carlos Nannini, who acts as financial expert and Elidie Palma Bifano, Celso Clemente Giacometti and René Luiz Grande, who each act as coordinator. Our audit committee meets twice a month. The current members of the audit committee were appointed on March 22, 2016 to serve until the first board meeting after the ordinary shareholders’ meeting to be held in 2017.
Set forth below are the biographies of the members of our audit committee:
René Luiz Grande. Mr. Grande is Brazilian and was born on April 19, 1953. He holds a degree in Economics from Pontificia Universidade Católica de São Paulo, and a specialization degree in National Financial System from Fundação Instituto de Administração. He was an employee of the Brazilian Central Bank, qualified by the public examination since June, 1975, and worked in the Supervision and Inspection Department of the National Financial System. During his career in the Brazilian Central Bank he served as an analyst from 1975 to 1978; technical assistant from 1978 to 1989; inspection supervisor from 1989 to 1999; head of the Banking Supervisory and Technical Department from 1999 to 2003, and deputy head of the Banking Supervisory and Financial Conglomerates Department from 2003 to 2011. Before working with the Brazilian Central Bank, he occupied the position of head of Human Resources with the Companhia Brasileira de Embalagens Metálicas BRASILATA from 1973 to 1975. Currently, Mr. Grande serves as Coordinator of the Audit Committee and is a member of the Risk and Compliance Committee of Santander Brasil.
Elidie Palma Bifano. Mrs. Bifano is Brazilian and was born on May 16, 1947. She holds a bachelor’s degree in Law and Social Sciences from the Faculdade de Direito da Universidade de São Paulo. She holds a specialization degree in Tax Law from Universidade de São Paulo and Pontifícia Universidade Católica de São Paulo and a Master’s Degree and a Doctorate in Tax Law from Pontifícia Universidade Católica de São Paulo. From 1974 to 2012 she worked at PricewaterhouseCoopers, where she served as a partner in the tax advisory department for more than 20 years. In June 2012, she became a partner at Mariz Oliveira e Siqueira Campos Advogados. She is also a professor of postgraduate studies at Universidade de São Paulo, Pontifícia Universidade Católica, Fundação Getúlio Vargas, Instituto Brasileiro de Estudos Tributários and Instituto Brasileiro de Direito Tributário, or “IBDT.” For more than 18 years she has been serving as Chief Financial Officer of the Brazil-Canada Chamber of Commerce. She is also a member of the IBDT’s Council and the International Tax Law Magazine’s Editorial Council, at Quartier Latin Publishing. She has been a member of the Audit Committee of Santander Brasil since 2012.
Luiz Carlos Nannini. Mr. Nannini is Brazilian and was born on January 2, 1960. He holds a degree in Accounting Sciences, with several specialization courses in Brazil and abroad, including a leadership course at Harvard. He has more than 30 years of experience in the conduct of independent audit services, including: the preparation of financial statements in accordance with IFRS and U.S. GAAP; due diligence; implementation of internal controls (including IT); corporate restructuring; tax planning and affairs; and participation in advisory councils in Brazil, the U.S. and globally.
Celso Clemente Giacometti. See “—Members of the Board of Directors.”
Compensation Committee
In compliance with regulations issued by the Brazilian Central Bank (specifically, CMN Resolution No. 3,921/2010 of November 25, 2010), on February 7, 2012 our shareholders established the compensation committee in our by-laws, which also acts as the compensation committee for certain of our affiliates and subsidiaries.
Our compensation committee is composed of three to five members, appointed by the board of directors from among persons who meet all statutory and regulatory requirements for the exercise of their office. At least one of the members cannot be an executive officer and the others may or may not be members of our board of directors, and at least two members shall be independent, pursuant to paragraph 3 of article 14, of our By-Laws. The compensation committee shall have in its composition qualified members with the experience required for the competent and independent judgment about our internal compensation policy and the repercussion of this internal compensation policy on the risk management. Such persons shall serve for a term of two years and may be reelected for up to four consecutive times, pursuant to applicable legislation.
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Our compensation committee has as its main functions:
| · | develop internal compensation policies applicable to our executive officers and makes proposals to our board of directors regarding policies for variable and fixed compensation, benefits, and special programs for recruiting and terminations; |
| · | to supervise the implementation and coming into operation of the compensation policy for Banco Santander’s management; |
| · | to propose to the board of directors the aggregate compensation of the Executive Officers and members of the audit committee to be submitted to the general meeting, pursuant to Article 152 of Brazilian Corporate Law; |
| · | to analyze our internal officer and board compensation policies and procedures in comparison with market practice, and recommends changes to align our policies with market practice if significant differences from market practice are identified; |
| · | to prepare annually, within ninety days as from December 31 of each year, the compensation committee report, in accordance with applicable statutory and regulatory provisions; and |
| · | to ensure that the internal officer compensation policy is compatible with our risk management rules, with performance targets and with our current and expected financial condition, and pursuant to the applicable regulatory provisions and regulations published by the Brazilian Central Bank. |
The current members of the compensation committee are Álvaro Antonio Cardoso de Souza (who acts as coordinator), Celso Clemente Giacometti, Deborah Patricia Wright and Luiz Fernando Sanzogo Giorgi. The current members of the compensation committee were appointed on May 28, 2015, December 15, 2016 and February 22, 2017 to serve until the first board of directors meeting occurring after the ordinary shareholders’ meeting to be held on 2017.
Set forth below are the biographies of the members of our compensation committee:
Álvaro Antonio Cardoso de Souza. See “—Members of the Board of Directors.”
Celso Clemente Giacometti. See “—Members of the Board of Directors.”
Deborah Patricia Wright. See “—Members of the Board of Directors.”
Luiz Fernando Sanzogo Giorgi. Mr. Giorgi is Brazilian and was born on September 3, 1964. He has a bachelors’ degree in Business Administration from Fundação Armando Alvares Penteado (FAAP) and over 26 years of experience in management. He started his career in 1982 at Price Waterhouse, where he worked until 1986, and, then at Embraer, where he worked between 1986 and 1989. From 1989 to 2003, he worked as a consultant and director at Hay Group, and from 2003 to 2005, he worked for the Suzano Group as a vice chairman of Suzano Holding. He was a member of the Management Committee of the Board of Directors of Suzano Papel e Celulose, Chief Executive Officer of Suzano Petroquímica, and a full member of the Board of Petroflex. In September of 2005, he founded LFG – Assessoria em Gestão Empresarial e Liderança. From 2007 to 2015, he served as a member of the Board of Directors of Santher S.A.; from 2007 to 2011, he served as a full member of the Board of Directors of J. Macedo Alimentos S.A.; in 2008, he served as a full member of the Board of Directors of Vix Logística S.A.; from 2007 to 2008, he served as a member of the HR Committee of the Board of Directors of Grupo Libra S.A.; and in 2013, he served as a member of the Board of Directors of Itautec S.A. Currently, he serves as a member of the Boards of Directors of Vonpar S.A. and Empresas Concremat. He is also a member of the Advisory Board of Heads Agencia De Propaganda and chairman of the Board of Directors of Teadit S.A. He holds the position of member of the HR Committees of Sul América Seguros S.A, Lojas Marisa S.A, and Martins Atacadista S.A. He is also a member of our Nomination and Governance Committee.
Risk and Compliance Committee
The risk and compliance committee is a consultative body, which has the responsibility of advising our board of directors on subjects related to the policies, operational directions and methodologies of capital allocation, risk management and exposure edges, according to the applicable law, as well as advising on compliance practices that
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enhance the management of Santander Brasil, regarding the transparency and the monitoring of the compliance functions of the company.
The risk and compliance committee is composed of three to five members, and at least two of these members must be independent. The term of office is of two years, re-election permitted, and the members may be removed at any time. The risk and compliance committee meetings are held at least four times a year or when extraordinarily convened by its coordinator.
The current members of the risk and compliance committee are Álvaro Antônio Cardoso de Souza (who acts as coordinator), Conrado Engel, José de Paiva Ferreira and René Luiz Grande. The current members of the risk and compliance committee were appointed on May 28, 2015 and January 23, 2017 to serve until the first board of directors meeting occurring after the ordinary shareholders’ meeting to be held in 2017.
Álvaro Antônio Cardoso de Souza. See “—Members of the Board of Directors.”
Conrado Engel. See “—Members of the Board of Directors.”
José de Paiva Ferreira. See “—Members of the Board of Directors.”
René Luiz Grande. See “—Audit Committee.”
Nomination and Governance Committee
The nomination and governance committee is a consultative body which is responsible for advising the board of directors on subjects related to the nomination and governance of Santander Brasil.
The committee is composed of three to five members, and at least two of these members must be independent. The term of office is of two years, re-election permitted, and the members may be removed at any time. The committee meetings are held at least four times a year or when extraordinarily convened by its coordinator.
The current members of the nomination and governance committee are Álvaro Antonio Cardoso de Souza (who acts as coordinator), Celso Clemente Giacometti, Deborah Patricia Wright and Luiz Fernando Sanzogo Giorgi. The current members of the nomination and governance committee were appointed on January 23, 2017 and February 22, 2017 to serve until the first board of directors meeting occurring after the ordinary shareholders’ meeting to be held in 2017.
Álvaro Antonio Cardoso de Souza. See “—Members of the Board of Directors.”
Celso Clemente Giacometti. See “—Members of the Board of Directors.”
Deborah Patricia Wright. See “—Members of the Board of Directors.”
Luiz Fernando Sanzogo Giorgi. See “—Compensation Committee.”
Sustainability Committee
The sustainability committee is a consultative body which is responsible for advising the board of directors on subjects relating to social and sustainable development issues, including the promotion of sustainable development and other social initiatives.
The committee is composed of three to five members, and at least two of these members must be independent. The term of office is of two years, re-election permitted, and the members may be removed at any time. The committee meetings are held at least four times a year or when extraordinarily convened by its coordinator.
The current members of the sustainability committee are José Luciano Duarte Penido (who also acts as coordinator), Gilberto Mifano and Viviane Senna Lalli. The current members of the sustainability committee were appointed on January 23, 2017 to serve until the first board of directors meeting occurring after the ordinary shareholders’ meeting to be held in 2017.
José Luciano Duarte Penido. See “—Members of the Board of Directors.”
Viviane Senna Lalli. See “—Members of the Board of Directors.”
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Gilberto Mifano. Mr. Mifano is Brazilian and was born on November 11, 1949. He has a degree in Business Administration, from the School of Business Administration of São Paulo of Fundação Getúlio Vargas. He is Independent Director of Cielo S.A. and Ambar S.A., and he is an independent member of TOTVS’s Audit Committee. He is also external consultant of the audit committee, Risk Management and Finance of Natura S.A. and partner counselor of PRAGMA Patrimônio Ltda. From 2006 to 2012 he was a Director, Vice-Chairman and Chairman of the board of directors of IBGC – Brazilian Institute of Corporate Governance. From 1994 to 2008, he was General Officer of BOVESPA – Bolsa de Valores de São Paulo and CBLC – Brazilian Clearing and Depository Company. During this period he was responsible, among other functions, for the creation of the New Market, the integration of the Brazilian stock exchanges, demutualization and IPO of BOVESPA. He then organized the merger of BOVESPA and BM&F when he was elected as the first Chairman of BM&FBOVESPA. At international level, for about eight years, he was part of the Executive Committees of WFE – World Federation of Exchanges and FIAB – Ibero-American Federation of Exchanges. Previously, he was executive and officer in banks and financial companies in Brazil in the areas of credit, planning, products and marketing.
Executive Committee
The Chief Executive Officer, Senior Vice President Executive Officers and Vice President Executive Officers make up the executive committee which examines policies for business management, operational support, human resources and capital allocation. It also deliberates on the main technological, infrastructure and services projects.
On December 31, 2016, we had 47,252 full-time, permanent employees. The following table presents the breakdown of our full-time, permanent employees at the date indicated.
| As of December 31, 2016 | ||||||||||||
| 2016 | 2015 | 2014 | ||||||||||
| Administrative employees | 10,256 | 9,884 | 8,976 | |||||||||
| Commercial areas employees | 36,996 | 40,140 | 40,333 | |||||||||
| Total | 47,252 | 50,024 | 49,309 | |||||||||
We provide a competitive benefits package, which contributes to the engagement, attraction and retention of our employees. To ensure competitiveness, we compare our annual benefit package to market practices and trends. Policies are developed and offered contemplating the needs of our employees. We also have a policy of providing continuous training to our employees, allowing them to hone their skills and create a more effective team, committed to the values of the group.
We have a profit sharing plan with our employees based on predetermined goals for our annual operating and financial results. As a result, if we meet or exceed certain goals, our employees can share in our financial performance. See “—B. Compensation.”
We also offer our employees a defined contribution pension plan where employees can choose to contribute part of their wages and to which we can also make contributions on behalf of such employees. This plan provides retirement benefits, and disability and death benefits. SantanderPrevi is the only pension plan currently open for new membership. Most of our current employees are registered with the SantanderPrevi plan. As of December 31, 2016, 42,982 participants were enrolled in that plan, making the total amount under management approximately R$3.088 billion. For additional information on our pension plans, see note 23 to our audited consolidated financial statements.
The Brazilian Banking Employees’ Union represents most of our employees. In the event of a potential conflict with our banking employees and/or the banking union, negotiations are conducted by the FENABAN. Each year, generally in September, all Brazilian banks have a collective negotiation period in which they revise salary structures. During this period, the Brazilian Banking Employees’ Union negotiates bank employees’ salaries within the scope of the Brazilian Banking Collective Agreement with the FENABAN. Negotiations pertaining to wages and salaries for 2017 have already been concluded and the levels of compensation agreed are consistent with market practice. Since the acquisition of our predecessor banks by our indirect shareholder Santander Spain, we have not suffered significant losses through strikes and our management believes it has good relations with our employees.
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| 6E. | Share Ownership |
The following table provides the names of our directors and executive officers who owned shares of Santander Brasil as of December 31, 2016.
| Shareholders | Common Shares |
Percentage
of Outstanding Common Shares |
Preferred Shares |
Percentage
of Outstanding Preferred Shares |
Percentage
of Total Share Capital |
|||||||||||||||
| Alexandre Grossmann Zancani | 15,710 | (1) | 15,710 | (1) | (1) | |||||||||||||||
| Alexandre Silva D’ Ambrósio | 16,166 | (1) | 16,166 | (1) | (1) | |||||||||||||||
| Amancio Acurcio Gouveia | 72,238 | (1) | 72,238 | (1) | (1) | |||||||||||||||
| Ana Paula Nader Alfaya | 37,117 | (1) | 37,118 | (1) | (1) | |||||||||||||||
| Andre de Carvalho Novaes | 30,187 | (1) | 30,187 | (1) | (1) | |||||||||||||||
| Angel Santodomingo Martell | 53,570 | (1) | 53,570 | (1) | (1) | |||||||||||||||
| Antonio Pardo de Santayana Montes | 125,881 | (1) | 125,881 | (1) | (1) | |||||||||||||||
| Carlos Rey de Vicente | 177,000 | (1) | 177,000 | (1) | (1) | |||||||||||||||
| Cassio Schmitt | 102,112 | (1) | 102,112 | (1) | (1) | |||||||||||||||
| Cassius Schymura | 59,987 | (1) | 59,987 | (1) | (1) | |||||||||||||||
| Celso Clemente Giacometti | 1 | (1) | 0 | (1) | (1) | |||||||||||||||
| Conrado Engel | 392,984 | (1) | 392,984 | (1) | (1) | |||||||||||||||
| Ede Ilson Viani | 74,190 | (1) | 74,190 | (1) | (1) | |||||||||||||||
| Felipe Pires Guerra de Carvalho | 201,977 | (1) | 201,977 | (1) | (1) | |||||||||||||||
| Flavio Tavares Valadão | 156,558 | (1) | 156,558 | (1) | (1) | |||||||||||||||
| Gilberto Duarte de Abreu Filho | 39,588 | (1) | 39,588 | (1) | (1) | |||||||||||||||
| Jean Pierre Dupui | 104,003 | (1) | 104,003 | (1) | (1) | |||||||||||||||
| João Guilherme de Andrade So Consiglio | 374,706 | (1) | 374,706 | (1) | (1) | |||||||||||||||
| Jose Alberto Zamorano Hernandez | 153,334 | (1) | 153,334 | (1) | (1) | |||||||||||||||
| José Antonio Álvarez Álvarez | 1 | (1) | 0 | (1) | (1) | |||||||||||||||
| José de Paiva Ferreira | 141,799 | (1) | 141,798 | (1) | (1) | |||||||||||||||
| José Roberto Machado Filho | 72,037 | (1) | 72,037 | (1) | (1) | |||||||||||||||
| Juan Sebastian Moreno Blanco | 85,514 | (1) | 85,514 | (1) | (1) | |||||||||||||||
| Luis Guilherme Matosso de Oliem Bittencourt | 18,421 | (1) | 18,421 | (1) | (1) | |||||||||||||||
| Luiz Masagao Ribeiro Filho | 52,451 | (1) | 52,451 | (1) | (1) | |||||||||||||||
| Manoel Marcos Madureira | 44,658 | (1) | 44,658 | (1) | (1) | |||||||||||||||
| Marcelo Malanga | 29,403 | (1) | 29,403 | (1) | (1) | |||||||||||||||
| Marcelo Zerbinatti | 48,515 | (1) | 48,515 | (1) | (1) | |||||||||||||||
| Marcio Aurelio de Nobrega(2) | 65,007 | (1) | 65,007 | (1) | (1) | |||||||||||||||
| Maria Eugênia Andrade Lopez Santos | 74,765 | (1) | 74,765 | (1) | (1) | |||||||||||||||
| Mario Adolfo Libert Westphalen | 18,894 | (1) | 18,894 | (1) | (1) | |||||||||||||||
| Nilton Sergio Silveira Carvalho | 40,790 | (1) | 40,790 | (1) | (1) | |||||||||||||||
| Rafael Bello Noya | 39,683 | (1) | 39,683 | (1) | (1) | |||||||||||||||
| Ramón Sanchez Díez | 63,841 | (1) | 63,841 | (1) | (1) | |||||||||||||||
| Reginaldo Antonio Ribeiro | 59,600 | (1) | 59,600 | (1) | (1) | |||||||||||||||
| Roberto de Oliveira Campos Neto | 282,926 | (1) | 282,926 | (1) | (1) | |||||||||||||||
| Robson de Souza Rezende | 19,208 | (1) | 19,208 | (1) | (1) | |||||||||||||||
| Ronaldo Wagner Rondinelli | 30,930 | (1) | 30,930 | (1) | (1) | |||||||||||||||
| Sergio Agapito Lires Rial | 120,986 | (1) | 120,986 | (1) | (1) | |||||||||||||||
| Sergio Gonçalves | 44,620 | (1) | 44,620 | (1) | (1) | |||||||||||||||
| Thomas Gregor Ilg | 94,365 | (1) | 94,365 | (1) | (1) | |||||||||||||||
| Ulisses Gomes Guimaraes | 23,434 | (1) | 23,434 | (1) | (1) | |||||||||||||||
| Vanessa de Souza Lobato Barbosa | 65,476 | (1) | 65,476 | (1) | (1) | |||||||||||||||
| Viviane Senna Lalli | 1 | (1) | 0 | (1) | (1) | |||||||||||||||
| Employees | 3,915,021 | 0.10 | % | 3,929,105 | 0.11 | % | 0.10 | % | ||||||||||||
| Total | 7,639,655 | 7,653,736 | ||||||||||||||||||
| (1) | Owns less than 0.01%. |
| (2) | No longer an officer. |
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Shares held by members of our board of directors and our officers do not have special voting rights in relation to shares held by our other shareholders.
For a description of our equity compensation plans, see “Item 6. Directors, Senior Management and Employees ––B. Compensation.”
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
| 7A. | Major Shareholders |
As of December 31, 2016, Santander Spain directly and indirectly through its subsidiaries, Grupo Empresarial Santander, S.L. and Sterrebeeck B.V., owned approximately 88.8% of our total capital stock (not including the shares held by Banco Madesant - Sociedade Unipessoal).
The following table presents the beneficial ownership of our common and preferred shares as of December 31, 2016.
| Principal Shareholders | Common Shares | Percentage
of Outstanding Common Shares | Preferred Shares | Percentage
of Outstanding Preferred Shares | Total
Shares (thousands) | Percentage
of Total Share Capital | ||||||||||||||||||
| (in thousands, except percentages) | ||||||||||||||||||||||||
| Sterrebeeck BV (4) | 1,809,583 | 46.99 | % | 1,733,644 | 46.70 | % | 3,543,227 | 46.85 | % | |||||||||||||||
| Grupo Empresarial Santander SL | 1,107,673 | 28.76 | % | 1,019,645 | 27.47 | % | 2,127,318 | 28.13 | % | |||||||||||||||
| Qatar Holding LLC (2) | 207,812 | 5.40 | % | 207,812 | 5.60 | % | 415,623 | 5.50 | % | |||||||||||||||
| Banco Santander, S.A. | 521,964 | 13.55 | % | 519,268 | 13.99 | % | 1,041,232 | 13.77 | % | |||||||||||||||
| Treasury Shares (1) | 25,786 | 0.67 | % | 25,786 | 0.69 | % | 51,572 | 0.68 | % | |||||||||||||||
| Banco Madesant | 950 | 0.02 | % | 950 | 0.03 | % | 1,900 | 0.03 | % | |||||||||||||||
| Employees (3) | 7,639 | 0.20 | % | 7,653 | 0.21 | % | 15,293 | 0.20 | % | |||||||||||||||
| Other minority shareholders | 169,564 | 4.40 | % | 197,354 | 5.32 | % | 366,917 | 4.85 | % | |||||||||||||||
| Total | 3,850,971 | 100.00 | % | 3,712,112 | 100.00 | % | 7,563,082 | 100.00 | % | |||||||||||||||
| (1) | On December 14, 2015, our shareholders approved the cancellation of 37,757,908 treasury shares (18,878,954 common shares and 18,878,954 preferred shares), with no consequent reduction in our capital stock. |
| (2) | The information provided is as of December 31, 2014, the date of the last available Schedule 13.G Form filed by Qatar Holding LLC with the SEC. |
| (3) | Includes members of senior management. See “—E. Share Ownership.” |
| (4) | An affiliate within the Santander Group. |
The total number of ADRs held by U.S. investors as of December 31, 2016, is 236,064,489. The total number of Units held by U.S. investors as of December 31, 2016, is 43,908,842 (excluding Units held by The Bank of New York Mellon as depositary).
Significant Changes in Percentage Ownership of Principal Shareholders
On April 29, 2014, Santander Spain, our indirect controlling shareholder, announced its intention to launch the Brazilian Exchange Offer and the U.S. Exchange Offer to acquire up to all of our shares that were not held by the Santander Group, which represented approximately 25% of our share capital, with payment in BDRs or ADRs representative of Santander Spain’s common shares.
On October 30, 2014, the Brazilian Exchange Offer and the U.S. Exchange Offer were concluded. As a result of these offers, the Santander Group’s shareholding increased to 88.3% of our total share capital at that time (not including the shares held by Banco Madesant - Sociedade Unipessoal). Also as a result of the offer in Brazil, our units were delisted from Level 2 Segment and are now traded at the basic listing segment of BM&FBOVESPA.
On December 14, 2015, our shareholders approved the cancellation of 37,757,908 shares held in treasury, representing 18,878,954 common shares and 18,878,954 preferred shares. Such treasury shares corresponded, as of
| 170 |
that date, to approximately 53.9% of the totality of the shares then held in treasury. As a result, as of December 31, 2015, we held 40,435,466 shares in treasury, of which 20,217,733 were common shares and 20,217,733 were preferred shares.
On December 31, 2016, we held 51,571,846 shares in treasury, of which 25,785,923 were common shares and 25,785,923 were preferred shares.
Subscription of Tier 1 and Tier 2 Notes
At a shareholders’ meeting held on November 1, 2013, as part of the plan for optimization of our capital structure, our shareholders approved: (i) the equity distribution to our shareholders as a result of a capital reduction, in the total amount of R$6 billion, with no reduction in the number of shares; (ii) the issuance abroad of debt instruments to compose our Tier 1 and Tier 2 regulatory capital; and (iii) a bonus share program and an adjustment in the composition of the Units, followed by a reverse share split (inplit), with the purpose of eliminating trading in cents.
The distribution of Tier 1 and Tier 2 Notes was finalized on January 29, 2014. We issued U.S.$1,247,712,527 aggregate principal amount of 7.375% Tier 1 Subordinated Perpetual Notes, and U.S.$1,247,712,527 aggregate principal amount of 6.000% Tier 2 Subordinated Notes due January 29, 2024. The Tier 1 and Tier 2 Notes were offered directly to the holders of our ADRs, as well as to the holders of our units, and our common and preferred shares.
Voting Rights of Principal Shareholders
Our principal shareholders do not have voting rights distinct from those of our other shareholders. See “Item 10. Additional Information—B. By-Laws—Rights of Common Shares and Preferred Shares.”
7B. Related Party Transactions
We have a documented policy with respect to related party transactions approved by the board of directors, which is intended to ensure that all transactions covered by the policy are conducted based on our interest and that of our shareholders. The policy defines the power to approve certain transactions by the board of directors. The rules are also applied to all our directors, senior management, employees and subsidiaries. Additionally, related party transactions are also included in the regular auditing program developed by our internal audit.
We currently engage in, and expect from time to time in the future to engage in, financial and commercial transactions with our subsidiaries and affiliates and those of the Santander Group. We have credit lines outstanding with the Santander Group and its affiliated financial institutions around the world. As of December 31, 2016, borrowings and deposits from the Santander Group represented approximately 2.0 % of our total funding. In addition, from time to time, we enter into certain transactions with the Santander Group and other related parties for the provision of advisory and advertising services. Such transactions are conducted at arm’s-length, based on terms that would have been applied for transactions with third parties.
The transactions and remuneration of services with related parties are made in the ordinary course of business on an arms’ length basis under similar conditions, including interest rates, terms and guarantees, and involve no greater risk than transactions with unrelated parties carried out in the ordinary course and have no other disadvantages. The following discussion describes all of our material related party transactions.
On December 17, 2013, we concluded the sale of our asset management business to an affiliate of Santander Spain, by way of disposal of all shares of Santander Brasil Asset. The sales price was R$2,243 million, generating a post-tax capital gain of R$1,205 million (after deducting costs). See “Item 5. Operating and Financial Review and Prospects—A. Operating Results—Factors Affecting the Comparability of Our Results of Operations—Sale of the Investment Fund Management and Managed Portfolio Operations.”
Information Technology Platform
We enter into certain agreements with some affiliates of the Santander Group (Ingeniería de Software Bancário S.L. (Spain), ISBAN S.A. (Chile), Produban Servicios Informáticos Generales S.L. (Spain), ISBAN S.A. (Brazil) and Produban Serviços de Informática S.A. (Brazil) for the outsourcing of certain products and services relating to
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our information technology platform, including software development, hosting and information processing. We believe the provisions of these services are provided on an arm’s-length basis with terms substantially similar to those available from other providers in the market. In 2016 and 2015, Santander Group affiliates received approximately R$761 million and R$729 million, respectively, for the products and outsourcing provided above. In addition, these affiliates are responsible for managing all third party technology contracts. See “Item 4. Company Information – B. General Business Vision – Technology and Infrastructure.”
Procurement Services
We have entered into agreements with Aquanima Brasil Ltda., an affiliate of the Santander Group, which offers procurement services (sourcing, e-procurement, outsourcing and consultancy) to Santander Brasil. Volume aggregation between Santander Brasil and other client companies allow for joint purchases for groups of different clients. The agreements entered into with Aquanima Brasil Ltda. were on an arm’s-length basis. We paid Aquanima Brasil Ltda. approximately R$25 million in 2016 and R$24 million in 2015.
Other Related Party Transactions
From time to time, we engage in lending and borrowing transactions to fund our operations and other miscellaneous transactions with various companies of the Santander Group, in compliance with restrictions on loans or advances imposed by Brazilian law. The following table shows the balances owed to us by such companies (assets) at each of December 31, 2016 and December 31, 2015 and the amounts owed by us to such companies (liabilities) at the same dates. The table also sets forth amounts received (income) or paid (expenses) to such companies for the year ended December 31, 2016 and December 31, 2015. All such transactions with Santander Group companies were conducted on an arm’s-length basis with terms substantially similar to those available from other providers in the market.
| As of December 31, 2016 | As of December 31, 2015 | |||||||||||||||||||||||
| Parent(1) | Jointly- controlled companies | Other
Related Party(2) | Parent(1) | Jointly- controlled companies | Other
Related Party(2) | |||||||||||||||||||
| (in thousands of R$) | ||||||||||||||||||||||||
| Assets | 10,919,116 | 794,800 | 556,248 | 23,245,276 | 954,190 | 805,572 | ||||||||||||||||||
| Trading derivatives, net | (184,304 | ) | — | (400,570 | ) | (265,491 | ) | — | (536,215 | ) | ||||||||||||||
| Santander Spain | (184,304 | ) | — | — | (265,491 | ) | — | — | ||||||||||||||||
| Abbey National Treasury Services Plc | — | — | (91,828 | ) | — | — | (156,976 | ) | ||||||||||||||||
| Real Fundo de Investimento Multimercado Santillana Crédito Privado | — | — | (308,742 | ) | — | — | (379,239 | ) | ||||||||||||||||
| Loans and amounts due from credit institutions–Cash and overnight operations in foreign currency | 10,900,941 | — | 94,530 | 23,248,821 | — | 136,634 | ||||||||||||||||||
| Santander Spain(3)(5) | 10,900,941 | — | — | 23,248,821 | — | — | ||||||||||||||||||
| Banco Santander Totta, S.A. | — | — | 1,261 | — | — | 1,303 | ||||||||||||||||||
| Abbey National Treasury Services Plc | — | — | 92,118 | — | — | 135,165 | ||||||||||||||||||
| Bank Zachodni. | — | — | 117 | — | — | 101 | ||||||||||||||||||
| Banco Santander, S.A. – México | — | — | 1,034 | — | — | 65 | ||||||||||||||||||
| Loans and other values with customers | — | 136,354 | 862,288 | — | 11,112 | 1,205,153 | ||||||||||||||||||
| Zurich Santander Brasil Seguros S.A. | — | — | 862,553 | — | — | 753,581 | ||||||||||||||||||
| Webmotors S.A. | — | 136,354 | — | — | 11,112 | — | ||||||||||||||||||
| Santander Brasil Gestão de Recursos Ltda. | — | — | (265 | ) | — | — | 186 | |||||||||||||||||
| BW Guirapá I S.A. | — | — | — | — | — | 451,386 | ||||||||||||||||||
| Loans and amounts due from credit institutions(1) | 25,546 | 656,806 | — | 26,414 | 940,236 | — | ||||||||||||||||||
| Santander Spain | 25,546 | — | — | 26,414 | — | — | ||||||||||||||||||
| Companhia de Crédito, Financiamento e Investimento RCI Brasil | — | — | — | — | 939,861 | — | ||||||||||||||||||
| Banco RCI Brasil S.A. (Current Company Name of Social da RCI Brasil Leasing) (8) | — | 656,806 | — | — | 375 | — | ||||||||||||||||||
| Other Assets | 176,933 | 1,640 | — | 235,532 | 2,842 | — | ||||||||||||||||||
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| As of December 31, 2016 | As of December 31, 2015 | |||||||||||||||||||||||
| Parent(1) | Jointly- controlled companies | Other
Related Party(2) | Parent(1) | Jointly- controlled companies | Other
Related Party(2) | |||||||||||||||||||
| (in thousands of R$) | ||||||||||||||||||||||||
| Santander Spain | 176,933 | — | — | 235,532 | — | — | ||||||||||||||||||
| Companhia de Crédito, Financiamento e Investimento RCI Brasil | — | — | — | — | 2,276 | — | ||||||||||||||||||
| Banco RCI Brasil S.A. (Current Company Name of Social da RCI Brasil Leasing) (8) | — | 1,640 | — | — | 566 | — | ||||||||||||||||||
| Liabilities | (11,984,199 | ) | (106,527 | ) | (1,222,556 | ) | (12,155,786 | ) | (255,330 | ) | (937,572 | ) | ||||||||||||
| Deposits from credit institutions | (327,466 | ) | (40,202 | ) | (980,702 | ) | (219,037 | ) | (37,796 | ) | (650,620 | ) | ||||||||||||
| Santander Spain(4) | (327,466 | ) | — | — | (219,037 | ) | — | — | ||||||||||||||||
| Santander Securities Services Brasil DTVM S.A. | — | — | (208,059 | ) | (219,037 | ) | — | — | ||||||||||||||||
| Santander Brasil Asset Management Distribuidora de Títulos e Valores Mobiliários S.A. | — | — | (12,079 | ) | — | — | (12,360 | ) | ||||||||||||||||
| Companhia de Crédito, Financiamento e Investimento RCI Brasil | — | — | — | — | (31,656 | ) | — | |||||||||||||||||
| Real Fundo de Investimento Multimercado Santillana Credito Privado | — | — | (757,874 | ) | — | — | (616,399 | ) | ||||||||||||||||
| Banco Santander, S.A. – Uruguay | — | — | (2,158 | ) | — | — | (20,533 | ) | ||||||||||||||||
| Banco RCI Brasil S.A. (Current Company Name of Social da RCI Brasil Leasing) (8) | — | (40,202 | ) | — | — | (6,140 | ) | — | ||||||||||||||||
| Others | — | — | (532 | ) | — | — | (1,328 | ) | ||||||||||||||||
| Marketable debt securities | — | — | — | (12,416 | ) | — | — | |||||||||||||||||
| Santander Spain (6) | — | — | — | (12,416 | ) | — | — | |||||||||||||||||
| Customer Deposits | — | (66,325 | ) | (189,794 | ) | — | (217,534 | ) | (285,870 | ) | ||||||||||||||
| ISBAN Brasil S.A | — | — | (22,232 | ) | — | — | (43,842 | ) | ||||||||||||||||
| Santander Securities Services Brasil DTVM S.A. | — | — | (52,484 | ) | — | — | (679 | ) | ||||||||||||||||
| Produban Serviços de Informática S.A. | — | — | (19,653 | ) | — | — | (29,993 | ) | ||||||||||||||||
| Zurich Santander Brasil Seguros e Previdência S.A. | — | — | (44,840 | ) | — | — | (109,506 | ) | ||||||||||||||||
| Santander Brasil Gestão de Recursos Ltda. | — | — | (39,361 | ) | — | — | (72,182 | ) | ||||||||||||||||
| Webmotors S.A. | — | (66,325 | ) | — | — | (217,534 | ) | — | ||||||||||||||||
| Others | — | — | (11,224 | ) | — | — | (29,668 | ) | ||||||||||||||||
| Other liabilities – Dividends and Bonuses Payable | (3,794,130 | ) | — | (16,494 | ) | (2,488,510 | ) | — | (705 | ) | ||||||||||||||
| Santander Spain | (589,227 | ) | — | — | (385,067 | ) | — | — | ||||||||||||||||
| Grupo Empresarial Santander S.L.(1) | (1,201,612 | ) | — | — | (788,119 | ) | — | — | ||||||||||||||||
| Santander Insurance Holding S.L. | — | — | — | (1,398 | ) | — | — | |||||||||||||||||
| Sterrebeeck B.V.(1) | (2,003,291 | ) | — | — | (1,313,926 | ) | — | — | ||||||||||||||||
| Banco Madesant – Sociedade Unipessoal S.A. | — | — | (1,075 | ) | — | — | (705 | ) | ||||||||||||||||
| Santusa Holding, S.L. | — | — | (15,419 | ) | — | — | - | |||||||||||||||||
| Other payables | (2,954 | ) | — | (35,566 | ) | — | — | (377 | ) | |||||||||||||||
| Santander Spain | (2,954 | ) | — | — | ||||||||||||||||||||
| Santander Brasil Asset Management Distribuidora de Títulos e Valores Mobiliários S.A. | — | — | (70 | ) | — | — | (68 | ) | ||||||||||||||||
| ISBAN Brasil S.A | — | — | (339 | ) | — | — | (309 | ) | ||||||||||||||||
| Santander Securities Services Brasil DTVM S.A. | — | — | (4,430 | ) | — | — | — | |||||||||||||||||
| Zurich Santander Brasil Seguros e Previdência S.A. | — | — | (30,684 | ) | — | — | — | |||||||||||||||||
| Others | — | — | (43 | ) | — | — | — | |||||||||||||||||
| Debt Instruments Eligible Capital | (7,859,649 | ) | — | — | (9,435,823 | ) | — | — | ||||||||||||||||
| Santander Spain (2)(7) | (7,859,649 | ) | — | — | (9,435,823 | ) | — | — | ||||||||||||||||
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| (*) | All loans and amounts to related parties were made in our ordinary course of business and on sustainable basis, including interest rates and collateral and did not involve more than the normal risk of collectability or present other unfavorable features. |
| (1) | Santander Brasil is indirectly controlled by Santander Spain and, through its subsidiaries Grupo Empresarial Santander and S.L. Sterrebeeck B.V. |
| (2) | Refers to the subsidiaries of Santander Spain. |
| (3) | In December 31, 2016, refers to the cash of R$582,571 (2015 – R$1,866,683, and 2014 – R$410,193). |
| (4) | As of December 31, 2016, refers to raising funds through international financing operations amounting to R$327,466 (2015 - R$219,037 and 2014 - R$416,969), with maturity until November, 2017 and interest between 0.56% and 12.95%p.a. |
| (5) | On December 31, 2016, refers to investments in foreign currency maturing on January 3, 2017 in the amount of R$10,269,812 (2015 - R$20,699,539 and 2014 - R$10,663,319) and interest of 0.68% p.a. held at Santander Establishment Credit Financial, Santander Brasil and our Grand Cayman Branch. |
| (6) | Refers to issuances of Eurobonds of Santander Brasil’s Grand Cayman Branch, maturing between January 16, 2016 and February 13, 2017 and interest of 3.152% p.a. and 4.625% p.a. |
| (7) | Refers to the portion acquired by the controlling shareholder with the PR Optimization Plan held in the first half of 2014. |
| (8) | In February, 2016 the Cia de Crédito, Financiamento e Investimentos Renault was acquired by Banco RCI Brasil S.A. |
As of December 31, 2016 | As of December 31, 2015 | |||||||||||||||||||||||
Parent(1) | Joint-controlled | Other Related– | Parent(1) | Joint–controlled | Other Related– | |||||||||||||||||||
| (in thousands of R$) | ||||||||||||||||||||||||
| Income | (798,022 | ) | 136,111 | 1,197,489 | (761,189 | ) | 189,182 | 2,509,524 | ||||||||||||||||
| Interest and similar income—Loans and amounts due from credit institutions | 39,677 | 114,909 | 396 | 31,930 | 163,684 | 104 | ||||||||||||||||||
| Santander Spain | 39,677 | — | — | 31,930 | — | — | ||||||||||||||||||
| Abbey National Treasury Services Plc | — | — | 396 | — | — | 104 | ||||||||||||||||||
| Banco RCI Brasil S.A. (Current Company Name of Social da RCI Brasil Leasing) (6) | — | 114,909 | — | — | 163,684 | — | ||||||||||||||||||
| Interest expenses and similar charges—Deposits from customers | (4,192 | ) | (26,996 | ) | (49,420 | ) | — | (25,330 | ) | (28,508 | ) | |||||||||||||
| ISBAN Brasil S.A | — | — | (3,560 | ) | — | — | (7,841 | ) | ||||||||||||||||
| Produban Serviços de Informática S.A. | — | — | (2,117 | ) | — | — | (3,752 | ) | ||||||||||||||||
| Webmotors S.A | — | (26,996 | ) | — | — | (25,330 | ) | — | ||||||||||||||||
| Santander Brasil Gestão de Recursos Ltda. | — | — | (12,417 | ) | — | — | (14,302 | ) | ||||||||||||||||
| Santander Spain | (4,192 | ) | — | — | — | — | — | |||||||||||||||||
| Santander Cultural | — | — | (11 | ) | — | — | — | |||||||||||||||||
| Real Fundo de Investimento Multimercado Santillana Credito Privado | — | — | (31,097 | ) | — | — | — | |||||||||||||||||
| Others | — | - | (218 | ) | — | — | (2,613 | ) | ||||||||||||||||
| Interest expenses and similar charges—Deposits from credit institutions | (512 | ) | (10,959 | ) | (115,458 | ) | (311 | ) | (1,447 | ) | (89,636 | ) | ||||||||||||
| Santander Spain | (512 | ) | — | — | (311 | ) | — | — | ||||||||||||||||
| Banco RCI Brasil S.A. (Current Company Name of Social da RCI Brasil Leasing) (6) | — | (10,959 | ) | — | — | (1,447 | ) | — | ||||||||||||||||
| Real Fundo de Investimento Multimercado Santillana Credito Privado | — | — | (88,467 | ) | — | — | (15,584 | ) | ||||||||||||||||
| Santander Securities Services Brasil DTVM S.A. | — | — | (20,979 | ) | — | — | (71,939 | ) | ||||||||||||||||
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| As of December 31, 2016 | As of December 31, 2015 | |||||||||||||||||||||||
| Parent(1) | Joint-controlled companies | Other
Related– Party(2) | Parent(1) | Joint–controlled companies | Other
Related– Party(2) | |||||||||||||||||||
| (in thousands of R$) | ||||||||||||||||||||||||
| Santander Asset Management, S.A. SGIIC | — | — | (1,760 | ) | — | — | (2,113 | ) | ||||||||||||||||
| Santander Securities | — | — | (4,119 | ) | — | — | — | |||||||||||||||||
| SAM Brasil Participações | — | — | (133 | ) | ||||||||||||||||||||
| Fee and commission income (expense) | 5,334 | 20,133 | 1,955,255 | (8,022 | ) | 21,376 | 1,889,138 | |||||||||||||||||
| Santander Spain | 5,334 | — | — | (8,022 | ) | — | — | |||||||||||||||||
| Companhia de Crédito, Financiamento e Investimento RCI Brasil | — | — | — | — | 16,579 | — | ||||||||||||||||||
| Banco RCI Brasil S.A. (Current Company Name of Social da RCI Brasil Leasing) (6) | — | 19,211 | — | — | 3,863 | — | ||||||||||||||||||
| Banco Santander Internacional | — | — | 20,959 | — | — | 8,804 | ||||||||||||||||||
| Santander Securities | — | — | 1,896 | — | — | — | ||||||||||||||||||
| Webmotors S.A. | — | 922 | — | — | 934 | — | ||||||||||||||||||
| Zurich Santander Brasil Seguros S.A. | — | — | 218,773 | — | — | 248,824 | ||||||||||||||||||
| Zurich Santander Brasil Seguros e Previdência S.A. | — | — | 1,711,138 | — | — | 1,626,288 | ||||||||||||||||||
| Others | — | — | 2,489 | — | — | 5,222 | ||||||||||||||||||
| Gains (losses) on financial assets and liabilities (net) and Exchange differences (net) | (613,168 | ) | 39,024 | 267,983 | (406,523 | ) | 30,899 | 953,678 | ||||||||||||||||
| Santander Spain | (613,168 | ) | — | — | (406,523 | ) | — | — | ||||||||||||||||
| Santander Benelux, S.A., N.V. | — | — | — | — | — | 424,182 | ||||||||||||||||||
| Real Fundo de Investimento Multimercado Santillana Crédito Privado | — | — | 257,475 | — | — | 602,557 | ||||||||||||||||||
| Abbey National Beta Investments Limited | — | — | 38,274 | — | — | (88,881 | ) | |||||||||||||||||
| Banco RCI Brasil S.A. (Current Company Name of Social da RCI Brasil Leasing) (6) | — | 39,024 | — | — | 30,899 | — | ||||||||||||||||||
| Santander Securities | — | — | (16,038 | ) | — | — | — | |||||||||||||||||
| Santander Investment Securities Inc. | — | — | (15,115 | ) | — | — | — | |||||||||||||||||
| Others | — | — | 3,387 | — | — | 15,820 | ||||||||||||||||||
| Administrative expenses and amortization | — | — | (840,739 | ) | — | — | (982,135 | ) | ||||||||||||||||
| ISBAN Brasil S.A. | — | — | (290,430 | ) | — | — | (406,662 | ) | ||||||||||||||||
| Produban Serviços de Informática S.A. | — | — | (209,253 | ) | — | — | (205,137 | ) | ||||||||||||||||
| ISBAN Chile S.A. | — | — | (26 | ) | — | — | (1,024 | ) | ||||||||||||||||
| Ingeniería de Software Bancario, S.L. | — | — | (42,519 | ) | — | — | (57,293 | ) | ||||||||||||||||
| Produban Servicios Informáticos Generales, S.L | — | — | (21,525 | ) | — | — | (22,834 | ) | ||||||||||||||||
| TECBAN—Tecnologia Bancária S.A. | — | — | (213,194 | ) | — | — | (160,563 | ) | ||||||||||||||||
| Konecta Brazil Outsourcing Ltda. | — | — | — | — | — | (98,492 | ) | |||||||||||||||||
| Aquanima Brasil Ltda. | — | — | (24,557 | ) | — | — | (24,075 | ) | ||||||||||||||||
| Santander Securities | — | — | (35,882 | ) | — | — | — | |||||||||||||||||
| Others | — | — | (3,353 | ) | — | — | (6,055 | ) | ||||||||||||||||
| Others Administrative expenses—Donation | — | — | (20,528 | ) | — | — | (18,071 | ) | ||||||||||||||||
| Santander Cultural | — | — | (2,737 | ) | — | — | (3,231 | ) | ||||||||||||||||
| Fundação Santander | — | — | (3,452 | ) | — | — | (3,500 | ) | ||||||||||||||||
| Instituto Escola Brasil | — | — | (939 | ) | — | — | (1,140 | ) | ||||||||||||||||
| Fundação Sudameris | — | — | (13,400 | ) | — | — | (10,200 | ) | ||||||||||||||||
| Gains (losses) on non-current assets held for sale not classified as discontinued operations | — | — | — | — | — | 784,954 | ||||||||||||||||||
| Capital Riesgo Global, SCR (Espanha) (3) | — | — | — | — | — | 34,404 | ||||||||||||||||||
| Santander Securities Services Brasil Participações S.A. (4) | — | — | — | — | — | 750,555 | ||||||||||||||||||
| Debt Instruments Eligible Capital | (225,161 | ) | — | — | (378,263 | ) | — | — | ||||||||||||||||
| Santander Spain (2) (5). | (225,161 | ) | — | — | (378,263 | ) | — | — | ||||||||||||||||
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| (1) | Santander Brasil is indirectly controlled by Santander Spain and, through its subsidiaries Grupo Empresarial Santander and S.L. Sterrebeeck B.V. |
| (2) | Refers to the subsidiaries of Santander Spain. |
| (3) | Refers to the profit on disposal of MS Participações S.A. |
| (4) | Refers the profit on disposal of Santander Brasil Asset Management Distribuidora de Títulos e Valores Mobiliários S.A. |
| (5) | Refers the profit on disposal of Santander Securities Services Brasil DTVM S.A. |
| (6) | In February, 2016 the Cia de Crédito, Financiamento e Investimentos Renault was acquired by Banco RCI Brasil S.A. |
| 7C. | Interests of Experts and Counsel |
Not applicable.
| 8A. | Consolidated Statements and Other Financial Information |
Consolidated Financial Statements
See “Item 18. Financial Statements,” which contains our audited consolidated financial statements prepared in accordance with IFRS as issued by the IASB.
Legal Proceedings
We are a party to lawsuits and administrative proceedings incidental to the normal course of our business. The main categories of lawsuits and administrative proceedings to which we are subject include:
| · | administrative and judicial actions relating to taxes; |
| · | administrative and indemnification suits for damages related to consumer rights, in particular with respect to credit cards, checking accounts, collection and loan disputes; |
| · | lawsuits involving disputes related to contracts and instruments to which we are a party, including claims related to breach of contracts and foreign currency indexation; |
| · | civil lawsuits mainly from depositors and civil associations, including individual lawsuits and class actions, challenging monetary adjustments determined by government economic plans instituted to combat inflation during the 1980s and 1990s; |
| · | lawsuits relating to the privatization of Banespa; |
| · | class actions involving agreements and settlement of debts with the public sector; and |
| · | suits brought by employees, former employees, associations and unions relating to alleged labor rights violations. |
In accordance with IAS 37 – Provisions, Contingent Liabilities and Contingent Assets, we record provisions for administrative and judicial proceedings in which we assess the risk of loss to be probable and we do not record provisions when the risk of loss is possible or remote. In cases where there is ongoing litigation, we record a provision for our estimate of the probable loss based on historical data for similar claims. In addition, we record provisions (i) on a case-by-case basis based on the analysis and legal opinion of internal and external counsel or (ii) by considering the historical average amount of loss of such category of lawsuits. Due to the established provisions and the legal opinions provided by our counsel, we believe that any liabilities related to lawsuits or proceedings to which we are a party, both individually and in the aggregate, will not have a material adverse effect on our financial condition or results of operations.
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As of December 31, 2016, our judicial and administrative proceedings classified as probable loss risk (tax, labor and civil) and legal obligation amounted to approximately R$13.4 billion and have been provisioned. We believe that we have made adequate provisions related to the costs anticipated to be incurred in connection with our judicial and administrative proceedings. Our judicial and administrative proceedings classified as possible loss risk (tax, labor and civil) amounted to approximately R$19.9 billion.
Tax Litigation
We are a party to several tax-related lawsuits and judicial and administrative proceedings.
The main lawsuits related to tax legal obligations fully recognized as obligation are:
| · | PIS/COFINS. We filed lawsuits seeking to invalidate the provisions of Law 9,718/98, pursuant to which PIS and COFINS taxes must be levied on all revenues of legal entities. Prior to the enactment of such provisions, which have been overruled by recent Supreme Court decisions for non-financial institutions, PIS and COFINS were levied only on revenues from services and sale of goods. On April 23, 2015, the Supreme Court issued a decision, applicable solely to Santander Brasil, accepting jurisdiction over the appeal regarding PIS and rejecting jurisdiction over the appeal related to COFINS. The tax authorities appealed the decision of the Supreme Court related to COFINS and their appeal was denied on August 19, 2015. In respect of COFINS, the case is finished. The appeal related to PIS, as well as the appeals submitted by other companies in the group, are pending. As of December 31, 2016, such claims amounted to R$3,291 million and are fully provisioned. |
| · | Tax rate increase of CSLL. We filed for an injunction to avoid the increase in the CSLL tax rate established by Law 11,727/2008. Financial institutions were formerly subject to a CSLL tax rate of 9.0%; however, this Law established a 15.0% CSLL tax rate as from April 2008. Judicial proceedings are pending judgment. As of December 31, 2016, the amount related to this injunction totaled R$852 million, which is fully provisioned. |
As of December 31, 2016, our probable loss risk for tax litigation amounted to approximately R$2.5 billion fully provisioned and our possible loss risk for tax litigation amounted to approximately R$18.6 billion.
The main judicial and administrative proceedings to which probable loss risk assessment relates are:
| · | Equal tax treatment. We filed a lawsuit challenging the application of an increased Social Contribution on Net Income (Contribuição Social sobre o Lucro Líquido) or “CSLL” rate of 18.0% for financial institutions, applicable until 1998, compared to the CSLL rate of 8.0% for non-financial institutions on the basis of the constitutional principle of equal tax treatment. As of December 31, 2016, the amount related to this claim totaled R$54 million, which is fully provisioned. |
| · | Tax on services for financial institutions. Certain municipalities levy Service Tax (Imposto Sobre Serviços – ISS) on certain revenues derived from transactions not usually classified as the rendering of services. In such cases, we have argued in administrative and judicial proceedings against the payment of ISS. As of December 31, 2016, amounts related to these proceedings totaled R$621 million, which are fully provisioned. |
| · | Social security contribution. We are involved in administrative and judicial proceedings regarding the collection of income tax on social security and education allowance contributions, as we believe that these benefits do not constitute salary. As of December 31, 2016, amounts related to these proceedings totaled R$266 million, which are fully provisioned. |
| · | Taxes on banking transactions. In May 2003, the Federal Revenue Service issued a tax assessment against Santander Distribuidora de Títulos e Valores Mobiliários Ltda. (Santander DTVM) and another tax assessment against Santander Brasil. The tax assessments refer to the collection of CPMF (Contribuição Provisória sobre Movimentação Financeira) tax on transactions conducted by Santander DTVM in the cash management of its customers’ funds and clearance services provided by Santander Brasil to Santander DTVM in 2000, 2001 and 2002. Based on our tax advisors’ opinion, the procedures adopted by Santander DTVM were correct. Santander Brasil DTVM succeeded in the first instance in its proceeding before the |
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| tax appeals board, but this decision was overturned in the Superior Chamber of Tax Appeals, and we were found liable for the tax assessment. Both decisions were appealed before the Board of Tax Appeals (Conselho Administrativo de Recursos Fiscais), or “CARF.” In June 2015, the CARF upheld the decision of the Superior Chamber of Tax Appeals. On July 3, 2015, Santander Brasil and Produban Serviços de Informática S.A. (current name of Santander DTVM) filed a lawsuit requesting the cancellation of both tax assessments and the amount as of December 31, 2016 totaled R$1,382 million. Based on the assessment of legal counsel, a provision of R$690 million was made to cover the probable risk of loss in these proceedings. |
Contingent liabilities classified as possible risk of loss refer to judicial and administrative proceedings involving tax matters assessed by the management taking in account the advice of our legal counsels, as possible losses, which were not recognized as liabilities. The main lawsuits include:
| · | Losses on loans. We have challenged the tax assessments issued by the Brazilian Federal Revenue Service claiming that our deduction of losses on loans from our corporate income tax (Imposto de Renda das Pessoas Jurídicas – IRPJ) and CSLL (Contribuição Social sobre o Lucro Líquido) bases have not met the relevant requirements under applicable law. As of December 31, 2016 the amount related to this challenge was approximately R$730 million. |
| · | Social Security Contribution – Profit Sharing Payments (Participação nos Lucros e Resultados, or “PLR”). We are involved in administrative and judicial proceedings arising from tax assessment with respect to the collection of social security contributions on profit sharing payments. The tax authorities claim that payments by us were not made in accordance with law. We have appealed against these infraction notices, since we consider the tax treatment to be appropriate based on applicable law and the nature of the payments. As of December 31, 2016 amounts related to these infraction notices totaled approximately R$2,978 million. |
| · | IRPJ and CSLL – Capital Gain. The Brazilian Federal Revenue Service issued a tax assessment against Santander Seguros (legal successor of ABN AMRO Brasil Dois Participações S.A. (AAB Dois Par)) charging income tax and social contribution related to the 2005 fiscal year. The Brazilian Federal Revenue Service claims that the capital gain on the sale of Real Seguros S.A. and Real Vida e Previdência S.A. by AAB Dois Par should be paid at a 34.0% tax rate instead of 15.0%. The assessment was appealed at the administrative level based on our understanding that the tax treatment adopted in the transaction was in compliance with the current tax law and the capital gain was properly taxed. The administrative process is set for trial. We are responsible for any adverse outcome in this process as a former controlling shareholder of Zurich Santander Brasil Seguros e Previdência S.A. As of December 31, 2016 the amount related to this proceeding was approximately R$279 million. |
| · | Goodwill amortization of the acquisition of Banco Real. In October 2014 the Brazilian Federal Revenue Service issued a tax assessment against Santander Brasil in the amount of R$1,063 billion, claiming income tax and social contribution relating to the 2009 tax year. The argument of the Brazilian Federal Revenue Service is that the amortization of goodwill arising before our merger with Banco Real cannot be deducted. On July 14, 2015, we obtained a judgment in our favor in the first instance. The Federal Revenue Service filed an ex officio appeal against the favorable decision granted to Santander Brasil. The CARF granted the appeal filed by the Federal Revenue Service. Santander Brasil filed a motion for clarification against this decision which is pending judgment. As of December 31, 2016 the amounts related to this proceeding totaled approximately R$1.2 billion. This case is classified as possible risk of loss concerning the amortization of goodwill and as remote loss in relation to the fine charged in the case. |
| · | Goodwill amortization of the acquisition of Banco Sudameris. In November 2014, we received a tax assessment of R$196 million related to the deduction of goodwill amortization relating to the acquisition of Banco Sudameris. In December 2012, we received a similar tax assessment in the amount of R$239 million relating to the fiscal years encompassing August 2007 to April 2009. We have appealed in both cases to the CARF. We consider our risk of loss in this case as possible. As of December 31, 2016 the amount related to this proceeding was approximately R$568 million. |
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Labor Litigation
Similar to many other Brazilian banks, we are party to lawsuits brought by labor unions, associations and individual employees seeking, in general, compensation for overtime work, lost wages and retiree complaints about pension benefits and other labor rights. We believe we have either paid or adequately provisioned for all such potential liabilities. In addition, we are defendants in labor lawsuits filed by third-party employees that rendered or render services to us through service providers. Brazilian courts understand that if a third-party service provider fails to pay its employee, the employee has the right to demand payment directly from the company to which it rendered its services. As of December 31, 2016, our probable loss risk of labor-related litigation amounted to R$3.1 billion, which amount has been provisioned. Our possible loss risk of labor-related litigation amounted to R$15 million.
Former employees of Banco do Estado de São Paulo S.A.:
| · | A claim was filed in 1998 by the association of retired Banespa employees (AFABESP) on behalf of its members, requesting the payment of a half-yearly bonus initially envisaged in the entity’s by-laws in the event that the entity obtained a profit and that the distribution of this profit were approved by the board of directors. The bonus was not paid in 1994 and 1995 since the bank did not make a profit during those years. Partial payments were made from 1996 to 2000, as approved by the board of directors. The relevant clause in the by-laws was eliminated in 2001. The Regional Employment Court ordered the bank to pay this half-yearly bonus in September 2005 and the bank filed an appeal against the decision with the High Employment Court (“TST”) and, subsequently, with the STF. The TST confirmed the judgment against the bank, whereas the STF rejected the extraordinary appeal filed by the bank in a decision adopted by only one of the Court members, thereby also upholding the order issued to the bank. This decision was appealed by the bank and AFABESP. Only the appeal lodged by the bank has been allowed leave to proceed and will be decided upon by the STF in plenary session. The contingent liabilities are classified as possible risk of loss. The amount related to this claim is not disclosed due to the current stage of the lawsuit and the possible impact such disclosure may have on the progress of the claim. |
| · | A claim was filed in 2002 by AFABESP on behalf of its members requesting that certain pension supplements to which persons admitted to the relevant retirement plan prior to May 22, 1975 be adjusted pursuant to the IGP-DI index (Índice Geral de Preços - Disponibilidade Interna). The first instance judgment was favorable to the plaintiffs, requiring that the correction be made but only in the periods in which no other form of adjustment was applied. We and Banesprev have appealed this decision. The contingent liabilities are classified as possible risk of loss. The amount related to this action is not disclosed due to the current stage of the process and the possible impact that such disclosure may generate on the progress of the action. |
Civil Litigation
We are a party to civil lawsuits claiming damages and other civil remedies. These disputes normally fall within one of the following categories typical for Brazilian banks: (i) actions requesting the review of contractual terms and conditions or seeking monetary adjustments, including the alleged effects of implementation of certain economic government plans (as described below); (ii) actions arising from loan agreements; (iii) execution actions; and (iv) actions seeking damages. As of December 31, 2016, our probable loss risk in connection with civil litigation liabilities amounted to R$1.8 billion, which has been provisioned in full and our possible loss risk in connection with civil litigation liabilities amounted to R$1.2 billion. For civil lawsuits considered to be common and similar in nature, the provisions are recorded based on statistically averaged previous payments, and on the legal counsel’s evaluation of success. Provisions for other lawsuits are determined individually on a case-by-case basis.
Economic Plans
Like the rest of the banking system, we have been the subject of claims from customers, mostly depositors, and of class actions brought for a common reason, arising from a series of legislative changes relating to the calculation of inflation in the 1980s and 1990s (“planos econômicos”). The claimants considered that their vested rights had been impaired due to the immediate application of these adjustments. In April 2010, the High Court of Justice (“STJ”) set a limitation period for these class actions at five years, as claimed by the banks, rather than twenty years, as sought by the claimants, which we believe should significantly reduce the number of actions brought and the amounts claimed in this connection. As regards the substance of the matter, the decisions issued to date have been
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adverse for the banks, although some proceedings have been brought at the STJ and the STF with which the matter is expected to be definitively settled. In August 2010, STJ handed down a decision finding for the plaintiffs in terms of substance, but excluding one of the “planos” from the claim, thereby reducing the amount thereof, and once again confirming the five-year statute of limitations period. Shortly thereafter, the STF issued an injunctive relief order whereby the proceedings in progress in this connection were stayed until the court issues a final decision on the matter. In spite of the fact that STF initiated judgment in November 2013, a formal ruling has not been handed down as of the date hereof and we cannot predict when a formal ruling will be handed down by either the STJ or the STF.
Insilene Indústria de Silenciosos do Nordeste Ltda.
This is a judicial claim filed against our wholly-owned subsidiary Bandepe S.A. Bank (“Bandepe”) in connection with a loan agreement entered into between Bandepe and Insilene Indústria de Silenciosos do Nordeste Ltda. (“Insilene”). According to the complaint, Bandepe never provided the loan established on the agreement, which led Insilene to bankruptcy. In this judicial process, the judge ruled in favor of Insilene and such decision already became unappealable. The proceeding is in its liquidation phase, and there is disagreement between Bandepe and Insilene regarding the value to be paid. The Court of Justice of the State of Pernambuco approved the amount indicated in the expert's report and denied the calculation criteria sustained by Bandepe. However, in light of the criteria used by the expert in its calculations, the controversy was referred to the STJ to review the prior judicial decision. Such court’s decision has not been issued as of the date of this report. We estimate the risk of loss as possible.
Fundo de Investimento em Direitos Creditórios Trendbank Banco de Fomento – Multisetorial.
A legal proceeding was filed against us in connection with the provision of custody services to Fundo de Investimento em Direitos Creditórios Trendbank Banco de Fomento – Multisetorial (the “Fund”) related to the acquisition of fake or defective bonds. In a decision by the first instance court, the case was dismissed in relation to us on the grounds that the custodian could not be held responsible for the acquisition of bonds. The procedure will continue in relation to other defendants. The Fund may file an appeal against the first instance court’s decision to the Court of Justice of the State of São Paulo. We estimate the risk of loss as possible.
Camargo Corrêa S.A. and Camargo Corrêa Administração e Participações Ltda.
We filed a judicial proceeding along with certain affiliates of ours against Camargo Corrêa S.A. and Camargo Corrêa Administração e Participações Ltda. (“Camargo Corrêa”) in connection with the association agreement entered into for the implementation of the control and administration of Banco Geral do Comércio S.A. (“BGC”) and its affiliates (“Association Agreement”). Under this proceeding the plaintiffs seek compensation for damages arising from obligations originated from events which took place before the signature of the Association Agreement which only were revealed to the parties after the implementation of the terms of such agreement and we (along with our affiliates) assumed BGC’s management. In response, Camargo Corrêa filed a counterclaim arguing to be our creditor. The judge ruled partially against our affiliates and us. In an appeal decision, the Court of Justice of the State of São Paulo (TJSP) reversed the decision in full, following grounds and granting the compensation claimed by us and our affiliates. We estimate the risk of loss as possible.
Other Litigation
In addition to the matters described above, we are from time to time subject to certain claims and party to certain legal proceedings incidental to the normal course of our business, including in connection with our lending activities, relationships with our employees and other commercial or tax matters. In view of the inherent difficulty of predicting the outcome of legal matters, particularly where the claimants seek very large or indeterminate damages, or where the cases present novel legal theories, or those that involve a large number of parties or are in the early stages of discovery, we cannot state with confidence what the eventual outcome of these pending matters will be, what the timing of the ultimate resolution of these matters will be or what the eventual loss, fines or penalties related to each pending matter may be. We believe that we have made adequate provisions related to the costs anticipated to be incurred in connection with these various claims and legal proceedings and believe that liabilities related to such claims and proceedings should not have, in the aggregate, a material adverse effect on our business, financial condition, or results of operations. However, in light of the uncertainties involved in such claims and proceedings, there is no assurance that the ultimate resolution of these matters will not significantly exceed the provisions currently accrued by us; as a result, the outcome of a particular matter may be material to our operating results for a
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particular period, depending upon, among other factors, the size of the loss or liability imposed and our level of income for that period.
Contingent liabilities classified as remote risk of loss refer to judicial and administrative proceedings involving other matters assessed by legal counsels, such as remote losses, which were not provided for. The main lawsuits are discussed in the following paragraphs.
In December 2008, the Brazilian Federal Revenue Service issued a tax assessment against us in the total amount of R$3.9 billion with respect to IRPJ and CSLL related to 2002 to 2004. The tax authorities assert that we did not meet the legal requirements for deducting amortization of the goodwill arising from the acquisition of Banespa. On October 21, 2011 an unanimous decision of CARF was handed down to cancel the tax assessments corresponding to fiscal years 2002 to 2004. The Brazilian Federal Revenue Service appealed to the Câmara Superior de Recursos Fiscais with respect to the merits but not due to the fine, and the 2002 fiscal year which was already being prescribed. Because of these two items, the assessment was reduced to R$1.8 billion. In June 2010, the Brazilian Federal Revenue Service issued other infraction notices in the total amount of R$1.4 billion, based on the same concepts as the previous notice, with respect to IRPJ and CSLL related to 2005 to 2007. In these cases, Santander Brasil was not granted a favorable decision, and it has been appealed on its merits, though there was a reduction in the fine of R$367 million, and the assessment was reduced to R$984 million. As of December 2013, the Brazilian Federal Revenue Service issued another infraction notice, in the total amount of R$344 million with respect to income tax and social contribution related to 2008. Santander Brasil challenged this tax assessment and was granted a favorable decision in the first instance. The tax authority has appealed the decision, which is pending final judgment. In accordance with the advice of our external legal counsel, we believe that the Brazilian Federal Revenue Service’s position is incorrect, and that the risk of loss is remote. We did not record any provision since this issue should not have an impact on our consolidated financial statements.
In addition to the aforementioned proceedings, in June 2013, the Brazilian tax authorities issued an infraction notice against us as the responsible party liable for the tax on the capital gain allegedly obtained in Brazil by an entity not resident in Brazil, Sterrebeeck B.V., as a result of the “incorporação de ações” (a shares merger) transaction carried out in August 2008. As a result of the aforementioned transaction, we acquired all the shares of Banco Real and AAB Dois Par through the delivery to these entities’ shareholders of newly-issued shares through a capital increase carried out for that purpose. The Brazilian tax authorities take the view that in the aforementioned transaction Sterrebeeck B.V. obtained income subject to tax in Brazil consisting of the difference between the issuance value of our shares that were received and the acquisition cost of the shares delivered in the exchange. We filed an appeal against the infraction notice at the Federal Tax Office and consider, based on the advice of our external legal counsel, that the position taken by the Brazilian tax authorities is not correct, that there are arguments for appeal against the infraction notice and that, as a result, the risk of loss is remote. Consequently, we have not recognized any provisions in connection with these proceedings.
On October 10, 2016, after an inspection conducted in rural properties located in the State of Mato Grosso, the Brazilian Environment Authority (Instituto Brasileiro do Meio Ambiente e dos Recursos Naturais Renováveis), or IBAMA, filed an Infraction Notice against the Company based on the ground of financing of corn in an embargoed area. The fine amount was established in an amount of R$47.5 million (approximately US$ 15 million). According to IBAMA, financing seed production on embargoed areas is considered an environmental infraction due to potential environmental damage resulting therefrom. We filed an administrative defense on November 9, 2016, stating that we had not financed production on embargoed area, since the financing agreement with the property owner had no connection with production of seeds. As a consequence of the filing of the administrative defense, the enforceability of the fine is suspended. Although we believe we have presented valid arguments, our risk assessment is probable loss in the administrative proceeding. If we were to lose the administrative proceeding, we may seek review of the administrative finding by a court in a future lawsuit.
On December 8, 2016, the General Superintendency of the Brazilian Anti-Trust Authority (Superintendencia Geral do Conselho Administrativo de Defesa Econômica), or “CADE,” began an investigation into alleged anticompetitive conduct in the real onshore foreign exchange market. The investigation concerns 11 financial institutions, including Santander Brasil, and 19 individuals active in the Brazilian foreign exchange market between 2009 and 2012. Santander Brasil is monitoring the investigations but is not aware of any evidence that it was involved in the alleged conduct. Santander Brasil expects that these investigations will not have an adverse impact on it.
Dividend Policy
General Rules
We are required by Brazilian Corporate Law and our By-Laws to hold an annual general shareholders’ meeting by no later than the fourth month after each fiscal year, at which time, among other things, the allocation of the net profits in the preceding year and the distribution of an annual dividend are approved by our shareholders. The payment of annual dividends is based on our consolidated audited financial statements prepared for the immediately preceding fiscal year.
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Our By-Laws provide that an amount equal to at least 25.0% of our adjusted net income, after deducting allocations to the legal and contingency reserves, should be available for distribution as a dividend or interest attributable to shareholders’ equity in any given year. This amount represents the mandatory dividend.
Our board of directors may declare interim dividends or interest attributable to shareholders’ equity based on income verified in semi-annual consolidated financial statements. The board of directors may also declare dividends or interest attributable to shareholders’ equity based on consolidated financial statements prepared for shorter periods, provided that the total dividends paid in each six-month period do not exceed the capital reserves amount required by Brazilian Corporate Law. The board of directors may also declare interim dividends or interest attributable to shareholders’ equity out of retained earnings or income reserves recorded in the last annual or semi-annual balance sheet. Any payment of interim dividends or interest on shareholders’ equity may be set off against the amount of mandatory dividends relating to the net income earned in the year in which the interim dividends were paid.
The amount distributed to shareholders as interest attributable to shareholders’ equity, net of any withholding tax, may be included as part of the minimum mandatory dividend. In accordance with applicable law, we are required to pay to shareholders an amount sufficient to ensure that the net amount they receive in respect of interest attributable to shareholders’ equity, after payment of the applicable withholding tax, plus the amount of declared dividends, is at least equivalent to the amount of the minimum mandatory dividend.
Brazilian Corporate Law allows, however, our shareholders to suspend dividends distribution if our board of directors reports to our annual shareholders’ meeting that the distribution would not be advisable given our financial condition. Our fiscal council, if in operation, should review any suspension of the mandatory dividend. In addition, our management should submit a report to the CVM setting out the reasons for the suspension. Net income not distributed by virtue of a suspension is allocated to a separate reserve and, if not absorbed by subsequent losses, is required to be distributed as a dividend as soon as our financial condition permits such payment.
Current and Future Dividend Policy
We currently recommend to our shareholders a 50% distribution of our yearly adjusted net income as dividends and/or interest attributable to shareholders’ equity. Our future dividend policy and the amount of future dividends and/or interest attributable to shareholders’ equity we decide to recommend to our shareholders for approval will depend on a number of factors, including, but not limited to, our cash flow, financial condition (including capital position), investment plans, prospects, legal requirements, economic climate and such other factors as we may deem relevant at the time.
Payment of Dividends
Any holder of record of shares at the time a dividend is declared is entitled to receive dividends. Under Brazilian Corporate Law, dividends are generally required to be paid within 60 days following the date on which the dividend is declared, unless the shareholders’ resolution establishes another payment date, which, in any event, must occur prior to the end of the fiscal year in which such dividend was declared. Based on Brazilian Corporate Law, unclaimed dividends do not bear interest, are not monetarily adjusted and may revert to us three years after dividends were declared.
The depositary is the registered owner of the units underlying the ADRs on the records of the registrar. Such units are held since December 13, 2016 by Santander Securities Services Brasil Distribuidora de Títulos e Valores Mobiliários S.A. in Brazil, acting as the custodian and agent for the depositary for our ADRs.
Payments of cash dividends and distributions, if any, are made in reais to the custodian on behalf of the depositary, which then converts such proceeds into U.S. dollars and causes such U.S. dollars to be delivered to the depositary for distribution to holders of ADRs. In the event that the custodian is unable to convert immediately the Brazilian currency received as dividends into U.S. dollars, the amount of U.S. dollars payable to holders of ADRs may be adversely affected by depreciation of the Brazilian currency.
The following table sets forth the amounts available for distribution as dividends based on the Brazilian GAAP calculation of net income. The reconciliation of net income under Brazilian GAAP to net income under IFRS is presented in note 45 of our audited consolidated financial statements for the years ended December 31, 2016, 2015 and 2014.
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| For the year ended December 31, | ||||||||||||
| 2016 | 2015 | 2014 | ||||||||||
| (in millions of R$) | ||||||||||||
| Net Income under Brazilian GAAP | 5,522 | 6,983 | 2,153 | |||||||||
| (-) Legal Reserve | 276 | 349 | 108 | |||||||||
| (=) Amounts Available for distribution | 5,246 | 6,634 | 2,045 | |||||||||
| Mandatory Dividends – 25.0% | 1,312 | 1,658 | 511 | |||||||||
| Interest on Shareholder’s Equity | 3,850 | 1,400 | 690 | |||||||||
| Dividends | 1,400 | 4,800 | 840 | |||||||||
| Total (Interest on Shareholder’s Equity and Dividends) | 5,250 | 6,200 | 1,530 | |||||||||
| Dividends distributed in excess of the Mandatory Dividend | 3,938 | 4,542 | 1,019 | |||||||||
History of Payment of Dividends and Interest Attributable to Shareholders’ Equity
In 2016, we declared dividends and interest on shareholders’ equity in the gross amount of R$5,250 million, R$500 million of which was paid on August 26, 2016, and R$4,750 million which was paid on February 23, 2017.
The table below shows the amounts paid to our shareholders in the periods indicated.
| For the year ended December 31, | ||||||||||||||||||||
| 2016 | 2015 | 2014 | 2013 | 2012 | ||||||||||||||||
| (in millions of R$, except per share figures) | ||||||||||||||||||||
| Dividends | 1,400 | 4,800 | 840 | 2,100 | 1,650 | |||||||||||||||
| Interest attributable to shareholders’ equity | 3,850 | 1,400 | 690 | 300 | 1,020 | |||||||||||||||
| Total | 5,250 | 6,200 | 1,530 | 2,400 | 2,670 | |||||||||||||||
| Dividends and interest on capital per 1,000 shares | ||||||||||||||||||||
| Common shares | 666.21 | 784.90 | 193.26 | 302.15 | 335.73 | |||||||||||||||
| Preferred shares | 732.83 | 863.39 | 212.59 | 332.36 | 369.30 | |||||||||||||||
| 8B. | Significant Changes |
There has been no significant change since the date of our last audited financial statements.
| 9A. | Offering and Listing Details |
Market Price and Volume Information
On September 18, 2009, our board of directors approved the implementation of the global public offering (“Global Offering”), which included the issue of 525,000,000 Units (each representing at that date 55 common shares and 50 preferred shares), all registered, without par value, free and clear of any liens or encumbrances, consisting of the simultaneous initial public offering of (i) Units in Brazil on the over-the-counter market, in accordance with CVM Instruction 400 of December 29, 2003, as amended, and (ii) Units abroad, including in the form of ADRs representing American Depositary Shares (“ADSs”) registered with the SEC under the Securities Act.
On October 6, 2009, the Global Offering priced shares at R$23.50 per unit and U.S.$13.40 per ADR. The Units have been traded on the BM&FBOVESPA and the NYSE since October 7, 2009.
On April 29, 2014, Santander Spain, our indirect controlling shareholder, announced its intention to launch voluntary exchange offers in Brazil and in the United States to acquire up to all of our shares that were not held by the Santander Group, representing approximately 25% of our share capital, with payment in BDRs or ADRs representative of Santander Spain’s common shares.
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On October 30, 2014, the Brazilian Exchange Offer and U.S. the Exchange Offer were concluded. As a result of these offers, the Santander Group’s shareholding increased to 88.3% of our total share capital (not including the shares held by Banco Madesant - Sociedade Unipessoal). Also as a result of the offer in Brazil, our Units were delisted from Level 2 Segment and are now traded at the basic listing segment of BM&FBOVESPA.
The following table shows our outstanding publicly traded common shares and preferred shares as of December 31, 2016:
| Free Float | BM&FBOVESPA | NYSE | ||||||
| Common shares | 146,175,156 | 236,064,489 | ||||||
| Preferred shares | 173,979,571 | 236,064,489 | ||||||
| Total | 320,154,727 | 472,128,978 | ||||||
Units, Common and Preferred Shares traded on BM&FBOVESPA
The table below sets forth the high, low and last daily sales prices in reais for our shares on the BM&FBOVESPA for the periods indicated.
| Reais per share – SANB3 (Common Shares) | ||||||||||||
| High | Low | Last | ||||||||||
| 2012 Annual | 0.20 | 0.13 | 0.15 | |||||||||
| 2013 Annual | 0.16 | 0.11 | 0.14 | |||||||||
| 2014 Annual(1) | 8.50 | 0.10 | 6.70 | |||||||||
| 2015 Annual | 10.80 | 6.10 | 8.83 | |||||||||
| 1st Quarter | 8.21 | 6.10 | 7.75 | |||||||||
| 2nd Quarter | 10.80 | 7.80 | 9.40 | |||||||||
| 3rd Quarter | 10.08 | 6.40 | 6.50 | |||||||||
| 4th Quarter | 8.99 | 6.50 | 8.83 | |||||||||
| 2016 Annual | 19.46 | 6.60 | 19.36 | |||||||||
| 1st Quarter | 10.13 | 6.60 | 9.31 | |||||||||
| 2nd Quarter | 11.42 | 8.75 | 9.90 | |||||||||
| 3rd Quarter | 14.20 | 9.61 | 13.51 | |||||||||
| 4th Quarter | 19.46 | 12.90 | 19.36 | |||||||||
| LAST 6 MONTHS | 22.92 | 12.90 | 20.11 | |||||||||
| October 2016 | 16.80 | 12.90 | 16.63 | |||||||||
| November 2016 | 19.16 | 13.95 | 17.50 | |||||||||
| December 2016 | 19.46 | 15.35 | 19.36 | |||||||||
| January 2017 | 21.10 | 18.61 | 20.25 | |||||||||
| February 2017 | 22.92 | 20.05 | 21.40 | |||||||||
| March 2017 (through March 24, 2017) | 22.02 | 18.00 | 20.11 | |||||||||
| (1) | On June 2, 2014, we carried out a reverse share split of the totality of our issued share capital at rate of 55:1 for each of our common and preferred shares. |
| Reais per share – SANB4 (Preferred Shares) | ||||||||||||
| High | Low | Last | ||||||||||
| 2012 Annual | 0.18 | 0.13 | 0.13 | |||||||||
| 2013 Annual | 0.16 | 0.11 | 0.14 | |||||||||
| 2014 Annual(1) | 8.18 | 0.10 | 6.02 | |||||||||
| 2015 Annual | 7.92 | 5.52 | 7.23 | |||||||||
| 1st Quarter | 6.75 | 5.80 | 6.15 | |||||||||
| 2nd Quarter | 7.89 | 6.10 | 7.40 | |||||||||
| 3rd Quarter | 7.80 | 5.52 | 5.89 | |||||||||
| 4th Quarter | 7.92 | 5.80 | 7.23 | |||||||||
| 2016 Annual | 10.59 | 5.40 | 10.05 | |||||||||
| 1st Quarter | 8.00 | 5.40 | 7.40 | |||||||||
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| Reais per share – SANB4 (Preferred Shares) | ||||||||||||
| High | Low | Last | ||||||||||
| 2nd Quarter | 8.27 | 7.20 | 8.09 | |||||||||
| 3rd Quarter | 9.64 | 7.86 | 8.53 | |||||||||
| 4th Quarter | 10.59 | 8.57 | 10.05 | |||||||||
| LAST 6 MONTHS | 13.79 | 8.57 | 12.41 | |||||||||
| October 2016 | 9.24 | 8.57 | 9.18 | |||||||||
| November 2016 | 10.59 | 9.00 | 10.15 | |||||||||
| December 2016 | 10.42 | 8.89 | 10.05 | |||||||||
| January 2017 | 11.60 | 9.31 | 11.15 | |||||||||
| February 2017 | 13.79 | 11.00 | 13.15 | |||||||||
| March 2017 (through March 24, 2017) | 13.50 | 11.72 | 12.41 | |||||||||
| (1) | On June 2, 2014, as part of our plan to optimize our capital, we carried out a reverse share split of the totality of our issued share capital at rate of 55:1 for each of our common and preferred shares. |
| BM&FBOVESPA Units – SANB11 | ||||||||||||
| High | Low | Last | ||||||||||
| R$ per share | ||||||||||||
| 2012 Annual | 19.70 | 13.59 | 14.97 | |||||||||
| 2013 Annual | 16.07 | 12.64 | 13.98 | |||||||||
| 2014 Annual | 16.49 | 10.84 | 13.46 | |||||||||
| 2015 Annual | 17.99 | 12.21 | 16.04 | |||||||||
| 1st Quarter | 14.82 | 12.21 | 14.07 | |||||||||
| 2nd Quarter | 17.99 | 14.13 | 16.92 | |||||||||
| 3rd Quarter | 17.69 | 12.31 | 12.61 | |||||||||
| 4th Quarter | 16.85 | 12.62 | 16.04 | |||||||||
| 2016 Annual | 29.80 | 12.33 | 29.53 | |||||||||
| 1st Quarter | 18.63 | 12.33 | 16.95 | |||||||||
| 2nd Quarter | 19.46 | 16.53 | 18.18 | |||||||||
| 3rd Quarter | 23.45 | 17.74 | 22.00 | |||||||||
| 4th Quarter | 29.80 | 21.80 | 29.53 | |||||||||
| LAST 6 MONTHS | 36.13 | 21.80 | 32.65 | |||||||||
| October 2016 | 26.35 | 21.80 | 26.30 | |||||||||
| November 2016 | 29.47 | 24.33 | 28.16 | |||||||||
| December 2016 | 29.80 | 25.15 | 29.53 | |||||||||
| January 2017 | 32.69 | 28.60 | 31.31 | |||||||||
| February 2017 | 36.13 | 31.19 | 34.36 | |||||||||
| March 2017 (through March 24, 2017) | 35.09 | 30.16 | 32.65 | |||||||||
For information on the rights attaching to our common shares and to our preferred shares, please see “Item 10. Additional Information—B. By-Laws—Rights of Common Shares and Preferred Shares.”
ADRs traded on NYSE
Our ADRs have been listed and traded on the NYSE since October 7, 2009. Our Units abroad, including in the form of ADRs representing ADSs are registered with the SEC under the Exchange Act.
The deposit agreement, pursuant to which ADRs have been issued is between us and The Bank of New York Mellon, as depositary, and the holders from time to time of ADRs. For further information on our arrangements with The Bank of New York Mellon, please see “Item 12. Description of Securities other than Equity Securities—D. American Depositary Receipts.”
Since certain of our shares and our ADRs are held by nominees, the number of record holders may not be representative of the number of beneficial owners.
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| NYSE ADR – BSBR | ||||||||||||
| High | Low | Last | ||||||||||
| U.S.$ per ADR | ||||||||||||
| 2012 Annual | 11.30 | 6.56 | 7.28 | |||||||||
| 2013 Annual | 8.08 | 5.71 | 5.97 | |||||||||
| 2014 Annual | 7.18 | 4.48 | 5.02 | |||||||||
| 2015 Annual | 5.98 | 2.96 | 3.89 | |||||||||
| 1st Quarter | 5.28 | 4.05 | 4.41 | |||||||||
| 2nd Quarter | 5.98 | 4.52 | 5.44 | |||||||||
| 3rd Quarter | 5.65 | 2.96 | 3.15 | |||||||||
| 4th Quarter | 4.35 | 3.10 | 3.89 | |||||||||
| 2016 Annual | 9.12 | 3.02 | 8.89 | |||||||||
| 1st Quarter | 4.93 | 3.02 | 4.65 | |||||||||
| 2nd Quarter | 5.74 | 4.41 | 5.70 | |||||||||
| 3rd Quarter | 7.19 | 5.33 | 6.70 | |||||||||
| 4th Quarter | 9.12 | 6.66 | 8.89 | |||||||||
| LAST 6 MONTHS | 11.75 | 6.66 | 10.37 | |||||||||
| October 2016 | 8.20 | 6.66 | 8.18 | |||||||||
| November 2016 | 8.77 | 6.97 | 8.25 | |||||||||
| December 2016 | 9.12 | 7.43 | 8.89 | |||||||||
| January 2017 | 10.15 | 8.98 | 9.91 | |||||||||
| February 2017 | 11.75 | 9.99 | 10.96 | |||||||||
| March 2017 (through March 24, 2017) | 11.28 | 9.71 | 10.37 | |||||||||
| 9B. | Plan of Distribution |
Not applicable.
| 9C. | Markets |
Our Units, common and preferred shares are traded on BM&FBOVESPA. The regulation of Brazilian securities markets which affects such securities is described below. In addition, we also have ADRs which have been listed and traded on the NYSE since October 7, 2009. For further information, see “Item 9. The Offer and Listing—A. Offering and Listing Details.”
Regulation of Brazilian Securities Markets
The Brazilian securities market is regulated by the CVM, as provided for by Law 6,385 of December 7, 1976, or the “Brazilian Securities Market Law,” and Brazilian Corporate Law, as well as the CMN and the Brazilian Central Bank.
The Brazilian Central Bank and the CVM are responsible for the regulation and supervision of brokerage firms. The Brazilian Central Bank also regulates foreign investment and exchange transactions, pursuant to the guidelines set forth by the CMN, as provided for in the Brazilian Securities Market Law and Law 4,595 of December 31, 1964. These laws and regulations provide for, among other things, disclosure requirements, criminal sanctions for insider trading and price manipulation, protection of minority shareholders, the procedures for licensing and supervising brokerage firms and the governance of Brazilian stock exchanges.
Under Brazilian Corporate Law, a company is either publicly held (companhia aberta) or privately held (companhia fechada) and unlisted. All publicly-held companies must be registered with the CVM and are subject to reporting and other regulatory requirements. A company registered with the CVM may list its securities either on the Brazilian stock exchange market or on Brazilian over-the-counter markets. The shares of a listed company may also be traded privately.
The over-the-counter market is divided into two categories: (i) organized over-the-counter markets, in which the transactions are supervised by self-regulating entities authorized by the CVM; and (ii) non-organized over-the-
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counter markets, in which the transactions are not supervised by self-regulating entities authorized by the CVM. In either case, the over-the-counter markets consist of direct trades, outside of the stock exchange market, through a financial institution registered with the CVM, which serves as an intermediary. No special application, other than registration with the CVM (and, in case of organized over-the-counter markets, registration with the applicable one), is necessary for securities of a public company to be traded in these markets.
To be listed on the BM&FBOVESPA, a company must apply for registration with the CVM and BM&FBOVESPA.
Trading on the BM&FBOVESPA
The BM&FBOVESPA currently gathers all trading activities of shares and commodities in Brazil, including settlement, clearing and depositary services.
Trading on the Brazilian stock exchange is conducted by authorized members. Trading sessions in the shares market take place every business day, from 10:00 a.m. to 5:00 p.m. between March and October and from 10:00 a.m. to 6:00 p.m. between November and February, on an electronic trading system called PUMA. Trading is also conducted from March to October between 5:30 p.m. and 6:00 p.m. in an after-market system connected to both traditional brokerage firms and brokerage firms operating on the Internet. This after-market trading is subject to regulatory limits on price volatility of securities traded by investors operating on the Internet.
The trading of securities on the BM&FBOVESPA may be suspended at the request of a company in anticipation of a material announcement. Trading may also be suspended on the initiative of the BM&FBOVESPA or the CVM, among other reasons, based on or due to a belief that a company has provided inadequate information regarding a significant event or has provided inadequate responses to inquiries by the CVM or the BM&FBOVESPA.
In addition, in order to maintain control over the fluctuation of the BM&FBOVESPA index, the BM&FBOVESPA has adopted a “circuit breaker” system pursuant to which trading sessions may be suspended for a period of 30 minutes, one hour, or a time to be defined by BM&FBOVESPA, whenever the BM&FBOVESPA index falls below 10.0%, 15.0% or 20.0%, respectively, in relation to the closing index levels of the previous trading session.
When investors trade shares on the BM&FBOVESPA, the trade is settled in three business days after the trade date, without adjustments to the purchase price. The seller is ordinarily required to deliver the shares to the exchange on the third business day following the trade date. Delivery of and payment for shares are made through the facilities of an independent clearing house, a division of the BM&FBOVESPA, which handles the multilateral settlement of both financial obligations and transactions involving securities. According to the regulations of the BM&FBOVESPA, financial settlement is carried out through the system of transfer of funds of the Brazilian Central Bank and the transactions involving the sale and purchase of shares are settled through the BM&FBOVESPA custody system. All deliveries against final payment are irrevocable.
Corporate Governance Practices
In 2000, BM&FBOVESPA introduced three special listing segments, known as Levels 1 and 2 of Corporate Governance and Novo Mercado, aimed at fostering a secondary market for securities issued by Brazilian companies listed on the BM&FBOVESPA, and it prompted such companies to follow good corporate governance practices. The listing segments are designed for the trading of shares issued by companies voluntarily undertaking to abide by corporate governance practices and disclosure requirements in addition to those already imposed by Brazilian law. The listing requirements were updated on May 10, 2011.
Our Units were initially listed on the Level 2 Segment. However, as a result of the Brazilian Exchange Offer and the U.S. Exchange Offer launched by Santander Spain in Brazil for the acquisition of our shares, our Units were delisted from Level 2 Segment and are now traded at the basic listing segment of BM&FBOVESPA.
Within the BM&FBOVESPA we are part of one sustainability index: ISE. The ISE (Índice de Sustentabilidade Empresarial – Entrepreneurial Sustainability Index) is a reference for socially responsible investments in Brazil. To be part of the portfolio composed by 40 companies, the company participates in a careful process to evaluate its
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performance in regards to sustainability, including economic efficiency, environmental balance, social practices and corporate governance.
In 2016, the Brazilian Code of Corporate Governance for Publicly-held Companies (Código Brasileiro de Governança Corporativa – Companhias Abertas), or the “Governance Code,” was published by the Brazilian Institute of Corporate Governance (Instituto Brasileiro de Governança Corporativa). The Governance Code sets forth corporate governance related principles, guidelines and actions applicable for publicly-held companies and establishes a “comply or explain” enforcement model. In December 2016, the CVM began a public consultation regarding a draft of a new set of rules to implement the Governance Code.
Investment in Our Units by Non-Residents of Brazil
Investors residing outside Brazil, including institutional investors, may either register their investments in securities in Brazil, as a foreign direct investment under Law 4,131/62, or as a portfolio investment under the applicable regulation enacted by CMN and CVM. Foreign investors, regardless of whether their investments are made as direct investments or portfolio investments, must be enrolled with the Brazilian Internal Revenue. This registration process is undertaken by financial institution or an institution authorized to operate by the Brazilian Central Bank as the investor’s legal representative in Brazil.
Since March 30, 2015, portfolio investments are regulated by CMN Resolution 4,373, of September 29, 2014 (“CMN Resolution 4,373”), which revoked CMN Resolution 2,689, of January 26, 2000, which had been in force for about 15 years.
The main purpose of CMN Resolution 4,373 is to facilitate the entry of foreign investors in the Brazilian financial and capital markets. CMN Resolution 4,373 introduces the possibility for foreign investors of making investments in local currency with funds held in foreign bank accounts of the non-resident investor, or with bills of payment denominated in reais but issued abroad.
With certain limited exceptions, CMN Resolution 4,373 allows investors to carry out any type of transaction in the Brazilian capital markets involving a security traded on a Brazilian stock or futures exchange or organized over-the-counter market, but investors may not transfer the ownership of investments made under such regulation to other non-Brazilian holders through private transactions. Investments and remittances outside Brazil of gains, dividends, profits or other payments under our Units are made through the foreign exchange market.
For further information on the requirements for the registration of foreign portfolio investments, see “Item 10. Additional Information—D. Exchange Controls—Foreign Investment in Brazil—Capital Markets Investment.”
In their turn, foreign direct investors under Law 4,131/62 may sell their shares in both private and open market transactions, but these investors are currently subject to a less favorable tax treatment on gains, apart from being subject to taxation on the execution of foreign exchange transactions. For more information on foreign direct investors, see “Item 10. Additional Information—D. Exchange Controls—Foreign Investment in Brazil—Foreign Direct Investment.”
Since March 30, 2015, CMN Resolution 4,373 also deals with investments of foreign capitals in Brazil through Depositary Receipts (“DRs”), and revoked the former rule (CMN Resolution 1,927 of May 18, 1992).
We filed an application to have the ADRs approved under the former rule by the Brazilian Central Bank and the CVM, and we received final approval on October 1, 2009.
If a holder of ADRs decides to exchange ADRs for the underlying Units, the holder will be entitled to (i) sell the Units on the BM&FBOVESPA and rely on the depositary’s electronic registration for five business days from the date of exchange to obtain and remit U.S. dollars abroad upon the holder’s sale of our Units, (ii) convert its investment into a foreign portfolio investment under CMN Resolution 4,373, or (iii) convert its investment into a foreign direct investment under Law 4,131/62. See “Item 10. Additional Information—E. Taxation—Brazilian Tax Considerations” for a description of the tax consequences for an investor residing outside Brazil of investing in our Units in Brazil.
If a holder of ADRs wishes to convert its investment into either a foreign portfolio investment under CMN Resolution 4,373 or a foreign direct investment under Law 4,131/62, it should begin the process of obtaining its own
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foreign investor registration with the Brazilian Central Bank or with the CVM, as the case may be, in advance of exchanging the ADRs for common shares.
The custodian is authorized to update the depositary’s electronic registration to reflect conversions of ADRs into foreign portfolio investments. If a holder of ADRs elects to convert its ADRs into a foreign direct investment under Law 4,131/62, the conversion will be effected by the Brazilian Central Bank after receipt of an electronic request from the custodian with details of the transaction. This may also involve the need to change the Units into shares.
If a foreign direct investor under Law 4,131/62 wishes to deposit its Units into the ADR program in exchange for ADRs, such holder will be required to present to the custodian evidence of payment of capital gains taxes. The conversion will be effected by the Brazilian Central Bank after receipt of an electronic request from the custodian with details of the transaction. This may also involve the need to change the Units into shares.
The Brazilian constitution permits foreign individuals or companies to invest in the voting shares of Brazilian financial institutions only if they have specific authorization by the President of Brazil based on national interest or reciprocity. A presidential decree issued on November 13, 1997, in respect of Banco Meridional do Brasil S.A. (a predecessor entity) allows up to 100% foreign participation in our capital stock. Foreign investors may acquire our Units or ADRs as a result of this decree. In addition, foreign investors may acquire publicly traded non-voting shares of Brazilian financial institutions traded on a stock exchange or depositary receipts offered abroad representing non-voting shares without specific authorization. See “Item 4. Information on the Company—B. Business Overview—Regulation and Supervision—Foreign Investment in Brazilian Financial Institutions.”
| 9D. | Selling Shareholders |
Not applicable.
| 9E. | Dilution |
Not applicable.
| 9F. | Expenses of the Issue |
Not applicable.
ITEM 10. ADDITIONAL INFORMATION
| 10A. | Share Capital |
Not applicable.
| 10B. | By-Laws |
We describe below a summary of the important provisions of our By-Laws and of the corporate and Brazilian capital markets legislation and regulations. This description is not intended to be exhaustive. It is based on our By-Laws (an English translation of which is attached as an exhibit to this annual report), as well as on the legislation and regulations applicable to companies and the Brazilian capital market currently in effect.
Registration and Business Purpose
We are a publicly-held company, incorporated under Brazilian law. Our documents of incorporation are duly registered with JUCESP, under NIRE 35300332067.
Pursuant to article 4 of our By-Laws, our corporate purpose is to (i) participate in asset, liability and accessory transactions related to our respective authorized portfolios (commercial, investment, credit, financing and investment, real estate credit and leasing), as well as foreign exchange transactions; (ii) manage investment portfolios and any other transaction that would be allowed by law and regulations in force; and (iii) participate, as shareholder or quotaholder, in other companies.
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Managers’ Role and Conflict of Interests
Brazilian Corporate Law imposes on the members of the board of directors and officers the duty of diligence during the performance of their functions, as well as the duty of loyalty to the company besides prohibiting the member of the board of directors and the officers from: (i) receiving any type of direct or indirect personal advantage from third parties, by virtue of the position occupied, without authorization in the By-Laws or from a shareholders’ meeting; (ii) taking part in any corporate transaction in which he or she has an interest that conflicts with our interest or in the decisions made by other directors on the matter; (iii) use any commercial opportunity which may come to his or her knowledge, by virtue of his or her position, for his or her own benefit or that of a third party, whether or not harmful to the company; (iv) fail to exercise or protect the company’s rights or to take advantage of a commercial opportunity of interest to the company, in seeking to obtain advantages for himself or herself or for a third party; and (v) acquire for resale with profit property or rights which he or she knows the company needs or which the company intends to acquire.
Additionally, since we are a financial institution, we are subject to certain prohibitions set forth in Law 4,595, dated as of December 31, 1964, including the prohibition to grant loans and advance amounts to the members of our board of directors and officers, as well as to the members of our other consulting, administrative, fiscal or similar boards and the respective spouses and 2nd degree relatives.
In addition to these provisions, Article 10 of our By-Laws provides that board members and officers are forbidden to be involved in the analysis, approval or settlement of business deals or loans relating to a company where (i) they hold more than five percent (5%) of the capital stock as partners or shareholders, or where they are members of the management, or (ii) had been members within a period of up to six (6) months before their appointment. Finally, our policy for transactions with related parties also sets forth procedures to be followed by managers involved in such transactions, and when other potential conflicts of interest may arise.
Rights of Common Shares and Preferred Shares
Each common share gives its holder the right to a vote at general meetings. In their turn, the preferred shares do not grant voting rights in our shareholders’ general meetings, except as related to the following matters:
| · | change of corporate status, merger, consolidation or spin-off; |
| · | approval of agreements entered into between us and our controlling shareholder, directly or indirectly, and agreements with other companies in which our controlling shareholder has an interest, whenever the law or the By-Laws provide that they must be approved at a shareholders’ general meeting; and |
| · | the appraisal of assets to be contributed to increase our capital stock. |
As regards the election of members of the board of directors, the Brazilian Corporate Law sets forth that, when members of the board of directors are elected, minority holders of shares in public companies holding a minimum of 15% of the total number of voting shares, or holders of preferred shares without voting rights, or with restricted voting rights, representing 10% of the capital stock, or holders of common and preferred shares who jointly represent at least 10% of the capital stock, have the right to elect one member of our board of directors in a separate vote. Nevertheless, these rights can only be exercised by the holders of shares that maintained their holding for at least three months before the date of the annual shareholders’ meeting. The Brazilian Corporate Law also permits a multiple vote procedure to be adopted, upon request by shareholders representing at least 10% of our voting capital. Pursuant to CVM Instruction 282 of June 26, 1998, the percentage needed to call for a multiple vote to elect members of the board of directors, in public companies with capital stock exceeding R$100 million, is 5% of the voting capital per request of multiple vote.
The holders of preferred shares are entitled to the following rights according to our By-Laws:
| · | dividends and interest on shareholders’ own equity in an amount 10% higher than those attributed to common shares, as well as priority in the distribution; |
| · | participation on equal terms with the common shares conditions, in capital increases arising from the capitalization of reserves and income, as well as in the distribution of bonus shares created by the capitalization of accrued income, reserves or any other resources; |
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| · | priority in reimbursement of capital, without payment of premium, in the case of liquidation; and |
| · | tag-along rights in the event of a change in our control, under the same terms and conditions extended to our controlling shareholders. |
Common shares not belonging to the controlling shareholders also give their holders tag-along rights in the event that our control is transferred on the same terms and conditions as those granted to our controlling shareholders.
The shareholders’ general meeting may decide on conversion of the preferred shares into common shares.
The Brazilian Corporate Law sets forth that shares without voting rights or shares with restricted rights, including our preferred shares, shall be granted unrestricted voting rights if the company ceases to distribute, during three consecutive fiscal years, any fixed or minimum dividend granted to these shares, until the respective distributions are made.
According to our By-Laws, the dividends that are not claimed by shareholders within three years, from the beginning of their payment, shall prescribe to our benefit.
Under the Brazilian Corporate Law, any change in the preferences or that have an adverse financial effect on the rights of the holders of our preferred shares, or any change that results in the creation of a more favored class of preferred shares, must be approved by a resolution at a general shareholders’ meeting and will become valid and effective only after approval by a majority of our preferred shareholders in a shareholders’ meeting.
Brazilian Corporate Law also sets forth that the following shareholders’ rights cannot be repealed by our By-Laws or decisions made at shareholders’ meetings:
| · | the right to vote at general meetings, in the case of holders of common shares; |
| · | the right to share in the distribution of dividends and interest on shareholders’ equity, and to share in the surplus assets in the event of our liquidation; |
| · | preemptive rights in subscribing for shares or convertible securities in specific circumstances; |
| · | the right to monitor the management; and |
| · | the right of withdrawal in the circumstances established by law, including our consolidation, merger and spin-off. |
Description of Units
The Units are share deposit certificates, each representing one common share and one preferred share, all of them free and unencumbered. The shares represented by the Units shall be registered in a trust account as linked to the Units, and ownership can only be transferred by means of a transfer of the corresponding Units, upon written instructions from the holder. Earnings from the Units and the amount received in the case of redemption or repayment shall only be paid to the holder of the Units registered in the books of the custodian.
None of the shares underlying the Units, the earnings thereon or the corresponding redemption or repayment amounts may be pledged, encumbered or in any other way given in guarantee by the holder of the Units, nor may they be subject to attachment (penhora), seizure (arresto), impounding (sequestro), search and apprehension (busca e apreensão), or to any other lien or encumbrance.
The Units are held by us (except units that underlie the ADSs which are held by our affiliate, Santander Securities Services Brasil Distribuidora de Títulos e Valores Mobiliários S.A.), as the custodian, in book-entry form in an account opened in the holder’s name and the transfer of ownership is effected by debiting the seller’s Unit account and crediting the buyer’s Unit account according to a written transfer order issued by the seller or a court authorization or transfer order delivered to the custodian. The custodian will retain all the written transfer orders sent by the holders of the Units, as well as the court authorizations or transfer orders. Dividends, interest on shareholders’ equity and/or cash bonuses shall be paid to the custodian and the custodian shall then transfer the amount to the
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custody agents for payment to the Unit holders. The pledge, usufruct, right of succession, fiduciary transfer in guarantee and any other conditions, onus or encumbrances on the Units must be registered in the custodian’s records, as well as noted in the corresponding statement of account of Units.
The custodian shall provide Unit holders with a statement of account at the end of each month in which there is movement and, even if there is no movement, at least once a year. The statement shall show the date and place of issue, the name and details of the holder of the Unit account, an indication that it is a statement of Unit account, details of the shares deposited, a statement that the shares deposited, their earnings and any amounts received in the event of redemption or repayment shall only be paid to the holder of the Unit account or to the holder’s order in writing, our charge for the deposit, if any, and the addresses where Unit holders may obtain assistance.
Upon a written order issued by the holder of the Unit account to a broker authorized by the stock exchange where the Units are traded, the custodian shall block the corresponding Units and transfer them to the buyer upon receipt of a confirmation of the sale from the stock exchange.
The Unit holder shall have the right, at any time, to instruct a broker to cancel Units and transfer the underlying shares. The broker must request to us, as agent, to transfer the Units to the share deposit accounts held by the custodian in the holder’s name. The Unit holder shall bear any transfer and cancellation costs involved. Similarly, the holder may instruct a broker to assemble Units by transferring the number of shares that jointly represent a Unit, which shall be registered by the custodian in a trust account linked to the Units.
The right to cancel Units may be suspended in the event of a public offering for distribution of Units, either in the domestic or the international market, in which case the suspension may not last longer than 180 days. Units subject to any lien or encumbrance may not be cancelled.
The following rules apply to the exercise of the rights granted to the shares represented by Units:
| · | Dividends and share redemption or repayment amounts delivered to us, as depository of the shares, shall be paid by us to the Unit holder; |
| · | Only the Unit holder shall have the right to attend our general meetings and to exercise all of the prerogatives conferred on our shareholders by the shares represented by the Units; |
| · | In the event of a stock split, cancellation or reverse stock split or new issuances of shares by us while the Units are in existence, the following rules will be observed: |
(1) In the event there is a change in the number of shares represented by Units as a result of a reverse stock split or cancellation of shares, we will debit from the Unit accounts the number of cancelled shares of each Unit holder and proceed with the automatic cancelation of Units, observing the ratio of one common share and one preferred share issued by us to each Unit. We will deliver to the shareholders those shares that are insufficient to constitute a Unit in the form of shares, rather than Units; and
(2) In the event there is a change in the number of shares represented by the Units as a result of a stock split or new issuances of shares, the custodian will register the deposit of the new shares and issue new Units, registering them in the accounts of their respective holders, so as to reflect the new number of shares held by unit holders, maintaining a ratio of one common share and one preferred share issued by us and represented by Units, and will deliver to holders those shares that are insufficient to constitute a Unit in the form of shares rather than Units;
In the event of a capital increase by means of the issue of shares that may be converted into new Units, Unit holders may exercise the preemption rights belonging to the shares represented by their Units. We shall create new Units in the register of book-entry Units and credit them to their holders so as to reflect the new number of common and preferred shares issued by us, subject to the current proportion of ordinary and preferred shares to constitute the Units. Shares that are too few to constitute a Unit shall be delivered to the shareholders as shares, rather than Units. There shall be no automatic credit of Units in the event of the exercise of preemption rights in the issue of securities other than shares; and
Unit holders will be entitled to receive any shares issued as a result of our spin-off, consolidation or merger.
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General Meetings
At our duly convened and installed general meetings, our shareholders are authorized to resolve on business related to our activities and to take the decisions they deem to be in our interests.
Our shareholders are exclusively responsible for approving the financial statements at the annual general meeting, and to decide on the destination of net earnings and the distribution of dividends for the year immediately preceding the meeting. The members of the board of directors and fiscal council are, as a general rule, elected at annual general meetings unless for an exceptional reason they have to be elected at an extraordinary general meeting.
An extraordinary general meeting may be held at any time, including together with an annual general meeting. Our shareholders in a general meeting are exclusively responsible for approving, among other matters: (i) amendments to our By-Laws; (ii) election and dismissal of members of our board of directors; (iii) creation of any reserves of profits, other than the legal reserve; (iv) suspension of the rights of a shareholder that has failed to comply with obligations under the law or our By-Laws; (v) approval of our incorporation, merger or spin-off; and (vi) approval of our dissolution or liquidation, approval of reports prepared by the liquidators and the election of a liquidator and members of the fiscal council to operate during a liquidation.
Quorum of General Meetings
As a general rule, the Brazilian Corporate Law sets forth that a general meeting can be held if shareholders holding at least 25% of the voting capital stock are present, at the first call, and at the second call if any number of holders of voting shares are present. If the shareholders have been convened to resolve on amendments to the By-Laws, the quorum at the first call must be at least 2/3 of the voting shares and, at the second call, any number of holders of voting shares.
The CVM may authorize the aforementioned quorum, set forth in the Brazilian Corporate Law, to be reduced in the case of a publicly held company with widely held shares, and where the last three general meetings have been attended by shareholders representing less than half the voting shares.
In general, the approval of any matter must occur through votes of shareholders attending a general meeting in person, or through a proxy, corresponding at least to a majority of the common shares represented at the meeting, and abstentions are not taken into account for this calculation. Nevertheless, the affirmative vote of shareholders representing at least one half of the voting shares is needed for the approval of the following matters, among others: (i) reduction of the mandatory dividend to be distributed to our shareholders; (ii) changes in our business purpose; (iii) our merger, spin-off or incorporation; (iv) our participation in a corporate group (as defined by the Brazilian Corporate Law); (v) the termination of a state of liquidation; and (vi) our dissolution.
Call Notice of our Shareholders’ General Meetings
The Brazilian Corporate Law requires all general meetings to be called by a minimum of three entries in the Official Gazette of the State of São Paulo and in another mass circulation newspaper in São Paulo, where the BM&FBOVESPA is located. Our call notices of meetings are currently published in the Official Gazette of the State of São Paulo, the official journal of São Paulo state, and in the Valor Econômico newspaper. The first call must be published not more than 30 days before the date of the meeting, and the second call not more than eight days in advance. However, in certain circumstances, at the request of any shareholder, the CVM may (i) after consulting us, require the shareholders’ meeting to be postponed and held 30 days after the first call; and/or (ii) suspend for up to 15 days the advance notice required for an extraordinary general meeting, to give the shareholder time to understand and analyze the proposals to be voted on at the meeting. The call notices must give full details of the agenda for the meeting (the term “general matters” being prohibited) and the adequate supporting documents must be available to the public on the CVM’s website from the date of publication of the first call.
Place of our Shareholders’ General Meetings
Our shareholders’ meetings are held at our headquarters at Avenida Presidente Juscelino Kubitschek, 2041/2235, Bloco A, Vila Olímpia, in the city of São Paulo, state of São Paulo, Brazil. The Brazilian Corporate Law allows our shareholders to hold meetings outside our headquarters in an event of force majeure, provided that the
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meetings are held in the city of São Paulo and the relevant notice contains a clear indication of the place where the meeting will be held.
Responsibility for Calling General Meetings
It is usually the responsibility of our board of directors to call a general meeting, provided that such meetings may also be called by the following persons or bodies: (i) any shareholder, when our directors fail to call a meeting within 60 days of the date required by law or by our By-Laws; (ii) shareholders representing a minimum of 5% of our capital stock, if our managers fail to call a meeting, within eight days, in response to a justified request submitting matters to be discussed; (iii) shareholders representing a minimum of 5% of our capital stock, if our board of directors fail to call a meeting intended to install a fiscal council, within eight days of the request being made; and (iv) the fiscal council (if already installed), if our board of directors fails to call the annual general meeting; and the fiscal council can also call an extraordinary general meeting whenever there are serious or urgent reasons.
Conditions for Admission to a General Shareholders’ Meetings
Shareholders attending general meetings must prove that they are the holders of shares with voting rights, as set forth in the Brazilian Corporate Law. Our shareholders may be represented by a proxy (including a public proxy in accordance with CVM Instruction 481, of December 17, 2009, as amended), appointed not more than one year before the date of the meeting, and this representative must be a shareholder, a manager, a lawyer or, in the case of a publicly-held company, as ours is, a financial institution. Investment funds may be represented by their respective administrators.
Remote Voting
The CVM has enacted a regulation which establishes rules for remote participation and voting in general meetings of publicly-held companies. The mandatory applicability of this rule was postponed by a decision of the CVM in late 2015, and remained optional throughout 2016.
From January 1, 2017 the rule became applicable to all publicly-held companies that on April 9, 2015 had at least one type or class of share listed included in either the IBrX-100 or the IBOVESPA indices, as is our case. Accordingly, as from 2017 we will have in place the necessary structure to allow our shareholders to participate and vote remotely at general meetings. For this purpose, our shareholders must follow the voting procedures disclosed by us in the call notice for the relevant general meeting to transfer the voting pronouncements including by contacting either us or the custodians (whom will be responsible for transferring the voting pronouncements to us), pursuant to the terms of the applicable regulation.
Policy on Trading in Our Own Securities
The objective of our Policy on Trading in Our Own Securities, prepared in accordance with in accordance with CVM Instruction 358 of January 3, 2002, as amended (“CVM Instruction 358”), is: (i) to control and punish those persons with access to privileged information and who use this information to trade in securities issued by us; and (ii) to establish rules for trading in our securities.
The purpose of this policy is to avoid insider trading (the furnishing of privileged information from which third parties may benefit) and to ensure transparency in the trading of our securities. Our trading policy establishes blackout periods for trading in our shares by ourselves, our controlling shareholders (direct or indirect), members of the board and of our fiscal council (when one has been installed) and other technical or consultative bodies or other persons who, by virtue of their job, position or commercial, professional or trust relationship with us, have access to any privileged information. This is intended to avoid improper use of information not disclosed to us.
Among other matters, our policy establishes that the persons subject to it shall refrain from buying or selling, by themselves or via their direct dependents or by using directly or indirectly controlled companies, any securities issued by us, or backed by them, as well as their respective derivatives:
(1) From the time when such persons become aware of material information that may affect the value of our securities, until such information is disclosed to the public. Those subject to the policy may trade in Company securities received or acquired under our variable compensation plans only during a period of 30 days from the date
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when such securities are vested, and after the end of the corresponding lock-up period, for the purpose of disposing of them, subject to the undertakings described in the following items;
(2) During the period between our decision to increase capital stock, issue securities, distribute dividends, pay bonuses, or execute a stock split or a reverse stock split, and the publication of the corresponding notices or announcements;
(3) When it is intended to carry out a takeover, a total or partial spin-off, transformation or corporate reorganization;
(4) During the 30-day period prior to the publication of annual or six-monthly financial statements, or quarterly financial information. However, exceptionally in the case of issues of fixed-rate securities by us by means of a public offer overseas, in order to raise funds for us in the ordinary course of our business, including medium term notes issued by us, this period shall be reduced to 15 days before the publication of such statements.
Our policy also establishes that our controlling shareholders, officers, and members of our board of directors, members of our fiscal council (when there is an active one) and members of any other bodies with technical or consulting functions created by a provision in the By-Laws, shall not trade securities issued by us or their respective derivatives on the same day that we, our controlled or associated companies or any other company under their common control are selling shares held in treasury or purchasing shares to be held in treasury, or while holding open orders to deal in our shares. However, such prohibition shall not apply if the acquisition or sale of our shares by us has the specific purpose of making feasible the management of risk arising out of our activities as market maker of certain funds indexes.
Right to Withdrawal
The Brazilian Corporate Law gives our shareholders the right to withdraw from Santander Brasil, upon reimbursement of the equity value of their shares, if the shareholder disagrees with or abstains from voting on certain resolutions approved in shareholders’ general meetings.
According to the Brazilian Corporate Law, the right of withdrawal may be exercised in the following circumstances, among others as provided by law: (i) a change in the preferences, privileges or repayment or redemption conditions granted to our preferred shares, or the creation of a new, more favored class of shares (in which case, only a shareholder who is adversely affected by such change or creation shall have the right of withdrawal); (ii) spin-off (subject to the conditions below); (iii) a reduction in our mandatory dividend; (iv) a change in our corporate purpose; (v) a merger or incorporation with another company in specific circumstances (as described below); (vi) our joining to a group of companies, as defined in the Brazilian Corporate Law; (vii) a corporate transformation; (viii) the takeover of all of our shares by another Brazilian company, so as to make us its wholly-owned subsidiary; or (ix) the acquisition of control of another company at a price exceeding the legal limits.
The Brazilian Corporate Law also provides that a spin-off of a company shall entitle its shareholders to withdraw only if it results in: (i) a change in the corporate purpose, unless the assets spun off are transferred to a company whose principal activity coincides with the business purpose of spun-off company; (ii) a reduction in the mandatory dividend; or (iii) becoming part of a group of companies, as defined in the Brazilian Corporate Law. Besides, in the event of a consolidation or merger of us into another company, or when we become part of a group of companies (as defined in the Brazilian Corporate Law), our shareholders will not be entitled to withdraw from our company if the shares of such companies (a) are liquid, i.e., are listed on the BM&FBOVESPA general index or on any other Stock Exchange index, as defined by the CVM, and (b) are widely held, such that our controlling shareholders or other companies under common control hold less than half the shares of the type or class to which the right of withdrawal corresponds. The right of withdrawal must be exercised within 30 days of publication of the minutes of the general meeting resolving on the matter that gave rise to such right. Furthermore, we have the right to reconsider any resolution that has given rise to a right of withdrawal, during the ten days following the end of the period for exercising the right, if we consider that the payment of the price for buying out dissident shareholders would put our financial stability at risk.
Shareholders who exercise the right to withdrawal shall receive the equity value of their shares, based on the latest balance sheet approved at a general meeting. If, however, the resolution giving rise to the right of withdrawal was passed more than 60 days after the date of the latest approved balance sheet, a shareholder may call for a special balance sheet to be prepared as of a date not more than 60 days before the resolution, to assess the value of the
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shares. In this case, we must immediately pay 80% of the reimbursement value, calculated according to the latest balance sheet approved by our shareholders, and the balance within 120 days of the date of the resolution of the general meeting.
Redemption of Shares
According to the Brazilian Corporate Law, we may redeem our shares by means of a resolution passed at a general meeting by votes representing at least 50% of the shares affected by the redemption. Shares may be redeemed out of retained profits, revenues reserves or capital reserves. If not all of the shares are to be redeemed, a lottery ballot shall be held. If custody shares are selected in the ballot and the custody agreement does not provide for the situation, the financial institution must specify the proportion of shares to be redeemed.
Preemption Rights
Our shareholders have preemptive rights to subscribe for shares in any capital increase, in proportion to their shareholding at the time of the increase. Our shareholders also have preemptive rights in any offer of our shares or subscription warrants. A period of not less than 30 days from the publication of the notice to shareholders of the capital increase is allowed for the exercise of preemptive rights, and these rights are transferable.
However, according to the Brazilian Corporate Law and our By-Laws, our shareholders do not have preemptive rights in cases of granting or exercise of any share call option. In addition, our board of directors may exclude the preemptive right of our shareholders or reduce the exercise period, in the issuance of shares and subscription warrants whose placement is made through sale on stock exchange or public subscription, or share exchange, in a public offering of control acquisition.
Purchase of Our Own Shares
Our By-Laws authorize our board of directors to approve the purchase of our own shares. In any of the following circumstances, the decision, will only become effective upon prior approval by a shareholders meeting: (i) acquisition on an organized securities market involving more than 5% of our outstanding shares of a certain type or class in less than 18 months; (ii) acquisition on an organized securities market for prices 10% above the market price; (iii) acquisition aiming at changing or preserving our share control composition or our management structure; or (iv) where the counterparty in an acquisition out of the organized securities markets is related to us (according to the applicable accounting rules). The decision to purchase our shares will be disclosed to the markets and the respective trade be settled within 18 months from the approval.
The decision to acquire our shares is also subject to certain restrictions. It may not, among others: (i) aim for the acquisition of shares belonging to our controlling shareholders; (ii) be carried in the organized markets for prices above the market prices; (iii) take place simultaneously with a public offering for the purchase of our shares; or (iv) require the use of funds exceeding the available funds (considered all capital or profits reserves plus the realized results of the ongoing fiscal year, excluded, in both cases, the legal reserve, the reserve for realizable profits, the special reserve for non-distributed compulsory dividends and the tax incentives).
We may not hold in treasury more than 10% of our outstanding shares of a certain type or class, including shares held by our subsidiaries and affiliated companies and the shares corresponding to the economical exposure arising from derivatives or deferred settlement transactions entered into by us, our subsidiaries and affiliated companies. This limit does not apply to reimbursed shares or forfeited shares, and acquisitions in the scope of a public offering for acquisition of shares, which will be subject to specific laws and regulation.
We may purchase our shares on the stock exchange, but not for a price above the market value. Acquisitions by means of private transactions must observe the applicable limitations and the approval by the shareholders meeting may be required. We may also buy our own shares in the event that we should cease to be a publicly-held company. We may also purchase or issue put or call options on our shares.
On November 3, 2016, our board of directors approved the Unit repurchase program to cover the acquisition of up to 38,042,972 Units, representing 38,042,972 common shares and 38,042,972 preferred shares or ADRs by us or our branch in Cayman, corresponding to approximately 1.02% of the totality of our corporate capital. The repurchase program ends on November 3, 2017.
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On December 14, 2015, our shareholders approved the cancellation of 37,757,908 shares held in treasury, representing 18,878,954 common shares and 18,878,954 preferred shares. Such treasury shares corresponded, as of that date, to approximately 53.9% of the totality of the shares then held in treasury. As a result, as of December 31, 2016 (and 2015), we held 51,571,846 (40,435,466) shares in treasury, of which 25,785,923 (20,217,733) were common shares and 25,785,923 (20,217,733) were preferred shares.
Cancellation of Registration as a Publicly-Held Company
We may cancel our registration as a publicly-held company and, for this purpose, our controlling shareholders must necessarily make a public offer to acquire all our shares in the market, according to the Brazilian Corporate Law and the regulations issued by the CVM. The minimum offer price must be at least equal to the economic value of our shares, as valued by a specialized company using any generally accepted and recognized valuation method, or any other criteria defined by the CVM.
The valuation report must be prepared by a specialized and experienced appraiser, who is independent of Santander Brasil, our management team and our controlling shareholders and who shall be chosen by the board of directors. The controlling shareholder shall bear the costs of preparing the valuation report.
Disposal of Control
Our By-Laws state that disposal of control of our company, either in a single transaction or in a series of transactions, must be subject to the condition, whether suspensive or resolutory, that the acquirer undertakes to make a public offer to acquire all the shares held by our other shareholders, both common and preferred, pursuant to the conditions and deadlines required by the current legislation, so as to ensure that they receive equal treatment with respect to the controlling shareholder in the disposal.
This offer will still be required (i) in cases where there is assignment for consideration of rights to subscribe for shares that may result in the disposal of the company’s control; and (ii) in case of disposal of control of a company that holds the control power over us.
Requirement for Disclosure of Information
As a publicly-held company, we must comply with the requirements for disclosure of information set forth by the Brazilian Corporate Law and the CVM.
Periodic and Occasional Disclosure of Information
The regulations applicable to publicly-held companies issued by the CVM, including CVM Instruction 358, provide that we must disclose a number of items of periodic and occasional information. Among such items of information are, for example, our financial statements accompanied by the management reports and the reports of our independent auditors, our standard financial information form (formulário de informações financeiras padronizadas – DFP), our quarterly report (formulário de informações trimestrais – ITR) and our reference form (formulário de referência).
According to CVM Instruction 480 of December 7, 2009, as amended, the reference form (formulário de referência) must be filed with the CVM annually, within five months of the closing date of the reporting period, in the form established by the regulation. The reference form (formulário de referência) shall be updated prior to a public offer, as well as upon the occurrence of certain events determined by the regulation that alter the information described therein, within 7 business days of the date of the respective change. This document contains complete information regarding us including, in general, the matters addressed in this annual report.
CVM Instruction 457 of July 13, 2007, as amended (“CVM Instruction 457”) provides that we are also subject to the disclosure of our consolidated financial statements based on the International Financial Reporting Standards, or IFRS, within four months of the end of each reporting period. The financial statements mentioned by CVM Instruction 457 must be disclosed in their entirety, together with (i) the management report, (ii) explanatory note expressly stating without reservation that the consolidated financial statements are in accordance with IFRS as issued by the IASB and Brazilian GAAP, and (iii) the opinion of the independent auditors. Within 15 days following the term established by Brazilian law for disclosure of our quarterly information, we must: (i) disclose our full quarterly information translated into the English language; or (ii) disclose our financial statements or consolidated
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financial statements in accordance with IFRS as issued by the IASB, accompanied by the independent auditors’ review report.
Disclosure of Information about Trading by Our Managers and Related Persons
Our officers, members of our board of directors, fiscal council, if in operation, and any technical or consulting body created by our By-Laws must disclose to us the securities issued by us, our controlling or controlled companies, when publicly-held, and the derivatives and other securities referenced by such securities that are held by them, as well as the trades with such securities. This obligation includes the securities held by the spouses, companions and any dependents of the aforementioned persons, as well as the companies directly or indirectly controlled by them.
We are obliged to send such information to CVM and BM&FBOVESPA within ten days following the end of the month in which there is a change in the holding position or the month in which the relevant person is invested in the position (including name of person acquiring the shares, number and characteristics of the securities, form, price and date of acquisition). Upon the issuance of CVM Instruction 568 of September 17, 2015, it also became mandatory to provide the CVM and BM&FBOVESPA within the same time period the information related to the securities traded by us, our entities and affiliated companies.
Disclosure of Information about our Shareholders with Relevant Interest
CVM Instruction 358 sets forth that (i) any direct or indirect controlling shareholders, (ii) any shareholders entitled to elect members of the board of directors and fiscal council, as well as (iii) any person or group of persons acting jointly with the aforementioned persons or representing the same interest, that carries out relevant transactions (that is, transactions whereby the direct or indirect holding of the aforementioned persons surpasses, upwards or downwards the thresholds of 5%, 10%, 15%, and so on successively, of our shares of a certain class and type) must disclose to us information on their trades, which will be forwarded to the CVM.
The ruling establishes that the following information must be provided: (i) the name and qualification of the person acquiring the shares, including the registration number in the Natural Persons Registry (CPF) or the National Register of Legal Entities (CNPJ); (ii) the reason for the participation and aimed quantity of shares, containing, if it were the case, a declaration by the acquiring party that it does not intend to alter the composition of its control or the structure of the company’s administration; (iii) the number of shares and other securities or other financial instruments referenced in such shares, of physical or financial settlement, specifying the number, class and type of such shares; (iv) indication of any agreements ruling the exercise of voting rights or the purchase and sale of our securities; and (v) if the shareholder is resident or domiciled abroad, the name and the registration number in the Natural Persons Registry (CPF) or the National Register of Legal Entities (CNPJ) of its agent or legal representative in Brazil for the purposes of article 119 of the Brazilian Corporate Law.
Such obligations also apply to (i) the acquisition of any right over our shares and other securities subject to disclosure; and (ii) execution of any derivative financial instruments referenced in our shares, even without physical settlement provisions.
Our investor relations officer is responsible for sending this information to CVM and to BM&FBOVESPA as soon as received.
Disclosure of Material Facts
The Brazilian Securities Market Law and CVM Instruction 358 set forth that we must disclose any decision of our controlling shareholder, of a general shareholders’ meeting or of any of our management bodies, or any other act or event in connection with our business that could influence: (i) the trading price of our securities or securities referenced to our securities; (ii) the decision by investors to buy, sell or keep those securities; and (iii) the decision by investors to exercise any rights they have as holders of those securities.
Examples of material facts are: the signing of shareholders’ agreements, the transfer of control of the company, a consolidation, merger or spin-off involving the company or associated companies, the change in rights and advantages of the securities issued by the company, the split or reverse split of shares, among others.
Our investor relations officer is responsible for the disclosure of any material facts to the market.
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The applicable regulation authorizes us, on an exceptional basis, to request confidential treatment of certain material developments from the CVM when our management believes that disclosure of the respective fact to the public could result in adverse consequences to us.
| 10C. | Material Contracts |
For the two years immediately preceding the publication of this annual report, we were not a party to any material contract outside the ordinary course of business.
| 10D. | Exchange Controls |
Foreign Investment in Brazil
Foreign Direct Investment
Foreign Direct Investment in Brazil is regulated by Law 4,131 and Law 4,390, enacted on September 3, 1962 and August 29, 1964, respectively, as amended. A foreign direct investor under Law 4,131/62 must:
| · | register as a foreign direct investor with the Brazilian Central Bank; |
| · | obtain a taxpayer identification number from the Brazilian tax authorities; |
| · | appoint a tax representative in Brazil; and |
| · | appoint a representative in Brazil for service of process in respect of suits based on the Brazilian Corporate Law. |
Foreign capital must be registered with the Brazilian Central Bank through the Electronic Registration System – Foreign Direct Investment (the “Registro Declaratório Eletrônico – Investimento Externo Direto”) within 30 days of the flow of funds into Brazil in accordance with Law 4,131. The registration of foreign capital is required for the remittance of profits abroad, the repatriation of capital and the registration of reinvestments. Investments will always be registered in the foreign currency in which they are actually made, or in Brazilian currency, if the funds are derived from a non-resident account properly held in Brazil.
On December 28, 2006, Law 11,371 allowed the registration of the foreign capital invested in Brazilian companies but not yet duly registered and not subject to other types of registration. For the purposes of such registration the amount of foreign capital in reais to be registered must be evidenced in the accounting records of the relevant Brazilian company and must be registered prior to the last business day of the subsequent calendar year during which the company becomes obligated to register the capital.
Other than such registration, foreign investment is not subject to government approvals or authorizations and there are no requirements regarding minimum investment or local participation in capital (except in very limited cases such as in regard to financial institutions, insurance companies and other entities subject to specific regulations). Foreign participation, however, is limited (that is, subject to approvals) or forbidden in several sectors.
Foreign investments in currency must be officially channeled through financial institutions duly authorized to deal in foreign exchange. Foreign currency must be converted into Brazilian currency and vice versa through the execution of an exchange contract. Foreign investments may also be made through the contribution of assets and equipment intended for the local production of goods and services.
Capital Markets Investment
Investors residing outside Brazil, including institutional investors, are authorized to purchase securities in Brazil on the Brazilian stock exchange, provided that they comply with the registration requirements set forth in the applicable regulation enacted by CMN and the CVM.
Since March 30, 2015, portfolio investments are regulated by CMN Resolution 4,373, which revoked the former rule (CMN Resolution 2,689, of January 26, 2000) which had been in force for about 15 years.
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The main purpose of CMN Resolution 4,373 is to facilitate the entry of foreign investors in the Brazilian financial and capital markets. It introduced, among other things, the possibility for foreign investors of making investments in local currency with funds held in foreign bank accounts of the non-resident investor, or with bills of payment denominated in reais but issued abroad.
With certain limited exceptions, under CMN Resolution 4,373 investors are permitted to carry out any type of transaction in the Brazilian capital markets involving a security traded on a stock or futures exchange or an organized over-the-counter market, but may not transfer the ownership of investments made under such regulation to other non-Brazilian holders through private transactions. Investments and remittances outside Brazil of gains, dividends, profits or other payments under Santander Brasil’s shares are made through the commercial rate exchange market.
Under CMN Resolution 4,373, an investor residing outside Brazil must:
| · | appoint at least one financial institution or an institution authorized to operate by the Brazilian Central Bank as representative in Brazil that will be responsible for complying with the registration and reporting requirements and reporting procedures of the Brazilian Central Bank and the CVM; |
| · | register as a foreign investor with the CVM; |
| · | appoint one or more custodians authorized by CVM; |
| · | register the foreign investment with the Brazilian Central Bank; |
| · | appoint a tax representative in Brazil; and |
| · | obtain a taxpayer identification number from the Brazilian federal tax authorities. |
Securities and other financial assets held by foreign investors pursuant to said regulation must be registered or maintained in deposit accounts or under the custody of an entity duly licensed by the Brazilian Central Bank or the CVM. In addition, securities trading by foreign investors is generally restricted to transactions involving securities listed on the Brazilian stock exchanges or traded in organized over-the-counter markets licensed by the CVM.
Instruction CVM 560 of March 27, 2015, as amended, introduced in Brazilian securities regulation the obligation of the representatives of investors residing outside Brazil to inform the CVM of the movements and applications of funds of such investors participating in collective accounts and holders of own accounts represented by them.
| 10E. | Taxation |
The following summary contains a description of certain Brazilian and U.S. federal income tax consequences of the ownership and disposition of units or ADRs, but it does not purport to be a comprehensive description of all the tax considerations that may be relevant to the ownership or disposition of units or ADRs. The summary is based on the tax laws of Brazil and regulations thereunder and on the tax laws of the United States and regulations thereunder, as of the date hereof, which are subject to change.
Although there is at present no income tax treaty between Brazil and the United States, the tax authorities of the two countries have had discussions that may culminate in a treaty. No assurance can be given, however, as to whether or when a treaty will enter into force or how it will affect the U.S. Holders (as defined below) of units or ADRs. Prospective holders of units or ADRs should consult their tax advisors as to the tax consequences of the acquisition, ownership and disposition of units or ADRs in their particular circumstances.
Brazilian Tax Considerations
The following discussion is a summary of the Brazilian tax considerations relating to the acquisition, exchange, ownership and disposition of units or ADRs by a Non-Resident Holder. The discussion is based on Brazilian law as currently in effect, which is subject to change, possibly with retroactive effect, and to differences of interpretation. Any change in such law may change the consequences described below.
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The tax consequences described below do not take into account the effects of any tax treaties or reciprocity of tax treatment entered into by Brazil and other countries. The discussion also does not address any tax consequences under the tax laws of any state or locality of Brazil.
The description below is not intended to constitute a complete analysis of all tax consequences relating to the acquisition, exchange, ownership and disposition of our units or ADRs. Holders of units or ADRs and prospective purchasers thereof should consult their tax advisors with respect to the tax consequences of owning and disposing of our units or ADRs in light of their particular investment circumstances.
Income Tax
Dividends
Dividends paid by a Brazilian company, such as ourselves, including stock dividends to a Non-Resident Holder are currently not subject to withholding income tax in Brazil, to the extent that such amounts are related to profits generated since January 1, 1996. Dividends relating to profits generated prior to January 1, 1996 may be subject to Brazilian withholding tax at varying rates, depending on the year the profits were generated.
Interest Attributable to Shareholders’ Equity
Law 9,249, dated December 1995, as amended, allows a Brazilian corporation, such as ourselves, to make distributions to shareholders of interest on net equity and to treat those payments as a deductible expense for purposes of calculating Brazilian corporate income tax and social contribution on net profits, subject to the limits described below. These distributions may be paid in cash. For tax purposes, this interest is limited to the daily pro rata variation of the Long-Term Interest Rate (Taxa de Juros de Longo Prazo – TJLP), as determined by the Brazilian Central Bank from time to time, and the amount of this deductible expense may not exceed the greater of:
| · | 50.0% of the net income (after the deduction of social contribution on net profit but before taking into account allowances for income tax and the interest attributable to shareholders’ equity) for the period in respect of which the payment is made; and |
| · | 50.0% of our accumulated profits. |
Payment of interest on shareholders’ equity to a Non-Resident Holder is subject to withholding income tax at the rate of 15.0%, or 25.0% for individuals or entities residing in a “Tax Haven.” According to Brazilian legislation, a “Tax Haven” jurisdiction is one in which there is no income taxation or where the local income tax rate is generally applied at rates under 20%. Ordinance 488 dated December 12, 2014, provided for the possibility of that 20% threshold being reduced to 17% if the corresponding jurisdictions are aligned with international standards of fiscal transparency in accordance with rules to be established by the Brazilian tax authorities, or where local legislation imposes restrictions on disclosure regarding shareholder composition or investment ownership. These payments may be included, at their net value, as part of any mandatory dividend, as discussed above under “—Dividend Policy.”
Distributions of interest on shareholders’ equity to Non-Resident Holders may be converted into U.S. dollars and remitted outside Brazil, subject to applicable exchange controls, if the investment is registered with the Brazilian Central Bank.
Capital Gains
(i) Taxation of Capital Gain Earned in the Country in a Transaction Not Carried Out on the Brazilian Stock Exchange (Or Similar Exchange)
According to Law 10,833/03, the gains recognized on a disposition of assets located in Brazil, such as our units, by a Non-Resident Holder, could be subject to withholding tax in Brazil. This rule is applicable regardless of whether the disposition occurs in Brazil or abroad and regardless of whether the disposition is made to an individual or entity resident or domiciled in Brazil.
As a general rule, capital gains realized as a result of a disposition of units are the positive difference between the amount realized on the disposition of the units and the acquisition cost of such units.
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Historically, the income tax on these gains had to be withheld at source and the tax rate would vary depending on the domicile of the Non-Resident Holder:
| · | If the Non-Resident Holder is not located in a Tax Haven, the tax rate will be 15.0%; |
| · | If the Non-Resident Holder is located in a Tax Haven, the tax rate will be 25.0%. |
| · | However, on September 22, 2015, the Brazilian federal government enacted PMP 692, converted into Law 13,259/16, which introduced the application of progressive tax rates for income taxation over capital gains recognized by Brazilian individuals and Non-Resident Holders on the disposition of assets in general. Under Law 13,259/16, the income tax rates applicable to capital gains realized by these investors would be: (i) 15% for the part of the gains up to R$5 million, (ii) 17.5% for the part of the gain that exceeds R$5 million but does not exceed R$10 million, (iii) 20% for the part of the gain that exceeds R$10 million but does not exceed R$30 million, and (iv) 22.5% for the part of the gain that exceeds R$30 million. |
| · | The provisions of Law 13,259/16 apply to Non Resident Holders pursuant to CMN Resolution 4,373, provided such Non Resident Holders are not located in a Tax Haven. However, Non Resident Holders (whether they are considered to be Non-Resident Holders as a result of CMN Resolution 4373 or otherwise) located in a Tax Haven are subject to a specific tax regulation and will continue to be taxed at a rate of 25.0%. |
| · | Pursuant to article 5 of Law 13,259/16, the new progressive rates regime for income tax assessment on capital gains would apply to transactions carried out as of January 1, 2016. As a result, although there could be a risk of Brazilian tax authorities attempting to apply the new progressive rates regime of Law 13,259/16 for capital gains arising out of transactions executed as of January 1, 2016, since MP 692 was not converted into law until the end of 2015, based on the constitutional principles governing the income tax in Brazil, there are solid grounds to sustain that its provisions should only apply for transactions carried out as of January 1, 2017, an understanding which has been formally ratified by Interpretative Declaratory Act No. 3/2016 issued by the Brazilian tax authorities. |
The tax must be withheld and paid by the buyer or, in cases where the buyer and seller are domiciled abroad, a legal representative of buyer shall be designated for the payment of the tax.
(ii) Taxation of the Capital Gains Earned in the Country in a Transaction Carried Out on the Brazilian Stock Exchange (Or Similar Exchange)
There could also be the levy of income tax on net gains earned by a Non-Resident Holder on the disposition of units sold on the Brazilian stock exchange, commodities or futures exchange (or similar exchange). The tax rate will vary according to the type of investment registration made by the Non-Resident Holder at the Brazilian Central Bank, as well as the location of the beneficiary:
| · | Capital gains earned by a Non-Resident Holder who (i) has its investment registered in Brazil with the Brazilian Central Bank under the rules of CMN Resolution 4,373 (“Registered Holder”) and (ii) is not a Tax Haven resident are exempt from income tax; and |
| · | Capital gains earned by a Non-Resident Holder who is not a Registered Holder or is a Tax Haven resident (Registered Holder or not) are currently subject to income tax at a rate of 15.0%. In this case, withholding income tax of 0.005% will be levied by the intermediary institution (that is, a broker) that receives the order directly from the Non-Resident Holder, which can be later offset against the 15.0% income tax due on the capital gain, which will be paid by the Non-Resident Holder’s tax representative in Brazil. |
Any other gains realized on a disposition of units that is not carried out in an exchange environment or that is conducted in the non-organized “OTC market” are subject to the same rules set forth in item “(i) Taxation of Capital Gain Earned in the Country in a Transaction Not Carried Out on the Brazilian Stock Exchange (Or Similar Exchange).” Gains realized by a Non-Resident Holder on the disposition of preemptive rights held in stock will be subject to Brazilian income tax, according to the same rules applicable to the sale of units or ADRs.
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(iii) Capital Reduction
In the case of a capital reduction by a Brazilian corporation, such as ourselves, the positive difference between the amount received by the Non-Resident Holder and the acquisition cost of the shares is treated as capital gain derived from a transaction held out of a Brazilian exchange described above in (i) and is therefore currently subject to withholding tax at the rate of 15.0% for a Non-Resident Holder not located in a Tax Haven or up to 25.0% for a Non-Resident Holder located in a Tax Haven, for the year of 2016.
As mentioned above, in this case, as from January 1, 2017, although subject to interpretation, in the case of Non-Resident Holders carrying out investments pursuant to CMN Resolution 4,373, it is possible to sustain that the income tax should not apply at progressive rates under Law 13,259/16. Moreover, Non-Resident Holders located in a Tax Haven jurisdiction are subject to a specific tax regulation and remain taxed to a tax rate of 25.0%.
Sale of ADRs
Pursuant to Section 26 of Law 10,833/2003, the sale of an asset located in Brazil by a Non-Resident Holder, whether to a Brazilian resident or to another Non-Resident Holder, is subject to Brazilian income tax. Our understanding is that ADRs do not qualify as assets located in Brazil and thus should not be subject to the Brazilian income tax. Notwithstanding the foregoing, since the tax rule referred to in Section 26 of Law 10,833 provides broad language and has not been definitely analyzed by the administrative or judicial courts, we are unable to assure you of the final outcome of such discussion.
Gains on the exchange of ADRs for units
Non-Resident Holders may exchange ADRs for the underlying units, sell the units on the Brazilian stock exchange and the sale proceeds may be remitted abroad. As a general rule, the exchange of ADRs for shares is not subject to income taxation in Brazil.
Upon receipt of the underlying units in exchange for ADRs, Non-Resident Holders may also elect to register with the Brazilian Central Bank the U.S. dollar value of such units as a foreign portfolio investment under CMN Resolution 4373, which will entitle them to the tax treatment applicable to Registered Holders described above.
Alternatively, the Non-Resident Holder is also entitled to register with the Brazilian Central Bank the U.S. dollar value of such units as a foreign direct investment under Law 4,131/62, in which case the respective sale would be subject to the tax treatment applicable to transactions carried out of by a Non-Resident Holder that is not a Registered Holder.
Gains on the exchange of units for ADRs
The deposit of units in exchange for ADRs by a Non-Resident Holder may be subject to Brazilian income tax on capital gains if the acquisition cost of the units is lower than the market price for such units.
The difference between the acquisition cost and the average price of the units is considered a capital gain currently subject to income tax at a rate of 15.0% (for the year of 2016), or 25.0% for Tax Haven residents. If a Non-Resident Holder that is a foreign direct investor under Law 4,131/62 wishes to deposit its units into the ADR program in exchange for ADRs, such Non-Resident Holder will be required to present to the custodian evidence, if applicable, of payment of the income tax assessed on capital gains at the rate of 15.0%(for the year of 2016) or, in the case of a Tax Haven resident, 25.0%.
As mentioned above, in this case, from January 1, 2017 pursuant to CMN Resolution 4,373 the progressive rates of Law 13,259/16 to capital gains obtained by Non-Resident Holders not located in a Tax Haven will be applicable and for Non Resident Holders (whether they are considered to be Non-Resident Holders as a result of CMN Resolution 4373 or otherwise) located in a Tax Haven are subject to a specific tax regulation and remain taxed to a tax rate of 25.0%.
However, there are arguments to support the position that there should be no withholding tax on this transaction, because: (i) the deposit of units would not have represented the disposal of the investment; and (ii) the transaction is registered on the stock exchange. Given the uncertainty of these two positions, we recommend that you consult your tax advisors.
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Tax on Foreign Exchange Transactions (IOF/Exchange)
The Tax on Foreign Exchange Transactions (IOF/Exchange), is due on the conversion of Brazilian or foreign currency, or any document that represents it, into an available equivalent amount. Currently, for most foreign exchange transactions, the IOF/Exchange rate is 0.38%.
However, currently different IOF/Exchange rates apply to foreign exchange transactions carried out in connection with investments made by Non-Resident Holders in the Brazilian financial and capital markets under CMN Resolution 4373. These rates are:
| i. | investment in financial and capital markets (Fixed Income), constitution of guaranteed margin, derivatives operations with predetermined yield, including simultaneous transactions: zero (from June 4, 2013); |
| ii. | investment in variable income securities negotiated on a stock exchange, commodities and futures, acquisition of shares in public offerings or subscription of shares, as long as they belong to publicly-held companies whose shares are subject to trading on the stock exchange: zero; |
| iii. | investment in private equity funds (FIP), investment funds in emerging companies (FIEE) and investment funds in shares from these funds (FIC-FIP and FIC-FIEE): zero; |
| iv. | simultaneous foreign exchange transactions resulting from the cancellation of depositary receipts for the acquisition of shares negotiated on the stock exchange: zero; |
| v. | return of investments made in the Brazilian capital and financial markets: zero; |
| vi. | distribution of interest on shareholders’ equity and dividends: zero; |
| vii. | investment in Brazilian Depositary Receipts: zero; and |
| viii. | investments in bonds related to infrastructure projects, which comply with the requirements provided for in Article 1 of Law 12,431/2011: zero. |
Under the provisions of the Law, the Brazilian government may increase any of these rates at any time, up to 25.0%. However, any increase in rates may only apply to future transactions.
Tax on Transactions Involving Bonds and Securities and Derivatives
Brazilian law imposes a Tax on Transactions Involving Bonds and Securities, known as “IOF/Bonds Tax.”
Currently, the IOF Bonds Tax is due at a daily rate of 1.0%, limited to 96.0% of the income generated by fixed income bonds, on the redemption amount or the amount received from assignment or renegotiation. The rate is reduced to zero as from the thirtieth day.
The rate of IOF/Bonds Tax applicable to transactions of variable income securities, including those traded in stock, commodities or futures markets that involve shares, or units composed of shares, is reduced to zero.
The IOF Derivatives Tax was established by Decree 7,563 of September 16, 2011, with the original levy of 1.0% per day on the notional value of the adjusted purchase sale or maturity of financial derivative contract in the country that individually results in an increased foreign exchange exposure on a short position. However, under Decree 8,027 of June 12, 2013 the tax rate was reduced to zero.
Other Brazilian Taxes
The inheritance and gift tax (“ITCMD”) is applicable to the transfer of any goods or rights by gift or bequest. The transfer of shares, or units comprised of shares, that are abroad to individuals who are domiciled in Brazil is subject to taxation. If the shares are in Brazil and are transferred to a non-resident, the ITCMD will apply if the donor is domiciled in Brazil and the recipient is domiciled abroad. The ITCMD is a state tax with a maximum rate of 8%.
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Material U.S. Federal Income Tax Considerations for U.S. Holders
The following summary describes the material U.S. federal income tax consequences of the ownership and disposition of ADRs or units, but it does not purport to be a comprehensive description of all of the tax considerations that may be relevant to a particular person’s decision to acquire such securities. This summary does not address “Medicare contribution tax” consequences and applies only to U.S. Holders (as defined below) that hold ADRs or units as capital assets for U.S. federal income tax purposes and does not address special classes of holders, such as:
| i. | certain financial institutions; |
| ii. | insurance companies; |
| iii. | dealers and traders in securities that use a mark-to-market method of tax accounting; |
| iv. | persons holding ADRs or units as part of a hedge, “straddle,” conversion transaction or integrated transaction; |
| v. | holders whose “functional currency” is not the U.S. dollar; |
| vi. | holders liable for the alternative minimum tax; |
| vii. | tax exempt entities, including “individual retirement accounts” and “Roth IRAs”; |
| viii. | partnerships or other entities classified as partnerships for U.S. federal income tax purposes; |
| ix. | holders that own or are deemed to own 10% or more of our voting shares; |
| x. | persons holding ADRs or units in connection with a trade or business conducted outside the United States; and |
| xi | persons who acquired ADRs or units pursuant to the exercise of an employee stock option or otherwise as compensation. |
If an entity that is classified as a partnership for U.S. federal income tax purposes holds units or ADRs, the U.S. federal income tax treatment of a partner will generally depend on the status of the partner and upon the activities of the partnership. Partnerships holding units or ADRs and partners in such partnerships should consult their tax advisors as to the particular U.S. federal income tax consequences of holding and disposing of the units or ADRs.
The summary is based upon the Internal Revenue Code of 1986, as amended (the “Code”), administrative pronouncements, judicial decisions and final, temporary and proposed Treasury Regulations, all as of the date hereof, changes to any of which may affect the tax consequences described herein, possibly with retroactive effect. In addition, the summary is based in part on representations of the depositary and assumes that each obligation provided for in, or otherwise contemplated by, the deposit agreement or any other related document will be performed in accordance with its terms. U.S. Holders are urged to consult their tax advisors as to the U.S. federal income tax consequences of the acquisition, ownership and disposition of ADRs or units in their particular circumstances.
As used herein, a “U.S. Holder” is, for U.S. federal income tax purposes, a beneficial owner of ADRs or units that is:
(1) an individual who is a citizen or resident of the United States;
(2) a corporation, or other entity taxable as a corporation, created or organized in or under the laws of the United States, any state thereof or the District of Columbia;
(3) an estate the income of which is subject to U.S. federal income taxation regardless of its source; or
(4) a trust if (a) a court within the United States is able to exercise primary supervision for the administration of the trust, and one or more U.S. persons have the authority to control all substantial decisions of the trust, or (b) the trust has validly elected under applicable Treasury Regulations to be treated as a U.S. person.
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In general, for U.S. federal income tax purposes, U.S. Holders of ADRs will be treated as the owners of the underlying units represented by those ADRs. Accordingly, no gain or loss will be recognized if a U.S. Holder exchanges ADRs for the underlying units represented by those ADRs.
The U.S. Treasury has expressed concerns that parties to whom American depositary shares are released before delivery of shares to the depositary (a practice called “pre-release”) or intermediaries in the chain of ownership between U.S. Holders and the issuer of the security underlying the American depositary shares, may be taking actions that are inconsistent with the claiming of foreign tax credits by U.S. Holders of American depositary shares. These actions would also be inconsistent with the claiming of the preferential tax rates described below, applicable to dividends received by certain non-corporate holders. Accordingly, the creditability of Brazilian taxes and the availability of the preferential tax rates for dividends received by certain non-corporate holders, each described below, could be affected by actions taken by these parties or intermediaries.
Taxation of Distributions
Distributions paid on our units or ADRs (including distributions to shareholders that are treated as interest on net equity for Brazilian tax purposes and amounts withheld in respect of Brazilian tax), other than certain pro rata distributions of our common shares, will be treated as dividends to the extent paid out of our current or accumulated earnings and profits (as determined under U.S. federal income tax principles). Because we do not maintain calculations of our earnings and profits under U.S. federal income tax principles, it is expected that distributions generally will be reported to U.S. Holders as dividends. These dividends will be included in a U.S. Holder’s income on the date of the U.S. Holder’s (or in the case of ADRs, the depositary’s) receipt of the dividend, and will not be eligible for the “dividends received deduction” generally allowed to corporations receiving dividends from domestic corporations under the Code. The amount of the distribution will equal the U.S. dollar value of the reais received, calculated by reference to the exchange rate in effect on the date that distribution is received (which, for U.S. Holders of ADRs, will be the date on which the distribution is received by the depositary), whether or not the depositary or U.S. Holder in fact converts any reais received into U.S. dollars at that time. If the dividend is converted into U.S. dollars on the date of receipt, a U.S. Holder generally will not be required to recognize foreign currency gain or loss in respect of the dividend income. A U.S. Holder may have foreign currency gain or loss if the dividend is converted into U.S. dollars after the date of receipt. Any gains or losses resulting from the conversion of reais into U.S. dollars will be treated as ordinary income or loss, as the case may be, of the U.S. Holder and will generally be U.S. source.
Subject to applicable limitations (including the requirement that the ADRs be readily tradable on an established securities market in the United States), the discussion above regarding concerns expressed by the U.S. Treasury and the discussion of the passive foreign investment company rules below, under current law, dividends paid with respect to our ADRs to certain non-corporate U.S. Holders will be taxable at the preferential rates applicable to long-term capital gain. Non-corporate U.S. Holders should consult their tax advisors regarding the availability of these favorable rates in their particular circumstances.
Sale or Other Disposition of ADRs or Units
Subject to the discussion of the passive foreign investment company rules below, gain or loss realized by a U.S. Holder on the sale or exchange of ADRs or units will be subject to U.S. federal income tax as capital gain or loss in an amount equal to the difference between the U.S. Holder’s adjusted tax basis in the ADRs or units and the amount realized on the disposition, in each case as determined in U.S. dollars. Such gain or loss will be long-term capital gain or loss to the extent that the U.S. Holder’s holding period with respect to the ADRs or units exceeds one year. Gain or loss, if any, will generally be U.S. source for foreign tax credit purposes. The deductibility of capital losses is subject to limitations. Long-term capital gain of a non-corporate U.S. Holder is generally taxed at preferential rates. If a Brazilian tax is withheld on the sale or other disposition of ADRs or units, a U.S. Holder’s amount realized will include the gross amount of proceeds of the sale or disposition before the deduction of the Brazilian tax. See “—Brazilian Tax Considerations” for a description of when a disposition may be subject to taxation by Brazil.
Foreign Tax Credits
Subject to certain generally applicable limitations, which may vary depending upon a U.S. Holder’s circumstances, and subject to the discussion above regarding concerns expressed by the U.S. Treasury, a U.S.
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Holder will be entitled to a credit against its U.S. federal income tax liability for Brazilian income taxes withheld from dividends on ADRs or units. A U.S. Holder will be entitled to use these foreign tax credits to offset only the portion of its U.S. tax liability that is attributable to foreign-source income. This limitation on foreign taxes eligible for credit is calculated separately with regard to specific classes of income. In addition, a U.S. Holder must satisfy minimum holding period requirements in order to be eligible to claim a foreign tax credit for foreign taxes withheld on dividends.
Because a U.S. Holder’s gains from the sale or exchange of ADRs or units will generally be treated as U.S. source income, the limitation described above may preclude a U.S. Holder from claiming a credit for all or a portion of the foreign taxes imposed on any such gains. U.S. Holders should consult their tax advisors as to whether these Brazilian taxes may be creditable against the U.S. Holder’s U.S. federal income tax liability on foreign-source income from other sources. Instead of claiming a credit, a U.S. Holder may, at its election, deduct such otherwise creditable Brazilian income taxes in computing taxable income, subject to generally applicable limitations under U.S. law. An election to deduct foreign taxes instead of claiming foreign tax credits applies to all foreign taxes paid or accrued in the taxable year.
The Brazilian IOF/Exchange Tax imposed on the purchases of units and the IOF/Bonds Tax on the deposits of units in exchange for ADRs (as discussed above under “—Brazilian Tax Considerations”), will not be treated as creditable foreign tax for U.S. federal income tax purposes. U.S. Holders should consult their tax advisors as to whether those taxes would be deductible for U.S. federal income tax purposes.
The rules governing foreign tax credits are complex and, therefore, U.S. Holders are urged to consult their own tax advisors to determine whether they are subject to any special rules that limit their ability to make effective use of foreign tax credits.
Passive Foreign Investment Company Rules
Based on proposed Treasury Regulations, which are proposed to be effective for taxable years beginning after December 31, 1994, we believe we were not a passive foreign investment company (a “PFIC”) for our taxable year ended December 31, 2016. However, because the proposed Treasury Regulations may not be finalized in their current form, because the application of the proposed regulations is not entirely clear and because the composition of our income and assets will vary over time, there can be no assurance that we will not be a PFIC for any taxable year. The determination of whether we are a PFIC is made annually and is based upon the composition of our income and assets (including, among others, entities in which we hold at least a 25.0% interest), and the nature of our activities.
If we were a PFIC for any taxable year during which a U.S. Holder held our ADRs or units, any gain recognized by a U.S. Holder on a sale or other disposition of ADRs or units would be allocated ratably over the U.S. Holder’s holding period for the ADRs or units. The amounts allocated to the taxable year of the sale or other exchange and to any year before we became a PFIC would be taxed as ordinary income. The amount allocated to all other taxable years would be subject to tax at the highest rate in effect for individuals or corporations, as appropriate, for that taxable year, and an interest charge would be imposed on the resulting tax liability for each of those taxable years. Further, the portion of any distribution in respect of ADRs or units that is in excess of 125.0% of the average of the annual distributions on ADRs or units received by the U.S. Holder during the preceding three years or the U.S. Holder’s holding period, whichever is shorter, would be subject to taxation as described above. Certain elections may be available that would result in alternative treatments (such as mark-to-market treatment) of the ADRs or units. U.S. Holders should consult their tax advisors to determine whether any of these elections would be available and, if so, what the consequences of the alternative treatments would be in their particular circumstances.
If we were to be treated as a PFIC in any taxable year in which a U.S. holder held units or ADRs, a U.S. holder would generally be required to file IRS Form 8621 with its annual U.S. federal income tax returns, subject to certain exceptions.
In addition, if we were to be treated as a PFIC in a taxable year in which we pay a dividend or the prior taxable year, the preferential dividend rates discussed above with respect to certain dividends paid to non-corporate holders would not apply.
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Information Reporting and Backup Withholding
Payments of dividends and sales proceeds that are made within the United States or through certain U.S.-related financial intermediaries generally are subject to information reporting, and may be subject to backup withholding unless (i) the U.S. Holder is an exempt recipient or (ii) in the case of backup withholding, the U.S. Holder provides a correct taxpayer identification number and certifies that it is not subject to backup withholding. The amount of any backup withholding from a payment to a U.S. Holder will be allowed as a credit against the U.S. Holder’s U.S. federal income tax liability and may entitle the U.S. Holder to a refund, provided that the required information is timely furnished to the IRS.
Certain U.S. Holders who are individuals (and specified entities that are formed or availed of for purposes of holding certain foreign financial assets) may be required to report information relating to their ownership of an interest in certain foreign financial assets, including stock of a non-U.S. entity, subject to certain exceptions (including an exception for publicly traded stock and interests held in custodial accounts maintained by a U.S. financial institution). U.S. Holders are urged to consult their tax advisors regarding the effect, if any, of this requirement on the ownership and disposition of ADRs or units.
FATCA
The United States has enacted legislation, commonly referred to as “FATCA,” that generally imposes a reporting and withholding regime with respect to certain U.S. source payments (including interest and dividends), and, beginning January 1, 2019, to gross proceeds from the disposition of property that can produce U.S. source interest and dividends and certain payments made by entities that are classified as financial institutions under FATCA. The United States has entered into an intergovernmental agreement regarding the implementation of FATCA with Brazil (the “IGA”). For further information see “Item 4. Information on the Company—B. Business Overview—Other Applicable Laws and Regulations—FATCA,” above. Under the current terms and conditions of the IGA, we do not expect payments made on or with respect to the ADRs or units to be subject to withholding under FATCA. However, significant aspects of when and how FATCA will apply remain unclear, and no assurance can be given that withholding under FATCA will not become relevant with respect to payments made on or with respect to the ADRs or units in the future. Prospective investors should consult their own tax advisors regarding the potential application of FATCA.
| 10F. | Dividends and Paying Agents |
Not applicable.
| 10G. | Statement by Experts |
Not applicable.
| 10H. | Documents on Display |
We are subject to the information requirements of the Exchange Act, except that as a foreign issuer, we are not subject to the proxy rules or the short-swing profit disclosure rules of the Exchange Act. In accordance with these statutory requirements, we file with or furnish reports and other information to the SEC. Reports and other information filed or furnished by us to the SEC may be inspected and copied at the public reference facilities maintained by the SEC at Room 1024, 100 F Street, N.E., Washington, D.C. 20549. Copies of such material may also be inspected at the offices of the NYSE, 11 Wall Street, New York, New York 10005, on which our ADRs are listed. In addition, the SEC maintains a website that contains information filed electronically with the SEC, which can be accessed over the internet at http://www.sec.gov.
We also file consolidated financial statements and other periodic reports with the CVM located at Rua Sete de Setembro, 111, Rio de Janeiro, Rio de Janeiro 20159-900, Brazil. The CVM maintains an Internet website that contains reports and other information about issuers, like us, that file electronically with the CVM. The address of that website is http://www.cvm.gov.br. We also file consolidated financial statements and other periodic information with BM&FBOVESPA. The address of the BM&FBOVESPA website is http://www.bovespa.com.br.
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| 10I. | Subsidiary Information |
Not applicable.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Overview
To manage the risks of our operations, in addition to establishing and applying our local risk management policies and procedures, we have incorporated the Santander Group’s global risk management functions at various levels of our organization to ensure a consistent management approach worldwide, by implementing the Santander Group’s risk management policies for all areas, including financial, credit, market, operational and compliance risk, among others.
In addition, committees headed by senior management are responsible for overseeing credit approval and risk control, taking into account the parameters and limits of exposure defined and approved by the Bank’s board of directors.
Risk management reports provided to our senior management are generated mainly by the control department and the risk consolidation department based on the databases corresponding to each department. Likewise, the reports for senior management of the Santander Group’s financial entities and foreign branches are generated mainly by the risk control departments of each of those entities and branches.
The presentation of risk management information to senior management is designed to enhance the understanding and management of risks for the Santander Group’s administrative bodies and branches. These reports are targeted to different audiences within senior management, whether the Santander Group, its financial entities, or its foreign branches, depending on the kind of information and of each type of report highlights. Information may be transmitted to senior management either through our intranet risk reporting tool, through e-mail or by live presentations.
Information, analyses and decisions are also disseminated through the channels described below, fostering communication among areas within Santander Brasil and within the risk management process:
| i. | internal department mailboxes, which allow for the exchange of information within groups and areas; |
| ii. | periodic meetings (departmental, monthly, quarterly, off-site, conventions), which allow for regular exchange of information on an in-person basis; |
| iii. | our regulations portal, which is an internal portal within our intranet where we maintain our current risk management policies; |
| iv. | e-mail; |
| v. | video and teleconferences with Santander Spain; and |
| vi. | risk committees, including the Executive Risk Committee for Brazil and the RCC Risk control committee. |
Information is prepared in an effort to improve risk management and is classified as standard information or non-standard information.
| i. | Standard information: includes information and reports generated on a regular basis and with fixed content, subject to revisions, which is available to senior management for different target areas, depending on the type of information included in each report. This information is used to facilitate knowledge about credit use, instrument valuation and the results generated, in addition to the analyses needed to manage these risks and optimize capital. Each report may have a distinct presentation based on the guidelines pursuant to which it is prepared. |
| ii. | Non-standard information: includes presentations and other information prepared for our senior management on an ad hoc basis or upon specific request and addresses specific topics that are not included in the standard reports. When the request for certain information becomes more regular, such reporting |
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| becomes standard and is generated automatically. Standard information delivered to our senior management is intended to facilitate the understanding of all risks for which the risk management department is responsible. |
| iii. | The content of each report fits within one of two fundamental bases: the nature of the information and its frequency. The nature of the information prepared is either quantitative or qualitative. |
Quantitative Information. Quantitative information includes risk metrics that permit our senior management to better analyze situations, trends and developments in each segment, activity or portfolio, relating to planned scenarios or defined limits, with emphasis on any scenarios falling outside such limits. Quantitative information is developed primarily to analyze liquidity and market risks, and solvency risks. Information related to liquidity and market risk includes, among other items, measurements of positions, mark-to-market valuations, sensitivity analyses, volume analyses, measures of liquidity gaps and country risk models, impacts of risks on results, economic risks, stress test simulations and back-testing. Information related to solvency risks includes, among other items, credit exposure measures, abnormal events, doubtful asset measurements, impacts of solvency risks on our results, measures of expected loss, stress test simulations, and other information related to economic and market risks.
Qualitative Information. Qualitative information includes internal and external events relating to the economic, financial or competitive environment, and an evaluation and analysis of the causes and consequences or foreseeable consequences of such events. These also include measures used to prepare such models.
The frequency with which quantitative and qualitative risk management information is prepared is determined by the kind of information provided, as follows:
Daily information:
| i. | liquidity and market risk: includes data on treasury limits (VaR, positions, sensitivity of linear and non-linear econometric models) and the principal changes in the treasury portfolio; and |
| ii. | solvency risk: focuses on sharp changes in our business and/or business environment or those that involve significant variations in the evolution of the business and its environment. |
Weekly information:
| i. | focuses on generating updated high-level information in different segments (focused on solvency risk) or portfolios (focused on market risk), as well as a summary of the relevant facts and expected short-term changes; |
| ii. | is generated for our senior management, including the chief executive officer and vice president executive officers of retail, risks and finance, and an independent member of our board of directors; and |
| iii. | is drawn from our risk management framework and policies globally and is validated by local market and solvency risk areas. |
Monthly information:
| i. | liquidity and market risk: facilitates the analysis of the current situation of different activities, including structural and interest rate risks; it also includes a detailed analysis of alternative measures and stress scenarios; |
| ii. | solvency risk: facilitates an assessment of the current situation in different segments, compared to the budgeted situations and an analysis of the causes of deviations; also introduces credit rating with a basis of analysis; |
Monthly information is generally more detailed than weekly information.
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Risk Management Committees
The following table describes our principal credit and market risk management committees in Brazil, the responsibilities and members of each such committee and the frequency with which such committees meets.
| Committee | Responsibilities | Members | Meeting Frequency | |||
| Executive Risk Committee | · Apply the Group’s risk policies locally in a manner compatible with the objectives of the business areas. | CEO | Weekly | |||
| · Approves the risk appetite that will be proposed to the board of directors of Santander Brasil; | Executive Vice Presidents (Risks; Legal; Wealth and specialized business; GCB and Corporate) that are member of the Santander executive committee.
Executive Superintendent Global Corporate Banking & Corporate |
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| · Manage exposures from different clients, economic sectors and types of risks, including, among others, the following functions: | Executive Superintendent of Financial Management | |||||
| · Approve risk, including among others, fixed and variable income securing, customer limits and limits / products for Treasury, asset and liability committee, restructuring proposals and payment arrangements; | Ad hoc Members:
Director for Risks Retail
Director for business Retail
Executive Vice President CFO
Executive Vice President for Finance, Strategy and Corporate Affairs. |
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| · Handle general issues related to market risk, cross-border limits, country risk, global banking operations, enterprises and retail clients; | ||||||
| · Adopt and, if necessary, validate, portfolio sales or individual asset-credits; | ||||||
| · Approve internal risk regulations; | ||||||
| · Approve changes in risk policies with an impact on revenue, margin or provision expenses on the Strategic Business Plan as well as on any related matters; |
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| Committee | Responsibilities | Members | Meeting Frequency | |||
| · Authorize management tools, improvement initiatives, follow up on projects and any other relevant activities related to risk management; | ||||||
| · Approve policies and standards for methodologies and their internal validations; | ||||||
| · Gather knowledge and take the necessary measures regarding risk to comply with the recommendations and directions issued by supervisory authorities in the exercise of its functions and the internal audit of the Bank; | ||||||
| · Provide to the board of directors and to the executive committee the information and assistance needed in order to execute the tasks in risk management that were assigned to it by applicable law, the by-laws, the Council regulation and the regulation of the Risk Executive Committee; and | ||||||
| · Approve the creation, modification and termination of other committees or decision bodies, its regulations and delegate to those committees or people authorization in risk management. | ||||||
| Risk Control Committee | · Oversee Risk Identification and Assessment (RIA). | Risk Executive Vice President | Biweekly | |||
| · Conduct a full segment and regular follow up of all risks, checking if the risk profile is set in accordance with the risk appetite, the commercial and strategic plan and the budget approved by the board of directors. | CFO Executive Vice President
Risk Executive Superintendents for Risk
Architecture,
Executive Superintendents for T&O Retail; OR and Technological Risk. |
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| Committee | Responsibilities | Members | Meeting Frequency | |||
| · Carry out an independent and periodical control of risk management activities, which include: | Executive Vice President for Finance, Strategy and Corporate Affairs.
Compliance Director |
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| · Full risk profile view of the different businesses, including among others, benchmarking of the main competitors of the bank and monitoring of key strategic projects. | Permanent guests: | |||||
| · Detect and report alerts on relevant risks as well as possible breaches or other significant aspects regarding risks. | Chief Audit Officer
Legal Executive Vice President |
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| · Monitor the observance of appetite and risk policies, advising the board risk committee on these issues. | ||||||
| · Support and assist the board in carrying out stress tests, in particular valuing the scenarios and assumptions to be used in these tests, valuing the results and analyzing the measures proposed by the risk function as a consequence of the results. | ||||||
| · Validate the information on risks that must be submitted to the board of directors when so required and without prejudice to the direct access to the person responsible for the risk function (Chief Risk Officer or Risk VPE) to the board. | ||||||
| · Supervise measures taken regarding risks to comply with the recommendations and directions issued by the supervisory authorities in the exercise of its function and Santander Brasil’s audit. |
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| Committee | Responsibilities | Members | Meeting Frequency | |||
| · Provide the board of directors, through the board risk committee, and the executive committee the information and assistance needed regarding risks for the fulfillment of its functions in risk management matters assigned to it by law, the by-laws, the Council regulation and the regulation of the Risk Control Committee – RCC. |
Our executive credit committee makes decisions with regard to risk management in Brazil with representatives of our senior management, including our Chief Executive Officer, our Vice President Executive Officer of Risk Management and the other members of our executive committee. The main responsibilities of the executive credit committee include defining our level of risk tolerance, monitoring our loan portfolios and market conditions, as well as any recommendations made by the Brazilian Central Bank. The executive credit committee also raises any matters to our board of directors that exceed the authority of the committee. Each of our risk management committees has certain powers and approval levels, in each case subject to Brazilian law and regulations. Decisions at the committee level are intended to be collegial in a manner to ensure that differing opinions are all considered.
Credit Risk
The Santander Group risk management model is based on prudent risk management and the definition of risk tolerance by our board of executive officers. We operate within the risk management culture of the Santander Group following the guidelines of our board of executive officers, the Brazilian Central Bank regulations and international best practices, to protect capital and promote profitability. One of our credit risk management principles is independence among our business areas, which provides sufficient autonomy to accomplish appropriate risk management. Another characteristic of our credit model is the direct involvement of our senior management in decision-making through credit committees. Our credit approval process, particularly the approval of new loans and risk monitoring, is structured according to our classification of customers and products between our retail and wholesale lending operations.
Retail Lending
In retail banking, credit requests by individuals are analyzed by a credit approval system applying various types of processes depending on the credit history of the individual and the type of credit requested. For standard credit requests, approval is generally made at our branches based on an automatic, standardized process. When the customer’s request is submitted for credit approval, we collect relevant credit information from the customer, including the individual’s profession, level of income, internal and external financial restrictions, credit history, current indebtedness, and relationship with us. Based on this data and the type of credit requested, our credit rating system automatically assigns a credit rating based on a scoring model and our risk management policies. We use our scoring models in two different phases: during the “application” process and later in the “ongoing” phase. A credit scoring model is applied in the application phase when the customer begins a relationship with us and a behavioral scoring model is used when the customer has already had a relationship with us for a period established by our risk management policies. This policy allows us to evaluate our existing customers with a more complete analysis than if we applied a pure scoring model for all customers.
For financing products offered to SMEs (retail business), the credit risk approval process can involve an automated scoring system, based on credit policies, and/or be manually and individually analyzed and approved, based on the creditworthiness of the SME, in accordance with the respective credit risk approval authority levels developed internally. This preliminary analysis also generates a credit risk rating based on our internal models.
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Additional information, such as the characteristics of the financing product being offered, including related terms and conditions and collateral granted in connection therewith, is also taken into account as part of the approval process.
Pre-approved limits on lines of credit for a particular individual or an SME are granted based on the creditworthiness and size as determined according to our scoring criteria. Credit approval by our branches is allowed by authorized personnel according to established parameters. Credit limits are managed based on the performance of the customers, taking into account each customer’s risk profile.
Credit authorizations are established through policies that define the rules and responsibilities of the members of each committee. We have established procedures and authorized certain organizational bodies to approve credit requests in amounts greater than those delegated to individual branches (both for individuals and SMEs). Such approvals are made following application of the relevant scoring model and individualized analysis by the relevant authorized organization body.
The following table presents the individuals or organizational bodies authorized to make extensions of credit to retail borrowers for the amounts specified:
| Authorization Required | Amount | |
| Branch (1) | Up to R$500 thousand | |
| Decision centers(2) | Up to R$30 million | |
| Retail Risk Higher Committee and Wholesale(3) | Up to R$70 million |
| (1) | For individuals, the maximum value is R$200,000. For SMEs the maximum is R$500,000. |
| (2) | Members of risk decision-making centers include superintendents and other representatives of the risk area. |
| (3) | Members of the higher Risk Committee include, among others, the officers of Wholesale, Retail, Market Risk, Recovery and representatives of the Risk departments. |
Wholesale Lending
With respect to our wholesale customers, the approval process is determined for each customer and product separately, taking into account the customer’s financial condition as well as other relevant information pertaining to the customer. All credit requests by our wholesale customers must be approved by the relevant credit committees.
| Authorization Required | Limit | |
| Local Committee | Up to R$25 million | |
| Territorial Committee | Up to R$60 million | |
| Superior and High Risk Committee | Up to R$150 million | |
| Wholesale Committee | Up to R$300 million | |
| Executive Risk Committee | Up to R$600 million |
Credit Monitoring
Credit lines to retail banking SME customers are reviewed on a weekly basis. Credit lines to retail banking individual clients are reviewed, systemically, on a daily basis, based on a client’s credit rating. This process allows for improvements in the credit exposure of customers who have presented good credit quality. Specific early warnings are automatically generated in the case of the deterioration of a customer’s credit quality. In this case, with the identification of the client’s solvency problem, a process to reduce credit risk, designed to prevent default, is implemented. For example, early warnings are automatically generated for SMEs, and their financial performance is monitored monthly. In addition, the financial situation of each enterprise is discussed by specific committees in the presence of the commercial area, with the aim of continuously improving the quality of our loan portfolio.
Credit lines to wholesale customers and related credit quality are reviewed on an annual basis. There is a monitoring procedure and, for any specific concern in regard to the credit quality of a certain customer, we use a system of customer monitoring known as FEVE (Firmas em Vigilância Especial - Firms under Special Vigilance), with possible actions to be taken under the following categories: “monitor,” “reduce exposure,” “seek collateral” or
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“cancel.” A customer subject to action under one of these categories will be reviewed on a quarterly or a semi-annual basis, depending on the situation.
We use 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 history, with the exception of certain portfolios classified as “low default portfolios.” These ratings and models are used in our loan approval and risk monitoring processes.
The table below shows the internal risk rating levels and their corresponding probability of default:
| Internal Risk Rating | Probability of Default | |
| Low | Smaller than 2.1% | |
| Medium-low | Bigger than 2.1% and Smaller than 4.1% | |
| Medium | Bigger than 4.1% and Smaller of 6.3% | |
| Medium-high | Bigger than 6.3% and Smaller 10.0% | |
| High | Bigger than 10.0% |
For a breakdown of our portfolio by internal risk rating, see “Item 4. Information on the Company—B. Business Overview—Selected Statistical Information—Movements in Allowances for Impairment Losses—Internal Risk Rating.”
Recovery
Our business recovery area is responsible for all of our non-performing portfolios. This area defines, implements and monitors strategies and performance related to non-performing portfolios, seeking to ensure maximum efficiency in recovery subject to applicable Brazilian law and regulation.
The business recovery area uses statistical tools to study the behavior of clients and develop strategies for more effective recovery. Customers with greater probability of payment are classified as low risk customers and those with a low probability of payment are classified as high risk. The aforementioned risk classification determines the intensity of collection efforts expended.
The channels of operation are defined as “Mapa de Responsabilidade,” (Responsibility Map), using the time value of default versus risk value, in addition to other characteristics, to create strategies for recovery.
Our credit recovery tools include daily contact through our call center, inclusion of defaulting clients within external sources of credit protection, sending collection letters, and direct contact through our branch network. In addition to the aforementioned tools, we use the following strategies:
| · | Internal teams specialized in restructuring and debt recovery work directly with defaulting clients with loans of higher values and/or overdue more than 60 days. |
| · | We use specialized external firms to collect, report and assess high-risk customers. These firms are remunerated according to pre-established percentages applied to the amounts recovered. |
Once we have exhausted all of the credit recovery resources available to us, we conduct sales of any remaining non-performing loans. These sales of non-performing loans are held periodically through an auction process, with the aim of obtaining optimal prices in the markets and thereby reduce the impact on us.
Assets and Liabilities Committee
Our asset and liability management strategy is defined by our assets and liabilities committee, which operates under the strict guidelines and procedures established by the Santander Group. Members of the committee include our Chief Executive Officer, Vice President Executive Officer of Risk Management, Chief Financial Officer, Treasurer, Executive Superintendent of Financial Management and the Chief Economist. The assets and liabilities committee establishes and implements strategies, policies and procedures with the objective of managing our balance sheet and risk structure.
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Market Risk
Types of market risk
Interest rate risk
Interest rate risk is the possibility that changes in interest rates could adversely affect the value of a financial instrument, a portfolio or our operations as a whole. We are exposed to interest rate risk whenever there is a mismatch between interest rate sensitive assets and liabilities, subject to any hedging we have engaged in using interest rate swaps or other off-balance sheet derivative instruments. Interest rate risk arises in connection with both our trading and non-trading activities.
Credit spread risk
Credit spread risk arises where changes in credit spread curves associated with specific issuers and debt types may adversely affect the value of a financial instrument, a portfolio or adversely affect Santander Group as a whole. The “spread” refers to the margin charged on financial instruments based on benchmark rates (i.e., the difference between the rate on the relevant instrument and the underlying benchmark rate), with the latter usually being the internal rate of return of government bonds and interbank interest rates.
Exchange rate risk
Exchange rate risk arises due to the sensitivity of the value of a foreign currency position in relation to a base currency (in our case, reais) due to a potential change in exchange rates. We are exposed to foreign exchange rate risk as a result of mismatches between assets and liabilities, and off-balance sheet items denominated in different currencies, either as a result of trading or in the normal course of business. We maintain non-trading open currency positions arising from our investments in overseas subsidiaries (such as our Cayman Islands branch), affiliates and their respective currency funding. Our principal non-trading currency exposure is the U.S. dollar, which, as mandated by our policies, is hedged to the real within established limits.
Equity price risk
Equity price risk arises due to the sensitivity of the value of an investment position in equity markets to adverse movements in the market prices or in response to expectations of future dividends. Among other instruments, equity price risk affects positions in shares, stock market indices and derivatives using shares as the underlying asset (puts, calls, and equity swaps). We are exposed to equity price risk in both our trading and non-trading investments in equity securities.
Commodities price risk
Commodities price risk is the risk derived from the effect of potential change in commodity prices. Our exposure to this risk is not significant and is concentrated in derivative operations involving commodities for clients.
Inflation risk
Inflation risk is the risk that changes in inflation rates may adversely affect the value of a financial instrument, a portfolio or Santander Group as a whole.
Volatility risk
Volatility risk is the sensitivity of the value of a portfolio to changes in the volatility of a number of risk factors, including volatility of interest rates, exchange rates, share prices and of commodity prices. This risk is applicable to financial instruments which have volatility as a variable in their valuation model.
Other, more complex, risks to which we may be exposed include:
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Correlation risk
Correlation risk is the sensitivity of the value of a portfolio to changes in the relation between risk factors, whether of the same type (for example, between two exchange rates) or of a different nature (for example, between an interest rate and the price of a commodity).
Market liquidity risk
Market liquidity risk is the possibility of a Bank entity or the Santander Group as a whole finding itself unable to exit or close a position in time without affecting the market price or the cost of the transaction. This risk can be caused by a decrease in the number of market makers or institutional investors, the execution of large volumes of operations, market instability and increases of the concentration existing in certain products and currencies. Market depth is the main liquidity driver in our trading portfolio, even though our policy is to trade the most liquid assets. Our liquidity risk also arises in non-trading activity due to the maturity gap between assets and liabilities mostly in the retail banking business.
Risk of prepayment or cancellation
In certain transactions the relevant loan agreement allows, explicitly or implicitly, voluntary prepayment prior to maturity without any penalty, which creates a risk that the cash flows expected from that particular credit line have to be reinvested at a potentially lower interest rate. This mainly affects loans or mortgage securities.
Underwriting risk
Underwriting risk occurs as a result of participation in the underwriting of a placement of securities or another type of debt, assuming the risk of partially owning the issue or the loan due to non-placement of all or any proportion of any issuance among potential buyers.
Derivatives used in Managing Market Risks
We use derivatives both in trading and non-trading activities to manage market risks. Trading derivatives are used to eliminate, reduce or modify risk in trading portfolios (interest rate, foreign exchange and equity price risk), and to provide financial services to customers. Our principal counterparties (in addition to customers) for this activity are financial institutions and the BM&FBOVESPA. Our principal derivative instruments include interest rate swaps, interest rate futures, foreign exchange forwards, foreign exchange futures, foreign exchange options, cross currency swaps, equity index futures and equity options and interest rate options. With respect to non-trading activity, derivatives are used in order to manage interest rate risks and foreign exchange risks arising from asset and liability management activity. We also use interest rate and foreign exchange linear derivatives in non-trading activity. We have no credit derivatives in Brazil, as there is no market for credit derivatives in Brazil.
Activities subject to market risk
Our market risk area is responsible for measuring, controlling and monitoring risk in respect of those operations where risk to our business arises as a result of changes in market factors. Market risk arises due to changes and potential volatility in interest rates, exchange rates, share prices and commodities prices, as well as due to liquidity risk of the various products and markets in which we operate. The following paragraphs summarize the principal market risks to which we are exposed.
On the basis of the origin of the risk to which we are exposed, our activities are classified as follows:
Trading book
The trading book includes financial services to customers and purchase-sale and positioning mainly in fixed income, equity and currency products. The trading book comprises our proprietary positions in financial instruments held for resale and/or bought to take advantage of current and/or expected differences between purchase and sale prices. This portfolio also includes positions in financial instruments deriving from market-making and sales activities. As a result of trading fixed income securities, equity securities and foreign exchange, we are exposed to interest rate, equity price and foreign exchange rate risks. We are also exposed to volatility when non-linear derivatives are used.
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Non-trading book (banking/structural)
The non-trading book is constituted of market risks inherent in the balance sheet, excluding the trading portfolio. These include:
| i. | Structural interest rate risks. This arises from mismatches in the maturities and re-pricing of all assets and liabilities. |
| ii. | Structural exchange rate risk/hedging of results. Exchange rate risk occurs when the currency in which the investment is made is different from the real in companies or branches that are consolidated and those that are not (structural exchange rate). In addition, exchange rate hedging of future results generated in currencies other than the real (hedging of results). |
| iii. | Structural equity risk. This involves investments via stakes in financial or non-financial companies that are not consolidated, as well as portfolios available for sale formed by equity positions. |
Market Risk Management Framework
Our board of directors is responsible for establishing our policies, procedures and limits with respect to market risk, including which businesses to enter into and maintain. The risk committee monitors our overall performance in light of the risks we assume. Together with the local and global assets and liabilities committees, each market risk unit measures and monitors our market and liquidity risk and provides figures to the assets and liabilities committees to use in managing such risks.
Market risk is regulated and controlled through certain policies, set forth in our market and liquidity risk management policies manual, and through structures setting forth specific limits to our exposure to market risk which is based on global limits established for the entire Santander Group. In addition, authorized products are listed and reviewed periodically.
These policies, procedures and limits on market risk are applicable to all units, businesses or portfolios susceptible to market risk, and rest on five basic pillars, which we believe are vital for correct management of market risks:
| i. | Market and structural risk measurement, analysis and control; |
| ii. | Calculation, analysis, explanation and reconciliation of profit and loss (P&L); |
| iii. | Definition, capture, validation and distribution of market data; |
| iv. | Definition of limits, products and underlyings; and |
| v. | Consolidation of information. |
In turn, our market risk management is guided by the following basic principles:
| i. | Independence of the trading and balance sheet activities; |
| ii. | Global overview of the risks taken; |
| iii. | Definition of limits and empowerment; |
| iv. | Control and oversight; |
| v. | Homogeneous aggregated metrics; |
| vi. | Homogeneous and documented methodologies; |
| vii. | Measuring risk; |
| viii. | Information consolidation; and |
| ix. | Contingency plans and technical capability. |
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Structure of Limits Regarding Market Risk
The market risk limit structure represents Santander Brasil’s risk appetite and is aligned with our global market risk management policies, which encompass all of our business units and serve to:
| i. | identify and define the main types of risk incurred in a manner consistent with our business strategy; |
| ii. | quantify and report to our business segments with respect to appropriate risk levels and risk profile in line with senior management’s assessment of risks to help avoid any of our business segments taking undesired risks; |
| iii. | provide flexibility to our business segments to timely and efficiently establish risk positions that are responsive to market changes and our business strategies, and always within risk levels acceptable to Santander Brasil; |
| iv. | allow the individuals and teams originating new business to take prudent risks that will help attain budgeted results; |
| v. | establish investment alternatives by limiting equity requirements; and |
| vi. | define the range of products and underlying assets within which each unit of treasury can operate, taking into consideration our risk modeling and valuation systems and our liquidity tools. This will help to constrain market risk within our defined risk strategy. |
Global market risk management policies define our risk limit structure while the risk committee reviews and approves such policies. Business managers administer their activities within these limits. The risk limit structure covers both our trading and non-trading portfolios and includes limits on fixed income instruments, equity securities, foreign exchange and derivative instruments.
Limits considered to be global limits refer to the business unit level. To date, system restrictions prevent intra-day limits. Our business units must comply with approved limits. Potential excesses require a range of actions carried out by the global market risk function unit including (i) providing risk-reducing suggestions and controls, which are the result of breaking “alarm” limits and (ii) taking executive actions that require risk takers to close out positions in order to reduce risk levels.
The market risk limits used by us are established along different metrics intended to cover all activity subject to market risk from many perspectives, applying criteria we believe to be conservative. The principal limits include:
Trading limits
VaR limits;
| i. | limits of equivalent positions and/or nominal; |
| ii. | sensitivity limits to interest rates; |
| iii. | vega limits; |
| iv. | risk limits of delivery by short positions in securities (fixed income and equities); and |
| v. | limits aimed at reducing the volume of effective losses or protecting results already generated during the period: |
| · | loss trigger; and |
| · | stop loss. |
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Structural limits
| i. | structural interest rate risk of the balance sheet: |
| · | sensitivity limit of net interest margin (“NIM”) over a one year horizon; and |
| · | sensitivity limit of market value of equity (“MVE”); |
| ii. | structural exchange rate risk comprised of the net position in each currency; and |
| iii. | liquidity risk: limits defined based on several stress scenarios. |
Market Risk Statistical Tools
Locally, we use a variety of mathematical and statistical models, including VaR models, historical simulations and stress testing to measure, monitor, report and manage market risk. Such numbers, produced locally, also serve as input for global activities such as evaluations of RORAC, and to allocate economic capital to various activities in order to evaluate the RORAC of such activities.
Trading Activity
| · | VaR: as calculated by us, our internal VaR model is an estimate of the expected maximum loss in the market value of a given portfolio over a one-day time horizon at a 99% confidence level, subject to certain assumptions and limitations discussed below. Our standard methodology is based on historical simulation of 520 days and is calculated using the VaR methodology “full revaluation.” In order to capture recent market volatility in the model, the reported VaR is the higher of two different VaR figures, both of which use a historical window of 520 days. One VaR figure applies an exponential declining factor to give a higher weight for the most recent observations and the other VaR figure gives the same weight to all observed values. This methodology makes our VaR numbers react very quickly to changes in current volatility, significantly reducing the likelihood of back testing exceptions. We use VaR estimates to alert senior management whenever the statistically estimated losses in our portfolios exceed prudent levels. |
| 1. | Assumptions and limitations: our VaR methodology should be interpreted in light of the limitations that (i) a one-day time horizon may not fully capture the market risk of positions that cannot be liquidated or hedged within one day and (ii) at present, we compute VaR at the close of business and trading positions may change substantially during the course of the trading day. |
| 2. | Calibration measures: in order to calibrate our VaR model, we use back testing, which is a comparative analysis between VaR estimates and the daily clean Profit and Loss (theoretical result generated assuming the mark-to-market daily variation of the portfolio considering only the movement of the market variables). The purpose of these tests is to verify and measure the precision of the models used to calculate VaR. |
| · | Stressed VaR: our stressed VaR model uses the same calculation methodology as VaR with the following two exceptions: (i) the stressed VaR uses a window of 250 days, instead of 520 days for the VaR; (ii) unlike when calculating the VaR the higher of the percentile uniformly weighted and the one exponentially weighted is not applied. Instead, only the uniformly weighted percentile is used. All the other aspects regarding the methodology and the inputs for calculating the stressed VaR are the same as those for the VaR. To determine the period of observation the methodology area has analyzed the history of the main market risk factors, which were chosen on the basis of expert criteria, and taking into account the most significant positions of our portfolio. |
| · | Stress Test: this is a simulation technique, which consists of estimating the potential impact on results by applying different stress scenarios to all the trading portfolios and considering the same assumptions according to the relevant risk factor. These scenarios can replicate events that happened in the past (such as crisis events) or hypothetical scenarios that do not correspond to past events. These results are analyzed at least monthly and, along with the VaR provide a fuller spectrum of the risk profile. |
| · | Sensitivities: our market risk sensitivity measures are those that gauge the change (or sensitivity) of the market value of an instrument or portfolio to changes in each of the risk factors. The sensitivity of the value |
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| of an instrument to changes in market factors may be obtained through analytical approximations by partial derivatives or through a full revaluation of the portfolio. |
Non-trading Activities
| · | Interest rate gap of assets and liabilities: interest rate gap analysis focuses on lags or mismatches between changes in the value of assets, liabilities and off-balance sheet items. Gap analysis provides a basic representation of the balance sheet structure and allows for the detection of interest rate risk by concentration of maturities. It is also a useful tool for estimating the impact of eventual interest rate movements on NIM or equity. All on- and off-balance sheet items must be broken down by their flows and analyzed in terms of re-pricing and maturity. In the case of those items that do not have a contractual maturity, an internal model of analysis is used and estimates are made of their duration and sensitivity. |
| · | NIM sensitivity: The NIM sensitivity measures the change in the short- and medium-term in the accruals expected over a 12-month horizon, in response to a shift in the yield curve. The yield curve is calculated by simulating the NIM, both for a scenario of a shift in the yield curve, as well as for the current scenario. The sensitivity is the difference between the calculation of the two margins. |
| · | MVE sensitivity: Net worth sensitivity measures the interest risk implicit in net worth (equity) over the entire life of the operation on the basis of the effect that a change in interest rates has on the current values of financial assets and liabilities. This is an additional measure to the sensitivity of the NIM. |
| · | Value at risk: The VaR for balance sheet activity and investment portfolios is calculated with the same standard as for trading and historical simulation, with a confidence level of 99.0% and a time frame of one day. |
| · | Analysis of scenarios of stress test: We apply three scenarios for the performance of interest rates: six standard deviations up and six standard deviations down of risk factors and one abrupt scenario in which risk factors are increased by 50.0% up and down from current levels. These scenarios are applied to the balance sheet, obtaining the impact on net worth, as well as the projections of net interest revenue for the year. |
| · | Liquidity risk: Liquidity risk is associated with our capacity to finance our commitments at reasonable market prices, as well as to carry out our business plans with stable sources of funding. We permanently monitor maximum gap profiles. The measures used to control liquidity risk are the liquidity gap, stress scenarios and contingency plans. |
| · | Liquidity gap: The liquidity gap provides information on contractual and expected cash inflows and outflows for a certain period of time, for each of the currencies in which we operate. The gap measures the net need or excess of funds at a particular date and reflects the level of liquidity maintained under normal market conditions. |
| · | Analysis of scenarios/contingency plan: The contingency plan includes the local and external activities and consists of a formal set of preventive and corrective actions taken in times of liquidity crises. Using analysis of historical scenarios and simulations of impacts on bank liquidity we define action plans and contingencies to establish roles and responsibilities and levels to trigger the contingency plan. Each unit should prepare its contingency plan. Additionally, Santander Spain must be periodically informed about the contingency plan of each subsidiary. The frequency with which this plan must be updated depends on market liquidity conditions. |
Quantitative Analysis
Trading Activity
Quantitative Analysis of Daily VaR in 2016
Our risk performance with regard to trading activity in financial markets between 2014 and 2016, measured by daily VaR (measured at a 99% of confidence level, over a one day time frame), is shown in the following graph.
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During 2016, VaR remained relatively more stable in comparison to 2014 and 2015, fluctuating between R$20.9 million and R$103.7 million. In contrast, in 2015, VaR fluctuated between R$16.7 million and R$299.7 million. VaR remained relatively stable during most of 2016, with significantly higher levels in October 2016, driven by an optimistic scenario regarding the Brazilian economy after the impeachment. However, just after US elections, uncertainties related to global economic scenarios resulted in a gradual decrease of VaR until the end of the year.
The histogram below shows the distribution of average risk in terms of VaR in 2016 where the accumulation of days with VaR levels between R$40 million and R$60 million can be observed in 68.5% of the distribution.
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VaR by Risk Factor
The minimum, maximum, average and year-end 2016 VaR values by risk factor were as follows:
| 2015 | 2016 | |||||||||||||||||||
| Period End | Low | Average | High | Period End | ||||||||||||||||
| (in millions of R$) | ||||||||||||||||||||
| Trading VaR | 44.76 | 20.9 | 49.0 | 103.7 | 37.7 | |||||||||||||||
| Diversification Effect | (3.85 | ) | 0.7 | (16.6 | ) | (67.8 | ) | (10.0 | ) | |||||||||||
| Interest Rate VaR | 39.97 | 19.6 | 37.8 | 85.3 | 34.7 | |||||||||||||||
| Equity VaR | 2.55 | 0.6 | 4.6 | 13.4 | 2.7 | |||||||||||||||
| Foreign Exchange VaR | 6.10 | 1.9 | 23.1 | 65.2 | 10.3 | |||||||||||||||
The average VaR for 2016 was R$49.0 million, with most of the risk due to foreign exchange and interest rate positions. Santander Brasil was relatively conservative in equity trading activity.
The average VaR of the three main risk factors, interest rates, equity prices and exchange rates, were R$37.8 million, R$4.6 million and R$23.1 million, respectively, with a negative average diversification effect of R$16.6 million. The chart below shows the evolution of the risk groups VaR interest rates (IR), VaR exchange rates (FX) and VaR equity prices (EQ) (at a 99% confidence level, over a day time frame and a 15 day moving average).
Risk Management of Structured Derivatives
Our structured derivatives activity is mainly focused on designing investment products and managing hedging risks for clients. Our risk management is focused on ensuring that the net risk exposure is the lowest possible. These transactions include options on equities, currencies, fixed-income instruments and mostly market making books.
The chart below shows the VaR Vega performance of our structured derivatives business in 2014, 2015 and 2016, which fluctuated around an average of R$2.79 million. In general, the periods with higher VaR Vega levels are related to episodes of significant increases in market volatility.
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Scenario analysis
Different stress test scenarios were analyzed during 2016. A correlation break scenario generated the results presented below.
Worst Case Scenario
The table below shows the maximum daily losses for each risk factor (fixed-income, equities and currencies) as of December 31, 2016, in a scenario that uses historical volatilities and simulates variations of the risk factors for +/-3 and +/-6 standard deviations on a daily basis. From this group of scenarios, we generate a table of stress test results, which identifies the largest loss per risk factor. The sum of the largest losses of each risk factor is the result of the Worst Case Scenario, which considers the break of correlation between risk factors.
| Worst Case Stress Test | Exchange Rate | Fixed Income | Equity | Total | ||||||||||||
| (in millions of R$) | ||||||||||||||||
| Total trading | (7.8 | ) | (152.7 | ) | (5.5 | ) | (166.0 | ) | ||||||||
The stress test shows that the economic loss suffered by the group in the marked-to-market result would be, if this scenario materialized in the market, R$166.0 million.
Non-trading Activity
Quantitative Analysis of Interest Rate Risk in 2016
Convertible Currencies
At the end of 2016, the sensitivity of NIM at one year, to a parallel rise of 100 basis points in the local yield curve was R$385 million.
In addition, at the end of 2016, the sensitivity of net worth to parallel rises of 100 basis points in the yield curves was R$1,680 million in the local currency yield curve.
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Structural Gap
The following table shows the managerial gaps between the re-pricing dates of our assets and liabilities as of December 31, 2016 in millions of reais.
| Total | 0-1 month | 1-3 months | 3-6 months | 6-12 months | 1-3 years | 3-5 years | > 5 years | Not Sensitive | ||||||||||||||||||||||||||||
| (in millions of R$) | ||||||||||||||||||||||||||||||||||||
| Structural Gap | ||||||||||||||||||||||||||||||||||||
| Money Market | 240,345 | 106,861 | 39,973 | 6,037 | 2,790 | 29,854 | 16,796 | 38,526 | (491 | ) | ||||||||||||||||||||||||||
| Loans | 247,747 | 64,188 | 28,622 | 32,988 | 32,746 | 40,920 | 13,816 | 16,709 | 17,758 | |||||||||||||||||||||||||||
| Permanent | 210,235 | 55,286 | 21,541 | 21,554 | 26,029 | 39,411 | 13,084 | 16,697 | 16,633 | |||||||||||||||||||||||||||
| Other | 37,512 | 8,902 | 7,081 | 11,434 | 6,717 | 1,508 | 732 | 12 | 1,126 | |||||||||||||||||||||||||||
| Total Assets | 706,555 | 283,430 | 68,660 | 39,042 | 35,541 | 70,773 | 30,612 | 55,235 | 123,263 | |||||||||||||||||||||||||||
| Money Market | (139,915 | ) | (98,428 | ) | (5,229 | ) | (1,817 | ) | (5,018 | ) | (13,725 | ) | (3,818 | ) | (4,698 | ) | (7,182 | ) | ||||||||||||||||||
| Deposits | (10,371 | ) | (2,958 | ) | (10 | ) | (217 | ) | (5 | ) | – | – | – | (7,182 | ) | |||||||||||||||||||||
| Equity and Other | (129,544 | ) | (95,470 | ) | (5,218 | ) | (1,600 | ) | (5,014 | ) | (13,725 | ) | (3,818 | ) | (4,698 | ) | 0 | |||||||||||||||||||
| Total Liabilities | (706,555 | ) | (464,504 | ) | (22,860 | ) | (10,083 | ) | (14,611 | ) | (25,152 | ) | (12,828 | ) | (24,140 | ) | (132,376 | ) | ||||||||||||||||||
| – Balance Gap | – | (181,074 | ) | 45,800 | 28,959 | 20,930 | 45,621 | 17,784 | 31,095 | (9,114 | ) | |||||||||||||||||||||||||
| Off-Balance Gap | (30,225 | ) | 63,683 | (11,947 | ) | 8,065 | 544 | 8,837 | (479 | ) | 8,189 | (107,154 | ) | |||||||||||||||||||||||
| Total Structural Gap | (30,225 | ) | (117,391 | ) | 33,852 | 37,024 | 21,474 | 54,457 | 17,304 | 39,284 | (116,267 | ) | ||||||||||||||||||||||||
| Accumulated Gap | (30,225 | ) | (117,391 | ) | (83,539 | ) | (46,515 | ) | (25,041 | ) | 29,416 | 46,720 | 86,004 | (30,263 | ) | |||||||||||||||||||||
The interest rate risk of our balance sheet management portfolios, measured by the sensitivity of the net margin to a parallel movement of 100 basis points, decreased R$140 million during 2016, reaching a maximum of R$569 million in April. The sensitivity of the market value decreased R$120 million during 2016, reaching a maximum of R$2,204 million in July. The main factors in 2016 that influenced sensitivity were the volatility of the yield curve, the portfolio decay, the methodologies in the cash flows and the effect of liquidity.
The following chart shows our NIM and MVE sensitivity during each month in 2016.
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Interest Rate Risk Profile as of December 31, 2016
The currency gap tables below show the managerial distribution of risk by maturity and currency in Brazil as of December 31, 2016 in millions of reais.
| Total | 0-1 month | 1-3 months | 3-6 months | 6-12 months | 1-3 years | 3-5 years | > 5 years | Not Sensitive | ||||||||||||||||||||||||||||
| Gaps in local currency | ||||||||||||||||||||||||||||||||||||
| Money Market | 215,088 | 95,784 | 39,931 | 5,874 | 2,531 | 28,513 | 14,926 | 30,953 | (3,424 | ) | ||||||||||||||||||||||||||
| Loans | 213,492 | 59,970 | 20,335 | 21,650 | 26,251 | 39,954 | 13,393 | 16,709 | 15,228 | |||||||||||||||||||||||||||
| Permanent | 16,821 | – | – | – | – | – | – | – | 16,821 | |||||||||||||||||||||||||||
| Others | 111,081 | 23,180 | – | – | – | – | – | – | 87,902 | |||||||||||||||||||||||||||
| Total Assets | 556,482 | 178,933 | 60,266 | 27,524 | 28,782 | 68,467 | 28,319 | 47,662 | 116,528 | |||||||||||||||||||||||||||
| Money Market | (123,678 | ) | (98,359 | ) | (272 | ) | (1,056 | ) | (2,411 | ) | (5,892 | ) | (3,808 | ) | (4,698 | ) | (7,182 | ) | ||||||||||||||||||
| Deposits | (300,866 | ) | (251,427 | ) | (2,045 | ) | (1,424 | ) | (3,162 | ) | (8,330 | ) | (5,846 | ) | (16,589 | ) | (12,042 | ) | ||||||||||||||||||
| Equity and Other | (141,040 | ) | (18,403 | ) | (2,626 | ) | (1,071 | ) | 291 | (2,118 | ) | (2,614 | ) | (2,853 | ) | (111,645 | ) | |||||||||||||||||||
| Total Liabilities | (565,583 | ) | (368,189 | ) | (4,943 | ) | (3,552 | ) | (5,282 | ) | (16,340 | ) | (12,268 | ) | (24,140 | ) | (130,869 | ) | ||||||||||||||||||
| Off-Balance Gap | 9,928 | 84,074 | 3,121 | (332 | ) | 2,210 | 19,093 | (995 | ) | 9,938 | (107,183 | ) | ||||||||||||||||||||||||
| Gap | 827 | (105,181 | ) | 58,444 | 23,640 | 25,711 | 71,220 | 15,057 | 33,460 | (121,525 | ) | |||||||||||||||||||||||||
| Total | 0-1 month | 1-3 months | 3-6 months | 6-12 months | 1-3 years | 3-5 years | > 5 years | Not Sensitive | ||||||||||||||||||||||||||||
| Gaps in foreign currency | ||||||||||||||||||||||||||||||||||||
| Money Market | 25,257 | 11,078 | 42 | 163 | 258 | 1,341 | 1,870 | 7,573 | 2,932 | |||||||||||||||||||||||||||
| Loans | 34,255 | 4,218 | 8,286 | 11,337 | 6,495 | 966 | 423 | (0 | ) | 2,530 | ||||||||||||||||||||||||||
| Permanent | 7 | – | – | – | – | – | – | – | 7 | |||||||||||||||||||||||||||
| Others | 90,554 | 89,201 | 66 | 17 | 5 | – | – | – | 1,266 | |||||||||||||||||||||||||||
| Total Assets | 150,073 | 104,496 | 8,394 | 11,517 | 6,758 | 2,307 | 2,293 | 7,573 | 6,735 | |||||||||||||||||||||||||||
| Money Market | (16,237 | ) | (69 | ) | (4,956 | ) | (761 | ) | (2,608 | ) | (7,833 | ) | (10 | ) | – | – | ||||||||||||||||||||
| Deposits | (4,574 | ) | (1,590 | ) | (1,894 | ) | (246 | ) | (641 | ) | (178 | ) | (26 | ) | – | – | ||||||||||||||||||||
| Equity and Other | (120,161 | ) | (94,656 | ) | (11,067 | ) | (5,524 | ) | (6,081 | ) | (801 | ) | (525 | ) | – | (1,507 | ) | |||||||||||||||||||
| Total Liabilities | (140,972 | ) | (96,315 | ) | (17,917 | ) | (6,531 | ) | (9,329 | ) | (8,812 | ) | (561 | ) | – | (1,507 | ) | |||||||||||||||||||
| Off-Balance Gap | (40,152 | ) | (20,391 | ) | (15,069 | ) | 8,397 | (1,667 | ) | (10,257 | ) | 516 | (1,749 | ) | 29 | |||||||||||||||||||||
| Gap | (31,051 | ) | (12,210 | ) | (24,592 | ) | 13,384 | (4,238 | ) | (16,762 | ) | 2,247 | 5,823 | 5,258 | ||||||||||||||||||||||
Market Risk: VaR Consolidated Analysis
Our total daily VaR as of December 31, 2015 and December 31, 2016, broken down by trading and structural (non-trading) portfolios, is set forth below. Our VaR data for trading and non-trading portfolios were summed and thus do not reflect the diversification effect.
| 2016 | 2015 | |||||||||||||||||||
| Low | Average | High | Period End | Period End | ||||||||||||||||
| (in millions of R$) | ||||||||||||||||||||
| Trading | 20.9 | 49.0 | 103.7 | 37.7 | 44.8 | |||||||||||||||
| Non-trading | 588.0 | 804.6 | 900.0 | 588.0 | 911.6 | |||||||||||||||
| Diversification effect | – | – | – | – | – | |||||||||||||||
| Total | 608.9 | 853.6 | 1,003.7 | 625.7 | 956.4 | |||||||||||||||
| Note: | VaR figures for trading and non-trading portfolios were added, thus disregarding the diversification effect. |
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Our daily VaR estimates of interest rate risk, foreign exchange rate risk and equity price risk were as set forth below:
Interest Rate Risk
| 2016 | 2015 | |||||||||||||||||||
| Low | Average | High | Period End | Period End | ||||||||||||||||
| (in millions of R$) | ||||||||||||||||||||
| Interest rate risk | ||||||||||||||||||||
| Trading | 19.6 | 37.8 | 85.3 | 34.7 | 40.0 | |||||||||||||||
| Non-trading | 588.0 | 804.6 | 900.0 | 588.0 | 911.6 | |||||||||||||||
| Diversification effect | – | – | – | – | – | |||||||||||||||
| Total | 607.5 | 842.5 | 985.4 | 622.7 | 951.6 | |||||||||||||||
| Note: | VaR figures for trading and non-trading portfolios were added, thus disregarding the diversification effect. |
Foreign Exchange Rate Risk
| 2016 | 2015 | |||||||||||||||||||
| Low | Average | High | Period End | Period End | ||||||||||||||||
| (in millions of R$) | ||||||||||||||||||||
| Exchange rate risk | ||||||||||||||||||||
| Trading | 1.9 | 23.1 | 65.2 | 10.3 | 6.1 | |||||||||||||||
| Non–trading | N.A. | N.A. | N.A. | N.A. | N.A. | |||||||||||||||
| Diversification effect | – | – | – | – | – | |||||||||||||||
| Total | 1.9 | 23.1 | 65.2 | 10.3 | 6.1 | |||||||||||||||
| Note: | VaR figures for trading and non-trading portfolios were added, thus disregarding the diversification effect. |
Equity Price Risk
| 2016 | 2015 | |||||||||||||||||||
| Low | Average | High | Period End | Period End | ||||||||||||||||
| (in millions of R$) | ||||||||||||||||||||
| Equity price risk | ||||||||||||||||||||
| Trading | 0.6 | 4.6 | 13.4 | 2.7 | 2.5 | |||||||||||||||
| Non–trading | N.A. | N.A. | N.A. | N.A. | N.A. | |||||||||||||||
| Diversification effect | – | – | – | – | – | |||||||||||||||
| Total | 0.6 | 4.6 | 13.4 | 2.7 | 2.5 | |||||||||||||||
| Note: | VaR figures for trading and non-trading portfolios were added, thus disregarding the diversification effect. |
Our daily VaR estimates by activity were as set forth below:
| 2016 | 2015 | |||||||||||||||||||
| Low | Average | High | Period End | Period End | ||||||||||||||||
| (in millions of R$) | ||||||||||||||||||||
| Trading | ||||||||||||||||||||
| Interest rate risk | 19.6 | 37.8 | 85.3 | 34.7 | 40.0 | |||||||||||||||
| Exchange rate risk | 1.9 | 23.1 | 65.2 | 10.3 | 6.1 | |||||||||||||||
| Equity | 0.6 | 4.6 | 13.4 | 2.7 | 2.5 | |||||||||||||||
| Total | 20.9 | 49.0 | 103.7 | 37.7 | 44.8 | |||||||||||||||
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| 2016 | 2015 | |||||||||||||||||||
| Low | Average | High | Period End | Period End | ||||||||||||||||
| (in millions of R$) | ||||||||||||||||||||
| Non-trading interest rate | ||||||||||||||||||||
| Interest rate | 588.0 | 804.6 | 900.0 | 588.0 | 911.6 | |||||||||||||||
| Non-trading foreign exchange | ||||||||||||||||||||
| Exchange rate | N.A. | N.A. | N.A. | N.A. | N.A. | |||||||||||||||
| Non-trading equity | ||||||||||||||||||||
| Equity | N.A. | N.A. | N.A. | N.A. | N.A. | |||||||||||||||
| Total | 588.0 | 804.6 | 900.0 | 588.0 | 911.6 | |||||||||||||||
| Total (Trading + Non-Trading) | 608.9 | 853.6 | 1,003.7 | 625.7 | 956.3 | |||||||||||||||
| Interest rate | 607.5 | 842.5 | 985.4 | 622.7 | 951.5 | |||||||||||||||
| Exchange rate | 1.9 | 23.1 | 65.2 | 10.3 | 6.1 | |||||||||||||||
| Equity | 0.6 | 4.6 | 13.4 | 2.7 | 2.5 | |||||||||||||||
| Note: | VaR figures for trading and non-trading portfolios were added, thus disregarding the diversification effect. |
Operational Risk
Operational risk losses can occur due to inadequate processes, people and systems failures or even from external events such as natural disasters, terrorism, robbery and vandalism. Operational risk losses may result in financial losses, adversely affect the continuity of our business and also negatively affect the public’s image of us.
To accomplish our operational risk objectives, we have established an operational risk model based on three lines of defense, with the objective of continuously improving and developing our management and control of operational risks. The three lines of defense are as follows:
| · | First line of defense: all business and support areas within Santander Brasil are responsible for identifying, managing, mitigating and reporting operational risk; |
| · | Second line of defense: the non-financial risk unit is responsible for monitoring and ensuring sound operational and technological risk management practices throughout the organization. It is also responsible for implementing and disseminating our operational risk culture, defining methodologies, policies, tools, training and applicable procedures and requirements for the effective management of operational risk and of ensuring there is adequate business contingency planning in place throughout the organization; |
| · | Third line of defense: the internal audit department is responsible for undertaking independent reviews of the risk management undertaken by the first and second lines of defense and for promoting continuous improvements in both of these lines of defense. |
The objectives of our operational risk management model are:
| · | to disseminate a culture of operational risk management and control, to foster the prevention of risk events and operational risks losses and to mitigate their financial, legal and reputational impacts; |
| · | to provide support to decision-makers within Santander Brasil; |
| · | to ensure the business continuity in a sustainable manner and to improve internal controls; and |
| · | to maintain control of our operational risk in a manner which is consistent with our business strategy. |
The following bodies are involved in the implementation of our risk management model:
| · | Risk Control Committee (Comitê de Controle de Riscos): A committee which aims to perform a holistic and periodic monitoring of the risks to which we are exposed and to exercise independent control on the risk management activities; |
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| · | Operational Risk Operational Committee (Comitê Operacional de Riscos Operacionais): A committee which aims to ensure and to foster the adequate monitoring, control and mitigation of operational risks; and |
| · | Operational Risk Forum (Fórum de Riscos Operacionais): An independent forum, responsible for implementing and disseminating cultural norms, methodologies, standards, policies, tools, training and procedures applicable and required for the effective and efficient management and control of operational risk. |
Our risk management model assists managers in achieving their strategic objectives by contributing to the decision-making process and by reducing operational risk losses. It is based on best market practice in the identification, assessment, monitoring, management and control of risks. It is compliant with the applicable regulatory requirements and seeks to ensure the sustained improvement of the internal controls environment.
Environmental and Social Risk
We have an environmental and social risk management system for analyzing clients in the wholesale segment. Under this system, clients who are part of one of our 14 sectors of special social and environmental attention and have credit limits and/or risk greater than R$1.0 million are screened for environmental and social concerns. These aspects include contaminated land, illegal deforestation, labor violations and other major environmental and social issues where there are potential legal penalties and reputational risk. In 2016, we screened 2,635 wholesale corporate clients, including about 29 major new projects, both Equator Principles and non-Equator Principles, for these types of risks. A specialized team with backgrounds in biology, health and safety engineering, chemical engineering and geology monitors our customers’ environmental practices and point out to our financial analysts unfavorable environmental conditions that may cause damage to our customers’ financial condition and collateral, among other effects. Furthermore, wholesale segment clients, when starting their commercial relationship with us, are screened for environmental and social concerns by the new clients’ acceptance area. The social and environmental risk unit uses software that optimizes, organizes and standardizes the analysis process, leading to more precise monitoring of clients. We constantly train our credit and commercial areas about how to apply environmental and social risk standards in the credit approval process for companies. In 2016, we trained 78% of the new employees of those areas in social and environmental risk.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
| 12A. | Debt Securities |
Not applicable.
| 12B. | Warrants and Rights |
Not applicable.
| 12C. | Other Securities |
Not applicable.
| 12D. | American Depositary Receipts |
Depositary
The Bank of New York Mellon, or BNYM, has acted as depositary in relation to our ADR program since October 20, 2015. The principal executive office of BNYM is located at One Wall Street, New York, New York 10286, United States.
Fees and Expenses
BNYM, as depositary, may charge the following fees and expenses to the ADR holders, any party depositing or withdrawing Units or any party surrendering ADRs or to whom ADRs are issued (including, without limitation, issuance pursuant to a stock dividend or stock split declared by us or an exchange of stock regarding the ADRs or the deposited securities or a distribution of ADRs), as applicable:
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| · | a fee of U.S.$5.00 or less for each 100 ADRs (or portion thereof) issued, delivered or surrendered, as the case may be; |
| · | a fee of U.S.$0.05 or less per ADR (or portion thereof) for any cash distribution made pursuant to the deposit agreement; |
| · | a fee of U.S.$0.05 or less per ADR (or portion thereof) per annum for depositary services; |
| · | a fee for the distribution of securities or of rights (where the depositary will not exercise or sell those rights on behalf of the ADR holders), such fee being in an amount equal to the fee for the execution and delivery of ADRs which would have been charged as a result of the deposit of such securities under the deposit agreement entered into with BNYM (for these purposes treating all such securities as if they were Units) but which securities are instead distributed by the depositary to the ADR holders; |
| · | such registration fees as may from time to time be in effect for the registration of transfers of Units generally on the registrar’s unit register and applicable to transfers of Units to or from the name of the depositary or its nominee or the name of the custodian for the depositary or its nominee on the making of deposits or withdrawals; |
| · | certain other cable and facsimile transmission fees and expenses; |
| · | such expenses as are incurred by the depositary in the conversion of foreign currency; |
| · | stock transfer or other taxes and other governmental charges; and |
| · | any other charges payable by the depositary or the custodian of the depositary, any of the depositary’s or such custodian’s agents or the agents of the depositary’s or such custodian’s agents, in connection with the servicing of Units or other deposited securities (which charges shall be assessed against the ADR holders as of the date or dates set by the depositary in accordance with the deposit agreement which we have entered into with BNYM and shall be payable at the sole discretion of the depositary by billing those ADR holders for those charges or by deducting those charges from one or more cash dividends or other cash distributions). |
The depositary may collect any of its fees by deduction from any cash distribution payable, or by selling a portion of any securities to be distributed, to ADR holders that are obligated to pay those fees.
We will pay all other charges and expenses of the depositary and any agent of the depositary (except the custodian) pursuant to agreements from time to time between us and the depositary. The fees described above may be amended from time to time.
Direct and Indirect Payments
BNYM has agreed to reimburse us for certain expenses related to the establishment and maintenance of the ADR program including, among others, expenses incurred in connection with investor relations activities and any other ADR program expenses. Under certain circumstances, including the removal of BNYM as depositary, we are required to repay to BNYM amounts reimbursed in prior periods. For the year ended December 31, 2016, such reimbursements amounted to U.S.$7.0 million.
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ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
No matters to report.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
No matters to report.
ITEM 15. CONTROLS AND PROCEDURES
| 15A. | Disclosure Controls and Procedures |
As of December 31, 2016, under the supervision and with the participation of our management, including our Chief Executive Officer, Chief Financial officer and Chief Accounting Officer, we performed an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). There are, as described below, inherent limitations to the effectiveness of any control system, including disclosure controls and procedures. Accordingly, even effective disclosure controls and procedures can provide only reasonable assurance of achieving their control objectives.
Based on such evaluation, our Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer concluded that our disclosure controls and procedures are effective in ensuring that information we are required to disclose in the reports we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our management, including our Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer, as appropriate to allow timely decisions regarding required disclosures.
Additionally to this and in accordance with the legal requirements (Resolutions 2,554/98 and Circular 3,467/09), we produced and issued an internal report on March 13, 2017, according to the Brazilian Central Bank’s requirements regarding the effectiveness of the internal control environment.
| 15B. | Management’s Annual Report on Internal Control over Financial Reporting |
Our management is responsible for establishing and maintaining an adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act.
Our internal control over financial reporting is a process designed by, or under the supervision of, our principal executive and principal financial officers and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes, in accordance with generally accepted accounting principles. For us, generally accepted accounting principles refer to IFRS as issued by the IASB.
Our internal control over financial reporting includes those policies and procedures that:
| · | pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets; |
| · | provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and officers; and |
| · | provide reasonable assurance of prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the consolidated financial statements. |
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
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controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
We have adapted our internal control over financial reporting to the international standards and comply with the guidelines set by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in its Internal Control – Integrated Framework 2013. These guidelines have been extended and implemented for the Group, applying a common methodology and standardizing the procedures for identifying processes, risks and controls.
Risk Management Integrated Framework
The documentation process in our companies has been constantly directed and monitored by a global coordination team, which set the guidelines for its development and supervised its execution at the unit level.
The general framework is consistent, as it assigns to management specific responsibilities regarding the structure and effectiveness of the processes related directly and indirectly with the production of consolidated financial statements, as well as the controls needed to mitigate the risks inherent in these processes.
Under the supervision and with the participation of our management, including our Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2016, based on the framework set by the COSO Integrated Framework 2013.
Based on this assessment, which was carried out through March 27, 2017, our management concluded that, as of December 31, 2016, its internal control over financial reporting was effective based on those criteria.
Our internal control over financial reporting as of December 31, 2016, has been audited by an independent registered public accounting firm which has issued a report on the effectiveness of our Internal Control over financial reporting as of December 31, 2016, for which see “Item 15C. Audit Report of the Registered Public Accounting Firm.”
| 15C. | Audit Report of the Registered Public Accounting Firm |
For the report of PwC, our registered public accounting firm, dated March 27, 2017, on the effectiveness of our Internal Control over financial reporting as of December 31, 2016, see “Item 18. Financial Statements.”
| 15D. | Changes in Internal Control over Financial Reporting |
There was no change in our internal control over financial reporting that occurred during the period covered by this annual report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
The board of directors has determined that one of the members of our audit committee, Mr. Luiz Carlos Nannini is an “Audit Committee Financial Expert” and meets the requirements set forth by the SEC and NYSE. He is, as are all other current members of the audit committee, deemed independent under the applicable Brazilian law and the regulations of the SEC and NYSE.
For more details about the audit committee see “Item 6. Directors, Senior Management and Employees—C. Board Practices—Board Advisory Committees—Audit Committee”
ITEM 16B. SANTANDER BRASIL’S CODE OF ETHICAL CONDUCT
The Code of Ethical Conduct, the central element of the Governance Compliance, is applicable to the members of the board of directors and to all employees and trainees (“Persons Subject to the Code of Ethical Conduct”) of Santander Brasil and its subsidiaries. It defines the principles that should guide both the personal and professional behavior of the Persons Subject to the Code of Ethical Conduct. They must know the Code of Ethical Conduct and seek to broaden it, by championing and striving for its enforcement. To that effect, Persons Subject to the Code of
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Ethical Conduct have the obligation to attend and participate in all training activities to which they are summoned in order to become appropriately acquainted with the Code of Ethical Conduct. The Persons Subject to the Code of Ethical Conduct should be guided by ethical principles and rules of conduct that are consistent with the companies’ values.
The Code of Ethical Conduct helps us to establish respectful and transparent relationships and aims for the accomplishment of Santander Brasil’s obligations with its customers, employees, shareholders, partners, regulators and society as a whole. The Code of Ethical Conduct should also be a reference for compliance with legal duties and for the maintenance of commercial relationships founded on trust with partners and clients.
The full version of the Santander Code of Ethical Conduct is available on our website at www.santander.com.br/ri.
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The balance of “Other general administrative expenses—Technical reports” includes the fees paid by the consolidated companies (detailed in the accompanying Appendix I of the consolidated financial statements included elsewhere in this annual report) to PwC for the fiscal year ended December 31, 2016 and to Deloitte for the fiscal year ended December 31, 2015, as follows:
| For the year ended December 31, | ||||||||
| 2016 | 2015 | |||||||
| (in millions of R$) | ||||||||
| Audit of the annual financial statements of the companies audited (constant scope of consolidation)(1) | 9.2 | 12.0 | ||||||
| Audit related | 0.1 | 1.5 | ||||||
| Tax | — | – | ||||||
| All other | 0.7 | 1.7 | ||||||
| Total | 10.0 | 15.2 | ||||||
| (1) | On March 18, 2016, Santander Brasil engaged PwC to act to replace Deloitte as the auditor of the Santander Brasil group from January 1, 2016. |
The approximate value of withholding taxes in respect of the audit fees for the year ended December 31, 2016 according to applicable law totaled R$1.8 million.
The services commissioned from our auditors meet the independence requirements stipulated by the Brazilian Central Bank and CVM regulation and by the Sarbanes-Oxley Act of 2002, and they did not involve the performance of any work that is incompatible with the audit function.
If we are required to engage an auditing firm for audit and audit-related services, those services and any fees paid to the auditing firms by us have to be pre-approved by the audit committee.
Our audit committee pre-approves all audit and non-audit services to be performed by our registered public accounting firm.
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
Under NYSE and SEC rules for listed companies, we must comply with Rule 10A-3 under the Securities Exchange Act (Listing Standards Relating to Audit Committees). Rule 10A-3 provides that we should establish an audit committee composed of members of the board of directors, meet the requirements specified in the listing standards, or appoint and establish a board of auditors or similar body to perform the role of the audit committee, in reliance on the general exemption of audit committees of foreign private issuers set forth in Rule 10A-3(c) (3) of the Securities Exchange Act.
In accordance with the rules of the Brazilian Central Bank, we constituted a body similar to the audit committee of the board of directors of an American company, which we refer to as our “audit committee.”
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Our audit committee observes Brazilian legislation and performs all the functions of an audit committee under Rule 10A 3. As provided in Brazilian law, our board of directors and the audit committee are distinct statutory entities. Moreover, according to Brazilian law, the function of hiring independent auditors is a power reserved exclusively to the board of directors of the company, under the specific and express recommendation issued from the audit committee, as the case may be, for the engagement or replacement of independent auditors, and our board of directors acts as our audit committee for the purposes of nominating such independent auditors.
Except in these respects, our audit committee is comparable to an audit committee of the board and performs the same functions of an American company. Our audit committee is able to act independently in carrying out the responsibilities of an audit committee under the Sarbanes-Oxley Act, meets the exemption requirements of Rule 10A-3(c)(3) and therefore is in compliance with Rule 10A-3 of the Securities Exchange Act.
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
The following table reflects purchases of our equity securities, including in the form of ADRs, by us or our affiliates in 2016.
Santander Brasil – Buyback Program Units
| Months | Total Number of Units Purchased (3) | Average Price Paid per Unit in U.S.$ (4) | Total Number of Units Purchased as Part of Publicly Announced Plans or Programs (1)(5) | Maximum Number of Units that May Yet Be Purchased Under the Plans or Programs (2) | ||||||||||||
| November 2015 | 453,800 | 15.155773 | 453,800 | — | ||||||||||||
| December 2015 | 4,067,997 | 15.719481 | 4,067,997 | — | ||||||||||||
| January 2016 | 70,900 | 12.679589 | 70,900 | — | ||||||||||||
| February 2016 | 2,503,800 | 13.763915 | 2,503,800 | — | ||||||||||||
| March 2016 | 4,003,900 | 16.775495 | 4,003,900 | — | ||||||||||||
| April 2016 | — | — | — | — | ||||||||||||
| May 2016 | 1,790,700 | 18.204826 | 1,790,700 | — | ||||||||||||
| June 2016 | 1,389,500 | 17.891631 | 1,389,500 | — | ||||||||||||
| July 2016 | — | — | — | — | ||||||||||||
| August 2016 | 840,400 | 21.466152 | 840,400 | — | ||||||||||||
| September 2016 | 776,800 | 22.070555 | 776,800 | — | ||||||||||||
| October 2016 | 1,318,600 | 25.695899 | 1,318,600 | — | ||||||||||||
| Total | 17,216,397 | — | 17,216,397 | 39,391,314 | ||||||||||||
| (1) | The buyback program, as approved by our board of directors on November 3, 2015, for the period from November 4, 2015 to November 3, 2016. A new buyback program was approved by our board of directors on November 3, 2016 for the period from November 4, 2016 to November 3, 2017. |
| (2) | The number entered in the “Total” row of the column “Maximum Number (or Approximate Dollar Value) of Units that May Yet Be Purchased Under the Plans or Programs” refers to the number of Units which may be repurchased in the period from November 2015 to November 2016 as approved by our board of directors. The number of Units that may be repurchased for the period from November 4, 2016 to November 3, 2017 as approved by our board of directors is 38,402,972. |
| (3) | The “Total Number of Units Purchased” was 678,400 in November 2016 and 911,400 in December 2016. |
| (4) | The “Average Price Paid per Unit in U.S.$” was U.S.$25.695921 in November 2016 and U.S.$26.262221 in December 2016. |
| (5) | The “Total Number of Units Purchased as Part of Publicly Announced Plans or Programs” was 678,400 in November 2016 and 911,400 in December 2016. |
| (6) | The repurchase plans define an annual maximum of Units to be repurchased but without a monthly limit. |
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Santander Brasil – Buyback Program ADRs
| Months | Total Number of ADRs Purchased(3) | Average Price Paid per ADR in U.S.$(4) | Total Number of ADRs Purchased as Part of Publicly Announced Plans or Programs (1)(5) | Maximum Number of ADRs that May Yet Be Purchased Under the Plans or Programs (2) | ||||||||||||
| November 2015 | — | — | — | — | ||||||||||||
| December 2015 | — | — | — | — | ||||||||||||
| January 2016 | — | — | — | — | ||||||||||||
| February 2016 | — | — | — | — | ||||||||||||
| March 2016 | — | — | — | — | ||||||||||||
| April 2016 | — | — | — | — | ||||||||||||
| May 2016 | — | — | — | — | ||||||||||||
| June 2016 | — | — | — | — | ||||||||||||
| July 2016 | — | — | — | — | ||||||||||||
| August 2016 | — | — | — | — | ||||||||||||
| September 2016 | — | — | — | — | ||||||||||||
| October 2016 | — | — | — | — | ||||||||||||
| Total | — | — | — | 39,391,314 | ||||||||||||
| (1) | The buyback program, as approved by our board of directors on November 3, 2015, for the period from November 4, 2015 to November 3, 2016. A new buyback program was approved by our board of directors on November 3, 2016 for the period from November 4, 2016 to November 3, 2017. |
| (2) | The number entered in the “Total” row of the column “Maximum Number (or Approximate Dollar Value) of ADRs that May Yet Be Purchased Under the Plans or Programs” refers to the number of ADRs which may be repurchased for the period from November 2015 to November 2016 as approved by our board of directors. The number of ADRs that may be repurchased for the period from November 4, 2016 to November 3, 2017 as approved by our board of directors is 38,402,972. |
| (3) | The “Total Number of ADRs Purchased” was zero in each of November 2016 and December 2016. |
| (4) | The “Average Price Paid per ADRs in U.S.$” was zero in each of November 2016 and December 2016. |
| (5) | The “Total Number of ADRs Purchased as Part of Publicly Announced Plans or Programs” was zero in November 2016 and December 2016. |
| (6) | The repurchase plans define an annual maximum of ADRs to be repurchased but without a monthly limit. |
For further information on our buyback program, please see “Item 4. Information on the Company—A. History and Development of the Company—Important Events—Buyback Program.”
ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT
Not applicable.
ITEM 16G. CORPORATE GOVERNANCE
In December 2012, primarily in response to the requirements of the European Banking Authority, Santander Spain adopted a corporate governance framework (Marco de Gobierno Interno del Grupo Santander). The purpose of the framework is to organize and standardize the corporate governance practices of Santander Spain and its most significant subsidiaries, including us, in order to enhance the ability of Santander Spain to manage the risks arising from Santander group operations around the world.
The three pillars of the framework are (i) an organizational model based on functions subject to internal governance, (ii) terms of reference according to which Santander Spain exercises control and oversight over its subsidiaries and participates in specific decisions as their controlling shareholder, and (iii) corporate models establishing common guidelines for the management and control of Santander Spain’s subsidiaries, subject to local autonomy considerations. In general, the framework purports to implement organizational and procedural changes
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rather than mandating particular substantive outcomes. However, in some cases, and subject to the limitations there set forth, the framework states that Santander Spain may require that its subsidiaries make substantive changes or take specific actions. The framework enables Santander Spain to participate in the decision-making processes of its subsidiaries by requiring its approval of certain decisions that may have a significant impact on the Santander Group as a whole due to their significance or potential risk, such as decisions relating to mergers and acquisitions, capital structure, dividends and risk tolerance, among other things. The framework also requires that a single person at each subsidiary be in charge of each function subject to internal governance and gives Santander Spain the authority to participate in the appointment, evaluation and compensation of each such person.
By its own terms, the framework as a whole is premised on the legal and financial autonomy of the subsidiaries and does not empower Santander Spain to supplant its subsidiaries’ decision-making processes. Moreover, each of the three pillars of the framework is explicitly made subject to local legal requirements. We approved the adoption of this corporate governance framework in May 2013, subject to the precedence of applicable Brazilian laws and regulations and the limitations imposed thereby such as banking secrecy laws, and subject also to our corporate governance practices, including our policies for related party transactions and for disclosure of material acts and facts.
As a result of the precedence given to local legal requirements in the framework itself and in our adopting resolutions, we do not expect that the adoption of the corporate governance framework will affect our ability to comply with applicable corporate governance regulations, including the rules of the Brazilian Central Bank, CVM and BM&FBOVESPA, and SEC and NYSE rules applicable to foreign private issuers.
Pursuant to Section 303A.11 of the Listed Company Manual of the NYSE we are required to provide a summary of the significant ways in which our corporate governance practices differ from those required for United States resident companies under the NYSE listing standards. Section 303A of the NYSE Listed Company Manual sets forth certain corporate governance requirements that a company must satisfy to be listed on the NYSE. However, exemptions from many of the requirements are available to foreign private issuers such as us. As a foreign private issuer, we are permitted to, and we will, follow home country practice in lieu of the NYSE corporate governance standards from which we are exempt.
A discussion of the significant differences between Brazilian corporate governance standards that govern our practices and the NYSE standards applicable to U.S. companies follows below. It includes only a brief summary description of our corporate governance practices.
Principal Differences between Brazilian and U.S. Corporate Governance Practices
We are also subject to the NYSE corporate governance listing standards. As a foreign private issuer, the standards applicable to us are considerably different than the standards applied to U.S. listed companies. Under the NYSE rules, we are required only to: (i) have an audit committee or audit board, pursuant to an applicable exemption available to foreign private issuers, that meets certain requirements, as discussed below, (ii) provide prompt certification by our Chief Executive Officer of any material non-compliance with any applicable NYSE corporate governance rules, (iii) submit an executed written affirmation annually to the NYSE and submit an interim written affirmation each time a change occurs to the board or any of the committees subject to Section 303A of the NYSE rules, and (iv) provide a brief description of the significant differences between our corporate governance practices and the NYSE corporate governance practice required to be followed by U.S. listed companies. The discussion of the significant differences between our corporate governance practices and those required of U.S. listed companies follows below, as required for foreign private issuers by NYSE Rule 303A.11.
Majority of Independent Directors
The NYSE rules require that a majority of the board must consist of independent directors. As a company with a majority of our voting shares being beneficially owned by another entity (Santander Spain), we are not required to comply with this rule. Independence is defined by various criteria, including the absence of a material relationship between the director and the listed company. Currently, our board of directors must have at least five members, at least 20.0% of which must be independent, as determined pursuant to Article 14 of our By-Laws. Currently, five members of our board of directors are deemed independent (representing 50% of the composition of our board of directors). Also, Brazilian Corporate Law, the Brazilian Central Bank and the CVM have established rules that require directors to meet certain qualification requirements and that address the compensation, duties and
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responsibilities of, as well as the restrictions applicable to, a company’s executive officers and directors. While we believe that these rules provide adequate assurances that our directors are independent and meet the requisite qualification requirements under Brazilian law, we believe such rules would permit us to have directors that would not otherwise pass the test for director independence established by the NYSE. Brazilian Corporate Law requires that our directors shall be elected by our shareholders at an annual shareholders’ meeting. Currently, all of our directors are elected by our shareholders after recommendation of the Nomination and Governance Committee, for a term of 2 years.
Executive Sessions
NYSE rules require that the non-management directors must meet at regularly scheduled executive sessions without management present. Brazilian Corporate Law does not have a similar provision. According to Brazilian Corporate Law, up to one-third of the members of the board of directors can be elected from management members. Our Chief Executive Officer, Mr. Sergio Agapito Lires Rial, and the Senior Vice President Executive Officers, Mr. José de Paiva Ferreira and Conrado Engel are members of our board of directors. There is no requirement that our non-management directors meet regularly without management. As a result, the non-management directors on our board do not typically meet in executive session.
Committees
NYSE rules require that listed companies have a nominating/corporate governance committee and a remuneration committee composed entirely of independent directors and governed by a written charter addressing the committee’s required purpose and detailing its required responsibilities. As a company whose majority of voting shares is held by another group, we are not required to comply with this rule. The responsibilities of the nominating/corporate governance committee include, among other things, identifying and selecting qualified board member nominees and developing a set of corporate governance principles applicable to the company. The responsibilities of the remuneration committee, in turn, include, among other things, reviewing corporate goals relevant to the Chief Executive Officer’s compensation, evaluating the Chief Executive Officer’s performance, approving the Chief Executive Officer’s compensation levels and recommending to the board non-chief executive officer compensation, incentive-compensation and equity-based plans.
In January 2016, our board of directors approved the terms for the establishment of our Nomination and Governance Committee. The Nomination and Governance Committee will oversee corporate governance and compliance at Santander Brasil.
CMN rules require us to have a compensation committee of at least three members. We have created the compensation committee, whose function is to advise our board of directors on matters in connection with, but not limited to (i) fixed and variable remuneration policies and benefits and (ii) the long-term incentive plan.
See “Item 6. Directors, Senior Management and Employees—C. Board Practices” for a complete description of all of our board advisory committees.
Pursuant to Brazilian Corporate Law, the aggregate compensation for our directors and executive officers is established by our shareholders.
Audit Committee and Audit Committee Additional Requirements
NYSE rules require that listed companies have an audit committee that (i) is composed of a minimum of three independent directors who are all financially literate, (ii) meets the SEC rules regarding audit committees for listed companies, (iii) has at least one member who has accounting or financial management expertise and (iv) is governed by a written charter addressing the committee’s required purpose and detailing its required responsibilities.
CMN rules require us to have an audit committee of at least three independent members. The audit committee is elected by the board of directors. SEC Rule 10A-3 provides that the listing of securities of foreign private issuers will be exempt from the audit committee requirements if the issuer meets certain requirements. Our audit committee allows us to meet the requirements set forth by this rule. See “Item 16D. Exemptions from the Listing Standards for Audit Committees.”
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Shareholder Approval of Equity Compensation Plans
NYSE rules require that shareholders be given the opportunity to vote on all equity compensation plans and material revisions thereto, with limited exceptions. Under Brazilian Corporate Law, shareholders must approve all stock option plans. In addition, any issuance of new shares that exceeds our authorized share capital is subject to shareholder approval. Our shareholders do not have the opportunity to vote on all equity compensation plans.
Corporate Governance Guidelines
NYSE rules require that listed companies adopt and disclose corporate governance guidelines. We comply with the corporate governance guidelines under applicable Brazilian law. The corporate governance guidelines applicable to us under Brazilian law are consistent with the guidelines established by the NYSE.
Pursuant to best practices of corporate governance guidelines, on September 22, 2010, our board of directors approved a policy that regulates related party transactions, which was last revised on March 18, 2015. This policy provides rules which aim to ensure that all decisions, in particular those involving related parties and other situations with potential conflict of interests will be aligned with our interests and those of our shareholders. The policy applies to all employees, directors and executive officers of Santander Brasil.
Code of Business Conduct and Ethics
NYSE rules require that listed companies adopt and disclose a code of business conduct and ethics for directors, officers and employees, and promptly disclose any waivers of the code for directors or executive officers. Applicable Brazilian law does not have a similar requirement. We adopted a Code of Ethics on February 27, 2009, last revised on September 28, 2016, which regulates the set of ethical principles that shall guide the conduct of our employees, officers and directors of Santander Brasil, as well as of its affiliates. Our Code of Ethics complies with the requirements of the Sarbanes-Oxley Act and the NYSE rules.
Internal Audit Function
NYSE rules require that listed companies maintain an internal audit function to provide management and the audit committee with ongoing assessments of the company’s risk management processes and system of internal control.
Our internal audit department works independently to conduct methodologically structured examinations, analysis, surveys and fact finding to evaluate the integrity, adequacy, effectiveness, efficiency and economy of the information systems processes and internal controls related to our risk management. The internal audit department reports on an ongoing basis to the audit committee. In carrying out its duties, the internal audit department has access to all documents, records, systems, locations and professionals involved with the activities under review.
Other Corporate Frameworks
On the recommendation of our controlling shareholder, our board of directors analyzed and approved the adoption of a series of corporate frameworks which aim to foster the adoption of best practices applicable to matters such as: (i) risk control; (ii) accounting and disclosure of financial information; (iii) risk assessment; (iv) communication and branding; (v) human resources; (vi) information technology; and (vii) money laundering protection. During 2016, from the actual 23, a total of nine frameworks (Marcos Corporativos) were assessed by the board of directors and created and/or adjusted in order to comply with applicable Brazilian laws and regulations. Once these frameworks are adopted by us, we believe they will enhance the formalization of our governance and internal controls structures.
Website
Our corporate governance codes, which do not form part of this annual report, are available to the public on our website in Portuguese and English at www.santander.com.br under the heading “Investor Relations—Corporate Governance.”
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ITEM 16H. MINE SAFETY DISCLOSURE
Not applicable.
| 240 |
We have responded to Item 18 in lieu of this item.
Consolidated Financial Statements are filed as part of this annual report, see pages F-1 to F-113.
| (a) | Index to Consolidated Financial Statements |
| Page | |
| Report of PricewaterhouseCoopers Auditores Independentes | F-1 |
| Report of Deloitte Touche Tomahtsu Auditores Independentes | F-3 |
| Consolidated Statement of Financial Position for the years ended December 31, 2016, 2015 and 2014 | F-4 |
| Consolidated Income Statements for the years ended December 31, 2016, 2015 and 2014 | F-6 |
| Consolidated Statements of Profit or Loss and Other Comprehensive Income for the years ended December 31, 2016, 2015 and 2014 | F-7 |
| Consolidated Statements of Changes in Equity for the years ended December 31, 2016, 2015 and 2014 | F-8 |
| Consolidated Statements of Cash Flow for the years ended December 31, 2016, 2015 and 2014 | F-9 |
| Notes to the Consolidated Financial Statements for the years ended December 31, 2016, 2015 and 2014 | F-11 |
| (b) | List of Exhibits. |
We are filing the following documents as part of this annual report on Form 20-F:
| Exhibit Number | Description | |
| 1.1 | English translation of the By-laws of Santander Brasil, amended and restated on December 14, 2015 (incorporated by reference to our Registration Statement on Form 6-K (file no. 001-34476) filed with the SEC on December 14, 2015). | |
| 2.1 | Form of Deposit Agreement among Santander Brasil, The Bank of New York Mellon, as depositary, and the holders from time to time of American depositary shares issued thereunder, including the form of American depositary receipts (file no. 333-207353 filed with the SEC on October 9, 2015). | |
| 2.2 | Subordinated Indenture dated as of January 29, 2014, among Santander Brasil and The Bank of New York Mellon, as trustee (incorporated by reference to our Annual Report on Form 20-F (file no. 001-34476) filed with the SEC on April 30, 2014). | |
| 2.3 | First Supplemental Indenture dated as of January 29, 2014, among Santander Brasil and The Bank of New York Mellon, as trustee, paying agent, transfer agent and registrar (incorporated by reference to our Annual Report on Form 20-F (file no. 001-34476) filed with the SEC on April 30, 2014). | |
| 2.4 | Second Supplemental Indenture dated as of January 29, 2014, among Santander Brasil and The Bank of New York Mellon, as trustee, paying agent, transfer agent and registrar (incorporated by reference to our Annual Report on Form 20-F (file no. 001-34476) filed with the SEC on April 30, 2014). | |
| 4.1 | Option Plan to Purchase Share deposit Certificate of Santander Brasil (incorporated by reference to Attachment I to our Form 6-K/A filed with the SEC on January 6, 2010). |
| 241 |
| Exhibit Number | Description | |
| 4.2 | Long-term Incentive Plan – Investment in Deposit Share Certificate (“Units”) of Santander Brasil (incorporated by reference to Exhibit III to our Form 6-K (file no. 001-34476) filed with the SEC on September 27, 2011). | |
| 4.3 | Deferred Bonus Plans related to 2011 (incorporated by reference to Exhibit I to our Form 6-K (file no. 001-34476) filed with the SEC on January 9, 2012). | |
| 4.4 | Deferred Bonus Plans related to 2012 (incorporated by reference to Exhibit I to our Form 6-K (file no. 001-34476) filed with the SEC on January 15, 2013). | |
| 4.5 | Long-term Incentive Plan – Investment in Deposit Share Certificates (“Units”) of Santander Brasil (incorporated by reference to Exhibit V to our Form 6-K (file no. 001-34476) filed with the SEC on April 4, 2013). | |
| 4.6 | Deferred Bonus Plans related to 2013 (incorporated by reference to Exhibit I to our Form 6-K (file no. 001-34476) filed with the SEC on May 1, 2013). | |
| 4.7 | Deferred Bonus Plans related to 2014 (incorporated by reference to Exhibit I to our Form 6-K (file no. 001-34476) filed with the SEC on April 1, 2015). | |
| 4.8 | Deferred Bonus Plans related to 2015 (incorporated by reference to Exhibit I to our Form 6-K (file no. 001-34476) filed with the SEC on December 3, 2015). | |
| 8.1 | List of Subsidiaries (incorporated by reference as Appendix I of our Consolidated Financial Statements filed with this Form 20-F). | |
| 11.1 | English translation of the Code of Ethical Conduct of Santander Brasil. | |
| 12.1 | Section 302 Certification by the principal executive officer. | |
| 12.2 | Section 302 Certification by the principal financial officer. | |
| 13.1 | Section 906 Certification by the Chief Executive Officer. | |
| 13.2 | Section 906 Certification by the Chief Financial Officer. |
| 242 |
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
| BANCO SANTANDER (Brasil) S.A. | |||
| By: | /s/ Sergio Agapito Lires Rial | ||
| Name: | Sergio Agapito Lires Rial | ||
| Title: | Chief Executive Officer | ||
Date: March 28, 2017
| 243 |
BANCO SANTANDER (BRASIL) S.A.
CONSOLIDATED FINANCIAL STATEMENTS
| INDEX | Page | ||
| Independent Auditors' Report | F- 1 | ||
| Independent Auditors' Report | F- 3 | ||
| Consolidated Statement of Financial Position | F- 4 | ||
| Consolidated Income Statements | F- 6 | ||
| Consolidated Statements of Profit or Loss and Other Comprehensive Income | F- 7 | ||
| Consolidated Statements of Changes in Equity | F- 8 | ||
| Consolidated Statement of Cash Flows | F- 9 | ||
| Notes to the Consolidated Financial Statements | |||
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
Banco Santander (Brasil) S.A.
In our opinion, the accompanying consolidated statement of financial position as of December 31, 2016 and the related consolidated income statement, consolidated statement of profit or loss and other comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the year then ended present fairly, in all material respects, the financial position of Banco Santander (Brasil) S.A. and its subsidiaries as of December 31, 2016, and the results of their operations and their cash flows for the year then ended in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on these financial statements and on the Company’s internal control over financial reporting based on our integrated audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audit of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.
The Reconciliation of Shareholders' Equity and Net Income – BRGAAP vs IFRS as of and for the year ended December 31, 2016 and the Statement of Value Added for the year ended December 31, 2016, included in APPENDIX I and II respectively, have been subjected to audit procedures performed in conjunction with the audit of the Company’s consolidated financial statements. The supplemental information is the responsibility of the Company’s management. Our audit procedures included determining whether the supplemental information reconciles to the consolidated financial statements or the underlying accounting and other records, as applicable, and prescribed performing procedures to test the completeness and accuracy of the information presented in the supplemental information. In forming our opinion on the supplemental information, we evaluated whether the supplemental information, including its form and content is presented in conformity with Brazilian Corporate Law. In our opinion, the Reconciliation of Shareholders' Equity and Net Income – BRGAAP vs IFRS as of and for the year ended December 31, 2016 and the Statement of Value Added for the year ended December 31, 2016 are fairly stated, in all material respects, in relation to the consolidated financial statements as a whole.
PricewaterhouseCoopers, Av. Francisco Matarazzo 1400, Torre Torino, São Paulo, SP, Brasil 05001-903, Caixa Postal 61005
T: (11) 3674-2000, www.pwc.com/br
F-1
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/PricewaterhouseCoopers Auditores Independentes
São Paulo, Brazil
March 27, 2017
F-2
 |
Deloitte Touche Tohmatsu Dr. Chucri Zaidan Avenue, no 1.240 4th to 12th floors - Golden Tower 04711-130 - São Paulo - SP Brazil
Tel: + 55 (11) 5186-1000 Fax: + 55 (11) 5181-2911 www.deloitte.com.br |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Banco Santander (Brasil) S.A.
Sao Paulo - SP - Brazil
We have audited the accompanying consolidated balance sheets of Banco Santander (Brasil) S.A. and its subsidiaries (the “Bank”) as of December 31, 2015 and 2014, and the related consolidated income statements, statements of comprehensive income and changes in total equity, and cash flows statements for each of the two years in the period ended December 31, 2015, all expressed in Brazilian reais. These financial statements are the responsibility of the Bank's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Banco Santander (Brasil) S.A. and its subsidiaries as of December 31, 2015 and 2014, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2015, in conformity with International Financial Reporting Standards – IFRS as issued by the International Accounting Standards Board - IASB.
Our audits were conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplementary information included in the Appendix II to the notes under the caption Statements of Value Added is presented for the purpose of additional analysis, whose presentation by publicly-held companies is required by Brazilian Corporate Law, and is not a required part of the basic financial statements in conformity with International Financial Reporting Standards – IFRS as issued by the International Accounting Standards Board – IASB. This supplementary information is the responsibility of the Bank's management. Such information has been subjected to the auditing procedures applied in our audit of the basic financial statements and, in our opinion, is fairly stated, in all material respects, when considered in relation to the basic financial statements taken as a whole.
/s/ Deloitte Touche Tohmatsu Auditores Independentes
São Paulo, Brazil
April 29, 2016
Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee (“DTTL”), its network of member firms, and their related entities. DTTL and each of its member firms are legally separate and independent entities. DTTL (also referred to as “Deloitte Global”) does not provide services to clients. Please see www.deloitte.com/about for a more detailed description of DTTL and its member firms.
Deloitte provides audit, consulting, financial advisory, risk management, tax and relates services to public and private clients spanning multiple industries. Deloitte serves four out of five Fortune Global 500® companies through a globally connected network of member firms in more than 150 countries bringing world-class capabilities, insights, and high-quality service to address clients’ most complex business challenges. To learn more about how Deloitte’s approximately 225,000 professionals make an impact that matters, please connect with us on Facebook, Linkedln or Twitter.
© 2017 Deloitte Touche Tohmatsu. All rights reserved.
F-3
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(Thousands of Brazilian Reais - R$)
| Assets | Note | 2016 | 2015 | 2014 | ||||||||||||
| Cash and Balances With The Brazilian Central Bank | 5 | 110,604,911 | 89,143,353 | 55,903,848 | ||||||||||||
| Financial Assets Held For Trading | 84,873,663 | 50,536,731 | 56,013,603 | |||||||||||||
| Debt instruments | 7 | 59,994,946 | 25,193,598 | 47,106,811 | ||||||||||||
| Equity instruments | 8 | 398,461 | 404,973 | 391,656 | ||||||||||||
| Trading derivatives | 9 | 24,480,256 | 24,938,160 | 8,515,136 | ||||||||||||
| Other Financial Assets At Fair Value Through Profit Or Loss | 1,711,204 | 2,080,234 | 996,694 | |||||||||||||
| Debt instruments | 7 | 1,668,749 | 1,506,570 | 93,900 | ||||||||||||
| Equity instruments | 8 | 42,455 | 573,664 | 902,794 | ||||||||||||
| Available-For-Sale Financial Assets | 57,815,045 | 68,265,606 | 75,164,342 | |||||||||||||
| Debt instruments | 7 | 55,829,572 | 67,103,274 | 73,510,698 | ||||||||||||
| Equity instruments | 8 | 1,985,473 | 1,162,332 | 1,653,644 | ||||||||||||
| Held to maturity investments | 7 | 10,048,761 | 10,097,836 | - | ||||||||||||
| Loans and Receivables | 296,048,506 | 306,268,788 | 264,607,746 | |||||||||||||
| Loans and amounts due from credit institutions | 6 | 27,762,473 | 42,422,638 | 28,917,397 | ||||||||||||
| Loans and advances to customers | 10 | 252,002,774 | 252,033,449 | 235,690,349 | ||||||||||||
| Debt instruments | 7 | 16,283,259 | 11,812,701 | - | ||||||||||||
| Hedging Derivatives | 9 | 222,717 | 1,312,202 | 212,552 | ||||||||||||
| Non-Current Assets Held For Sale | 11 | 1,337,885 | 1,237,493 | 929,948 | ||||||||||||
| Investments in Associates and Joint Ventures | 12 | 990,077 | 1,060,743 | 1,023,461 | ||||||||||||
| Tax Assets | 25 | 28,753,184 | 34,769,848 | 23,019,696 | ||||||||||||
| Current | 4,316,072 | 4,194,344 | 2,981,696 | |||||||||||||
| Deferred | 24,437,112 | 30,575,504 | 20,038,000 | |||||||||||||
| Other Assets | 16 | 5,104,012 | 3,802,118 | 5,066,726 | ||||||||||||
| Tangible Assets | 13 | 6,646,433 | 7,005,914 | 7,071,036 | ||||||||||||
| Intangible Assets | 30,236,842 | 29,813,662 | 30,221,258 | |||||||||||||
| Goodwill | 14 | 28,355,039 | 28,332,719 | 28,270,955 | ||||||||||||
| Other intangible assets | 15 | 1,881,803 | 1,480,943 | 1,950,303 | ||||||||||||
| TOTAL ASSETS | 634,393,240 | 605,394,528 | 520,230,910 |
The accompanying Notes are an integral part of these consolidated financial statements.
F-4
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(Thousands of Brazilian Reais - R$)
| Liabilities and Stockholders' Equity | Note | 2016 | 2015 | 2014 | ||||||||||
| Financial Liabilities Held For Trading | 51,619,869 | 42,387,768 | 19,569,791 | |||||||||||
| Trading derivatives | 9.a | 19,925,600 | 22,340,137 | 8,284,360 | ||||||||||
| Short positions | 9.b | 31,694,269 | 20,047,631 | 11,285,431 | ||||||||||
| Financial Liabilities at Amortized Cost | 471,579,467 | 457,281,656 | 392,186,593 | |||||||||||
| Deposits from Brazilian Central Bank and deposits from credit institutions | 17 | 78,634,072 | 69,451,498 | 63,674,201 | ||||||||||
| Customer deposits | 18 | 247,445,177 | 243,042,872 | 220,644,019 | ||||||||||
| Marketable debt securities | 19 | 99,842,955 | 94,658,300 | 70,355,249 | ||||||||||
| Subordinated debts | 20 | 466,246 | 8,097,304 | 7,294,077 | ||||||||||
| Debt Instruments Eligible to Compose Capital | 21 | 8,311,918 | 9,959,037 | 6,773,312 | ||||||||||
| Other financial liabilities | 22 | 36,879,099 | 32,072,645 | 23,445,735 | ||||||||||
| Hedging Derivatives | 9 | 311,015 | 2,376,822 | 893,902 | ||||||||||
| Provisions | 11,776,491 | 11,409,677 | 11,127,444 | |||||||||||
| Provisions for pensions funds and similar obligations | 23 | 2,710,627 | 2,696,653 | 3,869,728 | ||||||||||
| Provisions for judicial and administrative proceedings, commitments and other provisions | 24 | 9,065,864 | 8,713,024 | 7,257,716 | ||||||||||
| Tax Liabilities | 25 | 6,094,740 | 5,253,125 | 12,423,002 | ||||||||||
| Current | 4,826,703 | 4,436,000 | 12,110,582 | |||||||||||
| Deferred | 1,268,037 | 817,125 | 312,420 | |||||||||||
| Other Liabilities | 26 | 8,199,099 | 6,850,196 | 5,346,885 | ||||||||||
| Total Liabilities | 549,580,681 | 525,559,244 | 441,547,617 | |||||||||||
| Stockholders' Equity | 29 | 85,434,855 | 83,531,754 | 80,105,041 | ||||||||||
| Share capital | 57,000,000 | 57,000,000 | 56,806,384 | |||||||||||
| Reserves | 27,881,326 | 24,388,967 | 20,594,135 | |||||||||||
| Treasury shares | (514,034 | ) | (423,953 | ) | (445,501 | ) | ||||||||
| Option for Acquisition of Equity Instrument | (1,017,000 | ) | (1,017,000 | ) | (950,000 | ) | ||||||||
| Profit for the year attributable to the Parent | 7,334,563 | 9,783,740 | 5,630,023 | |||||||||||
| Less: dividends and remuneration | (5,250,000 | ) | (6,200,000 | ) | (1,530,000 | ) | ||||||||
| Other Comprehensive Income | (1,347,800 | ) | (4,131,532 | ) | (1,801,921 | ) | ||||||||
| Stockholders' Equity Attributable to the Parent | 84,087,055 | 79,400,222 | 78,303,120 | |||||||||||
| Non - Controlling Interests | 28 | 725,504 | 435,062 | 380,173 | ||||||||||
| Total Stockholders' Equity | 84,812,559 | 79,835,284 | 78,683,293 | |||||||||||
| Total Liabilities and Stockholders' Equity | 634,393,240 | 605,394,528 | 520,230,910 |
The accompanying Notes are an integral part of these consolidated financial statements.
F-5
CONSOLIDATED INCOME STATEMENTS
(Thousands of Brazilian Reais - R$, except for per share data)
| Note | 2016 | 2015 | 2014 | |||||||||||
| Interest and similar income | 33 | 77,146,077 | 69,870,200 | 58,923,916 | ||||||||||
| Interest expense and similar charges | 34 | (46,559,584 | ) | (38,533,089 | ) | (31,695,404 | ) | |||||||
| Net interest income | 30,586,493 | 31,337,111 | 27,228,512 | |||||||||||
| Income from equity instruments | 35 | 258,545 | 142,881 | 222,302 | ||||||||||
| Income from companies accounted for by the equity method | 12 | 47,537 | 116,312 | 91,096 | ||||||||||
| Fee and commission income | 36 | 13,548,481 | 11,797,191 | 11,368,098 | ||||||||||
| Fee and commission expense | 37 | (2,570,885 | ) | (2,313,682 | ) | (2,602,212 | ) | |||||||
| Gains (losses) on financial assets and liabilities (net) | 38 | 3,016,156 | (20,002,859 | ) | 2,748,163 | |||||||||
| Financial assets held for trading | 3,166,399 | (19,936,801 | ) | 2,270,059 | ||||||||||
| Other financial instruments at fair value through profit or loss | 82,638 | 46,859 | (77,624 | ) | ||||||||||
| Financial instruments not measured at fair value through profit or loss | (115,202 | ) | (120,523 | ) | 512,190 | |||||||||
| Other | (117,679 | ) | 7,606 | 43,538 | ||||||||||
| Exchange differences (net) | 39 | 4,574,814 | 10,084,420 | (3,635,599 | ) | |||||||||
| Other operating expense (net) | 40 | (624,571 | ) | (347,123 | ) | (470,477 | ) | |||||||
| Total Income | 48,836,570 | 30,814,251 | 34,949,883 | |||||||||||
| Administrative expenses | (14,920,410 | ) | (14,515,132 | ) | (13,941,816 | ) | ||||||||
| Personnel expenses | 41 | (8,377,265 | ) | (7,798,792 | ) | (7,203,442 | ) | |||||||
| Other administrative expenses | 42 | (6,543,145 | ) | (6,716,340 | ) | (6,738,374 | ) | |||||||
| Depreciation and amortization | (1,482,639 | ) | (1,490,017 | ) | (1,362,129 | ) | ||||||||
| Tangible assets | 13 | (1,154,588 | ) | (1,029,706 | ) | (872,749 | ) | |||||||
| Intangible assets | 15 | (328,051 | ) | (460,311 | ) | (489,380 | ) | |||||||
| Provisions (net) | (2,724,742 | ) | (4,001,294 | ) | (2,036,237 | ) | ||||||||
| Impairment losses on financial assets (net) | (13,301,445 | ) | (13,633,989 | ) | (11,271,605 | ) | ||||||||
| Loans and receivables | 6&10.c | (13,389,834 | ) | (13,110,319 | ) | (11,193,571 | ) | |||||||
| Other financial instruments not measured at fair value through profit or loss | 88,389 | (523,670 | ) | (78,034 | ) | |||||||||
| Impairment losses on other assets (net) | (114,321 | ) | (1,220,645 | ) | 3,751 | |||||||||
| Other intangible assets | 15 | (5,838 | ) | (679,254 | ) | (5,123 | ) | |||||||
| Other assets | (108,483 | ) | (541,391 | ) | 8,874 | |||||||||
| Gains (losses) on disposal of assets not classified as non-current assets held for sale | 43 | 3,816 | 780,615 | 86,846 | ||||||||||
| Gains (losses) on non-current assets held for sale not classified as discontinued operations | 44 | 87,073 | 50,493 | 14,636 | ||||||||||
| Operating Profit Before Tax | 16,383,902 | (3,215,718 | ) | 6,443,329 | ||||||||||
| Income taxes | 25 | (8,918,984 | ) | 13,049,544 | (735,553 | ) | ||||||||
| Consolidated Profit for the Year | 7,464,918 | 9,833,826 | 5,707,776 | |||||||||||
| Profit attributable to the Parent | 7,334,563 | 9,783,740 | 5,630,023 | |||||||||||
| Profit attributable to non-controlling interests | 28 | 130,355 | 50,086 | 77,753 | ||||||||||
| Earnings Per Share (Brazilian Reais) | 30 | |||||||||||||
| Basic earnings per 1,000 shares (Brazilian Reais) | ||||||||||||||
| Common shares | 929.93 | 1,236.96 | 709.69 | |||||||||||
| Preferred shares | 1,022.92 | 1,360.66 | 780.66 | |||||||||||
| Diluted earnings per 1,000 shares (Brazilian Reais) | ||||||||||||||
| Common shares | 929.03 | 1,235.79 | 709.40 | |||||||||||
| Preferred shares | 1,021.93 | 1,359.36 | 780.34 | |||||||||||
| Net Profit attributable - Basic (Brazilian Reais) | ||||||||||||||
| Common shares | 3,560,288 | 4,748,896 | 2,733,205 | |||||||||||
| Preferred shares | 3,774,275 | 5,034,844 | 2,896,818 | |||||||||||
| Net Profit attributable - Diluted (Brazilian Reais) | ||||||||||||||
| Common shares | 3,560,222 | 4,748,810 | 2,733,184 | |||||||||||
| Preferred shares | 3,774,341 | 5,034,930 | 2,896,839 | |||||||||||
| Weighted average shares outstanding (in thousands) - Basic | ||||||||||||||
| Common shares | 3,828,555 | 3,839,159 | 3,851,278 | |||||||||||
| Preferred shares | 3,689,696 | 3,700,299 | 3,710,746 | |||||||||||
| Weighted average shares outstanding (in thousands) - Diluted | ||||||||||||||
| Common shares | 3,832,211 | 3,842,744 | 3,852,823 | |||||||||||
| Preferred shares | 3,693,352 | 3,703,884 | 3,712,291 |
The accompanying Notes are an integral part of these consolidated financial statements.
F-6
CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME
(Thousands of Brazilian Reais - R$)
| 2016 | 2015 | 2014 | ||||||||
| Consolidated Profit for the Year | 7,464,918 | 9,833,826 | 5,707,776 | |||||||
| Other Comprehensive Income that will be reclassified subsequently to profit or loss when specific conditions are met: | 3,725,565 | (3,069,317 | ) | 720,473 | ||||||
| Available-for-sale financial assets | 3,311,607 | (2,718,709 | ) | 545,239 | ||||||
| Valuation adjustments - Gains / (Losses) | 5,458,735 | (4,155,414 | ) | 841,725 | ||||||
| Amounts transferred to income statement | 82,638 | 46,859 | (39,746 | ) | ||||||
| Income taxes | (2,229,766) | 1,389,846 | (256,740 | ) | ||||||
| Cash flow hedges | 413,958 | (350,608 | ) | 175,234 | ||||||
| Valuation adjustments | 761,423 | (842,073 | ) | 278,645 | ||||||
| Amounts transferred to income statement | 1,580 | 144,196 | 26,597 | |||||||
| Income taxes | (349,045) | 347,269 | (130,008 | ) | ||||||
| Net investment hedge | 634,207 | (791,228 | ) | (181 | ) | |||||
| Net investment hedge | 1,209,338 | (1,460,720 | ) | (301 | ) | |||||
| Income taxes | (575,131) | 669,492 | 120 | |||||||
| Exchange on investments Abroad | (634,207) | 791,228 | 181 | |||||||
| Exchange on investments Abroad | (634,207) | 791,228 | 181 | |||||||
| Other Comprehensive Income that will not be Reclassified to net Income: | (941,833) | 739,706 | (549,089 | ) | ||||||
| Defined benefits plan | (941,833) | 739,706 | (549,089 | ) | ||||||
| Defined benefits plan | (1,568,122) | 1,186,862 | (912,636 | ) | ||||||
| Income taxes | 626,289 | (447,156 | ) | 363,547 | ||||||
| Total Comprehensive Income | 10,248,650 | 7,504,215 | 5,879,160 | |||||||
| Attributable to the parent | 10,118,295 | 7,454,129 | 5,801,407 | |||||||
| Attributable to non-controlling interests | 130,355 | 50,086 | 77,753 | |||||||
| Total Comprehensive Income | 10,248,650 | 7,504,215 | 5,879,160 |
The accompanying Notes are an integral part of these consolidated financial statements.
F-7
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
(Thousands of Brazilian Reais - R$)
| Stockholders´ Equity Attributable to the Parent | Non- controlling Interests |
Total Stockholders' Equity | ||||||||||||||||||||||||||
| Other Comprehensive Income | ||||||||||||||||||||||||||||
| Note | Share Capital |
Reserves | Treasury Shares |
Option for Acquisition of Equity Instrument | Profit Attributed to the Parent |
Dividends
and Remuneration |
Total | Available- for-sale Financial Assets |
Defined Benefit Plans | Translation adjustments investment abroad | Gains and losses - Cash flow hedge and Investment | Total | ||||||||||||||||
| Balances at December 31, 2013 | 62,634,585 | 17,673,134 | (291,707) | - | 5,723,494 | (2,400,000) | 83,339,506 | (471,947) | (1,332,261) | 702,168 | (871,265) | 81,366,201 | 289,101 | 81,655,302 | ||||||||||||||
| Total comprehensive income | - | - | - | - | 5,630,023 | - | 5,630,023 | 545,239 | (549,089) | 181 | 175,053 | 5,801,407 | 77,753 | 5,879,160 | ||||||||||||||
| Appropriation of net profit for the year | - | 5,723,494 | - | - | (5,723,494) | - | - | - | - | - | - | - | - | - | ||||||||||||||
| Dividends and interest on capital | 29.b | - | (2,400,000) | - | - | - | 870,000 | (1,530,000) | - | - | - | - | (1,530,000) | - | (1,530,000) | |||||||||||||
| Share based payments | 41.b | - | (89,339) | - | - | - | - | (89,339) | - | - | - | - | (89,339) | - | (89,339) | |||||||||||||
| Treasury shares | 29.d | - | - | (153,748) | - | - | - | (153,748) | - | - | - | - | (153,748) | - | (153,748) | |||||||||||||
| Capital restructuring | (5,828,201) | (185,312) | (46) | - | - | - | (6,013,559) | - | - | - | - | (6,013,559) | - | (6,013,559) | ||||||||||||||
| Results of treasury shares | 29.d | - | (4,926) | - | - | - | - | (4,926) | - | - | - | - | (4,926) | - | (4,926) | |||||||||||||
| Option for Acquisition of Equity Instrument | - | - | - | (950,000) | - | - | (950,000) | - | - | - | - | (950,000) | - | (950,000) | ||||||||||||||
| Other | - | (122,916) | - | - | - | - | (122,916) | - | - | - | - | (122,916) | 13,319 | (109,597) | ||||||||||||||
| Balances at December 31, 2014 | 56,806,384 | 20,594,135 | (445,501) | (950,000) | 5,630,023 | (1,530,000) | 80,105,041 | 73,292 | (1,881,350) | 702,349 | (696,212) | 78,303,120 | 380,173 | 78,683,293 | ||||||||||||||
| Total comprehensive income | - | - | - | - | 9,783,740 | - | 9,783,740 | (2,718,709) | 739,706 | 791,228 | (1,141,836) | 7,454,129 | 50,086 | 7,504,215 | ||||||||||||||
| Appropriation of net profit for the year | - | 5,630,023 | - | - | (5,630,023) | - | - | - | - | - | - | - | - | - | ||||||||||||||
| Dividends and interest on capital | 29.b | - | (1,530,000) | - | - | - | (4,670,000) | (6,200,000) | - | - | - | - | (6,200,000) | - | (6,200,000) | |||||||||||||
| Share based payments | 41.b | - | 160,916 | - | - | - | - | 160,916 | - | - | - | - | 160,916 | - | 160,916 | |||||||||||||
| Treasury shares | 29.d | - | - | (246,975) | - | - | - | (246,975) | - | - | - | - | (246,975) | - | (246,975) | |||||||||||||
| Capital restructuring | - | - | (50) | - | - | - | (50) | - | - | - | - | (50) | - | (50) | ||||||||||||||
| Treasury shares income | 29.d | - | (3,918) | - | - | - | - | (3,918) | - | - | - | - | (3,918) | - | (3,918) | |||||||||||||
| Option for Acquisition of Equity Instrument | 4.c | - | - | - | (67,000) | - | - | (67,000) | - | - | - | - | (67,000) | (240,000) | (307,000) | |||||||||||||
| Cancellation of Shares | - | (268,573) | 268,573 | - | - | - | - | - | - | - | - | - | - | - | ||||||||||||||
| Other | 29.a | 193,616 | (193,616) | - | - | - | - | - | - | - | - | - | - | 244,803 | 244,803 | |||||||||||||
| Balances at December 31, 2015 | 57,000,000 | 24,388,967 | (423,953) | (1,017,000) | 9,783,740 | (6,200,000) | 83,531,754 | (2,645,417) | (1,141,644) | 1,493,577 | (1,838,048) | 79,400,222 | 435,062 | 79,835,284 | ||||||||||||||
| Total comprehensive income | - | - | - | - | 7,334,563 | - | 7,334,563 | 3,311,607 | (941,833) | (634,207) | 1,048,165 | 10,118,295 | 130,355 | 10,248,650 | ||||||||||||||
| Appropriation of net profit for the year | - | 9,783,740 | - | - | (9,783,740) | - | - | - | - | - | - | - | - | - | ||||||||||||||
| Dividends and interest on capital | 29.b | - | (6,200,000) | - | - | - | 950,000 | (5,250,000) | - | - | - | - | (5,250,000) | - | (5,250,000) | |||||||||||||
| Share based payments | - | (35,463) | - | - | - | - | (35,463) | - | - | - | - | (35,463) | - | (35,463) | ||||||||||||||
| Treasury shares | 29.d | - | - | (90,031) | - | - | - | (90,031) | - | - | - | - | (90,031) | - | (90,031) | |||||||||||||
| Capital restructuring | - | - | (50) | - | - | - | (50) | - | - | - | - | (50) | - | (50) | ||||||||||||||
| Treasury shares income | 29.d | - | (11,574) | - | - | - | - | (11,574) | - | - | - | - | (11,574) | - | (11,574) | |||||||||||||
| Other | - | (44,344) | - | - | - | - | (44,344) | - | - | - | - | (44,344) | 160,087 | 115,743 | ||||||||||||||
| Balances at December 31, 2016 | 57,000,000 | 27,881,326 | (514,034) | (1,017,000) | 7,334,563 | (5,250,000) | 85,434,855 | 666,190 | (2,083,477) | 859,370 | (789,883) | 84,087,055 | 725,504 | 84,812,559 | ||||||||||||||
The accompanying Notes are an integral part of these consolidated financial statements.
F-8
CONSOLIDATED STATEMENT OF CASH FLOWS
(Thousands of Brazilian Reais - R$)
| Note | 2016 | 2015 | 2014 | |||||||||||
| 1. Cash Flows From Operating Activities | ||||||||||||||
| Consolidated profit for the year | 7,464,918 | 9,833,826 | 5,707,776 | |||||||||||
| Adjustments to profit | 24,068,364 | (1,555,376 | ) | 11,036,674 | ||||||||||
| Depreciation of tangible assets | 13 | 1,154,588 | 1,029,706 | 872,749 | ||||||||||
| Amortization of intangible assets | 15 | 328,051 | 460,311 | 489,380 | ||||||||||
| Impairment losses on other assets (net) | 114,321 | 1,220,645 | (3,751 | ) | ||||||||||
| Provisions and Impairment losses on financial assets (net) | 16,026,187 | 17,635,283 | 13,307,842 | |||||||||||
| Net Gains (losses) on disposal of tangible assets, investments and non-current assets held for sale | (90,889 | ) | (831,108 | ) | (101,482 | ) | ||||||||
| Share of results of entities accounted for using the equity method | 12 | (47,537 | ) | (116,312 | ) | (91,096 | ) | |||||||
| Changes in deferred tax assets and liabilities | 25.d | 5,343,885 | (9,417,913 | ) | (2,055,872 | ) | ||||||||
| Monetary Adjustment of Escrow Deposits | (749,040 | ) | (650,314 | ) | (433,296 | ) | ||||||||
| Recoverable Taxes | (215,228 | ) | (985,776 | ) | (332,265 | ) | ||||||||
| Effects of Changes in Foreign Exchange Rates on Cash and Cash Equivalents | 2,289,849 | (2,106,652 | ) | (521,270 | ) | |||||||||
| Others (1) | (85,823 | ) | (7,793,246 | ) | (94,265 | ) | ||||||||
| Net (increase) decrease in operating assets | (56,779,768 | ) | (79,770,025 | ) | (89,899,611 | ) | ||||||||
| Balance with the Brazilian Central Bank | (24,156,755 | ) | (35,884,381 | ) | 2,063,056 | |||||||||
| Financial assets held for trading | (34,320,260 | ) | 5,476,872 | (25,794,816 | ) | |||||||||
| Other financial assets at fair value through profit or loss | 457,419 | (1,607,210 | ) | 223,568 | ||||||||||
| Available-for-sale financial assets | 10,127,344 | (16,354,040 | ) | (29,116,008 | ) | |||||||||
| Loans and receivables | (10,121,085 | ) | (30,420,173 | ) | (38,070,720 | ) | ||||||||
| Held to maturity investments | 49,075 | 318,169 | - | |||||||||||
| Other assets | 1,184,494 | (1,299,262 | ) | 795,309 | ||||||||||
| Net increase (decrease) in operating liabilities | 36,235,208 | 76,687,887 | 69,113,699 | |||||||||||
| Financial liabilities held for trading | 9,232,101 | 22,817,977 | 6,010,910 | |||||||||||
| Financial liabilities at amortized cost | 25,685,022 | 53,503,471 | 61,706,449 | |||||||||||
| Other liabilities | 1,318,085 | 366,439 | 1,396,340 | |||||||||||
| Paid taxes | 25.a | (4,240,115 | ) | (1,170,020 | ) | (573,684 | ) | |||||||
| Total net cash flows from operating activities (1) | 6,748,607 | 4,026,292 | (4,615,146 | ) | ||||||||||
| 2. Cash Flows From Investing Activities | ||||||||||||||
| Investments | (1,945,372 | ) | (2,136,002 | ) | (3,503,603 | ) | ||||||||
| Increase / Acquisition of Investments in subsidiaries | (3,105 | ) | - | (1,085,470 | ) | |||||||||
| Tangible assets | (873,140 | ) | (1,070,288 | ) | (1,838,284 | ) | ||||||||
| Intangible assets | (670,576 | ) | (710,176 | ) | (579,849 | ) | ||||||||
| Acquisition of subsidiary, less net cash in the acquisition | (392,998 | ) | - | - | ||||||||||
| Non - current assets held for sale | 11 | (10,462 | ) | (355,538 | ) | - | ||||||||
| Change in the scope of consolidation | 4 | 4,909 | - | - | ||||||||||
| Disposal | 677,088 | 1,375,167 | 347,048 | |||||||||||
| Net cash received from disposal of subsidiaries | - | 857,830 | - | |||||||||||
| Capital reduction of investee in joint control | 12.b | 76,860 | - | - | ||||||||||
| Subsidiaries, jointly controlled entities and associates | 3 | - | - | 55,493 | ||||||||||
| Tangible assets | 13&43 | 42,226 | 55,220 | 216,750 | ||||||||||
| Non - current assets held for sale | 11&43 | 208,232 | 317,321 | - | ||||||||||
| Acquisition of subsidiary, less net cash in the acquisition | - | 59 | - | |||||||||||
| Dividends and interest on capital received | 349,770 | 144,737 | 74,805 | |||||||||||
| Total net cash flows from investing activities (2) | (1,268,284 | ) | (760,835 | ) | (3,156,555 | ) | ||||||||
| 3. Cash Flows From Financing Activities | ||||||||||||||
| Capital Reduction | 29.e | - | - | (6,000,000 | ) | |||||||||
| Issuance of Debt Instruments Eligible to Compose Capital | 21 | - | - | 6,000,000 | ||||||||||
| Payment of Debt Instruments Eligible to Compose Capital | 21 | (701,671 | ) | (609,035 | ) | (291,241 | ) | |||||||
| Own shares Acquisition | 29 | (90,031 | ) | (247,025 | ) | (167,307 | ) | |||||||
| Issuance of other long-term financial liabilities | 19 | 50,313,469 | 72,936,057 | 53,187,121 | ||||||||||
| Dividends paid and interest on capital | (3,210,762 | ) | (3,992,956 | ) | (2,196,101 | ) | ||||||||
| Payments of subordinated liabilities | 20 | (8,362,652 | ) | (216,075 | ) | (2,495,283 | ) | |||||||
| Payments of other long-term financial liabilities | 19 | (56,164,769 | ) | (63,516,234 | ) | (55,388,115 | ) | |||||||
| Increase/ Decrease in non-controlling interests | 23,909 | 4,803 | 13,319 | |||||||||||
| Total net cash flows from financing activities (3) | (18,192,507 | ) | 4,359,535 | (7,337,607 | ) | |||||||||
| Exchange variation on Cash and Cash Equivalents (4) | (2,289,849 | ) | 2,106,652 | 521,270 | ||||||||||
| Net Increase in Cash (1+2+3+4) | (15,002,033 | ) | 9,731,644 | (14,588,038 | ) | |||||||||
| Cash and cash equivalents at beginning of year | 33,131,614 | 23,399,970 | 37,988,008 | |||||||||||
| Cash and cash equivalents at end of year | 18,129,581 | 33,131,614 | 23,399,970 | |||||||||||
| Cash and cash equivalents components | ||||||||||||||
| Cash | 5 | 4,445,940 | 7,141,137 | 9,786,013 | ||||||||||
| Loans and other | 6 | 13,683,641 | 25,990,477 | 13,613,957 | ||||||||||
| Total of cash and cash equivalents | 18,129,581 | 33,131,614 | 23,399,970 |
F-9
| Non-cash transactions | ||||||||||||||
| Foreclosures loans and other assets transferred to non-current assets held for sale | 11 | 834,903 | 293,440 | 337,840 | ||||||||||
| Dividends and interest on capital declared but not paid | 29.b | 4,750,000 | 3,000,000 | 690,000 | ||||||||||
| Supplemental information | ||||||||||||||
| Interest received | 75,818,511 | 70,566,274 | 58,461,650 | |||||||||||
| Interest paid | 46,051,070 | 37,912,698 | 31,004,745 |
(1) In 2015 includes mainly the effect noted in footnote 25.a.
The accompanying Notes are an integral part of these consolidated financial statements.
F-10
BANCO SANTANDER (BRASIL) S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Brazilian Reais - R$, unless otherwise stated)
1. Introduction, basis of presentation of the consolidated financial statements and other information
a) Introduction
Banco Santander (Brasil) S.A. (Banco Santander or Bank), directly and indirectly controlled by Banco Santander, S.A., based in Spain (Banco Santander Spain), is the lead institution of the Financial and Prudential Group (Conglomerate Santander) towards the Central Bank of Brazil (Bacen), established as a corporation, with headquarters at Avenida Presidente Juscelino Kubitschek, 2041 and 2235 - A Block - Vila Olímpia - São Paulo - SP. Banco Santander operates as a multiple service bank, conducting its operations by means of portfolios such as commercial, investment, lending and financing, mortgage lending, leasing, credit card operations and foreign exchange. Through its subsidiaries, the Bank also operates in the payment institution, leasing, buying club management and securities, insurance brokerage operations, capitalization and pension plan. The Bank's activities are conducted within the context of a group of institutions that operate on an integrated basis in the financial market. The corresponding benefits and costs of providing services are absorbed between them, they are conducted in the normal course of business and under commutative conditions.
The consolidated financial statements for the year ended on December 31, 2016, 2015 and 2014 were authorized for issue by the Board of directors at the meeting held on February 24, 2017.
b) Basis of presentation of the consolidated financial statements
These consolidated financial statements were prepared in accordance with International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB), and the interpretations issued by the IFRS Interpretations Committee (Current name of IFRIC). All the relevant information specific to Banco Santander's financial statements, and only these, are being evidenced, and correspond to those used by Banco Santander in its management.
Adoption of new standards and interpretations
The Bank has adopted all standards and interpretations that became effective up to January 1, 2016. The following standards and interpretations are applicable to the Bank and had no effect on the financial statements:
• Amendment IFRS 11 - Business Jointly - The amendment establishes accounting methods for the acquisition of joint ventures and joint operations which constitute an business, as established methodology in the IFRS 3 - Business Combinations. Effective for years beginning on January 1, 2016.
• Amendment to IAS 1 - Presentation of Financial Statements - The amendments are related to materiality concepts, order of notes, subtotals, accounting policies and breakdown. Effective for years beginning on January 1, 2016.
• Amendments to IFRS 10 - Consolidated Financial Statements and IAS 28 - Sale or Contribution of Assets between an Investor and its Associate or Joint Venture - These amendments establish that a gain or loss must be recognized for the full amount when the transaction involves assets that constitute a business (whether the business is housed in a subsidiary or not). When the transaction involves assets that do not constitute a business, a partial gain or loss is recognized, even if these assets are housed in a subsidiary. Effective for years beginning on January 1, 2016.
• Amendment to IAS 16 - Tangible assets and IAS 38 - Intangible Assets - The amendment clarifies the principle basis for depreciation and amortization as the expected pattern of consumption of future economic benefits of the asset. Effective for years beginning on January 1, 2016.
| • | Annual Improvements of IFRS |
Improvements to IFRSs, 2012-2014 cycle (obligatory for reporting annual periods, that beginning on 1 January 2016) - These improvements introduce minor amendments to IFRS 5 - Non- current Assets Held for Sale and Discontinued Operations, IFRS 7 - Financial Instruments, IAS 19 - Employee Benefits and IAS 34 - Interim Financial Reporting.
The amendments to IFRS 5 - Non-current Assets Held for Sale and Discontinued Operations - Address the circumstances in which an entity reclassifies an asset (or disposal group) from held for sale to held for distribution (or vice versa).The amendments clarify that this change must be considered as a continuation of the original disposal plan and therefore the requirements of IFRS 5 relating to alteration of the sales plan are not applicable. The amendments also clarify the guidance regarding discontinuation of accounting "held for distribution".
The amendments to IFRS 7 - Financial Instruments, provide clarification on whether servicing agreements constitute continuing involvement for the purpose of the transfer disclosures.
The amendments to IAS 19 - Employee Benefits, clarify that the rate used to discount post-retirement benefit obligations must be determined based on market yields at the end of the reporting period with respect to corporate bonds of high quality. The evaluation of the depth of a market for corporate bonds of high quality must be the level of the currency (i.e., the same currency in which the benefits will be paid). For currencies for which there are no high liquidity for these corporate bonds of high quality market, must be based on the market yields on government securities denominated in that currency at the end of the reporting period.
The amendments to IAS 34 - Interim Financial Reporting, were made to clarify the meaning of disclosure of information "elsewhere in the interim financial report" and to require the inclusion of a cross-reference from the interim financial statements to the location of this information.
Changes arising from IFRS Update cycles, did not produce a material impact on the financial statements of the Bank.
Standards and Interpretations that became effective after December 31, 2016
Lastly, at the date of preparation of these consolidated financial statements, the following standards and interpretations which effectively come into force after December 31, 2016 had not yet been adopted by the Bank:
• IFRS 9, Financial Instruments (mandatory for annual reporting periods beginning on or after 1st January 2018) issued in July 2014, the International Accounting Standards Board (IASB) approved the IFRS 9, to replace IAS39 – Financial instruments: establishing the requirements for the recognition and measurement of financial instruments to be applied as from January 2018.
F-11
BANCO SANTANDER (BRASIL) S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Brazilian Reais - R$, unless otherwise stated)
1. Model proposed by IFRS 9
The main new developments of the standard are as follows:
1.a) Classification of financial instruments
The criterion for classifying financial assets will depend both on their business management model and the features of the contractual flows. Consequently, the asset will be measured at i) amortized cost, at ii) fair value with changes in equity, or at iii) fair value with changes in profit/loss for the period. IFRS 9 also establishes the option of designating an instrument at fair value with changes in P/L under certain conditions.
The main activity of Banco Santander is the concession of retail banking operations and does not concentrate its exposure on complex financial products and the Bank is currently implementing an analysis of its portfolios in order to identify and classify the financial instruments into their corresponding portfolio under IFRS 9 and identify existing business models.
Based on current analysis, the Bank has not significant differences with respect to the composition of the portfolios until 2018 are expected, it is considered that there will be no significant changes with respect to the classification that was being carried out under pre-existing regulation:
• Financial assets classified as Loans and Advances and Held-to-Maturity under IAS 39 will generally be classified into amortized cost.
• Available for sale debt instruments will generally continue to be classified into fair value with changes in other comprehensive income, unless cash flows features imply its classification into other portfolio.
• Available for sale equity instruments will be classified into fair value, and depending on the nature of the investment, their variations will be recorded in the income statement or in other comprehensive income (irrevocably).
• Financial instruments currently classified into fair value through profit or loss will generally continue to be classified into this category, not expecting reclassifications.
1.b) Credit risk impairment model
The most important new development compared with the current model is that the new accounting standard introduces the concept of expected loss, whereas the current model (IAS 39) is based on incurred loss.
Scope of application
The IFRS 9 asset impairment model is applicable to financial assets classified in categories at amortized cost, to debt instruments valued at fair value through other comprehensive income, to leasing receivables, and to contingent risks and commitments not valued at fair value e availability of credit lines.
Classification of financial instruments by phases
The financial instruments portfolio for impairment purposes will be divided into three categories, depending on the phase each instrument has with regard to its credit risk:
- Stage 1: a financial instrument is in phase 1 when there has been no significant increase in its risk since it was initially registered. If applicable, the valuation correction for losses will amount to the possible credit expected losses arising from possible defaults with ta period of 12 months following the reporting date.
- Stage 2: if there has been a significant increase in risk since the date in which the instrument was initially registered, but the impairment has not actually materialized, then the financial instrument will be included in this stage. In this case, the amount of the valuation correction for losses will be the expected losses owing to defaults throughout the residual life of the financial instrument. In order to assess the significant increase in credit risk, both quantitative indicators used in the ordinary credit risk management and other qualitative variables such as the forbearance flag for not impaired exposures or the facilities are included in a special debt sustainability agreement shall be taken into account.
- Stage 3: a financial instrument will be included in this phase when it is considered to be effectively impaired. In this case, the amount of the valuation correction for losses will be the expected credit risk losses throughout the residual life of the financial instrument.
Impairment estimation methodology
Expected loss is measured using the following factors:
- Exposure at Default (EAD): is the amount of the transaction exposed to credit risk including the ratio of current undrawn exposure that could be drawn at default. Developed models incorporate hypotheses considering possible modifications in the payment schedule.
- Probability of Default (PD): is the likelihood that a counterparty will fail to meet its obligation to pay principal or interest. For the purposes of IFRS 9, this will consider both PD-12 months, which is the probability of the financial instrument entering default within the next 12 months, and also lifetime PD, which is the probability of the transaction entering into default between the reporting date and the transaction’s residual maturity date. Future information of relevance is considered to be needed to estimate these parameters, according to the standard.
- Loss Given Default (LGD): is the loss produced in the event of default. In other words, this reflects the percentage of exposure that could not be recovered in the event of a default. It depends mainly on the ability to demand additional collateral, which is considered as credit risk mitigants associated with each financial asset, and the future cash flows that are expected to be recovered. According to the standard, forward-looking information must be taken into account in the estimation.
- Discount rate: the rate applied to the future cash flows estimated during the expected life of the asset, and which is equal to the net present value of the financial instrument at its carrying value. When calculating the discount rate, expected losses for default when estimating future cash flows are not generally taken into account, except in cases in which the asset is considered to be impaired, in which case the interest rate applied will take into account such losses, and it will be known as the effective interest rate adjusted for credit risk.
F-12
BANCO SANTANDER (BRASIL) S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Brazilian Reais - R$, unless otherwise stated)
In order to estimate the above parameters, the Bank has applied on its experience in developing internal models for the estimation of parameters both for regulatory and management purposes.
Use of present, past and future information
Apart from using present and past information, the Bank currently uses forward-looking information in internal management and regulatory processes, considering several scenarios. In this sense, the Bank will re-use its experience in the management of such information and maintain consistency with the information used in the other processes.
1.c) Accounting of hedges
IFRS 9 includes new hedge accounting requirements which have a twofold objective: to simplify current requirements, and to bring hedge accounting in line with risk management, so allowing there to be a greater variety of derivative financial instruments which may be considered to be hedging instruments.
However, the Bank (at the moment) decided to keep its Hedge Accounting hedges in line with the accounting guidelines established in IAS 39, having seen the pronouncement provided by the Board of the IASB.
Once the analysis of the advantages and disadvantages of the proposal is completed, the Bank shall make its decision for hedge accounting under IFRS 9.
2. IFRS 9 implementation strategy
The Santander Spain Group together with its subsidiaries has established a global work stream with the aim of adapting its processes to the new classification standards for financial instruments, accounting of hedges and estimating credit risk impairment, so that such processes are applicable in a uniform way for all Bank units, and, at the same time, can be adapted to each unit’s individual features.
Accordingly, the Bank is working towards defining an objective internal model and analyzing all the changes which are needed to adapt accounting classifications and credit risk impairment estimation models in force in each unit to the previous definitions.
In principle, the governance structure currently implemented at both corporate level and in each one of the units, complies with the requirements set out in the new standards.
The project’s main phases and milestones
During this exercise, the Bank has successfully completed the design and development phase of the implementation plan. The major milestones achieved include the definition of functional requirements as well as the design of an operational model adapted to the requirements of IFRS 9. At the IT environment, the technological needs have been identified as well as the necessary adaptations to the existing control environment.
The Bank is currently in the implementation phase of the models and requirements defined. The objective of the Bank at this stage is to ensure an efficient implementation, optimizing its resources as well as the designs elaborated in previous stages.
Once the implementation phase is completed, the Bank will test the effective performance of the model through several simulations and ensuring that the transition to the new operating model meets the objectives established in the previous phases. This last stage includes the parallel execution of the provisions calculation.
• IFRS 15 - Revenue from Customers Contracts : The standard was issued in May 2014 and applies to an annual reporting period beginning on January 1, 2018. The standard specifies how and when an entity will recognize revenue as well as requiring such entities to provide users of financial statements with more informative, relevant disclosures. The standard provides five basic principles to be applied to all contracts with customers, which are: i) identify the contract with the customer; ii) identify the implementing obligations under the contract; iii) determine the transaction price; iv) allocate the transaction price to performance obligations; and v) recognize revenue at the moment (or the extent to which) the entity carrying out an obligation of execution.
• IFRS 16 - Leases Contracts - The standard was issued in January 2016 and the effective date after January 1st, 2019. This standard contains a new approach to lease accounting that requires a lessee to recognize assets and liabilities for the rights and obligations created by leases.
• Amendment to IFRS 2 - Share-based payment – The standard was issued in June 2016, and the effective date after January,1st 2017. This standard is intended to clarify the accounting for a share-based payment according to officials in situations in which the financial settlement award is canceled and replaced by a new award that its market value is higher than the original.
The potential impacts of changes in force from 2017 are under review by the Bank, which should be completed by the entry into force of the standard.
c) Used estimates
The consolidated results and the determination of consolidated equity are influenced by the accounting policies, assumptions, estimates and measurement bases used by the management of the Bank in preparing the consolidated financial statements. The Bank makes estimates and assumptions that affect the reported amounts of assets and liabilities of future periods. All estimates and assumptions required, in conformity with IFRS, are best estimates undertaken in accordance with the applicable standard.
In the consolidated financial statements estimates were made by the management of the Bank and of the consolidated entities in order to quantify certain assets, liabilities, revenues, expenses, and disclosure notes.
F-13
BANCO SANTANDER (BRASIL) S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Brazilian Reais - R$, unless otherwise stated)
c.1) Critical estimates
The estimates and critical assumptions that have the most significant impact on the carrying amounts of certain assets, liabilities, revenues and expenses and the disclosure of explanatory notes, are described below:
i. Allowance for loan losses
The carrying amount of impaired financial assets is adjusted by recording a provision for losses on debts of "Impairment Losses on Financial Assets (Net) - Loans and Receivables" in the consolidated income statement. The reversal of previously recorded losses is recognized in the consolidated income statement in the period in which the impairment decrease and it can be related objectively to an event of recovery.
To determine the balance of “Provision for Impairment Losses”, Banco Santander first assesses whether there is objective evidence of impairment loss individually for financial assets that are significant, and individually or collectively for financial assets that are not significant.
To measure the impairment loss on loans individually evaluated for impairment, the Bank considers the conditions of the borrower, such as their economic and financial situation, level of indebtedness, ability to generate income, cash flow, management, corporate governance and quality of internal controls, payment history, industry expertise, contingencies and credit limits, as well as characteristics of assets, such as its nature and purpose, type, sufficiency and liquidity level guarantees and total amount of credit, as well as based on historical experience of impairment and other circumstances known at the moment of evaluation.
To measure the impairment loss on loans collectively evaluated for impairment, the Bank segregates financial assets into groups considering the characteristics and similarity of credit risk, in other words, according to segment, the type of assets, guarantees and other factors associated as the historical experience of impairment and other circumstances known at the time of assessment.
For further details see Note 2.i.
ii. Income Tax (IRPJ) and Social Contribution on Net Income (CSLL)
The current income tax expense is calculated by sum of the current tax, social contribution, pis and cofins resulting from application of the appropriate tax rate to the taxable profit for the year (net of any deductions allowable for tax purposes), and of the changes in deferred tax assets and liabilities recognized in the consolidated income statement.
Deferred tax assets and liabilities include temporary differences, which are identified as the amounts expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities and their related tax bases, and tax loss and tax credit carry forwards. These amounts are measured at the tax rates that are expected to apply in the period when the asset is realized or the liability is settled. Deferred tax assets are only recognized for temporary differences to the extent that it is considered probable that the consolidated entities will have sufficient future taxable profits against which the deferred tax assets can be utilized, and the deferred tax assets do not arise from the initial recognition (except in a business combination) of other assets and liabilities in a transaction that affects neither taxable profit or accounting profit. Other deferred tax assets (tax loss and tax credit carry forwards) are only recognized if it is considered probable that the consolidated entities will have sufficient future taxable profits against which they can be utilized.
The deferred tax assets and liabilities recognized are reassessed at each balance sheets date in order to ascertain whether they still exist, and the appropriate adjustments are made on the basis of the findings of the analyses performed. Under the current regulation, the expected realization of tax credits based on the Bank's projections of future results and based on technical study.
For more details see note 2.aa
iii. Fair value measurement of certain financial instruments
Financial instruments are initially recognized at fair value, which is considered equivalent to the transaction price, until proven otherwise, and those that are not measured at fair value through profit are adjusted by the transaction costs.
Financial assets and liabilities are subsequently measured at each period-end by using valuation techniques. This calculation is based on assumptions, which take into account management's judgment based on existing information and market conditions at the date of financial statements.
Banco Santander classifies fair value measurements using a fair value hierarchy that reflects the model used in the measurement process, segregating financial instruments between Level I, II or III.
Notes 2.e & 48.c8 present the sensitivity analysis and accounting policies for Financial Instruments, respectively.
iv. Post-employment benefits
The defined benefit plans are recorded based on an actuarial study, conducted annually by specialized company, at the end of each year to be effective for the subsequent period and are recognized in income in "Interest expense and similar Charges" and "Provisions (net)".
The present value of the defined benefit obligation is the present value without any assets deductions of expected future payments required to settle the obligation resulting from employee service in the current and past periods.
Notes 2 & 23.iii present the sensitivity analysis and accounting policies for Post-employment benefits, respectively.
v. Provisions, contingent assets and liabilities
Provisions for the judicial and administrative proceedings are recorded when the risk of loss of administrative or judicial proceeding is considered probable and the amounts can be reliably measured, based on the nature, complexity and history of lawsuits and the opinion of legal counsel internal and external.
Provisions are made when the risk of loss of judicial or administrative proceedings is assessed as probable and the amounts involved can be measured with sufficient accuracy, based on best available information. They are fully or partially reversed when the obligations cease to exist or are reduced. Given the uncertainties arising from the proceedings, it is not practicable to determine the timing of any outflow (cash disbursement).
For more details see note 2.r
F-14
BANCO SANTANDER (BRASIL) S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Brazilian Reais - R$, unless otherwise stated)
vi. Goodwill
The goodwill recorded is subject to impairment test at least annually or in a short period, if any indication of impairment of assets.
The recoverable goodwill amounts are determined from value in use calculations. For this purpose, we estimate cash flow for a period of 5 years. We prepare cash flows considering several factors, including: (i) macro-economic projections, such as interest rates, inflation and exchange rates, among other, (ii) the performance and growth estimates of the Brazilian financial system, (iii) increased costs, returns, synergies and investment plans, (iv) the behavior of customers, and (v) the growth rate and long-term adjustments to cash flows. These estimates rely on assumptions regarding the likelihood of future events, and changing certain factors could result in different outcomes. The estimate of cash flows is based on valuations prepared by independent research company or whenever there is evidence of reduction to its recoverable amount, which is reviewed annually or whenever there is an evidence of reduction on its recoverable value and approved by the Executive Board.
For additional details see note 14.
d) Capital management
Capital management considers the regulatory and economic levels. The objective is to achieve an efficient capital structure in terms of cost and compliance, meeting the requirements of the regulatory body and contributing to achieving the goals of the classification of rating agencies and investors' expectations. The capital management includes securitization, sale of assets, raising capital through issue of shares, subordinated liabilities and hybrid instruments.
From an economic standpoint, capital management seeks to optimize value creation at the Bank and at its different business segment. To this end, the economic capital, RORAC (return on risk-adjusted capital) and value creation data for each business segment are generated, analyzed and reported to the management committee on a quarterly basis. Within the framework of the internal capital adequacy assessment process (Pillar 2 of the Basel Capital Accord), the Group uses an economic capital measurement model with the objective of ensuring that there is sufficient capital available to support all the risks of its activity in different economic scenarios, with the solvency levels agreed upon by the Bank.
In order to adequately manage the Bank’s capital, it is essential to estimate and analyze future needs, in anticipation of the various phases of the business cycle. Projections of regulatory and economic capital are made based in financial projections (balance sheets, income statement, etc.) and on macroeconomic scenarios estimated by the Economic Research Service. These estimates are used by the Bank as a reference to plan the management actions (issues, securitizations, etc.) required to achieve its capital targets.
2. Accounting policies and method of measurement
The accounting policies and method of measurement applied in preparing the consolidated financial statements were as follows:
a) Foreign currency transactions
The consolidated financial statements of Banco Santander are presented in Brazilian Reais, the functional and reporting currency of these financial statements.
For each subsidiary, entity under joint control and investment in an unconsolidated company, Banco Santander has defined the functional currency. The assets and liabilities of these entities with functional currency other than the Brazilian Real are translated as follows:
- Assets and liabilities are translated at the exchange rate at the balance sheets date.
- Revenues and expenses are translated at the monthly average exchange rates.
- Gain and losses on translation of net investment are recorded in the statement of comprehensive income, in “exchange rate of investees located abroad”.
b) Basis of consolidation
i. Subsidiaries
“Subsidiaries” are defined as entities over which the Bank has control. Control is based on whether the Bank has: i) power over the investee; ii) exposure, or rights, to variable returns from its involvement with the investee; and iii) the ability to use its power over the investee to affect the amount of the returns, as set forth in the law, the Bylaws or agreement.
Consolidation of a subsidiary begins when the Bank obtains control over the subsidiary and ceases when the Bank loses control of the subsidiary. Specifically, income and expense of a subsidiary acquired or disposed during the year are included in the consolidated income statement and other comprehensive income from the date the Bank gains controls until the date when the Bank ceases to control the subsidiary.
Profit or loss and each component of Other Comprehensive Income are attributed to the owners of the Bank and to the non-controlling interests even if the effect is attributed to non-controlling interests. Total comprehensive income of subsidiaries is attributed to the owners of the Bank and to the non-controlling interest even if this generates a negative balance for non-controlling interests. All transactions, balances, income and expenses between the companies of the Santander Group are eliminated in the consolidated financial statements.
Changes in the Bank’s interest in a subsidiary that do not result in loss of control are accounted for as equity transactions. Any difference between the amount by which the non-controlling interests are adjusted and the fair value of the consideration paid or received is recognized directly in equity and attributed to owners of the Company.
When the Bank loses control of a subsidiary, the profit or loss on disposal is calculated as the difference between (i) the aggregate of the fair value of the consideration received and the fair value of any retained interest and (ii) the previous carrying amount of the assets (including goodwill), and liabilities of the subsidiary and any non-controlling interests. Amounts previously recognized in other comprehensive income in relation to the subsidiary are accounted for (i.e. reclassified to profit or loss or transferred directly to retained earnings) in the same manner as would be required if the relevant assets or liabilities are disposed of. The fair value of any investment retained in the former subsidiary at the date when control is lost is regarded as the fair value on initial recognition for subsequent accounting under IAS 39 Financial Instruments: Recognition and Measurement or, when applicable, the costs on initial recognition of an investment in an associate or jointly controlled entity.
F-15
BANCO SANTANDER (BRASIL) S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Brazilian Reais - R$, unless otherwise stated)
ii. Interests in joint ventures (jointly controlled entities) and associates
Joint ventures mean interests in entities that are not subsidiaries but which are jointly controlled by two or more unrelated entities. This is evidenced by contractual arrangements whereby two or more entities (“ventures”) acquire interests in entities (jointly controlled entities) or carry out transactions or hold assets so that strategic financial and operating decisions affecting the joint venture require the unanimous consent of the ventures.
Associates are entities over which the Bank is in a position to exercise significant influence (significant influence is the power to participate in the financial and operating policy decisions of the investee) but it does not control or has joint control over those policies.
In the consolidated financial statements, interest in joint ventures and investments in associates are accounted for using the equity method, i.e. at the Bank’s share of net assets of the investee, after taking into account the dividends received from capital reductions and other related transactions. In the case of transactions with an associate, the related profits or losses are eliminated to the extent of the Bank’s investment in the associate. Relevant information regarding companies accounted for under the equity method by the Bank is provided in note 12.
iii. Business combinations, acquisitions and disposals
A business combination is the combination of two or more separate entities or economic units into one single entity or group of entities and is accounted for in accordance with IFRS 3 - “Business Combinations”.
Business combinations are carried out so that the Bank obtains control over an entity and are recognized for accounting purposes as follows:
• The Bank measures the cost of the business combination, defined as the fair value of the assets offered, the liabilities incurred and the equity instruments issued, if any.
• The fair values of the assets, liabilities and contingent liabilities of the acquired entity or business, including any intangible assets which might not have been recognized by the acquiree, are estimated at the acquisition date and recognized in the consolidated balance sheets.
• The excess of the acquisition cost over the fair values of the identifiable net assets acquired are recognized as goodwill (note 14). The excess of fair values of the identifiable net assets over the acquisition cost is bargain purchase gain and is recorded as income on the date of acquisition.
Also, note 4 below includes a description of the most significant transaction carried out in 2016, 2015 and 2014.
iv. Investment Funds
These include investment funds in which the Santander Group companies hold a substantial participation interest or the entirety of the participation interests and are therefore exposed to, or have rights, to variable returns and have the ability to affect those returns through power over the fund, in accordance with IFRS 10 - Consolidated Financial Statements and are therefore consolidated in these financial statements.
c) Definitions and classification of financial instruments
i. Definitions
A “financial instrument” is any contract that gives rise to a financial asset of one entity and, simultaneously, to a financial liability or financial interest of another entity.
An “equity instrument” is any agreement that evidences a residual interest in the assets of the issuing entity after deducting all of its liabilities.
A “financial derivative” is a financial instrument whose value changes in response to the change in an observable market variable (such as an interest rate, foreign exchange rate, financial instrument price, market index or credit rating), whose initial investment is very small compared with other financial instruments with a similar response to changes in market factors, and which is generally settled at a future date.
“Hybrid financial instruments” are contracts that simultaneously include a non-derivative host contract together with a derivative, known as an embedded derivative, that is not separately transferable and has the effect that some of the cash flows of the hybrid contract vary in a way similar to a stand-alone derivative.
The following transactions are not treated for accounting purposes as financial instruments:
• Investments in subsidiaries, jointly controlled entities and associates (note 3&12).
• Rights and obligations under employee benefit plans (note 23).
ii. Classification of financial assets for measurement purposes
Financial assets are initially classified into the various categories used for management and measurement purposes, unless they have to be presented as “Non-current assets held for sale” or they relate to “Cash and balances with the Brazilian Central Bank”, “Hedging derivatives” and “Investment in associates”, which are reported separately.
Financial assets are included for measurement purposes in one of the following categories:
• Financial assets held for trading (at fair value through profit or loss): this category includes the financial assets acquired for the purpose of generating a profit in the near term from fluctuations in their prices and financial derivatives that are not designated as hedging instruments.
• Other financial assets at fair value through profit or loss: this category includes hybrid financial assets not held for trading that are measured entirely at fair value and financial assets not held for trading that are included in this category in order to obtain more relevant information, either because this eliminates or significantly reduces recognition or measurement inconsistencies (“accounting mismatches”) that would arise from measuring assets or liabilities or recognizing the gains or losses on them on different bases, or because a group of financial assets or financial liabilities or both is managed and its performance is evaluated on a fair value basis, in accordance with a documented risk management or investment strategy, and information about the group is provided on that basis to the Bank’s key management personnel.
Financial instruments included in this category (and “Other financial liabilities at fair value through profit or loss”) are permanently subject to a consistent system of measuring, managing and controlling risks and returns that enables all the financial instruments involved to be monitored and identified and allows the effective reduction of risk to be checked. Financial assets may only be included in this category on the date they are acquired or originated.
Available-for-sale financial assets are stated at fair value. This category includes debt instruments not classified as “Held-to-maturity investments”, “Loans and receivables” or “Financial assets at fair value through profit or loss”, and equity instruments issued by entities other than subsidiaries, associates and jointly controlled entities, provided that such instruments have not been classified as “Financial assets held for trading” or as “Other financial assets at fair value through profit or loss”. Gains and losses arising from changes in fair value are recognized in "Equity" in the line item "Valuation Adjustment" with the exception of cumulative losses for non-recovery, which are recognized in profit or loss. When the investment is disposed of or is determined to be impaired, the cumulative gain or loss previously accumulated in "Equity - Valuation Adjustments" is reclassified to profit or loss.
F-16
BANCO SANTANDER (BRASIL) S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Brazilian Reais - R$, unless otherwise stated)
• Loans and receivables: this category includes financing granted to third parties, based on their nature, irrespective of the type of borrower and the form of financing, including finance lease transactions in which the consolidated entities act as lessors. The consolidated entities generally intend to hold the loans and credits granted by them until their final maturity and, therefore, they are presented in the consolidated balance sheets at their amortized cost (which includes the required adjustments to reflect estimated impairment losses).
• Held-to-maturity investments: this category includes debt instruments traded in an active market, with fixed maturity and with fixed or determinable payments, for which the Bank has both the intention and proven ability to hold to maturity. These investments are measured at amortized cost less any impairment, with revenue recognized on an effective yield basis.
iii. Classification of financial assets for presentation purposes
Financial assets are classified by nature into the following items in the consolidated balance sheets:
• Cash and balances with the Brazilian Central Bank: cash balances and balances receivable on demand relating to deposits with the Brazilian Central Bank.
• Loans and receivables: includes the balance of loans granted by the Bank, as well as finance lease receivables and other debit balances of a financial nature in favor of the Bank, such as checks drawn on credit institutions, balances receivable from clearing houses and settlement agencies for transactions on the stock exchange and organized markets, bonds given in cash, capital calls, fees and commissions receivable for financial guarantees and debit balances arising from transactions not originated in Banking transactions and services, such as the collection of rentals and similar items.
• Loans and amounts due from credit institutions: credit of any nature in the name of financial institutions.
• Loans and advances to customers: includes the debit balances of all the remaining credit and loans granted by the Bank, including money market operations through central counterparties.
• Debt instruments: bonds and other securities that represent a debt for their issuer, that generate an interest return, and that are in the form of certificates or book entries.
• Equity instruments: financial instruments issued by other entities, such as shares, which have the nature of equity instruments for the issuer, unless they are investments in subsidiaries, jointly controlled entities or associates. Investment fund units not consolidated are included in this item.
• Trading derivatives: includes the fair value in favor of the Bank of derivatives which do not form part of hedge accounting.
• Hedging derivatives: includes the fair value in favor of the Bank of derivatives designated as hedging instruments in hedge accounting.
• Investments in associates: includes the investments in the share capital of associates.
iv. Classification of financial liabilities for measurement purposes
Financial liabilities are classified for measurement purposes into one of the following categories:
• Financial liabilities held for trading (at fair value through profit or loss): this category includes the financial liabilities issued for the purpose of generating a profit in the short term from fluctuations in their prices, financial derivatives not considered to qualify for hedge accounting and financial liabilities arising from the direct sale of financial assets purchased under resale agreements or borrowed (“Short positions”).
• Other financial liabilities at fair value through profit or loss: financial liabilities are included in this category when more relevant information is obtained, either because this eliminates or significantly reduces recognition or measurement inconsistencies (“accounting mismatches”) that would arise from measuring assets or liabilities or recognizing the gains or losses on them on different bases, or because a group of financial liabilities or financial assets and liabilities is managed and its performance is evaluated on a fair value basis, in accordance with a documented risk management or investment strategy, and information about the Bank is provided on that basis to the Bank’s key management personnel.
• Financial liabilities at amortized cost: financial liabilities, irrespective of their instrumentation and maturity, not included in any of the abovementioned categories which arise from the funding-taking activities carried on by financial institutions.
v. Classification of financial liabilities for presentation purposes
Financial liabilities are classified by nature into the following items in the consolidated balance sheets:
• Deposits from the Brazilian Central Bank: deposits of any nature received from the Brazilian Central Bank.
• Deposits from credit institutions: deposits of any nature, including Borrowings and On endings and money market funding received from credit institutions.
• Customer deposits: includes deposits of any nature such as demand deposits, saving deposits and time deposits including money market operation received from customer.
• Marketable debt securities: includes the amount of bonds and other debt represented by marketable securities, other than subordinated liabilities.
• Trading derivatives: includes the fair value, with a negative balance for the Bank, of derivatives which do not form part of hedge accounting.
• Short positions: includes the amount of financial liabilities arising from the outright sale of financial assets purchased under reverse repurchase agreements or borrowed.
• Subordinated liabilities: amount of financing received which, for the purposes of payment priority, ranks behind ordinary debt. This category also includes the financial instruments issued by the Bank which, although equity for legal purposes, do not meet the requirements for classification as equity.
• Other financial liabilities: includes the amount of payment obligations having the nature of financial liabilities not included in other items, and liabilities under financial guarantee contracts, unless they have been classified as doubtful.
• Hedging derivatives: includes the fair value of the Bank’s liability in respect of derivatives designated as hedging instruments in hedge accounting.
F-17
BANCO SANTANDER (BRASIL) S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Brazilian Reais - R$, unless otherwise stated)
d) Funding, debt notes issued and other liabilities
Funding debt rates and other liabilities Instruments are recognized initially at fair value, considered primarily as the transaction price. They are subsequently measured at amortized cost and its expenses are recognized as a financial cost.
Among the liabilities initial recognition methods, it is important to emphasize those compound financial instruments which are classified as such due to the fact that the instruments contain both, a debt instrument (liability) and an embedded equity component (derivative).
The recognition of a compound instrument consists of a combination of (i) a main instrument, which is recognized as an entity’s genuine liability (debt) and (ii) an equity component (derivative convertible into ordinary share).
The issue of "Notes" must be registered at specific account liabilities and updated according to the agreed rates and adjusted by the effect of exchange rate variations, when denominated in foreign currency. All remuneration related to these instruments, such as interest and Exchange variation (difference between the functional currency and the currency in which the instrument was named) shall be accounted for as expenses for the period, according to the accrual basis.
The relevant details of these issued instruments are described in note 21.
e) Measurement of financial assets and liabilities and recognition of fair value changes
In general, financial assets and liabilities are initially recognized at fair value which, in the absence of evidence to the contrary, is deemed to be the transaction price. Financial instruments not measured at fair value through profit or loss, are adjusted by the transaction costs. Financial assets and liabilities are subsequently measured at each period-end as follows:
i. Measurement of financial assets
Financial assets are measured at fair value, without deduction of estimated costs of transaction that may be incurred on their disposal, except for loans and receivables, held-to-maturity investments, equity instruments whose fair value cannot be determined in a sufficiently objective manner and financial derivatives that have as equity instruments subject and are settled by delivery of those instruments.
"Fair value" is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The most objective and ordinary reference to fair value of a financial instrument are the price would be paid for a financial instrument on significative and transparent market. ("market price")
If there is no market price for a given financial instrument, its fair value is estimated on the basis of valuation techniques commonly used by the international financial community, according to the specific features of the instrument to be measured and, particularly, the various types of risk associated with it.
All derivatives are recognized in the balance sheets at fair value from the trade date. If the fair value is positive, they are recognized as assets and if the fair value is negative, they are recognized as liabilities. The changes in the fair value of derivatives from the trade date are recognized in “Gains (losses) on financial assets and liabilities” in the consolidated income statement. Specifically, the fair value of standard financial derivatives included in the portfolios of financial assets or liabilities held for trading is deemed to be their daily quoted price and if, for exceptional reasons, the quoted price cannot be determined on a given date, these financial derivatives are measured using methods similar to those used to measure over the counter “OTC” derivatives.
The fair value of OTC derivatives is taken to be the sum of the future cash flows arising from the instrument, discounted to present value at the date of measurement (“present value” or “theoretical close”) using valuation techniques commonly used by the financial markets: “net present value” (NPV), option pricing models and other methods.
“Loans and receivables” and “Held-to-maturity investments” are measured at amortized cost using the effective interest method. “Amortized cost” is the acquisition cost of a financial asset or liability plus or minus, as appropriate, the principal repayments and the cumulative amortization (taken to the income statement) between the difference of the initial cost and the maturity amount. In the case of financial assets, amortized cost furthermore includes any reductions for impairment or uncollectibility. In the case of loans and receivables hedged in fair value hedges, the changes in the fair value of these assets related to the risk or risks being hedged are recognized.
The “effective interest rate” is the discount rate that exactly matches the initial amount of a financial instrument to all its estimated cash flows of all kinds over its remaining life. For fixed rate financial instruments, the effective interest rate coincides with the contractual interest rate established on the acquisition date plus, where applicable, the fees and transaction costs that, because of their nature, form part of their financial return. In the case of floating rate financial instruments, the effective interest rate coincides with the rate of return prevailing in all connections until the next benchmark interest reset date.
Equity instruments whose fair value cannot be determined in a sufficiently objective manner are measured at acquisition cost adjusted, where appropriate, by any related impairment loss.
The amounts at which the financial assets are recognized represent, in all material respects, the Bank’s maximum exposure to credit risk at each reporting date. Also, the Bank has received collateral and other credit enhancements to mitigate its exposure to credit risk, which consist mainly of mortgage guarantees, cash collateral, equity instruments and personal security, assets leased out under leasing and renting agreements, assets acquired under repurchase agreements and securities loans and derivatives.
ii. Measurement of financial liabilities
In general, financial liabilities are measured at amortized cost, as defined above, except for those included under “Financial liabilities held for trading” and “Other financial liabilities at fair value through profit or loss” and financial liabilities designated as hedge items (or hedging instruments) in fair value hedges, which are measured at fair value.
iii. Recognition of fair value changes
As a general rule, changes in the carrying amount of financial assets and liabilities are recognized in the consolidated income statement, distinguishing between those arising from the accrual of interest and similar items -which are recognized under “Interest and similar income” or “Interest expense and similar charges”, as appropriate- and those arising for other reasons, which are recognized at their net amount under “Gains (losses) on financial assets and liabilities (net)”.
Adjustments due to changes in fair value arising from Available-for-sale financial assets are recognized temporarily in equity under “Other Comprehensive Income”. Items charged or credited to this account remain in the Bank’s consolidated equity until the related assets are written-off, whereupon they are charged to the consolidated income statement.
F-18
BANCO SANTANDER (BRASIL) S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Brazilian Reais - R$, unless otherwise stated)
iv. Hedging transactions
The consolidated entities use financial derivatives for the following purposes: i) to provide these instruments to customers who request them in the management of their market and credit risks; ii) to use these derivatives in the management of the risks of the Bank entities' own positions and assets and liabilities (“hedging derivatives”); and iii) to obtain gains from changes in the prices of these derivatives (“financial derivatives”).
Financial derivatives that do not qualify for hedge accounting are treated for accounting purposes as trading derivatives. A derivative qualifies for hedge accounting if all the following conditions are met:
1. The derivative hedges one of the following three types of exposure:
a. Changes in the fair value of assets and liabilities due to fluctuations, among other, in the interest rate and/or exchange rate to which the position or balance to be hedged is subject (“fair value hedge”);
b. Changes in the estimated cash flows arising from financial assets and liabilities, commitments and highly probable forecast transactions (“cash flow hedge”);
c. The net investment in a foreign operation (“hedge of a net investment in a foreign operation”).
2. It is effective in offsetting exposure inherent in the hedged item or position throughout the expected term of the hedge, which means that:
a. At the date of arrangement the hedge is expected, under normal conditions, to be highly effective (“prospective effectiveness”).
b. There is sufficient evidence that the hedge was actually effective during the whole life of the hedged item or position (“retrospective effectiveness”).
3. There must be adequate documentation evidencing the specific designation of the financial derivative to hedge certain balances or transactions and how this effective hedge was expected to be achieved and measured, provided that this is consistent with the Bank’s management of own risks.
The changes in value of financial instruments qualifying for hedge accounting are recognized as follows:
a. In fair value hedges, the gains or losses arising on both the hedging instruments and the hedged items (attributable to the type of risk being hedged) are recognized directly in the consolidated income statement.
b. In cash flow hedges, the effective portion of the change in value of the hedging instrument is recognized temporarily in equity under “Other comprehensive Income - Cash flow hedges” until the forecasted transactions occur, when it is recognized in the consolidated income statement, unless, if the forecast transactions result in the recognition of non-financial assets or liabilities, it is included in the cost of the non-financial asset or liability. The ineffective portion of the change in value of hedging derivatives is recognized directly in the consolidated income statement.
c. The ineffective portion of the gains and losses on the hedging instruments of cash flow hedges and hedges of a net investment in a foreign operation are recognized directly under “Gains (losses) on financial assets and liabilities (net)” in the consolidated income statement.
If a derivative designated as a hedge instrument no longer meets the requirements described above due to expiration, ineffectiveness or for any other reason, the derivative is classified as a trading derivative.
When fair value hedge accounting is discontinued, the adjustments previously recognized on the hedged item are transferred to profit or loss at the effective interest rate re-calculated at the date of hedge discontinuation. The adjustments must be fully amortized until maturity.
When cash flow hedges are discontinued, any cumulative gain or loss on the hedging instrument recognized in equity under "Other comprehensive Income” (from the period when the hedge was effective) remains recognized in equity until the forecast transaction occurs at which time it is recognized in profit or loss, unless the transaction is no longer expected to occur, in which case any cumulative gain or loss is recognized immediately in profit or loss.
f) Settlement of financial assets and liabilities
The accounting treatment of transfers of financial assets depends on the extent to which the risks and rewards associated with the transferred assets are transferred to third parties:
1. If the Bank transfers substantially all the risks and rewards to third parties-unconditional sale of financial assets, sale of financial assets under an agreement to repurchase them at their fair value at the date of repurchase, sale of financial assets with a purchased call option or written put option that is deeply out of the money, securitization of assets in which the transferor does not retain a subordinated debt or grant any credit enhancement to the new holders, and other similar cases, the transferred financial asset is derecognized and any rights or obligations retained or created in the transfer are recognized simultaneously.
2. If the Bank retains substantially all the risks and rewards associated with the transferred financial asset -sale of financial assets under an agreement to repurchase them at a fixed price or at the sale price plus interest, a securities lending agreement in which the borrower undertakes to return the same or similar assets, and other similar cases, the transferred financial asset is not derecognized and continues to be measured by the same criteria as those used before the transfer. However, the following items are recognized:
a. An associated financial liability, for an amount equal to the consideration received; this liability is subsequently measured at amortized cost.
b. The income from the transferred financial asset not derecognized and any expense incurred on the new financial liability.
3. If the Bank neither transfers or retains substantially all the risks and rewards associated with the transferred financial asset - sale of financial assets with a purchased call option or written put option that is not deeply in or out of the money, securitization of assets in which the transferor retains a subordinated debt or other type of credit enhancement for a portion of the transferred asset, and other similar cases, the following distinction is made:
a. If the transferor does not retain control of the transferred financial asset, the asset is derecognized and any rights or obligations retained or created in the transfer are recognized.
b. If the transferor retains control, it continues to recognize the transferred financial asset for an amount equal to its exposure to changes in value and recognizes a financial liability associated with the transferred financial asset. The net carrying amount of the transferred asset and the associated liability is the amortized cost of the rights and obligations retained, if the transferred asset is measured at amortized cost, or the fair value of the rights and obligations retained, if the transferred asset is measured at fair value.
Accordingly, financial assets are only settled when the rights on the cash flows they generate have been extinguished or when substantially all the inherent risks and rewards have been transferred to third parties. Similarly, financial liabilities are only derecognized when the obligations they generate have been extinguished or when they are acquired, with the intention of either to cancel them or to resell them.
F-19
BANCO SANTANDER (BRASIL) S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Brazilian Reais - R$, unless otherwise stated)
g) Offsetting of financial instruments
Financial asset and liability balances are offset (i.e. reported in the consolidated balance sheets at their net amount) only if the Bank and their subsidiaries currently have a legally enforceable right to set off the recognized amounts and intend either to settle on a net basis, or to realize the asset and settle the liability simultaneously.
The following table provides details of financial assets and liabilities subject to offsetting at December 31, 2016, 2015 and 2014:
| In thousands of Reais | 2016 | |||
| Financial assets | Financial assets | |||
| Assets: | Financial assets, gross | offset in the balance sheet, gross | offset in the balance sheet, net | |
| Derivatives | 16,510,517 | - | 16,510,517 | |
| Repurchase agreements | 47,424,919 | - | 47,424,919 | |
| Financial liabilities | Financial liabilities | |||
| Liabilities: | Financial liabilities, gross | offset in the balance sheet, gross | offset in the balance sheet, net | |
| Derivatives | 11,913,799 | - | 11,913,799 | |
| Repurchase agreements | 126,048,442 | - | 126,048,442 | |
| In thousands of Reais | 2015 | |||
| Financial assets, gross | Financial assets | Financial assets | ||
| Assets: | offset in the balance sheet, gross | offset in the balance sheet, net | ||
| Derivatives | 26,250,362 | - | 26,250,362 | |
| Repurchase agreements | 31,987,323 | - | 31,987,323 | |
| Financial liabilities | Financial liabilities | |||
| Liabilities: | Financial liabilities, gross | offset in the balance sheet, gross | offset in the balance sheet, net | |
| Derivatives | 24,716,959 | - | 24,716,959 | |
| Repurchase agreements | 115,003,783 | - | 115,003,783 | |
| In thousands of Reais | 2014 | |||
| Financial assets | Financial assets | |||
| Assets: | Financial assets, gross | offset in the balance sheet, gross | offset in the balance sheet, net | |
| Derivatives | 8,727,688 | - | 8,727,688 | |
| Repurchase agreements | 24,887,260 | - | 24,887,260 | |
| Financial liabilities | Financial liabilities | |||
| Liabilities: | Financial liabilities, gross | offset in the balance sheet, gross | offset in the balance sheet, net | |
| Derivatives | 9,178,262 | - | 9,178,262 | |
| Repurchase agreements | 97,113,281 | - | 97,113,281 |
On December 31, 2016, 2015 and 2014, the Bank has no financial instruments that meet the conditions for recognition on a net basis.
h) Regular way purchases of financial assets
Regular way purchases of financial assets are recognized on trade date. The assets are settled when the rights to receive cash flows have expired or the Bank has transferred substantially all the risks and rewards of ownership.
i) Impairment of financial assets
i. Definition
A financial asset is considered impaired when there is objective evidence that events have occurred which:
• Give rise to an adverse impact on the future cash flows that were estimated at the transaction date, in the case of debt instruments (loans and debt securities);
• Mean that their carrying amount cannot be fully recovered, in the case of equity instruments;
• Arising from the violation of terms of loans, and
• During the Bankruptcy process.
As a general rule, when the events above are observed, the carrying amount of impaired financial assets is adjusted by recording a provision for losses on debts expense as "Losses on financial assets (net)" in the consolidated income statement. The reversal of previously recorded losses is recognized in the consolidated income statement in the period in which the impairment and decrease can be related objectively to an event of recovery.
F-20
BANCO SANTANDER (BRASIL) S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Brazilian Reais - R$, unless otherwise stated)
ii. Debt instruments carried at amortized cost
The amount of an impairment loss incurred for determination of the recoverable amount on a debt instrument measured at amortized cost is equal to the difference between its carrying amount and the present value of its estimated future cash flows (excluding future credit losses that have not been incurred) discounted the original effective interest rate of the financial asset (or the effective interest rate computed at initial recognition), and is presented as a reduction of the asset balance and recorded in income statements.
In estimating the future cash flows of debt instruments the following factors are taken into account:
• All the amounts that are expected to be obtained over the remaining life of the instrument, in this case, the provided guarantees. The impairment loss takes into account the likelihood of collecting accrued interest receivable.
• The various types of risk to which each instrument is subject; and
• The circumstances in which collections will foreseeably be made.
These cash flows are subsequently discounted using the instrument's effective interest rate.
Specifically in regards to recoverable amount losses resulting from materialization of the insolvency risk of the obligors (credit risk), a debt instrument is impaired due to insolvency when there is evidence of a deterioration of the obligor's ability to pay, either because it is in arrears or for other reasons.
The Bank has certain policies, methods and procedures for covering its credit risk arising both from insolvency allocable to counterparties.
These policies, methods and procedures are applied in the granting, examination and documentation of debt instruments, and contingent liabilities and commitments, the identification of their recoverable amount and the calculation of the amounts necessary to cover the related credit risk.
The procedures applied in the identification, measurement, control and reduce the exposure to credit risk, are based on an individual basis or grouped by similarity.
• Customers with individual management: Wholesale segment customers, financial institutions and certain companies. Risk management is performed through an analysis complemented by tools to support decision-making model-based risk assessment internal procedure.
• Customers with standardized management: individuals and companies not classified as individual clients. Risk management models based on automated decision-making and risk assessment procedure, complemented, when the model is not comprehensive or accurate enough, by teams of analysts specializing in this type of risk. The credits related to customers standardized, are usually considered not recoverable when they have historical loss experience and delay greater than 90 days.
Regarding the provision for impairment losses from credit risk, the Bank evaluates all loans. Loans are either individually evaluated for impairment or collectively evaluated for impairment. Loans accounted as amortized cost, which are not individually evaluated for impairment, are collectively evaluated for impairment, grouping them considering the similarity of risk. Loans individually evaluated for impairment are not included in balances that are collectively evaluated for impairment.
The Bank first assesses whether objective evidence of impairment loss individually for financial assets that are individually significant, and individually or collectively for financial assets that are not individually significant.
To measure the impairment loss on loans individually evaluated for impairment, the Bank considers the conditions of the borrower, such as their economic and financial situation, level of indebtedness, ability to generate income, cash flow , management, corporate governance and quality of internal controls, payment history, industry expertise, contingencies and credit limits, as well as characteristics of assets, such as its nature and purpose, type, sufficiency and liquidity level guarantees and total amount of credit, as well as based on historical experience of impairment and other circumstances known at the moment of evaluation.
To measure the impairment loss on loans collectively evaluated for impairment, the Bank segregates financial assets into groups considering the characteristics and similarity of credit risk, in other words, according to segment, the type of assets, guarantees and other factors associated as the historical experience of impairment and other circumstances known at the time of assessment.
In some cases the observable data required to estimate the amount of an impairment loss on a financial asset may be limited or no longer fully relevant to current circumstances.
In such cases, an entity uses its experienced judgment to estimate the amount of any impairment loss. Similarly an entity uses its experienced judgment to adjust observable data for a group of financial assets to reflect current circumstances.
The impairment loss is calculated by using statistical models that consider the following factors:
• Exposure at default or “EAD” is the amount of risk exposure at the date of default by the borrower.
In accordance with IFRS, the exposure at default used for this calculation is the current exposure, as reported in the balance sheets.
• Probability of default, or “PD”, is the probability of the borrower failing to meet its principal and/or interest payment obligations.
PD is measured using a time horizon of one year; that is, it quantifies the probability of the borrower defaulting in the coming year. A loan is in default if either the principal or interest is past due by ninety days or more or the loan is current but there are doubts as to the solvency of the counterparty (subjective doubtful assets).
• Loss given default, or “LGD”, is the loss arising in the event of default.
LGD calculation is based on the net charge offs on defaulted loans, taking into account the guarantees/collateral associated with the loans, the income and expenses associated with the recovery process and the timing of delinquency.
• Loss identification period, or “LIP,” is 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.
• In addition, prior to charging off past due loans (which is only done after the Bank have completed all recovery efforts and after about 360 days late), is composed fully provision the remaining balance of the loan so our allowance for loan losses fully cover the losses. Thus, the Bank understands that its loan loss allowance methodology has been developed to fit its risk metrics and capture loans that could potentially become impaired.
iii. Debt or equity instruments classified as available for sale
The difference between the amortized cost and fair value of debt or equity instruments classified as available for sale are recorded in equity under "Other Comprehensive Income."
When there is objective evidence that the aforementioned differences are due to a prolonged decline in fair value, they are no longer recognized in equity and are reclassified, at the cumulative amount at that date, to the consolidated income statement. Losses from a prolonged decline in fair value relating to an investment in equity instruments are not reversed in subsequent periods.
F-21
BANCO SANTANDER (BRASIL) S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Brazilian Reais - R$, unless otherwise stated)
j) Repurchase agreements
Purchases (disposal) of financial assets under a non-optional resale (repurchase) agreement at a fixed price are recognized in the consolidated balance sheets as Investment (funding), in repurchase agreements based on the nature of the debtor (creditor), under “Cash and balances with the Brazilian Central Bank”, “Loans and amounts due from credit institutions” or “Loans and advances to customers” (“Deposits from the Brazilian Central Bank”, “Deposits from credit institutions” or “Customer deposits”).
Differences between the purchase and sale prices are recognized as interest over the contract term.
k) Accounting for leases
i. Financial leases
Financial leases are leases that transfer substantially all the risks and rewards incidental to ownership of the leased asset to the lessee.
When the consolidated entities act as the lessors of an asset, all types of finances leases have guaranteed residual values, and the sum of the present value of the lease payments receivable from the lessee plus the guaranteed residual value which is the exercise price of the purchase option of the lessee at the end of the lease term is recognized as loans to third parties and is therefore included under “Loans and receivables” in the consolidated balance sheets.
The finance income arising from these contracts is credited to “Interest and similar income” in the consolidated income statement so as to achieve a constant rate of return over the lease term.
l) Non-current assets held for sale
“Non-current assets held for sale” includes the carrying amount of individual items or disposal groups or items forming part of a business unit earmarked for disposal (“Discontinued operations”), whose sale in their present condition is highly probable and is expected to occur within one year, the property or other non-current assets received by the consolidated entities as total or partial settlement of their debtors' payment obligations to them are deemed to be non-current assets held for sale through the completion of actions which normally occurs up to one year.
Non-current assets held for sale are measured at the lower of fair value less costs to sell and their carrying amount at the date of classification in this category. Non-current assets held for sale are not depreciated.
Impairment losses on an asset or disposal group arising from a reduction in its carrying amount to its fair value (less costs to sell) are recognized under “Gains (losses) on disposal and expenses of non-current assets held for sale not classified as discontinued operations” in the consolidated income statement. The gains on a non-current asset held for sale resulting from subsequent increases in fair value (less costs to sell) increase its carrying amount and are recognized in the consolidated income statement up to an amount equal to the impairment losses previously recognized.
m) Residual maturity periods and average interest rates
The analysis of the maturities of the balances of certain items in the consolidated balance sheets and the average interest rates at 2016, 2015 and 2014 year-end is provided in note 45-d.
n) Tangible assets
“Tangible assets” includes the amount of buildings, land, furniture, vehicles, computer hardware and other fixtures owned by the Bank, including tangible assets received by the Bank in full or partial satisfaction of financial assets representing receivables from third parties which are intended to be held for continuing use and tangible assets acquired under finance leases are presented at acquisition cost, less the related accumulated depreciation and any impairment losses (net carrying amount higher than recoverable amount).
Depreciation is calculated, using the straight-line method, on the basis of the acquisition cost of the assets less their residual value. The land on which the buildings and other structures are located has an indefinite life and, therefore, it is not depreciated.
The tangible asset depreciation charge is recognized in the consolidated income statement and is calculated basically using the following depreciation rates (based on the average years of estimated useful life of the various assets):
| Annual | |
| Rate | |
| Buildings for own use | 4% |
| Furniture | 10% |
| Fixtures | 10% |
| Office and IT equipment | 20% |
| Leasehold improvements | 10% or up to contractual maturity |
The Bank assesses at end of each period, if there is no indication that the items of tangible assets may be impaired carrying amount exceeds its recoverable amount either for use or sale.
Once a reduction in the impairment loss of tangible assets is identified, it is adjusted to reach its recoverable amount by recognizing an impairment loss recorded in "Impairment loss on other assets (Net)". Additionally the value of depreciation of that asset is recalculated in order to adjust the value of the life of the asset.
In case of evidence or indication of an impairment loss of a tangible asset, the Bank recognizes the reversal of impairment loss recorded in prior years and should adjust the future depreciation expenses according to the lifetime value of the property. Under no circumstance, a reversal of impairment loss of an asset will increase its carrying amount higher than the amount that it would have had no impairment loss been recognized in prior years.
Upkeep and maintenance expenses relating to property, plant and equipment for own use are recognized as an expense in the period in which they are incurred.
F-22
BANCO SANTANDER (BRASIL) S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Brazilian Reais - R$, unless otherwise stated)
o) Intangible assets
Intangible assets are identifiable non-monetary assets (separable from other assets) without physical substance which arise as a result of a legal transaction or software development. Only assets whose cost can be estimated reliably and from which the consolidated entities consider it probable that future economic benefits will be generated are recognized.
Intangible assets are recognized initially at acquisition or production cost and are subsequently measured deducting any accumulated amortization and any accumulated impairment losses.
i. Goodwill
In the acquisition and/or merger of investment in subsidiary, any difference between the investment cost and the investor's share in net fair value of assets, liabilities and contingent liabilities of the investee (subsidiary or affiliate) is accounted for in accordance with IFRS 3 "Business Combination ".
Goodwill is recognized only when the amount of the investee acquired exceeds the fair value at the acquisition date, and therefore represents a payment made by the acquirer in anticipation of future economic benefits of assets of the acquired entity that can not be individually identified and recognized separately.
At the end of each reporting period or whenever there is any indication of impairment, the goodwill is reviewed for impairment (impairment test) and, if there is any impairment, the goodwill is written down against Impairment losses on Goodwill and other intangible assets in the consolidated income statement.
The net fair value adjustments of assets, liabilities and contingent liabilities of the investee in relation to its carrying amount are allocated to individual identifiable assets acquired and liabilities assumed that comprise it based on their respective fair values at the date of purchase.
In the case of a business combination achieved in stages, prior interest in the acquire is measured again at fair value at acquisition date when control of the acquire is obtained.
ii. Other intangible assets
Other intangible assets are non-monetary asset without physical substance. Generally arising from software development and acquisition of rights that can generate benefits for the Bank. They can have characteristics of definite or indefinite period.
Other intangible assets are considered to have indefinite useful life when, based on an analysis of all relevant factors, it is concluded that there is no foreseeable limit to the period over which the asset is expected to generate cash inflows for the Bank, or a finite useful life, in all other cases.
Intangible assets with indefinite useful lives are not amortized, but rather, at the end of each period, the entity reviews the remaining useful life of assets to determine if they are still undefined and, if this is not the case, the change should be accounted for as a change in accounting estimate.
Intangible assets with definite useful life are amortized over its useful life by using methods similar to those used to depreciate tangible assets. The amortization expense is recognized under "Depreciation and amortization" in the consolidated income statement.
The Bank assesses at the end of each period, if there is any indication that the items of intangible assets may present an impairment loss, i.e. an asset that presents the carrying amount higher than the net realizable value. After identifying any reduction in impairment loss, it is adjusted to reach its fair value.
Measurement of the recoverable amount of other intangible assets - software is made based on the value in use, as well as the analysis of the discontinuity of the asset in relation to the activities of the Bank.
Expenditures for acquisition and development of software are amortized over a maximum period of 5 years.
p) Other assets
Other Assets include the balance of all prepayments and accrued income (excluding accrued interest), acquired customer list, the net amount of the difference between pension plan obligations and the fair value of the plan assets with a balance on the entity’s behalf, when this net amount is to be reported in the consolidated balance sheets, and the amount of any other assets not included in other items.
The Bank uses the value in use of customer relationship as a basis for measuring the impairment since it is not reasonably possible to determine the net value of sales, because there is no basis for making a reliable estimate of the value to be obtained by selling the asset in a transaction at cumulative basis, between knowledgeable, willing parties. The value in use of customer lists acquired related to the purchase of the "payroll" will be determined individually. An analyses that aims to demonstrate the expectation of generating future economic benefit and the present value of expected cash flows is prepared by the business areas. Quarterly, these analyses are reviewed based on the actual cash flows of each business (value in use), which are compared with the carrying amount, checking whether there is a need to record a loss on non-recoverability.
q) Liabilities for insurance contracts
The liabilities for insurance contracts are comprised substantially by mathematical provisions for current and future benefits (PMBaC and PMBC). Insurance contracts are contracts under which the Bank accepts a significant risk, other than a financial risk, from a policyholder by agreeing to compensate the beneficiary on the occurrence of an uncertain future event by which the policyholder will be adversely affected.
Insurance liabilities are recognized when the contract is entered into and the premiums are charged. Contracts that have been classified as insurance are not reclassified subsequently. The liability is derecognized when the contract expires or is cancelled.
All valuation methods used by the subsidiaries are based on the general principle that the carrying amount of the net liability must be sufficient to meet any reasonably foreseeable obligation resulting from the insurance contracts. Investment assumptions are either determined by the local regulator and based on management’s future expectations. In the latter case, the anticipated future investment return is set by management, considering the available market information and economic indicators. A significant assumption related to estimated gross profits on variable annuities, is the annual long-term growth rate of the underlying assets.
At each balance sheets date an assessment is made of whether the provisions for Mathematical provisions are adequate.
In the years ended December 31, 2016, 2015 and 2014, as determined by IFRS 4 and subsequent amendments, the adequacy of the technical provisions constituted were evaluated through Liability Adequacy Test (LAT).
F-23
BANCO SANTANDER (BRASIL) S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Brazilian Reais - R$, unless otherwise stated)
In December 31, 2016, the LAT indicated the need for the additional constitution of technical provisions amounted to R$85,395 (2015 - R$57,523) for Indemnity Funds for Benefit (FGB) plans.
r) Provision for contingent assets and liabilities
Banco Santander and its subsidiaries are involved in judicial and administrative proceedings related to tax, labor and civil, in the normal course of their activities.
The provisions include legal obligations, judicial and administrative proceedings related to tax and social security obligations, whose object is to challenge their legality or constitutionality, regardless of the assessment that the probability of success, the amounts are fully recognized in the financial statements. Provisions are reviewed at each balance sheet date and adjusted to reflect the current best estimate and may be fully or partially reversed or reduced when the outflows of resources and obligations relevant to the process are no longer probable, including decay of legal deadlines, among others.
Provisions for the judicial and administrative proceedings are recorded when the risk of loss of administrative or judicial proceeding is considered probable and the amounts can be reliably measured, based on the nature, complexity and history of lawsuits, the legal opinion of the internal and external advisors, based on the best available information. For provisions for which the risk of loss is possible, are not recorded and the information is disclosed in the financial statements (Note 24.h.) and for those for which the risk of loss is remote, no disclosure is required. On the favorable decisions to Santander, the counterparty has the right, in the event of specific legal requirements, to file a rescission action within a period determined by current legislation.
Contingent assets are not recognized, except when there are guarantees or favorable judicial decisions, about which features no longer fit, characterizing the gain as practically certain. Assets with probable success, if any, are only disclosed in the financial statements.
s) Other liabilities
“Other liabilities” includes the balance of all accrued expenses and deferred income, excluding accrued interest, and the amount of any other liabilities not included in other categories.
t) Share-based compensation
The Bank has long-term compensation plans with vesting conditions. The main vesting conditions are: (1) service conditions, since it is necessary that the participant continues to be employed by the Bank during the term of the Plan for their rights to vest; (2) performance conditions, since the number of Units that ultimately vest will be determined according to the result of certain performance parameter of the Bank, such as: total Shareholder Return (TSR) and may be reduced in case of failure to achieve the goals of reducing the Return on Risk Adjusted Capital (RORAC), comparison between actual and budget in each year, as determined by the Board of Directors and (3) market conditions, since some parameters are linked to the market price of the Bank´s shares. The Bank measures the fair value of the services rendered by reference to the fair value of the equity instruments granted at the grant date, taking into account the market conditions for each plan when estimating the fair value.
Settlement in shares
The Bank measures the fair value of the services received by reference to the fair value of the equity instruments granted at the grant date, taking into account the market conditions for each grant when estimating the fair value. In order to recognize the personnel expenses against equity reserves throughout the vesting period, as the services are received, the Bank considers the treatment of service conditions and recognize the amount for the services received during the vesting period based on the best available estimate of the number of equity instruments expected to vest. Semi-annually, the Bank reviews the estimate of the number of equity instruments expected to vest.
Settlement in cash
For cash-settled share-based compensation (in the form of share appreciation rights), the Bank measures the fair value of services rendered and the corresponding liability incurred, based on the fair value of the share appreciation rights at the grant date and until the liability is settled. The Banks remeasures the fair value of the liability at the end of each reporting period and at the date of settlement, with any changes in fair value recognized in profit or loss for the period. In order to recognize the personnel expenses against a provision in “other liabilities” throughout the vesting period, reflecting the period as the services are received, the Bank bases the total liability on the best estimate of the number of share appreciation rights that will vest at the end of the vesting period and recognizes the amount for the services received during the vesting period based on such best available estimate. Periodically, the Bank reviews such estimate of the number of share appreciation rights that will vest at the end of vesting period.
u) Recognition of income and expenses
The most significant criteria used by the Bank to recognize its income and expenses are summarized as follows:
i. Interest income, interest expenses and similar items
Interest income, interest expenses and similar items are generally recognized on an accrual basis using the effective interest method. Dividends received from other companies are recognized as income when the consolidated entities' right to receive them arises.
ii. Commissions, fees and similar items
Fees and commission income and expenses are recognized in income using criteria that vary according to their nature (note 36). The main criteria are as follows:
• Fee and commission income and expenses relating to financial assets and financial liabilities measured at fair value through profit or loss are recognized when paid;
• Those arising from transactions or services that are performed over a period of time are recognized over the life of these transactions or services; and
• Those relating to services provided in a single act are recognized when the single act has been performed.
Certain 2014 and 2015 (notes 36 and 37) fee and commission income and expense related to the business activities of the subsidiary Getnet S.A., acquired in 2014, have been reclassified to conform to the 2016 presentation.
F-24
BANCO SANTANDER (BRASIL) S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Brazilian Reais - R$, unless otherwise stated)
iii. Non-financial income and expenses
These are recognized for accounting purposes on an accrual basis.
iv. Deferred collections and payments
These are recognized for accounting purposes at the amount resulting from discounting the expected cash flows at market rates.
v. Loan arrangement fees
Loan arrangement fees, mainly loan origination and application fees, are accrued and recognized in income over the term of the loan. In the case of loan origination fees, the portion relating to the associated direct costs incurred in the loan arrangement is recognized immediately in the consolidated income statement.
v) Guarantees
v.1) Financial guarantees
“Financial guarantees” are defined as contracts whereby an entity undertakes to make specific payments for a third party if the latter does not do so, irrespective of the various legal forms they may have, such as guarantees, irrevocable documentary credits issued or confirmed by the entity, among others.
The Bank initially recognizes the commission of the financial guarantees as liability in the consolidated balance sheets at fair value, which is generally the present value of the fees, commissions and similar interest receivable from these contracts over their term.
Financial guarantees, regardless of the guarantor, type of instrument or other circumstances, are reviewed periodically so as to determine the credit risk to which they are exposed and, if appropriate, to consider whether a provision is required. The credit risk is determined by application of criteria similar to those established for quantifying impairment losses on debt instruments measured at amortized cost.
The provisions made for these transactions are recognized under “Provisions - Provisions for contingent liabilities, commitments and other provisions” in the consolidated balance sheets (note 24).
If a specific provision is required for financial guarantees, the related unearned commissions are recognized under “Financial liabilities at amortized cost – Other financial liabilities” in the consolidated balance sheets are reclassified to the appropriate provision.
v.2) Guarantees and Credit Risk Mitigation Policy
Banco Santander controls the credit risk through the use of collateral in its operations. Each business unit is responsible for credit risk management and formalizes the use of collateral in its lending policies.
Banco Santander uses guarantees in order to increase their resilience in the subject to credit risk operations. The guarantees can be used fiduciary, real, legal structures with power mitigation and compensation agreements. The Bank periodically reviews its policy guarantees by technical parameters, normative and also its historical basis, to determine whether the guarantee is legally valid and enforceable.
Credit limits are continually monitored and changed in customer behavior function. Thus, the potential loss values represent a fraction of the amount available.
w) Assets under management and investment and pension funds managed by the Bank
Assets owned by third parties and managed by the consolidated entities are not presented in the consolidated balance sheets. Management fees are included in “Fee and commission income” in the consolidated income statement. Note 45-b contains information on the third-party assets managed by the Bank.
The investment funds and pension funds managed by the consolidated entities are not recorded in the consolidated balance sheets since the related assets are owned by third parties. The fees and commissions earned in the year for the services rendered by the Bank entities to these funds (asset management and custody services) are recognized under “Fee and commission income” in the consolidated income statement.
x) Post-employment benefits
Post-employment benefit plans include the commitments of the Bank: (i) addition to the benefits of public pension plan; and (ii) healthcare in case of retirement, permanent disability or death for those employees, and their direct beneficiaries.
Defined contribution plans
Defined benefit plans is the post-employment benefit plan which the Bank, and its subsidiaries, as the sponsoring entity pays fixed contributions into a pension fund, not having a legal or constructive obligation to pay further contributions if the fund does not hold sufficient assets to pay all benefits relating to services provided in the current and in previous periods.
The contributions made in this connection are recognized under "Interest Expense and Similar Charges" in the income statement.
Defined benefit plans
Defined benefit plan is the post-employment benefit plan which is not a defined contribution plan and is shown in Note 23 For this type of plan, the sponsoring entity's obligation is to provide the benefits agreed with employees, assuming the potential actuarial risk that benefits will cost more than expected.
For defined benefit plan, the amendment of IAS 19 established fundamental changes in the accounting for and disclosure of employee post-employment benefits such as removing the corridor approach in the accounting for the obligation of the plans, as well as changes in the criteria for recognition of conventional interest of plan assets (valuation based on the discount rate actuarial liability).
In addition, it occurs full recognition of liabilities on account of actuarial losses (actuarial deficit) not recognized previously, in contrast to the stockholders’ equity (Other Comprehensive Income).
F-25
BANCO SANTANDER (BRASIL) S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Brazilian Reais - R$, unless otherwise stated)
Main Definitions
- The present value of the defined benefit obligation is the present value without any assets deductions of expected future payments required to settle the obligation resulting from employee service in the current and past periods, without deducting any plan assets.
- Deficit or surplus is: (a) the present value of the defined benefit obligation, less (b) the fair value of plan assets.
- The sponsoring entity may recognize the plan's assets in the balance sheets when they meet the following characteristics: (i) the assets of the fund are sufficient to meet all employee benefit plan or a sponsor obligations; or (ii) the assets are returned to the sponsoring entity in order to reimburse it for employee benefits already paid.
- Actuarial gains and losses correspond to changes in the present value of defined benefit obligation resulting from: (a) adjustments by experience (the effects of differences between the actuarial assumptions adopted and what has actually occurred); and (b) effects of changes in actuarial assumptions.
- Current service cost is the increase in the present value of the defined benefit obligation resulting from employee service in the current period.
- The past service cost is the change in present value of defined benefit obligation for employee service in prior periods resulting from a change in the plan or reductions in the number of employees covered.
Post-employment benefits are recognized in income in "Interest expense and similar Charges" and "Provisions (net)".
The defined benefit plans are recorded based on an actuarial study, conducted annually by an external consulting firm, at the end of each year to be effective for the subsequent period.
y) Other long-term employee benefits
“Other long-term employee benefits”, defined as obligations to early retirees considered as those who have ceased to render services at the entity but who, without being legally retired, continue to have economic rights relating to the entity until they acquire the legal status of retiree, long-service bonuses, obligations for death of spouse or disability before retirement that depend on the employee's length of service at the entity and other similar items, are treated for accounting purposes, where applicable, as established above for defined benefit post-employment plans, except that all past service costs and actuarial gains and losses are recognized immediately (note 23).
z) Termination benefits
Termination benefits are recognized when there is a detailed formal plan identifying the basic changes to be made, provided that implementation of the plan has begun, its main features have been publicly announced or objective facts concerning its implementation have been disclosed.
aa) Income taxes (IRPJ), Social Contribution (CSLL), Social Integration Program (PIS) and Tax for Social Security Financing (COFINS)
Income tax is calculated at the rate of 15% plus a surcharge of 10% levied on the profit, after adjustments determined by tax legislation. The social contribution (CSLL) is calculated at the rate of 20% for financial institutions (15% up to August 2015) and 9% for other companies, levied on the profit, after considering the adjustments determined by tax legislation. The CSLL rate for financial institutions, legal persons of private insurance and capitalization was increased from 15% to 20% for the fiscal period between September 1, 2015 and December 31, 2018, pursuant to Law 13,169/2015 (a result of the conversion into law of Provisional Measure 675/2015).
The expense for corporate income tax is recognized in the consolidated income statement, except when it results from a transaction recognized directly in equity, in which case the tax effect is also recognized in equity.
The current income tax expense is calculated as the sum of the current tax resulting from application of the appropriate tax rate to the taxable profit for the year (net of any deductions allowable for tax purposes), and of the changes in deferred tax assets and liabilities recognized in the consolidated income statement.
Tax assets classified as "Current" are amounts of tax to be recovered within the next twelve months.
Tax liabilities includes the amount of all tax liabilities (except provisions for taxes), which are broken down into “current” amount payable in respect of the income tax on the taxable profit for the year and other taxes in the next twelve months.
Deferred tax assets and liabilities include temporary differences, which are identified as the amounts expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities and their related tax bases, and tax loss and tax credit carry forwards. These amounts are measured at the tax rates that are expected to apply in the period when the asset is realized or the liability is settled.
Deferred tax assets are only recognized for temporary differences to the extent that it is considered probable that the consolidated entities will have sufficient future taxable profits against which the deferred tax assets can be utilized, and the deferred tax assets do not arise from the initial recognition (except in a business combination) of other assets and liabilities in a transaction that affects neither taxable profit or accounting profit. Other deferred tax assets (tax loss and tax credit carry forwards) are only recognized if it is considered probable that the consolidated entities will have sufficient future taxable profits against which they can be utilized.
Due to the change in social contribution tax rate, the group companies made the remeasurement of tax credit assets and deferred liabilities at the rates applicable to the period in which estimates the realization of assets and settlement of liabilities.
Income and expenses recognized directly in stockholders equity are accounted for as temporary differences.
The deferred tax assets and liabilities recognized are reassessed at each balance sheets date in order to ascertain whether they still exist, and the appropriate adjustments are made on the basis of the findings of the analyses performed.
Under the current regulation, the expected realization of tax credits based on the Bank's projections of future results and based on technical study, as shown in Note 25.
PIS (Social Integration Program) and COFINS (Tax for Social Security Financing) taxes have been computed at a combined rate of 4.65% on certain gross revenues and expenses. Financial institutions may deduct financial expenses in determining the PIS/COFINS tax basis. PIS and COFINS are considered a profit-base component (net basis of certain revenues and expenses), therefore and accordingly to IAS 12 it is recorded as income taxes.
F-26
BANCO SANTANDER (BRASIL) S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Brazilian Reais - R$, unless otherwise stated)
ab) Consolidated cash flow statements
The following terms are used in the consolidated cash flow statements with the following meanings:
• Cash flows: inflows and outflows of cash and cash equivalents, which are short-term, highly liquid investments that are subject to an insignificant risk of changes in value and original maturity of three months or less.
• Operating activities: the primary revenue-generating activities of credit institutions and other activities that are not investing or financing activities.
• Investing activities: the acquisition and disposal of long-term assets and other investments not included in cash and cash equivalents.
• Financing activities: activities that result in changes in the size and breakdown of the equity and liabilities that are not operating activities.
In preparing the consolidated cash flows statement, the high liquidity investments with insignificant risk of changes in their values were classified as "Cash and cash equivalents". The Bank classifies as cash and cash equivalents balances recorded under "Cash and balance with the Brazilian Central Bank" and "Loans and amounts due from credit institutions" in the consolidated balance sheets, except restricted resources and long-term transactions.
The interest paid and received correspond basically to operating activities of Banco Santander.
Below are highlight the controlled entities and investment funds included in the consolidated financial statements of Banco Santander. Similar information regarding companies accounted for under the equity method by the Bank is provided in Note 12.
| Directly and Indirectly controlled by Banco Santander (Brasil) S.A. | Participation % | |||||||
| Activity | Direct | Direct and Indirect | ||||||
| Banco Bandepe S.A. | Bank | 100.00% | 100.00% | |||||
| Santander Leasing S.A. Arrendamento Mercantil (Santander Leasing) | Leasing | 78.57% | 99.99% | |||||
| Aymoré Crédito, Financiamento e Investimento S.A. (Aymoré CFI) | Financial | 100.00% | 100.00% | |||||
| Santander Brasil Administradora de Consórcio Ltda. | Buying club | 100.00% | 100.00% | |||||
| Santander Microcrédito Assessoria Financeira S.A. | Microcredit | 100.00% | 100.00% | |||||
| Santander Brasil Advisory Services S.A. | Other Activities | 96.58% | 96.58% | |||||
| Atual Companhia Securitizadora de Créditos Financeiros | Securitization | 100.00% | 100.00% | |||||
| Santander Corretora de Câmbio e Valores Mobiliários S.A. | Broker | 99.99% | 100.00% | |||||
| Santander Participações S.A. | Holding | 100.00% | 100.00% | |||||
| Getnet Adquirência e Serviços para Meios de Pagamento S.A. (Getnet S.A.) (1) | Payment Institution | 88.50% | 88.50% | |||||
| Sancap Investimentos e Participações S.A. (Sancap) | Holding | 100.00% | 100.00% | |||||
| Santander Brasil EFC | Financial | 100.00% | 100.00% | |||||
Santander S.A. Serviços Técnicos, Administrativos e de Corretagem de Seguros (Santander Serviços) |
Insurance Broker | 60.65% | 60.65% | |||||
| Controlled by Santander Serviços | ||||||||
| Webcasas S.A. | Other Activities | - | 100.00% | |||||
| Controlled by Getnet S.A. | ||||||||
| Auttar HUT Processamento de Dados Ltda. (Auttar HUT) | Other Activities | - | 100.00% | |||||
| Integry Tecnologia e Serviços A.H.U Ltda. (Integry Tecnologia) | Other Activities | - | 100.00% | |||||
| Toque Fale Serviços de Telemarketing Ltda. (Toque Fale) | Other Activities | - | 100.00% | |||||
| Controlled by Sancap | ||||||||
| Santander Capitalização S.A. | Savings and annuities | - | 100.00% | |||||
| Evidence Previdência S.A. | Social Securities | - | 100.00% | |||||
| Controlled by Aymoré CFI | ||||||||
| Super Pagamentos e Administração de Meios Eletrônicos Ltda. (Super) (2) | Other Activities | - | 100.00% | |||||
| Banco Olé Bonsucesso Consignado S.A. (Olé Consignado) (Current Company Name of Banco Bonsucesso Consignado) (3) | Bank | - | 60.00% | |||||
| Banco PSA Finance Brasil S.A. (6) | Bank | - | 50.00% | |||||
| Controlled by Olé Consignado (Current Company Name of Banco Bonsucesso Consignado) | ||||||||
| BPV Promotora de Vendas e Cobrança Ltda. | Other Activities | - | 100.00% | |||||
| Bonsucesso Tecnologia Ltda (Current Company Name of BSI Informática Ltda.) | Other Activities | - | 100.00% | |||||
| Controlled by Santander Leasing | ||||||||
| Santander Finance Arrendamento Mercantil S.A (Current Company Name of PSA Finance Arrendamento Mercantil S.A) (6) | Leasing | - | 100.00% | |||||
| Controlled by Santander Participações | ||||||||
| BW Guirapá I S.A. (4) | Holding | - | 86.81% | |||||
| Controlled by BW Guirapá I S.A. (4) | ||||||||
| Central Eólica Angical S.A. (4) | Wind Energy | - | 100.00% | |||||
| Central Eólica Caititu S.A. (4) | Wind Energy | - | 100.00% | |||||
| Central Eólica Coqueirinho S.A. (4) | Wind Energy | - | 100.00% | |||||
| Central Eólica Corrupião S.A. (4) | Wind Energy | - | 100.00% | |||||
| Central Eólica Inhambu S.A. (4) | Wind Energy | - | 100.00% | |||||
| Central Eólica Tamanduá Mirim S.A. (4) | Wind Energy | - | 100.00% | |||||
| Central Eólica Teiu S.A. (4) | Wind Energy | - | 100.00% |
F-27
BANCO SANTANDER (BRASIL) S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Brazilian Reais - R$, unless otherwise stated)
| Participation % | |||
| Directly and Indirectly controlled by Banco Santander (Brasil) S.A. | Activity | Direct | Direct and Indirect |
| Santander FIC FI Contract I Referenciado DI | Investment Fund | - | (a) |
| Santander Fundo de Investimento Unix Multimercado Crédito Privado | Investment Fund | - | (a) |
| Santander Fundo de Investimento Diamantina Multimercado Crédito Privado de Investimento no Exterior | Investment Fund | - | (a) |
| Santander Fundo de Investimento Amazonas Multimercado Crédito Privado de Investimento no Exterior | Investment Fund | - | (a) |
| Santander Fundo de Investimento SBAC Referenciado DI Crédito Privado | Investment Fund | - | (a) |
| Santander Fundo de Investimento Guarujá Multimercado Crédito Privado de Investimento no Exterior | Investment Fund | - | (a) |
| Santander Fundo de Investimento Financial Curto Prazo | Investment Fund | - | (a) |
| Santander Fundo de Investimento Capitalization Renda Fixa | Investment Fund | - | (a) |
| Santander Paraty QIF PLC (5) | Investment Fund | - | (a) |
| Santander FI Hedge Strategies Fund (5) | Investment Fund | - | (a) |
| BRL V - Fundo de Investimento Imobiliário-FII (7) | Real Estate Investment Fund | - | (a) |
(a)Company over which the Bank is exposed, or has rights, to variable returns and have the ability to affect those returns through the power of decision, in accordance with IFRS 10 - Consolidated Financial Statements. Banco Santander and its subsidiaries holds 100% of the shares of these investment funds.
(1) In May, 2016, it was approved by Brazil Central Bank the authorization process for operation of the Company as a payment institution.
(2) On January 4, 2016, Aymoré CFI informed the owners of the shares representing the remaining 50% of Super Pagamentos total voting capital its decision to exercise the call option for the acquisition of such shares, for a value of approximately R$113 million. The transaction was concluded on March 10, 2016. (Note 4.b)
(3) At the ESM of March 3, 2016 was approved the change from the name of Banco Bonsucesso Consignado S.A. for Banco Olé Bonsucesso Consignado S.A., the change process has been approved by the Bacen on June 1, 2016. At the ESM of November 1, 2016, was approved the capital increase of Olé Consignado in the amount of R$50,000, from the current R$350,000 to R$400,000, through the issuance of 28,509,708 new nominated ordinary shares, without nominal value. The process of the increase was approved by the Bacen in November 22, 2016.
(4) Investments transferred from the non-current assets held for sale caption in September, 2016 (Note 11).
(5) Banco Santander, through its subsidiaries, holds the risks and benefits of the Santander Paraty and the Sub-fund Santander FI Hedge Strategies, based in Ireland, and both are fully consolidated in its financial statements. The Irish market, an investment fund cannot act directly and, therefore, there was the need to create another structure (a sub-fund), Santander FI Hedge Strategies. The Santander Paraty has no equity position, and all derived position of the balance sheet of Santander FI Hedge Strategies.
(6) Investment acquired on August 1, 2016 (Note 4.e).
(7) This fund was established and became consolidated from August 2016. It is a structure where the Banco Santander figured as lender of certain debts (loans). The real object guarantee of said operations were converted into capital contributions by Fundo de Investimento Imobiliário, in conjunction concomitant transfer of the same shares to Banco Santander through dation process of payment of the above credit operations.
On July 14, 2016 it has completed the sales transaction of 100% of the shares representing the capital of Mantiq by Banco Santander and by Santander Participações to Angra Ventures Participações Ltda.
4. Change in the scope of consolidation
a) Sale of Santander Securities Services Brasil DTVM S.A.
On June 19, 2014, preliminary documents were executed containing the main terms and conditions related to the sale of the operation of qualified custody business, currently performed by Banco Santander, and all of the shares issued by Santander Securities Services Brasil Distribuidora de Títulos e Valores Mobiliários S.A.
On August 31, 2015 the sales transaction of the qualified custody business, with the sale of all shares of Santander Securities Services Brazil Distribuidora de Títulos e Valores Mobiliários S.A. to Santander Securities Services Brasil Participações S.A., indirectly controlled by Banco Santander Spain was concluded at the amount of R$859 million, according to was informed to the market on June 19, 2014.
The transaction generated a gain of R$750,550 before taxes, recorded in the caption Result on disposal of assets not classified as non-current assets held for sale.
The operation fits into the context of a global strategic partnership between Banco Santander Spain and a group led by Warburg Pincus LLC in qualified custody activity in Spain, Brazil and Mexico.
b) Investment in Super Pagamentos e Administração de Meios Eletrônicos Ltda. (“Super Pagamentos”)
On October 3, 2014, Aymoré CFI signed an investment agreement ("Agreement") with a view to make an investment in Super Pagamentos, which would result in the subscription and payment of new shares issued by Super, representing 50% of its total and voting capital.
The closing of the operation occurred on December 12, 2014 and was subject to completion of certain conditions precedent set forth in the Agreement, including the prior approval of the Central Bank (obtained on December 2, 2014). Aymoré CFI subscribed and paid share capital of Super Pagamentos in R$31,128, through the issuance of 20 million new common shares.
On January 4, 2016, Aymoré CFI informed the owners of the shares representing the remaining 50% of Super Pagamentos´ total voting capital its decision to exercise the call option for the acquisition of such shares, for a value of approximately R$113 million. The transaction was concluded on March 10, 2016.
Accordingly, Aymoré as the parent company purchased the remaining equity instruments of Super Pagamentos entity and should therefore consider the paid value of goodwill for expected future profitability as a reduction of shareholders' equity, since, according to the IFRS 10 this transaction is characterized as transactions between partners. For the same reason, the amount paid for the equity value of the interest participation acquired from non-controlling shareholder is a movement among Stockholders' Equity accounts.
F-28
BANCO SANTANDER (BRASIL) S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Brazilian Reais - R$, unless otherwise stated)
c) Investment Agreement between Banco Santander and Banco Bonsucesso S.A. (Banco Bonsucesso)
On July 30, 2014 Banco Santander, through its controlled company Aymore CFI, and Banco Bonsucesso entered into an Investment Agreement whereby agreed to form an association in payroll credit card loan segment and payroll loans (Olé Consignado).
On February 10, 2015, with the approval of the BACEN, the transaction was completed and Banco Santander, through Aymoré CFI, became the controlling shareholder of Olé Consignado, with 60% of the total and voting capital through an investment of R$460 million. Banco Bonsucesso remained with the remaining portion of the share capital (40%).
In December 2015, it has completed the study of the allocation of the purchase price (Purchase Price Allocation - PPA) on the acquisition of Bonsucesso by Aymoré, based on acquisition date as below:
| Book value | Fair value | |||||||
| Available-for-Sale Financial Assets | 121,468 | 121,468 | ||||||
| Loans and Receivables | 508,147 | 508,147 | ||||||
| Others Assets | 374,151 | 374,151 | ||||||
| Intangible Assets (1) | - | 62,000 | ||||||
| Total assets | 1,003,766 | 1,065,766 | ||||||
| Financial liabilities | 466,162 | 466,162 | ||||||
| Others liabilities | 397,604 | 397,604 | ||||||
| Total liabilities | 863,766 | 863,766 | ||||||
| Capital increase by Aymore CFI | 460,000 | 460,000 | ||||||
| Total of net assets acquired | 600,000 | 662,000 | ||||||
| Non-controlling interest (2) | 264,800 | |||||||
| Total consideration transferred by Aymore to acquire control | 460,000 | |||||||
| Goodwill (3) | 62,800 |
(1) Intangible assets identified relate to brand and customer relationship with estimated useful life of 10 years and 4 years, respectively.
(2) Amount of non-controlling interests were measured at R$240 million as the proportional value of the net assets of the investee.
(3) Goodwill will be tax deductible under current legislation.
Olé Consignado has become the exclusive vehicle of Banco Bonsucesso and its affiliates for the payroll credit supply in Brazil and should consolidate existing payroll loans at Banco Santander and Banco Bonsucesso, in accordance with the association. Banco Santander will continue to originate from payroll loans through their own channels independently.
In the operation context, it was granted between institutions a put option (right of Olé Consignado to sell) and purchase (right of Banco Santander acquisition), relating to the shares held by Banco Bonsucesso, equivalent to 40% of capital of this company. According to IAS 32, it has recognized a financial liability for the amount of R$307 million by the commitment made in relation to the put option, accounted in Shareholders' Equity, the amount of R$67 million and non-controlling interests, the amount of R$240 million.
At the ESM occurred on March 3, 2016 the amendment of the corporate name of Banco Bonsucesso Consignado S.A. to Banco Olé Bonsucesso Consignado S.A. was approved, the process was approved by the Bacen on June 1, 2016 .
d) Partnership Formation with the Hyundai Group in Brazil
On April 28, 2016, the Aymoré CFI and Banco Santander entered into a transaction for the formation of a partnership with Hyundai Motor Brasil Montadora de Automóveis Ltda. (Hyundai Motor Brazil) and Hyundai Capital Services, Inc. (Hyundai Capital) for the constitution of Banco Hyundai Capital Brasil S.A. and an insurance brokerage company to provide, respectively, auto finance and insurance brokerage services and products to consumers and Hyundai dealerships in Brazil. The partnership capital structure will have a shareholding of 50% (fifty percent) of the Aymoré, 25% (twenty five percent) of Hyundai Capital and 25% (twenty five percent) of Hyundai Motor Brazil. The execution of the operation shall be subject to the fulfillment of certain conditions precedent usual in similar transactions, including obtaining the applicable regulatory approvals.
e) Agreement on the Acquisition, of part of the Financial Operation of PSA Group in Brazil and a consequent creation of a Joint Venture
On August 1, 2016, after the fulfillment of the applicable conditions precedent, including obtaining the appropriate regulatory approvals, the Aymoré CFI and Banco Santander, in the context of a partnership between the Banque PSA Finance (Banque PSA) and Santander Consumer Finance in Europe for joint operation of the vehicle financing business of PSA brands (Peugeot, Citroën and DS), signed definitive documents for the formation of a financial cooperation with Banque PSA to offer a range of financial and insurance products to consumers and dealers of PSA in Brazil.
The main vehicle of financial cooperation is Banco PSA Finance Brasil S.A. which is now held in the proportion of 50% by Aymoré CFI, a subsidiary of Banco Santander, and 50% by Banque PSA.. The purchase price was equal to the book value (proportional to the 50% acquired) on the closing date (08/01/2016). The operation also included the acquisition by Banco Santander subsidiary, 100% of Santander Finance Arrendamento Mercantil S.A. (Current Company Name of PSA Finance Arrendamento Mercantil S.A.), whose price was equivalent to 74% of the equity value on the closing date recording a bargain purchase gain, and also 50% of PSA Corretora de Seguros e Serviços Ltda., whose purchase price was equal to the book value (proportional) on the closing date.
Banco Santander started to consolidate these companies from August 1, 2016, considering its shareholder agreement over Santander Finance Arrendamento Mercantil S.A and majority holding in the other investments.
F-29
BANCO SANTANDER (BRASIL) S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Brazilian Reais - R$, unless otherwise stated)
f) Merger of Getnet Tecnologia em Captura e Processamento de Transações H.U.A.H. S.A. (Getnet) into Getnet Adquirencia e Serviços para Meios de Pagamento S.A. (current corporate name of Santander Getnet)
Banco Santander announced to the market on April 7, 2014, the company's purchase of Getnet ("Transaction"), through its subsidiary SGS, partner of Banco Santander in the development of the activities of acquiring and processing debit and credit cards payments.
At the Extraordinary General Meeting occurred on July 31, 2014, the capital increase of SGS of R$1 million was approved, from the current R$16,000 to R$1,189,503 through the issuance of 54 million new common shares, nominative and without par value, fully subscribed and paid by Banco Santander as follows: R$1 million in local currency and R$17,240 in through the carrying amount, by Banco Santander of 5,300 common shares without par value issued by the iZettle do Brasil Meios de Pagamento S.A to the capital of SGS, which raised the share of Banco Santander from in Getnet S.A. 50.0% to 88.5%.
On July 31, 2014, SGS acquired all the shares of Getnet, the total price of R$1,156.3 million (R$1,089.1 million paid and R$67.2 million payable). At December 31, 2014, has completed the study of the allocation of the purchase price (Purchase Price Allocation - PPA), based on stockholders equity of July 31, 2014 and a summary of values is informed below:
| Summary of values: | ||||
| Stockholders’ Equity on July 31, 2014 | 42,895 | |||
| Added value of assets (1) | 74,064 | |||
| Adjusted accounting value | 116,959 | |||
| Purchase Price | 1,156,263 | |||
| Goodwill (2) | 1,039,304 | |||
(1) Recorded under Tangible Assets.
(2) Goodwill is tax deductible under current legislation.
At the Extraordinary General Meeting occurred on August 31, 2014, it was approved the merger of Getnet by SGS, which had its name changed to "Getnet Adquirencia e Serviços para Meios de Pagamento S.A." (Getnet S.A.) under the "Private Instrument of Protocol and Justification of Merger of Getnet by Getnet Adquirencia e Serviços para Meios de Pagamento S.A. (Protocol) of August 29, 2014 (the Merger).
The implementation of the Merger represents an important step in the simplification, consolidation and integration of capture and processing of operations activities of electronic payments Group Santander in Brazil, allowing for the consolidation for all commercial, financial and accounting purposes.
By the Protocol, Getnet S.A. received the book value of all assets, rights and obligations of Getnet totaling R$42,895 which was extinguished and succeeded by Getnet S.A. in all their rights and obligations. In view that all the shares issued by Getnet are the property of Getnet S.A., there was no increase in the share capital of Getnet S.A. following the approval of the Merger, so the net assets of Getnet was registered in Getnet S.A. in return of the investment account.
The acquisition of Getnet and their incorporation by SGS enabled Getnet S.A. pass to consolidate all activities of acquiring and credit and debit cards payment processing, still subject to approval by the Bacen.
The context of the transaction, Banco Santander has granted to the minority shareholders of Getnet S.A. a put option over shares of Getnet S.A. held by them equivalent to 11.5% of the total capital of the company. As set out in IAS 32, was recognized for the commitment made, as counterpart to a specific account in stockholders' equity in the amount of R$950 million.
5. Cash and balances with the Brazilian Central Bank
| Thousands of Reais | 2016 | 2015 | 2014 | |||||||||
| Cash and cash equivalents | 4,445,940 | 7,141,137 | 9,786,013 | |||||||||
| of which: | ||||||||||||
| Cash | 3,316,800 | 2,995,112 | 3,525,864 | |||||||||
| Money market investments | 1,129,140 | 4,146,025 | 6,260,149 | |||||||||
| Money market investments (1) | 45,242,674 | 27,170,892 | 16,212,907 | |||||||||
| Central Bank compulsory deposits (2) | 60,916,297 | 54,831,324 | 29,904,928 | |||||||||
| Total | 110,604,911 | 89,143,353 | 55,903,848 |
(1) Includes securities purchased under agreements to resell, long term and not considered cash equivalents.
(2) Central Bank compulsory deposits relate to a minimum balance that financial institutions are required to maintain with the Central Bank of Brazil based on a percentage of deposits received from third parties, considered as restricted use of resources.
| 6. | Loans and amounts due from credit institutions |
The breakdown, by classification, type and currency, of the balances of “Loans and amounts due from credit institutions” in the consolidated balance sheets is as follows:
| Thousands of Reais | 2016 | 2015 | 2014 | |||||||||
| Classification: | ||||||||||||
| Loans and receivables | 27,762,473 | 42,422,638 | 28,917,397 | |||||||||
| Of which: | ||||||||||||
| Loans and amounts due from credit institutions, gross | 27,963,914 | 42,601,397 | 29,059,676 | |||||||||
| Impairment losses (note 10.c) | (201,441 | ) | (178,759 | ) | (142,279 | ) | ||||||
| Loans and amounts due from credit institutions, net | 27,762,473 | 42,422,638 | 28,917,397 | |||||||||
| Loans and amounts due from credit institutions, gross | 27,963,914 | 42,601,397 | 29,059,676 |
F-30
BANCO SANTANDER (BRASIL) S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Brazilian Reais - R$, unless otherwise stated)
| Thousands of Reais | 2016 | 2015 | 2014 | |||||||||
| Type: | ||||||||||||
| Applications in time deposits (2) | 2,070,151 | 3,626,514 | 4,818,894 | |||||||||
| Reverse repurchase agreements (1) (2) | 848,096 | 152,870 | 2,407,741 | |||||||||
| Escrow deposits | 9,836,300 | 9,493,169 | 8,170,504 | |||||||||
| Cash and Foreign currency investments (2) | 13,194,923 | 24,057,973 | 12,398,350 | |||||||||
| Other accounts | 2,014,444 | 5,270,871 | 1,264,187 | |||||||||
| Total | 27,963,914 | 42,601,397 | 29,059,676 | |||||||||
| Currency: | ||||||||||||
| Brazilian Real | 25,421,465 | 18,631,226 | 15,469,912 | |||||||||
| US dollar | 1,658,980 | 23,607,170 | 12,180,659 | |||||||||
| Euro | 779,314 | 323,053 | 1,371,277 | |||||||||
| Pound sterling | 51,972 | 4,964 | 12,656 | |||||||||
| Other currencies | 52,183 | 34,984 | 25,172 | |||||||||
| Total | 27,963,914 | 42,601,397 | 29,059,676 |
(1) Collateralized by debt instruments.
(2) Includes R$13,683,641 (2015 - R$25,990,477 and 2014 - R$13,613,957), of short-term transactions and low risk of change in its value, considered cash equivalents.
Note 45-d contains a detail of the residual maturity periods of loans and receivables and of the related average interest rates.
The breakdown, by classification, type and currency, of the balances of “Debt instruments” is as follows:
| Thousands of Reais | 2016 | 2015 | 2014 | |||||||||
| Classification: | ||||||||||||
| Financial assets held for trading | 59,994,946 | 25,193,598 | 47,106,811 | |||||||||
| Other financial assets at fair value through profit or loss | 1,668,749 | 1,506,570 | 93,900 | |||||||||
| Available-for-sale financial assets (2) | 55,829,572 | 67,103,274 | 73,510,698 | |||||||||
| Held to maturity investments (2) | 10,048,761 | 10,097,836 | - | |||||||||
| Loans and receivables (2) | 16,283,259 | 11,812,701 | - | |||||||||
| Of which: | ||||||||||||
| Loans and receivables - Debt Instruments | 17,838,162 | 11,957,161 | - | |||||||||
| Provision for impairment losses (impairment) | (1,554,903 | ) | (144,460 | ) | - | |||||||
| Total | 143,825,287 | 115,713,979 | 120,711,409 | |||||||||
| Type: | ||||||||||||
| Government securities - Brazil (1) | 122,971,854 | 93,439,724 | 103,598,096 | |||||||||
| Debentures and Promissory notes | 12,922,763 | 11,967,222 | 13,428,165 | |||||||||
| Other debt securities | 7,930,670 | 10,307,033 | 3,685,148 | |||||||||
| Total | 143,825,287 | 115,713,979 | 120,711,409 | |||||||||
| Currency: | ||||||||||||
| Brazilian Real | 134,037,665 | 109,836,568 | 114,257,666 | |||||||||
| US dollar | 9,107,513 | 5,111,982 | 6,453,743 | |||||||||
| Euro | 680,109 | 765,429 | - | |||||||||
| Total | 143,825,287 | 115,713,979 | 120,711,409 |
(1) Includes, substantially, National Treasury Bills (LTN), Treasury Bills (LFT) e National Treasury Notes (NTN-A, NTN-B, NTN-C e NTN-F).
Transfer between categories (2)
In January 2014, the Bank made an issue of securities eligible to compose the capital of Tier I and Reference Equity (PR) Tier II, in the amount of US$2.5 billion (equivalent to R$6 billion) (Note 29.e). Aiming to mitigate the risk of interest rates in US dollars, it was made the purchase of assets indexed in this currency: NTN-A and Eurobonds issued by the federal government of Brazil and BNDES (acquired via Santander Cayman). Initially, these securities were classified as "Available-For-Sale Financial Assets - Debt instruments", and in July 1, 2015, were reclassified to "Held to maturity investments". On December 31, 2016 such securities amounted to R$10,048,761 (2015 - R$10,097,836). Banco Santander has the financial capacity and intention to hold to maturity securities classified as held-to-maturity. Additionally, were reclassified securities from "Available-For-Sale Financial Assets - Debt instruments" to "Loans and Receivables - Debt instruments". On December 31, 2016 such securities amounted to R$16,283,259 (2015 - R$11,812,701).
The fair value of this operation is R$10,555,437 (note 31).
Additionally, in the first quarter of 2016, due to the Banco Santander's strategy change, it was reclassified from Available Financial Assets for sale - Debt instruments to Loans and Receivables - Debt Instruments the total amount of R$4,562,869, meeting the required in IAS 39.
The transfers above comply with IAS 39.
The Debts Instruments are comprised, mainly, of R$71,810,310 (2015 - R$58,958,355 and 2014 - R$72,884,242) of debt securities relating to repurchase agreements, R$3,044,896 (2015 - R$6,216,315 and 2014 - R$8,859,309) to compulsory deposits in Central Bank, R$6,221,046 (2015 - R$10,197,025 and 2014 - R$7,588,094) to guarantee of BM&FBovespa transactions and R$5,358,604 (2015 - R$4,939,160 and 2014 - R$3,111,724) to escrow deposits and other guarantee.
Note 45-d contains a detail of the residual maturity periods of available-for-sale financial assets and of loans and receivables and of the related average interest rates.
F-31
BANCO SANTANDER (BRASIL) S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Brazilian Reais - R$, unless otherwise stated)
a) Breakdown
The breakdown, by classification and type, of the balances of “Equity instruments” is as follows:
| Thousands of Reais | 2016 | 2015 | 2014 | |||||||||
| Classification: | ||||||||||||
| Financial assets held for trading | 398,461 | 404,973 | 391,656 | |||||||||
| Other financial assets at fair value through profit or loss | 42,455 | 573,664 | 902,794 | |||||||||
| Available-for-sale financial assets | 1,985,473 | 1,162,332 | 1,653,644 | |||||||||
| Total | 2,426,389 | 2,140,969 | 2,948,094 | |||||||||
| Type: | ||||||||||||
| Shares of Brazilian companies | 1,185,653 | 1,168,186 | 1,338,776 | |||||||||
| Shares of foreign companies | 3,588 | 11,445 | 8,401 | |||||||||
| Investment fund units and shares (1) | 1,237,148 | 961,338 | 1,600,917 | |||||||||
| Total | 2,426,389 | 2,140,969 | 2,948,094 |
(1) Comprised mainly by investing in stocks, which mainly correspond to investments in assets in the electricity segment and technology, which is consistent with the established rules and accounting practices.
b) Changes
The changes in the balance of “Equity instruments – Financial assets held for trading” were as follows:
| Thousands of Reais | 2016 | 2015 | 2014 | |||||||||
| Balance at beginning of year | 404,973 | 391,656 | 477,577 | |||||||||
| Net additions /disposals | (7,125 | ) | 26,273 | (73,963 | ) | |||||||
| Valuation adjustments | 613 | (12,956 | ) | (11,958 | ) | |||||||
| Balance at end of year | 398,461 | 404,973 | 391,656 |
The changes in the balance of “Equity instruments – Other financial assets at fair value through profit or loss” were as follows:
| Thousands of Reais | 2016 | 2015 | 2014 | |||||||||
| Balance at beginning of year | 573,664 | 902,794 | 1,192,334 | |||||||||
| Net additions /disposals | (531,209 | ) | (318,307 | ) | (289,540 | ) | ||||||
| Valuation adjustments | - | (10,823 | ) | - | ||||||||
| Balance at end of year | 42,455 | 573,664 | 902,794 |
The changes in the balance of “Equity instruments – Available-for-sale financial assets” were as follows:
| Thousands of Reais | 2016 | 2015 | 2014 | |||||||||
| Balance at beginning of year | 1,162,332 | 1,653,644 | 1,329,810 | |||||||||
| Net additions /disposals | 852,820 | (482,406 | ) | 307,917 | ||||||||
| Valuation adjustments | (29,679 | ) | (8,906 | ) | 15,917 | |||||||
| Balance at end of year | 1,985,473 | 1,162,332 | 1,653,644 |
9. Derivative financial instruments and Short positions
a) Trading and hedging derivatives
a.1) Derivatives Recorded in Memorandum and Balance sheets
Portfolio Summary of Trading Derivative and Used as Hedge
| 2016 | 2015 | 2014 | ||||||||||
| Assets | ||||||||||||
| Swap Differentials Receivable | 15,321,646 | 22,312,106 | 5,538,082 | |||||||||
| Option Premiums to Exercise | 935,520 | 895,684 | 628,851 | |||||||||
| Forward Contracts and Others | 8,445,807 | 3,042,572 | 2,560,755 | |||||||||
| Total | 24,702,973 | 26,250,362 | 8,727,688 | |||||||||
| Liabilities | ||||||||||||
| Swap Differentials Payable | 12,267,819 | 20,154,760 | 6,552,166 | |||||||||
| Option Premiums Launched | 1,166,002 | 827,757 | 569,011 | |||||||||
| Forward Contracts and Others | 6,802,794 | 3,734,442 | 2,057,085 | |||||||||
| Total | 20,236,615 | 24,716,959 | 9,178,262 |
F-32
BANCO SANTANDER (BRASIL) S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Brazilian Reais - R$, unless otherwise stated)
Summary by Category
| Trading | 2016 | 2015 | 2014 | |||||||||||||||||||||
| Notional | Fair Value | Notional | Fair Value | Notional | Fair Value | |||||||||||||||||||
| "Swap" | 381,238,135 | 3,142,125 | 611,162,351 | 3,221,966 | 569,872,773 | (332,734 | ) | |||||||||||||||||
| Asset | 196,887,188 | 24,311,485 | 315,466,085 | 38,512,406 | 284,533,034 | 67,713,764 | ||||||||||||||||||
| CDI (InterBank Deposit Rates) | 44,868,680 | 22,759,822 | 38,808,344 | 9,081,792 | 70,772,781 | - | ||||||||||||||||||
| Fixed Interest Rate - Real | 126,300,261 | - | 200,528,046 | - | 83,317,134 | 67,425,070 | ||||||||||||||||||
| Indexed to Price and Interest Rates | 9,225,789 | - | 15,491,509 | 6,421,310 | 31,603,343 | 288,694 | ||||||||||||||||||
| Foreign Currency | 16,492,458 | 1,551,663 | 60,626,540 | 23,009,304 | 98,810,878 | - | ||||||||||||||||||
| Others | - | - | 11,646 | - | 28,898 | - | ||||||||||||||||||
| Liabilities | 184,350,947 | (21,169,360 | ) | 295,696,266 | (35,290,440 | ) | 285,339,739 | (68,046,498 | ) | |||||||||||||||
| CDI (InterBank Deposit Rates) | 23,178,722 | - | 32,000,584 | - | 101,623,563 | (30,163,786 | ) | |||||||||||||||||
| Fixed Interest Rate - Real | 133,185,717 | (17,414,147 | ) | 218,588,847 | (35,280,694 | ) | 16,491,571 | - | ||||||||||||||||
| Indexed to Price and Interest Rates | 12,767,212 | (3,518,297 | ) | 6,930,103 | - | 31,118,848 | - | |||||||||||||||||
| Foreign Currency | 15,049,776 | (38,836 | ) | 38,176,732 | (9,746 | ) | 136,072,590 | (37,879,212 | ) | |||||||||||||||
| Others | 169,520 | (198,080 | ) | - | - | 33,167 | (3,500 | ) | ||||||||||||||||
| Options | 175,841,405 | (230,482 | ) | 91,877,351 | 67,927 | 240,746,222 | 59,840 | |||||||||||||||||
| Purchased Position | 83,883,966 | 935,520 | 46,024,648 | 895,684 | 116,184,661 | 628,851 | ||||||||||||||||||
| Call Option - US Dollar | 12,693,748 | 181,463 | 5,018,652 | 665,655 | 3,942,457 | 331,533 | ||||||||||||||||||
| Put Option - US Dollar | 3,788,161 | 392,048 | 2,735,625 | 31,520 | 1,767,822 | 49,704 | ||||||||||||||||||
| Call Option - Other | 20,115,932 | 62,517 | 14,106,701 | 113,809 | 56,931,274 | 153,976 | ||||||||||||||||||
| InterBank Market | 17,391,500 | 7,062 | 13,114,822 | 93,435 | 51,308,444 | 118,061 | ||||||||||||||||||
| Others (1) | 2,724,432 | 55,455 | 991,879 | 20,374 | 5,622,830 | 35,915 | ||||||||||||||||||
| Put Option - Other | 47,286,125 | 299,492 | 24,163,670 | 84,700 | 53,543,108 | 93,638 | ||||||||||||||||||
| InterBank Market | 46,106,600 | 18,029 | 23,350,994 | 4,558 | 49,105,277 | 1,335 | ||||||||||||||||||
| Others (1) | 1,179,525 | 281,463 | 812,676 | 80,142 | 4,437,831 | 92,303 | ||||||||||||||||||
| Sold Position | 91,957,439 | (1,166,002 | ) | 45,852,703 | (827,757 | ) | 124,561,561 | (569,011 | ) | |||||||||||||||
| Call Option - US Dollar | 4,314,988 | (141,172 | ) | 3,331,244 | (596,729 | ) | 4,239,625 | (428,681 | ) | |||||||||||||||
| Put Option - US Dollar | 7,390,733 | (952,407 | ) | 4,402,202 | (73,815 | ) | 1,774,640 | (25,163 | ) | |||||||||||||||
| Call Option - Other | 30,441,646 | (46,940 | ) | 14,567,407 | (122,683 | ) | 54,354,491 | (103,436 | ) | |||||||||||||||
| InterBank Market | 27,597,764 | (4,087 | ) | 13,730,262 | (112,707 | ) | 53,571,293 | (72,078 | ) | |||||||||||||||
| Others (1) | 2,843,882 | (42,853 | ) | 837,145 | (9,976 | ) | 783,198 | (31,358 | ) | |||||||||||||||
| Put Option - Other | 49,810,072 | (25,483 | ) | 23,551,850 | (34,530 | ) | 64,192,805 | (11,731 | ) | |||||||||||||||
| InterBank Market | 49,245,495 | (5,793 | ) | 23,218,228 | (1,615 | ) | 60,555,093 | (1,950 | ) | |||||||||||||||
| Others (1) | 564,577 | (19,690 | ) | 333,622 | (32,915 | ) | 3,637,712 | (9,781 | ) | |||||||||||||||
| Futures Contracts | 104,651,180 | - | 184,191,204 | - | 302,239,388 | - | ||||||||||||||||||
| Purchased Position | 40,396,456 | - | 41,186,341 | - | 105,230,874 | - | ||||||||||||||||||
| Exchange Coupon (DDI) | 14,473,180 | - | 4,274,352 | - | 6,888,319 | - | ||||||||||||||||||
| Interest Rates (DI1 and DIA) | 23,756,523 | - | 22,760,484 | - | 94,307,498 | - | ||||||||||||||||||
| Foreign Currency | 1,393,538 | - | 11,710,934 | - | 3,897,223 | - | ||||||||||||||||||
| Indexes (2) | 195,160 | - | 577,149 | - | 137,834 | - | ||||||||||||||||||
| Others | 578,055 | - | 1,863,422 | - | - | - | ||||||||||||||||||
| Sold Position | 64,254,724 | - | 143,004,863 | - | 197,008,514 | - | ||||||||||||||||||
| Exchange Coupon (DDI) | 15,048,490 | - | 58,499,504 | - | 50,378,949 | - | ||||||||||||||||||
| Interest Rates (DI1 and DIA) | 29,047,678 | - | 20,836,314 | - | 57,355,214 | - | ||||||||||||||||||
| Foreign Currency | 17,384,256 | - | 35,463,589 | - | 15,845,107 | - | ||||||||||||||||||
| Indexes (2) | 185,506 | - | 500,993 | - | 8,418 | - | ||||||||||||||||||
| Treasury Bonds/Notes | 2,588,794 | - | 49,163 | - | 249,203 | - | ||||||||||||||||||
| Others | - | - | 27,655,300 | - | 73,171,623 | - | ||||||||||||||||||
| Forward Contracts and Others | 50,853,154 | 1,643,013 | 51,051,014 | (691,870 | ) | 46,406,749 | 503,670 | |||||||||||||||||
| Purchased Commitment | 20,864,170 | 3,386,347 | 21,570,405 | 3,028,038 | 20,552,988 | 270,611 | ||||||||||||||||||
| Currencies | 19,951,984 | 3,391,275 | 21,570,405 | 2,690,632 | 20,302,193 | 19,677 | ||||||||||||||||||
| Others | 912,186 | (4,928 | ) | - | 337,406 | 250,795 | 250,934 | |||||||||||||||||
| Sold Commitment | 29,988,984 | (1,743,334 | ) | 29,480,609 | (3,719,908 | ) | 25,853,761 | 233,059 | ||||||||||||||||
| Currencies | 29,911,406 | (1,826,965 | ) | 29,140,219 | (3,382,384 | ) | 25,708,788 | 474,273 | ||||||||||||||||
| Others | 77,578 | 83,631 | 340,390 | (337,524 | ) | 144,973 | (241,214 | ) |
(1) Includes stock options, indices and commodities.
(2) Includes Bovespa index and S&P.
F-33
BANCO SANTANDER (BRASIL) S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Brazilian Reais - R$, unless otherwise stated)
a.2) Derivatives Financial Instruments by Counterparty
| Notional | 2016 | |||||||||||||||
| Customers | Related Parties | Financial Institutions(1) | Total | |||||||||||||
| "Swap" | 43,082,605 | 15,910,871 | 137,893,712 | 196,887,188 | ||||||||||||
| Options | 5,916,105 | 839,182 | 169,086,118 | 175,841,405 | ||||||||||||
| Futures Contracts | - | - | 104,651,180 | 104,651,180 | ||||||||||||
| Forward Contracts and Others | 29,044,676 | 17,563,319 | 4,245,159 | 50,853,154 |
(1) Includes trades with the BM&FBovespa and other securities and commodities exchanges.
| Notional | 2015 | 2014 | ||||||||||||||||||
| Customers | Related Parties | Financial Institutions(1) | Total | Total | ||||||||||||||||
| "Swap" | 127,294,285 | 129,084,483 | 59,087,317 | 315,466,085 | 284,533,034 | |||||||||||||||
| Options | 3,958,901 | 1,458,552 | 86,459,898 | 91,877,351 | 240,746,222 | |||||||||||||||
| Futures Contracts | - | - | 184,191,204 | 184,191,204 | 302,239,388 | |||||||||||||||
| Forward Contracts and Others | 32,603,287 | 15,172,977 | 3,274,750 | 51,051,014 | 46,406,749 |
(1) Includes trades with the BM&FBovespa and other securities and commodities exchanges.
a.3) Derivatives Financial Instruments by Maturity
| Notional | 2016 | |||||||||||||||
| Up to | From 3 to | Over | ||||||||||||||
| 3 Months | 12 Months | 12 Months | Total | |||||||||||||
| "Swap" | 17,499,576 | 26,810,380 | 152,577,232 | 196,887,188 | ||||||||||||
| Options | 10,785,982 | 10,624,762 | 154,430,661 | 175,841,405 | ||||||||||||
| Futures Contracts | 66,298,799 | 16,041,642 | 22,310,739 | 104,651,180 | ||||||||||||
| Forward Contracts and Others | 28,235,186 | 17,826,727 | 4,791,241 | 50,853,154 |
| Notional | 2015 | 2014 | ||||||||||||||||||
| Up to | From 3 to | Over | ||||||||||||||||||
| 3 Months | 12 Months | 12 Months | Total | Total | ||||||||||||||||
| "Swap" | 20,862,816 | 28,175,069 | 266,428,200 | 315,466,085 | 284,533,034 | |||||||||||||||
| Options | 36,064,710 | 52,183,999 | 3,628,642 | 91,877,351 | 240,746,222 | |||||||||||||||
| Futures Contracts | 59,763,763 | 92,346,365 | 32,081,076 | 184,191,204 | 302,239,388 | |||||||||||||||
| Forward Contracts and Others | 26,545,840 | 16,772,668 | 7,732,506 | 51,051,014 | 46,406,749 | |||||||||||||||
| a.4) Derivatives by Market Trading | ||||||||||||||||||||
| Notional | 2016 | |||||||||||||||
| Stock Exchange(1) | Cetip (2) | Over the Counter | Total | |||||||||||||
| "Swap" | 133,759,441 | 61,856,098 | 1,271,649 | 196,887,188 | ||||||||||||
| Options | 166,899,868 | 8,234,147 | 707,390 | 175,841,405 | ||||||||||||
| Futures Contracts | 104,651,180 | - | - | 104,651,180 | ||||||||||||
| Forward Contracts and Others | - | 35,427,573 | 15,425,581 | 50,853,154 |
(1) Includes trades with the BM&FBovespa and other securities and commodities exchanges.
(2) Includes amounts traded on other clearinghouses.
| Notional | 2015 | 2014 | ||||||||||||||||||
| Stock Exchange(1) | Cetip(2) | Over the Counter | Total | Total | ||||||||||||||||
| "Swap" | 157,833,059 | 114,219,144 | 43,413,882 | 315,466,085 | 284,533,034 | |||||||||||||||
| Options | 87,165,911 | 4,129,727 | 581,713 | 91,877,351 | 240,746,222 | |||||||||||||||
| Futures Contracts | 184,191,204 | - | - | 184,191,204 | 302,239,388 | |||||||||||||||
| Forward Contracts and Others | - | 33,428,467 | 17,622,547 | 51,051,014 | 46,406,749 |
(1) Includes trades with the BM&FBovespa and other securities and commodities exchanges.
(2) Includes amounts traded on other clearinghouses.
F-34
BANCO SANTANDER (BRASIL) S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Brazilian Reais - R$, unless otherwise stated)
a.5) Derivatives Used as Hedge Instruments
Derivatives used as hedge by index are as follows:
Fair Value Hedge
Banco Santander’s fair value strategy consists of hedging exposure to changes in fair value in receivables and interest payments related to recognized assets and liabilities.
The adopted fair value management methodology segregates transactions by risk factor (e.g. Real/Dollar foreign exchange risk, fixed Reais interest rate risk, Dollar foreign exchange coupon risk, inflation risk, interest rate risk, etc.). The transactions generate exposures that are consolidated by risk factor and compared with internal pre-established limits.
In order to hedge against changes of fair value in receivables and interest payments, Santander uses interest rate Swap contracts related to pre-fixed assets and liabilities.
Banco Santander applies fair value hedges as follows:
• It contracts Foreign Currency + Coupon against % CDI swaps and designates them as a derivative instrument in a Hedge Accounting structure, having funding operations as the hedged item in this relationship, based on the instrument of Assumption of Foreign Currency Debt. The hedging relationships were designated in March 2015 and the related Swaps will mature between January 2017 and 2020.
• It contracts Foreign Currency + Coupon against % CDI swaps (sold jointly to the client) and designates them as a derivative instrument in a Hedge Accounting structure, having foreign currency loans as the hedged item in this relationship. The hedging relationships were designated in January 2016 and the related Swaps will mature between January 2017 and 2021.
• Banco Santander has a portfolio of Reais-indexed Assets traded in the Cayman Islands. In the Reais transaction, the value of the Dollar asset will be converted into Reais at the exchange rate in the contract on the date of recorded of the transaction. After the conversion, the principal, already denominated in Reais will be restated by % CDI or a pre-fixed rate. The Assets will be covered by Cross Currency Swaps in order to transfer the risk in Reais to LIBOR + Coupon. The hedging relationships were designated in October 2015 and the related Swaps will mature between March 2017 and 2021.
• Banco Santander has a portfolio of loan assets issued in foreign currency - Dollar at a fixed rate in the Balance Sheet of the “Santander EFC” (independent subsidiary in Spain), whose functional currency is the euro. In order to manage this mismatch, the Bank designates each Foreign Currency Floating EUR X Fixed Dollar swap as the fair value hedge of the corresponding loan. The hedging relationships were designated in 2013 and the related Swaps will mature between June 2017 and 2020.
• Banco Santander has a portfolio of private securities indexed to Brazilian inflation (IPCA and IGPM) combined with (IPCA or IGPM) + Coupon against CDI swaps; the Bank designates each Inflation + Coupon against CDI swap as the fair value hedge of the corresponding asset. The hedging relationships were designated between 2012 and 2015 and was matured June 2016.
• Santander has a portfolio of private securities in foreign currency combined with Foreign Currency + Coupon against CDI swaps; the Bank designates each Foreign Currency + Coupon against CDI swap as the fair value hedge of the corresponding asset. The hedging relationships were designated in 2011 and 2012 and was matured June 2016.
• Banco Santander has a portfolio of private securities indexed to the TJLP (Long-term Interest Term) combined with (TJLP) + Coupon against CDI swaps; the Bank designates each TJLP + Coupon against CDI swap as the fair value hedge of the corresponding asset. The hedging relationships were designated between 2012 and 2015 and was matured June 2016.
In order to assess the effectiveness and measure the ineffectiveness of the strategies, the institution complies with international accounting standard IAS 39, which requires that the effectiveness test be performed at the beginning (prospective test) of the hedge structure and be repeated periodically (prospective and retrospective tests) in order to demonstrate that the hedge ratio remains effective.
a) Prospective test: In accordance with the standard, the prospective test must be performed on the inception date and on a quarterly basis in order to demonstrate that the expectations regarding the effectiveness of the hedge ratio are high.
a.1) Initial prospective test (at inception): it is restricted to a qualitative review of the critical terms and conditions of the hedging instrument and the hedged item in order to conclude whether changes in the fair value of the two instruments are expected to fully offset each other.
a.2) Periodic prospective test: the sensitivity of the fair value of the hedged item and the hedging instrument will be periodically computed at a parallel variation of 10 basis points in the interest rate curve. For the purposes of effectiveness, these two sensitivity ratios should be between 80% and 125%.
b) Retrospective test: the retrospective effectiveness test will be performed by comparing the MTM change of the hedging instrument since the inception date with the MTM change of the hedged item since the inception date, excluding the transaction’s liquidity and credit spread:
In fair value hedges, gains or losses, both on hedging instruments and hedged items (attributable to the type of risk being hedged) are recognized directly in the consolidated statement of income.
| 12/31/2016 | 12/31/2015 | |||||||||||||||
| Hedge Structure | Effective Portion Accumulated | Portion Ineffective | Effective Portion Accumulated | Portion Ineffective | ||||||||||||
| Fair Value Hedge | ||||||||||||||||
| Debentures | - | - | 10,502 | - | ||||||||||||
| Eurobonds | 13,163 | - | 2,051 | - | ||||||||||||
| NCE | - | - | 53,131 | - | ||||||||||||
| Resolution 2770 | - | - | 35,338 | - | ||||||||||||
| Trade Finance Off | 20,471 | - | 11,046 | - | ||||||||||||
| Total | 33,634 | - | 112,068 | - |
F-35
BANCO SANTANDER (BRASIL) S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Brazilian Reais - R$, unless otherwise stated)
| 2016 | 2015 | 2014 | ||||||||||||||||||||||
| Adjustment | Adjustment | Adjustment | ||||||||||||||||||||||
| to Market | Fair Value | to Market | Fair Value | to Market | Fair Value | |||||||||||||||||||
| Hedge Instruments | ||||||||||||||||||||||||
| Swap Contracts | (26,703 | ) | (136,467 | ) | (66,990 | ) | 86,822 | (80,671 | ) | (163,307 | ) | |||||||||||||
| Asset | 11,486 | 1,046,012 | 57,829 | 7,130,753 | 62,296 | 3,126,038 | ||||||||||||||||||
| CDI (InterBank Deposit Rates) (1) (2) (7) | - | - | 4,376 | 1,783,075 | 1,549 | 1,515,508 | ||||||||||||||||||
| Fixed Interest Rate - Real (2) | - | - | 27,184 | 3,549,659 | 707 | 492,912 | ||||||||||||||||||
| Indexed to Foreign Currency - Pre Dollar (7) | 1,103 | 17,678 | 790 | 94,472 | - | - | ||||||||||||||||||
| Indexed to Foreign Currency - USD/BRL - Dollar (3) | (8,957 | ) | 744,260 | (10,904 | ) | 665,025 | - | - | ||||||||||||||||
| Indexed to Foreign Currency - Libor - Dollar (2) (4) (5) (7) | - | - | 1,962 | 612,623 | 10,850 | 352,587 | ||||||||||||||||||
| Indexed to Foreign Currency - Swiss Franc (5) | - | - | - | - | 2,628 | 339,980 | ||||||||||||||||||
| Indexed to Foreign Currency - Euro (7) | 19,340 | 284,074 | 34,347 | 390,156 | 46,092 | 400,066 | ||||||||||||||||||
| Indexed to Foreign Currency - Pre YEN (8) | - | - | 74 | 35,743 | 470 | 24,985 | ||||||||||||||||||
| Liabilities | (38,189 | ) | (1,182,479 | ) | (124,819 | ) | (7,043,931 | ) | (142,967 | ) | (3,289,345 | ) | ||||||||||||
| Indexed to Foreign Currency - US Dollar (1)(7) | (14,958 | ) | (323,197 | ) | (55,892 | ) | (1,082,503 | ) | (82,987 | ) | (1,155,573 | ) | ||||||||||||
| Indexed Indices of Prices and Interest (2) | - | - | (30,982 | ) | (831,156 | ) | (43,771 | ) | (1,291,277 | ) | ||||||||||||||
| Indexed to Foreign Currency - Pre Dollar (4) | (1,103 | ) | (17,676 | ) | - | - | (555 | ) | (15,776 | ) | ||||||||||||||
| CDI (InterBank Deposit Rates) (3) (5) | (18,395 | ) | (804,059 | ) | (12,298 | ) | (3,279,438 | ) | (900 | ) | (26,875 | ) | ||||||||||||
| Indexed to Foreign Currency - Libor - US Dollar (6) (8) | - | - | (61 | ) | (41,513 | ) | (2,810 | ) | (376,420 | ) | ||||||||||||||
| Fixed Interest Rate - Real (7) | (3,733 | ) | (37,547 | ) | (25,586 | ) | (1,809,321 | ) | (11,944 | ) | (423,424 | ) | ||||||||||||
| Object of Hedge | ||||||||||||||||||||||||
| Assets | 23,165 | 693,132 | 110,003 | 3,103,783 | 119,205 | 2,296,907 | ||||||||||||||||||
| Loans and Receivables | 23,165 | 693,132 | 94,104 | 2,218,727 | 82,368 | 1,666,203 | ||||||||||||||||||
| Indexed to Foreign Currency - US Dollar | 4,809 | 323,780 | 42,348 | 1,295,383 | 46,947 | 954,266 | ||||||||||||||||||
| Indexed to Foreign Currency - Pre Dollar | - | - | - | - | (423 | ) | 15,365 | |||||||||||||||||
| Indexed Indices of Prices and Interest | - | - | 52,984 | 916,765 | 32,415 | 453,559 | ||||||||||||||||||
| CDI (InterBank Deposit Rates) | 13,253 | 331,805 | - | - | 600 | 25,110 | ||||||||||||||||||
| Fixed Interest Rate - Real | 5,103 | 37,547 | (1,228 | ) | 6,579 | 2,829 | 217,903 | |||||||||||||||||
| Debt instruments | - | - | 15,899 | 885,056 | 36,837 | 630,704 | ||||||||||||||||||
| CDI (InterBank Deposit Rates) | - | - | 10,578 | 503,415 | - | - | ||||||||||||||||||
| Fixed Interest Rate - Real | - | - | 5,321 | 381,641 | - | - | ||||||||||||||||||
| Available-for-Sale Securities - Debentures | - | - | - | - | 36,837 | 630,704 | ||||||||||||||||||
| Liabilities | 12,830 | (803,929 | ) | (8,383 | ) | (3,520,951 | ) | (2,826 | ) | (366,992 | ) | |||||||||||||
| Foreign Borrowings | 12,830 | (803,929 | ) | (8,342 | ) | (3,485,167 | ) | - | - | |||||||||||||||
| Indexed to Foreign Currency - US Dollar | 12,830 | (803,929 | ) | (8,342 | ) | (3,485,167 | ) | - | - | |||||||||||||||
| Marketable debt securities | - | - | (41 | ) | (35,784 | ) | (2,826 | ) | (366,992 | ) | ||||||||||||||
| Eurobonds | - | - | (41 | ) | (35,784 | ) | (2,826 | ) | (366,992 | ) | ||||||||||||||
(1) Instruments whose the hedge object are loans operations indexed in foreign currency - dollar with fair value R$323,780 (2015 - R$1,295,383 and 2014 - R$954,266) and on December 31, 2015 securities shown by debentures with fair value R$59,615 (2014 - R$82,819).
(2) On December 31, 2015, instruments whose hedge objects are indexed loans in price indices and interest amounted to R$916,765 (2014 - R$453,559) and instruments whose hedge object are securities shown by debentures with fair value R$443,800 (2014 - R$547,885).
(3) On December 31, 2014, instruments whose the hedge item are loans operations indexed in foreign currency fixed interest - US dollar with fair value R$15,365.
(4) Instruments whose the hedge item are loan operations indexed in CDI with fair value R$331,805 (2014 - R$25,110).
(5) On December 31, 2015, instruments whose hedge objects are obligations for securities abroad - Eurobonds with fair value R$35,784 (2014 - R$366,992).
(6) Instruments whose hedge objects are loans operations indexed pre fixed interest - Reais with a market value of R$37,547 (2015 - R$6,579 and 2014 - R$217,903).
(7) Instruments whose hedge objects are foreign loans operations indexed foreign currency - dollar with a market value of R$803,929 and on December 31, 2015, assets instruments whose objects of hedge are securities represented by promissory notes indexed to fixed interest rates - real with a market value of R$381,641.
(8)In June of 2016, the management decided to change the strategic position of the hedged items relating to loans and debentures operations: indexed to foreign currency dollar, foreign currency pre-dollar, price indexes and pre-real interest rate that no longer have hedge accounting and remained economic hedge, with effect on Income statements for the period an expense of R$12,102 net of tax.
F-36
BANCO SANTANDER (BRASIL) S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Brazilian Reais - R$, unless otherwise stated)
Cash Flow Hedge
Banco Santander’s cash flow hedge strategies consist of hedging exposure to changes in cash flows, interest payments and the exchange rate, which are attributable to changes in the interest rates related to recognized assets and liabilities and changes in the exchange rate of non-recognized assets and liabilities.
Banco Santander applies cash flow hedges as follows:
• It contracts Fixed Dollar Liabilities and Reais Asset swaps and designates them as a derivative instrument in a Cash Flow Hedge structure, having Reais funding operations with third-parties in the Cayman Islands as the hedged item in this relationship. The hedging relationships were designated in January 2016 and the related hedges will mature between 2017 and 2021.
• It contracts Fixed Dollar Asset and Floating Reais Liability swaps and designates them as a derivative instrument in a Cash Flow Hedge structure, having floating-Reais-indexed loan operations with third-parties in the Cayman Islands as the hedged item in this relationship. The hedging relationships were designated in January 2016 and the related hedges will mature between January 2017 and 2021.
• It contracts USD futures or DDI + DI Futures (Synthetic Dollar Futures) and designates them as a derivative instrument in a Cash Flow Hedge structure, having part of its dollar Loan portfolio as the hedged item in this relationship. The hedging relationships were designated in 2007 and the related hedges will mature between January 2017 and 2025.
In order to assess the effectiveness and measure the ineffectiveness of these strategies, Banco Santander follows the IAS 39, which recommends that the hedge effectiveness test be performed at the inception/beginning (prospective test) of the hedge structure and be repeated periodically (prospective and retrospective tests) in order to demonstrate that the expected hedge ratio remains effective (between 80% and 125%).
In this hedge strategy the effectiveness tests (prospective and retrospective) are conducted through creation of two hypothetical derivatives, one for the object and another for the instrument.
The hypothetical derivative of the object is a conceptual swap where the liability leg simulates the “stable portion” to be protected and the asset leg is identical to the Pre-fixed leg of the derivative designated as hedge. For the hypothetical derivative of the instrument the asset leg will be set by the number of contracts of the future and the liability leg will be the pre-fixed rate negotiated on the acquisition of these contracts. The hypothetical derivative is stable once the contracts are kept until the maturity.
Any ineffectiveness will be recognized in profit or loss.
a) Prospective Test: in accordance with the standard, the prospective test should be performed on the inception date and on a quarterly basis in order to demonstrate that the expectations regarding the effectiveness of the hedge ratio are high. However, the tests are carried out on a monthly basis in order to monitor the projections in a proactive and more efficient manner, in addition to ensuring better maintenance of test-related routines.
a.1) Periodic Prospective Test: According to the agreed process flow, Market Risk performs the projections of three scenarios to the tests, being: 1st 10bps in the curve; 2nd 50bps in the curve and 3rd 100bps in the curve. Using the validated estimates, VPE Finance Strategy and Quality - Management Information | Products & Segments will perform the prospective tests through the valuation of the two legs variable from operation to market.
a.2) Initial Prospective Test: the methodology of the periodic prospective test should also be applied on the initial date of each new strategy. The Ineffective portion will be recognized using the hedge prospective test.
Ineffective Portion = Prospective Effectiveness – 100%
b) Retrospective Test: It should be made monthly with historical data to demonstrate cumulatively that the hedge was effective, according to the methodology presented previously. Any ineffectiveness will be recognized in profit or loss.
The Ineffective portion will be recognized through the prospective hedge test.
Effectiveness should range between 80% and 125%.
In cash flow hedges, the effective portion of changes in the value of the hedging instrument is temporarily recognized in equity under “Other comprehensive income - cash flow hedges” until the expected transactions occur, when this portion is then recognized in the consolidated income statement. However, if the expected transactions result in the recognition of non-financial assets or liabilities, this portfolio will be included in the cost of financial assets or liabilities. The non-effective portion of the change in the value of foreign exchange hedging derivatives is recognized directly in the consolidated income statement. And the non-effective portion of gains and losses on cash flow hedging instruments in a foreign operation is recognized directly in “Gains (losses) with (net) financial assets and liabilities” in the consolidated income statement.
| 12/31/2016 | 12/31/2015 | |||||||||||||||
| Hedge Structure | Effective Portion Accumulated | Portion Ineffective | Effective Portion Accumulated | Portion Ineffective | ||||||||||||
| Cash Flow Hedge | ||||||||||||||||
| Eurobonds | (20,535 | ) | - | (29,750 | ) | - | ||||||||||
| Loans and Receivables | 174,956 | - | (575,571 | ) | - | |||||||||||
| Total | 154,421 | - | (605,321 | ) | - | |||||||||||
F-37
BANCO SANTANDER (BRASIL) S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Brazilian Reais - R$, unless otherwise stated)
| 2016 | 2015 | 2014 | ||||||||||||||||||||||
| Adjustment | Adjustment | Adjustment | ||||||||||||||||||||||
| to Fair Value | Fair Value | to Fair Value | Fair Value | to Fair Value | Fair Value | |||||||||||||||||||
| Hedge Instruments | ||||||||||||||||||||||||
| Swap Contracts | (27,261 | ) | 48,169 | (35,492 | ) | (1,151,442 | ) | (108,678 | ) | (518,043 | ) | |||||||||||||
| Asset | 137,664 | 1,952,189 | 151,793 | 7,931,100 | 128,759 | 3,949,062 | ||||||||||||||||||
| Indexed to Foreign Currency - Swiss Franc (1) | - | - | 6,998 | 1,244,985 | 20,210 | 620,028 | ||||||||||||||||||
| Indexed to Foreign Currency - Chile (2) | - | - | 1,622 | 302,907 | 4,624 | 105,428 | ||||||||||||||||||
| Indexed in Reais (3) | - | - | (13,690 | ) | 3,733,095 | (36,351 | ) | 1,242,260 | ||||||||||||||||
| Indexed to Foreign Currency - Pre Dollar (4) (5) | 84,812 | 1,477,821 | 127,632 | 2,170,572 | 97,890 | 1,033,677 | ||||||||||||||||||
| Indexed to Foreign Currency - Euro (6) | 52,852 | 474,368 | 29,231 | 479,541 | 42,386 | 947,669 | ||||||||||||||||||
| Liabilities | (164,925 | ) | (1,904,020 | ) | (187,285 | ) | (9,082,542 | ) | (237,437 | ) | (4,467,105 | ) | ||||||||||||
| Deposit Certificate Interbank - CDI | (995 | ) | (341,938 | ) | - | - | - | - | ||||||||||||||||
| Indexed to Foreign Currency - Pre Dollar (1) (2) (3) (4) | - | - | (17,767 | ) | (6,598,073 | ) | (63,132 | ) | (2,514,597 | ) | ||||||||||||||
| Indexed to Foreign Currency - Reais (4) | (1,288 | ) | (199,954 | ) | - | (22,855 | ) | (15,444 | ) | (120,394 | ) | |||||||||||||
| Indexed to Foreign Currency - Pre Euro (4) | (102,998 | ) | (805,326 | ) | (133,376 | ) | (1,851,822 | ) | (108,193 | ) | (767,424 | ) | ||||||||||||
| Indexed to Foreign Currency - Dollar (5) | (59,367 | ) | (548,684 | ) | (34,379 | ) | (544,339 | ) | (40,440 | ) | (528,305 | ) | ||||||||||||
| Indexed to Foreign Currency - Reais (5) | (277 | ) | (8,118 | ) | (1,763 | ) | (65,453 | ) | (10,228 | ) | (536,385 | ) | ||||||||||||
| 2016 | 2015 | 2014 | ||||||||||
| Notional | Notional | Notional | ||||||||||
| Hedge Instruments | ||||||||||||
| Future Contracts | 80,149,530 | 72,798,063 | 16,053,248 | |||||||||
| Trade Finance Operations (6) | 80,149,530 | 72,798,063 | 16,053,248 | |||||||||
| Foreign Currency - Dollar | 450,571 | 2,651,572 | 16,053,248 | |||||||||
| Interest Rate (DI1 and DIA) | 46,314,644 | 34,303,028 | - | |||||||||
| Interest Rate DDI1 | 33,384,315 | 35,843,463 | - |
| 2016 | 2015 | 2014 | ||||||||||
| Hedge Item - Cost | ||||||||||||
| Assets | 27,858,923 | 37,251,860 | 17,678,432 | |||||||||
| Lending Operations - Financing and Export Credit and Imports | 24,720,800 | 35,743,885 | 15,999,182 | |||||||||
| Loans and Receivables | 496,874 | 641,421 | 1,023,468 | |||||||||
| Brazilian Foreign Debt Bonds | 701,300 | 866,554 | 655,782 | |||||||||
| Available for sale - Promissory Notes - NP | 1,939,949 | - | - | |||||||||
| Liabilities | (1,332,972 | ) | (1,995,118 | ) | (1,960,197 | ) | ||||||
| Foreign Borrowings | (1,332,972 | ) | - | - | ||||||||
| Eurobonds | - | (1,995,118 | ) | (1,960,197 | ) |
(1) On December 31, 2015, operations due April 12, 2016 (2014 - operations due March 4, 2015 and April 12, 2016), whose object of "hedging" transactions are Eurobonds.
(2) On December 31, 2015, operation due April 13, 2016 (2014 - operation due April 13, 2016), whose object of "hedge" is an operation of Eurobonds.
(3) On December 31, 2015, operation due March 18, 2016 (2014 - operations due March 18, 2015, September 18, 2015 and March 18, 2016), whose object of "hedge" is an operation of Eurobonds.
(4) Operation maturing on April 01, 2021 (2015 - operation due March 18, 2016 and April 1, 2021 and 2014 - operation due October 26, 2015 and April 1, 2021) which hedge objects its securities operation represented by Brazilian External Debt Bonds and loans operation.
(5) Operations maturing between January 2017 and December 2025 (2015 - operations maturing between August 2016 and June 2021 and 2014 - operations maturing between May, 2015 and June, 2021), whose objects "hedge "contracts are loans from lending institutions.
(6) Operation maturing between January 2017 and January 2018 (2015 - operation maturing between January 2016 and December 2024 and 2014 - operation maturing February 2, 2015) and the updated value of the instruments of R$29,164,917 (2015 - R$35,743,844 and 2014 - R$15,991,293), whose object of "hedge" are the loans - loan agreements and credit export and import.
Between July and September 2014 operations were contracted to hedge accounting of cash flow with the object of hedge Bank deposit certificates (CDB). In October, 2014 this structure was discontinued. The effect of marking to market the future contracts net of tax effects that will be recognized in income and is posted in equity corresponds to a credit of R$904,049 which will be amortized over the contract terms.
The effect of marking to market the swaps and future contracts corresponds to a credit in the amount of R$69,489 (2015 - corresponds to a debit in the amount of R$345,373 and 2014 - corresponds to a debit in the amount of R$77,261) accounted on Stockholders equity, net of tax effects.
Hedging of Foreign Investments
Banco Santander operates a branch in the Cayman Islands and a subsidiary called Santander Brasil Establecimiento Financeiro de Credito, EFC, or “Santander EFC” (independent subsidiary in Spain), which are used mainly to raise funds in international funding and financial markets, to provide the Bank with credit lines that are extended to its customers to finance foreign trade and working capital.
In order to hedge against changes in future cash flows and the impact of the exchange rate on net investments in foreign operations, the Bank uses futures contracts traded at the BM&FBovespa, forward contracts and Spot contracts.
Santander EFC’s functional currency is the euro; however, the foreign exchange differences generated in the conversion of this investment into reais are recorded under “Other Comprehensive Income”. The Cayman Islands branch’s functional currency is Real. As a result, exchange rate differences of dollar operations are recorded in profit or loss. In order to cover the exchange rate exposure, the Bank uses derivatives. In accordance with the Brazilian tax rules, gains or losses arising from the impact of the appreciation or depreciation of the real on foreign investments are not taxable or deductible for PIS/COFINS/IR/CSLL purposes, while gains and losses from derivatives used as hedges are taxable. The objective of this derivative is to protect net income after taxes. Given that the exchange rate effects are not taxable or deductible and that the effect of the changes in said derivatives is taxed or deductible, the notional value of the contracted derivatives is higher than the value of the hedged net assets.
F-38
BANCO SANTANDER (BRASIL) S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Brazilian Reais - R$, unless otherwise stated)
In the case of Santander EFC, the Bank uses Hedge Accounting. The changes in the value of derivatives and their tax effects are recorded in “Other Comprehensive Income”, offsetting the exchange rate changes caused by the conversion of the investment into reais when the hedging is effective.
The Bank does not use Hedge Accounting in the Cayman Islands branch. The foreign exchange variation of dollar operations and the effect of the derivatives used in economic hedging (futures contracts) are recorded in profit or loss. The special tax treatment of these foreign currency changes result in volatility in Operating Income (Loss) before Taxes and in “Income Taxes”.
The ineffective portion of gains and losses on hedging instruments of net investment in a foreign operation is recognized directly in “Gains(losses) with (net) financial assets and liabilities” in the consolidated income statement.
a) Prospective Test: in accordance with the standard, the prospective test should be performed on the inception date and on a quarterly basis in order to demonstrate that the expectations regarding the effectiveness of the hedge ratio are high. However, the tests are carried out on a monthly basis in order to monitor the projections in a proactive and more efficient manner, in addition to ensuring better maintenance of test-related routines.
a.1) Periodic Prospective Test: The prospective test will be performed comparing the sensitivity of the object with the sensitivity of the instrument to the exchange variation. The sensitivity will be calculated based on 3 scenarios with a 10%, 20% and 30% variation in the EUR / BRL exchange rate and the USD / BRL exchange rate.
a.2) Initial Prospective Test: the methodology of the periodic prospective test should also be applied on the initial date of each new strategy.
The Ineffective portion will be recognized using the hedge prospective test.
Ineffective Portion = Prospective Effectiveness – 100%
b) Retrospective Test: The retrospective test will be performed by comparing the cumulative exchange variation from the beginning of the designation of the object with the cumulative exchange variation of the hedging instrument.
The Ineffective portion will be recognized through the prospective hedge test.
Effectiveness should range between 80% and 125%.
Hedge of foreign investments, the effective portion of changes in the value of the hedging instrument is temporarily recognized in equity until the expected transactions occur, when this portion is then recognized in the consolidated income statement. However, if the expected transactions result in the recognition of non-financial assets or liabilities, this portfolio will be included in the cost of financial assets or liabilities. The non-effective portion of the change in the value of exchange rate hedging derivatives is recognized directly in the consolidated income statement. And the non-effective portion of gains and losses on cash flow hedging instruments in a foreign operation is recognized directly in “Gains (losses) with (net) financial assets and liabilities” in the consolidated income statement.
| 12/31/2016 | 12/31/2015 | |||||||||||||||
| Hedge Structure | Effective
Portion Accumulated | Portion Ineffective | Effective
Portion Accumulated | Portion Ineffective | ||||||||||||
| Foreign investment | ||||||||||||||||
| Forward / Spot | 44,844 | - | 13,462 | - | ||||||||||||
| Total | 44,844 | - | 13,462 | - |
On December 31, 2016, the notional value of this Investment Hedge is R$2,687,347, maturing between January, 2017 to June, 2017 and the effect of R$2,552,596, of exchange rate changes recorded in equity, net of taxes.
a.6) Derivatives Pledged as Guarantee
The guarantee margin transactions traded on the BM&FBovespa using own and third-party derivatives is composed of government securities.
| 2016 | 2015 | 2014 | ||||||||||
| Financial Treasury Bill - LFT | 1,556,804 | 330,605 | 1,135,366 | |||||||||
| National Treasury Bill - LTN | 4,636,644 | 8,757,097 | 4,688,978 | |||||||||
| National Treasury Notes - NTN | 27,598 | 757,969 | 1,763,751 | |||||||||
| Total | 6,221,046 | 9,845,671 | 7,588,095 |
b) Short positions
On December 31, 2016 the balance of short positions totaled R$31,694,269 (2015 - R$20,047,631 and 2014 - R$11,285,431) which includes the amount of financial liabilities resulting from the direct sale of financial assets purchased through resale or loan commitments.
10. Loans and advances to customers a) Breakdown
The breakdown, by classification, of the balances of “Loans and advances to customers” in the consolidated balance sheets is as follows:
| Thousands of Reais | 2016 | 2015 | 2014 | |||||||||
| Loans and receivables | 252,002,774 | 252,033,449 | 235,690,349 | |||||||||
| Of which: | ||||||||||||
| Loans and receivables at amortized cost | 268,437,556 | 267,266,449 | 249,110,881 | |||||||||
| Provision for impairment losses (impairment) | (16,434,782 | ) | (15,233,000 | ) | (13,420,532 | ) | ||||||
| Loans and advances to customers, net | 252,002,774 | 252,033,449 | 235,690,349 | |||||||||
| Loans and advances to customers, gross | 268,437,556 | 267,266,449 | 249,110,881 | |||||||||
| Thousands of Reais | 2016 | 2015 | 2014 | |||||||||
| Type: | ||||||||||||
| Loans operations (1) | 257,256,452 | 257,671,667 | 243,424,562 | |||||||||
| Lease Portfolio | 2,092,882 | 2,126,210 | 2,265,807 | |||||||||
| Repurchase agreements | 308,483 | 517,536 | 6,463 | |||||||||
| Other receivables (2) | 8,779,739 | 6,951,036 | 3,414,049 | |||||||||
| Total | 268,437,556 | 267,266,449 | 249,110,881 |
(1) Includes loans and other loans with credit characteristics.
(2) Refer substantially to Exchange Operations and Other Receivables without characteristics of credit granting.
F-39
BANCO SANTANDER (BRASIL) S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Brazilian Reais - R$, unless otherwise stated)
Note 45-d contains a detail of the residual maturity periods of loans and receivables and of the related average interest rates. There are no loans and advances to customers for material amounts without fixed maturity dates.
b) Detail
Following is a detail, by loan type and status, borrower sector and interest rate formula, of the loans and advances to customers, which reflect the Bank’s exposure to credit risk in its core business, gross of impairment losses:
| Thousands of Reais | 2016 | 2015 | 2014 | |||||||||
| Loan borrower sector: | ||||||||||||
| Commercial, and industrial | 140,993,043 | 150,880,864 | 133,087,371 | |||||||||
| Real estate-construction | 36,650,011 | 36,851,879 | 31,864,656 | |||||||||
| Installment loans to individuals | 88,701,763 | 77,407,496 | 81,893,047 | |||||||||
| Lease financing | 2,092,739 | 2,126,210 | 2,265,807 | |||||||||
| Total (1) | 268,437,556 | 267,266,449 | 249,110,881 |
(1) It includes commercial credit, secured loans, reverse repurchase agreements, finance leases, other term loans and impaired assets.
| Interest rate formula: | ||||||||||||
| Fixed interest rate | 178,231,509 | 173,018,504 | 172,649,313 | |||||||||
| Floating rate | 90,206,047 | 94,247,945 | 76,461,568 | |||||||||
| Total | 268,437,556 | 267,266,449 | 249,110,881 |
| Debt Sector by Maturity | Less than 1 year | % of total | Between 1 and 5 years | % of total | More than 5 years | % of total | Total | % of total | ||||||||||||||||||||||||
| Commercial and industrial | 99,657,167 | 61.65 | % | 35,789,118 | 45.10 | % | 5,546,758 | 20.23 | % | 140,993,043 | 52.52 | % | ||||||||||||||||||||
| Real estate | 8,648,702 | 5.35 | % | 11,761,420 | 14.82 | % | 16,239,889 | 59.23 | % | 36,650,011 | 13.65 | % | ||||||||||||||||||||
| Installment loans to individuals | 52,205,927 | 32.29 | % | 30,867,880 | 38.90 | % | 5,627,956 | 20.53 | % | 88,701,763 | 33.05 | % | ||||||||||||||||||||
| Lease financing | 1,152,436 | 0.71 | % | 937,950 | 1.18 | % | 2,353 | 0.01 | % | 2,092,739 | 0.78 | % | ||||||||||||||||||||
| Loans and advances | ||||||||||||||||||||||||||||||||
| to customers, gross | 161,664,232 | 100.00 | % | 79,356,368 | 100.00 | % | 27,416,956 | 100.00 | % | 268,437,556 | 100.00 | % |
| Thousands of Reais | 2016 | 2015 | 2014 | |||||||||
| Maturity | ||||||||||||
| Less than 1 year | 161,664,232 | 116,555,381 | 150,953,694 | |||||||||
| Between 1 and 5 years | 79,356,369 | 104,563,829 | 79,939,575 | |||||||||
| More than 5 years | 27,416,955 | 46,147,239 | 18,217,612 | |||||||||
| Loans and advances to customers, gross | 268,437,556 | 267,266,449 | 249,110,881 | |||||||||
| Internal risk classification | ||||||||||||
| Low | 207,889,639 | 211,645,464 | 199,200,968 | |||||||||
| Medium-low | 32,104,168 | 29,500,791 | 27,043,995 | |||||||||
| Medium | 10,940,879 | 8,638,914 | 7,934,964 | |||||||||
| Medium - high | 6,976,969 | 8,552,474 | 5,899,116 | |||||||||
| High | 10,525,901 | 8,928,806 | 9,031,838 | |||||||||
| Loans and advances to customers, gross | 268,437,556 | 267,266,449 | 249,110,881 |
c) Impairment losses
The changes in the allowances for the impairment losses on the balances of “Loans and receivables” were as follows:
| Thousands of Reais | 2016 | 2015 | 2014 | |||||||||
| Balance at beginning of year | 15,411,759 | 13,562,811 | 13,640,545 | |||||||||
| Impairment losses charged to income for the year | 14,383,935 | 13,723,179 | 12,048,587 | |||||||||
| Of which: | ||||||||||||
| Commercial and industrial | 6,523,051 | 6,634,110 | 4,875,243 | |||||||||
| Real estate-construction | 369,431 | 91,196 | 37,891 | |||||||||
| Installment loans to individuals | 7,616,819 | 6,765,541 | 6,867,258 | |||||||||
| Lease financing | (125,366 | ) | 232,332 | 268,195 | ||||||||
| Write-off of impaired balances against recorded impairment allowance | (11,604,568 | ) | (11,874,231 | ) | (12,126,321 | ) | ||||||
| Of which: | ||||||||||||
| Commercial and industrial | (4,553,166 | ) | (4,953,324 | ) | (4,493,800 | ) | ||||||
| Real estate-construction | (189,625 | ) | (77,412 | ) | (96,715 | ) | ||||||
| Installment loans to individuals | (6,810,997 | ) | (6,621,809 | ) | (7,336,858 | ) | ||||||
| Lease financing | (50,780 | ) | (221,686 | ) | (198,948 | ) | ||||||
| Balance at end of year | 18,191,126 | 15,411,759 | 13,562,811 | |||||||||
| Of which: | ||||||||||||
| Loans and advances to customers | 16,434,782 | 15,233,000 | 13,420,532 | |||||||||
| Loans and amounts due from credit institutions (Note 6) | 201,441 | 178,759 | 142,279 | |||||||||
| Provision for Debt Instruments (Note 7) | 1,554,903 | - | - | |||||||||
| Recoveries of loans previously charged off | 994,101 | 757,320 | 855,016 | |||||||||
| Of which: | ||||||||||||
| Commercial and industrial | 562,393 | 293,668 | 184,908 | |||||||||
| Real estate-construction | 102,826 | 86,360 | 80,804 | |||||||||
| Installment loans to individuals | 314,422 | 348,090 | 559,826 | |||||||||
| Lease financing | 14,460 | 29,202 | 29,478 |
F-40
BANCO SANTANDER (BRASIL) S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Brazilian Reais - R$, unless otherwise stated)
Taking into account these amounts recognized in “Impairment losses charged to income for the year” and the "Recoveries of loans previously charged off", the "Impairment losses on financial assets - Loans and receivables” amounted to R$13,389,834 in 2016, R$12,965,859 in 2015 and R$11,193,571 in 2014.
The balances of the provision for losses due to non-recovery by debtor sector are as follows:
| Thousands of Reais | 2016 | 2015 | 2014 | |||||||||
| Commercial and industrial | 10,555,109 | 8,585,225 | 6,905,522 | |||||||||
| Real estate | 363,859 | 184,053 | 170,269 | |||||||||
| Installment loans to individuals | 7,225,822 | 6,420,000 | 6,275,183 | |||||||||
| Lease financing | 46,336 | 222,481 | 211,837 | |||||||||
| Total | 18,191,126 | 15,411,759 | 13,562,811 |
d) Impaired assets
The detail of the changes in the balance of the financial assets classified as “Loans and receivables – loans and advances to customers” and considered to be impaired due to credit risk is as follows:
| Thousands of Reais | 2016 | 2015 | 2014 | |||||||||
| Balance at beginning of year | 18,599,379 | 14,011,225 | 14,021,777 | |||||||||
| Net additions | 11,892,321 | 16,462,385 | 12,115,769 | |||||||||
| Written-off assets | (11,604,568 | ) | (11,874,231 | ) | (12,126,321 | ) | ||||||
| Balance at end of year | 18,887,132 | 18,599,379 | 14,011,225 |
Following is a detail of the financial assets considered to be impaired classified by age of the oldest past-due amount:
| Thousands of Reais | 2016 | 2015 | 2014 | |||||||||
| With no Past-Due Balances or Less than 3 Months Past Due | 10,550,548 | 10,307,442 | 6,056,246 | |||||||||
| With Balances Past Due by | ||||||||||||
| 3 to 6 Months | 2,983,575 | 3,763,466 | 3,042,247 | |||||||||
| 6 to 12 Months | 4,921,527 | 4,186,323 | 4,343,615 | |||||||||
| 12 to 18 Months | 339,596 | 265,407 | 398,782 | |||||||||
| 18 to 24 Months | 53,578 | 20,045 | 88,955 | |||||||||
| More than 24 Months | 38,308 | 56,696 | 81,380 | |||||||||
| Total | 18,887,132 | 18,599,379 | 14,011,225 | |||||||||
| Debt Sector | ||||||||||||
| Commercial and industrial | 11,628,655 | 10,748,644 | 6,736,928 | |||||||||
| Real estate | 718,514 | 828,966 | 375,291 | |||||||||
| Installment loans to individuals | 6,487,717 | 6,970,241 | 6,838,576 | |||||||||
| Lease financing | 52,246 | 51,528 | 60,430 | |||||||||
| Total | 18,887,132 | 18,599,379 | 14,011,225 |
e) Loan past due for less than 90 days but not classified as impaired
Thousands of Reais | 2016 | % of total loans past due for less than 90 days | 2015 | % of total loans past due for less than 90 days | 2014 | % of total loans past due for less than 90 days | ||||||||||||||||||
| Commercial and industrial | 4,141,349 | 23.79 | % | 5,072,197 | 24.27 | % | 4,579,622 | 23.20 | % | |||||||||||||||
| Mortgage loans | 5,201,709 | 29.88 | % | 7,551,584 | 36.13 | % | 6,095,965 | 30.88 | % | |||||||||||||||
| Installment loans to individuals | 7,957,294 | 45.71 | % | 8,235,699 | 39.40 | % | 8,974,454 | 45.45 | % | |||||||||||||||
| Financial Leasing | 108,607 | 0.62 | % | 41,013 | 0.20 | % | 93,035 | 0.47 | % | |||||||||||||||
| Total (1) | 17,408,959 | 100.00 | % | 20,900,493 | 100.00 | % | 19,743,076 | 100.00 | % |
(1) Refers only to loans past due between 1 and 90 days.
f) Lease at present value
As at December 31, 2016, 2015 and 2014 there were no material agreements for lease contracts.
Breakdown by maturity
Gross investment in lease transactions
| Thousands of Reais | 2016 | 2015 | 2014 | |||||||||
| Overdue | 16,051 | 21,127 | 35,292 | |||||||||
| Due to: | ||||||||||||
| Up to 1 year | 1,207,473 | 1,241,798 | 1,270,897 | |||||||||
| From 1 to 5 years | 1,190,844 | 1,184,418 | 1,263,873 | |||||||||
| Over 5 years | 4,079 | 6,078 | 7,413 | |||||||||
| Total | 2,418,447 | 2,453,421 | 2,577,475 |
F-41
BANCO SANTANDER (BRASIL) S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Brazilian Reais - R$, unless otherwise stated)
g) Transfer of financial assets with retention of risks and benefits
In December 31, 2016, the amount recorded on “Loans and advances to customers” related to loan portfolio assigned is R$783,967 (2015 - R$202,113 and 2014 - R$262,515), and R$774,673 (2015 - R$190,333 and 2014 - R$242,024) of “Other financial liabilities - Financial Liabilities Associated with Assets Transfer”.
The foregoing transfer was conducted with a recourse clause and the mandatory repurchase is provided for in the following events:
- agreements in default for longer than 90 consecutive days;
- agreements under renegotiation;
- agreements subject to novation pursuant to Resolution 3,401 of the Brazilian Monetary Council (CMN);
- agreements subject to rights of intervention by certain parties to the contract.
11. Non-current assets held for sale
At December 31, 2016, 2015 and 2014, the total amount of non-current assets held for sale includes foreclosed assets and other tangible assets. The change in the "Non-current assets held for sale" is as follows:
| Thousands of Reais | 2016 | 2015 | 2014 | |||||||||
| Balance at beginning of year | 1,310,033 | 978,274 | 324,412 | |||||||||
| Foreclosures loans | 834,903 | 293,440 | 337,840 | |||||||||
| Capital Increase in Companies held for sale | 10,462 | 355,538 | - | |||||||||
| Change in the scope of consolidation (1) (4) | (497,847 | ) | - | 418,846 | ||||||||
| Sales (2) | (239,291 | ) | (317,321 | ) | (102,850 | ) | ||||||
| Others | 48 | 102 | 26 | |||||||||
| Final balance, gross (3) | 1,418,308 | 1,310,033 | 978,274 | |||||||||
| Impairment losses | (80,423 | ) | (72,540 | ) | (48,326 | ) | ||||||
| Impairment as a percentage of foreclosed assets | 5.67 | % | 5.54 | % | 4.94 | % | ||||||
| Balance at end of year | 1,337,885 | 1,237,493 | 929,948 |
(1) On September 30, 2014 based on the sale plan, investments in Wind Energy entities were transferred to this heading whose current condition is for sale; as approved by the Directors of Banco Santander, in compliance with required by IFRS 5.
(2) In 2015, refers mainly to the sale by Santander Participações S.A. of all of its interest in Santos Energia and its subsidiaries, and the Special Purpose Entities Gestamp Eólica Sierra de Santana S.A., Gestamp Eólica Paraíso S.A., Gestamp Eólica Lanchinha S.A., Gestamp Eólica Seridó S.A. and Gestamp Eólica Lagoa Nova S.A. In 2014, includes sale of administrative buildings.
(3) Refers mainly to buildings and vehicles arising from executions of loans.
(4) On September 30, 2016, due to no expectation of sale of this investment by the current market situation, management decided to transfer the total of this balance, to caption investments in affiliates and subsidiaries in the country (Note 2).
12. Investments in associates and joint ventures
Jointly controlled
Banco Santander considers investments classified as jointly controlled: when they possess a shareholders' agreement, which sets the strategic financial and operating decisions require the unanimous consent of all investors.
Significant Influence
Banco Santander considers investments classified as significant influence over the associates who have indication of board members.
a) Breakdown
| Participation % | |||||
| Jointly Controlled by Banco Santander | Activity | Country | 2016 | 2015 | 2014 |
| Banco RCI Brasil S.A. (Current Company Name of RCI | |||||
| Brasil Leasing) (5) | Financial | Brazil | 39.89% | 39.89% | 39.89% |
| Norchem Participações e Consultoria S.A.(1) | Other Activities | Brazil | 50.00% | 50.00% | 50.00% |
| Cibrasec - Companhia Brasileira de Securitização (1) (7) | Securitization | Brazil | 9.72% | 13.64% | 13.64% |
| Estruturadora Brasileira de Projetos S.A. - EBP (1) | Other Activities | Brazil | 11.11% | 11.11% | 11.11% |
| Campo Grande Empreendimentos | Other Activities | Brazil | 25.32% | 25.32% | - |
| Jointly Controlled by Santander S.A. Serviços | |||||
| Técnicos, Administrativos e de Corretagem de | |||||
| Seguros (Santander Serviços) | |||||
| Webmotors S.A. (3) (9) | Other Activities | Brazil | 70.00% | 70.00% | 70.00% |
| Tecnologia Bancária S.A. - TECBAN (1) (4) | Other Activities | Brazil | 19.81% | 19.81% | 19.81% |
| Jointly Controlled by Getnet S.A. | |||||
| iZettle do Brasil Meios de Pagamento S.A. ("iZettle do | |||||
| Brasil”) (6) | Other Activities | Brazil | - | 50.00% | 50.00% |
| Jointly Controlled by Santander Participações S.A. | |||||
| PSA Corretora de Seguros e Serviços Ltda. (8) | Insurance Broker | Brazil | 50.00% | - | - |
| Significant Influence of Banco Santander | |||||
| Norchem Holding e Negócios S.A. (1) | Other Activities | Brazil | 21.75% | 21.75% | 21.75% |
F-42
BANCO SANTANDER (BRASIL) S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Brazilian Reais - R$, unless otherwise stated)
| Investments | ||||||||||||
| 2016 | 2015 | 2014 | ||||||||||
| Jointly Controlled by Banco Santander | 578,761 | 567,367 | 545,110 | |||||||||
| Banco RCI Brasil S.A. (5) | 538,756 | 526,680 | 502,894 | |||||||||
| Norchem Participações e Consultoria S.A.(1) | 26,302 | 23,665 | 23,739 | |||||||||
| Cibrasec - Companhia Brasileira de Securitização (1) (7) | 7,435 | 10,325 | 10,236 | |||||||||
| Estruturadora Brasileira de Projetos S.A. - EBP (1) | 6,268 | 6,697 | 8,241 | |||||||||
| Jointly Controlled by Santander S.A. Serviços Técnicos, Administrativos e de Corretagem de Seguros (Santander Serviços) | 389,678 | 476,640 | 458,444 | |||||||||
| Webmotors S.A. (3) (9) | 246,965 | 339,899 | 327,615 | |||||||||
| Tecnologia Bancária S.A. - TECBAN (1) (4) | 142,713 | 136,741 | 130,829 | |||||||||
| Jointly Controlled by Santander Participações S.A | 658 | - | - | |||||||||
| PSA Corretora de Seguros e Serviços Ltda. (8) | 658 | - | - | |||||||||
| Jointly Controlled by Getnet S.A. | - | (2,768 | ) | 491 | ||||||||
| iZettle do Brasil (6) | - | (2,768 | ) | 491 | ||||||||
| Significant Influence of Banco Santander | 20,980 | 19,504 | 19,416 | |||||||||
| Norchem Holding e Negócios S.A. (1) | 20,980 | 19,504 | 19,416 | |||||||||
| Total | 990,077 | 1,060,743 | 1,023,461 |
| Results of Investments | ||||||||||||
| 1/01 to 12/31/2016 | 1/01
to 12/31/2015 | 1/01 to 12/31/2014 | ||||||||||
| Jointly Controlled by Banco Santander | 16,748 | 85,993 | 49,094 | |||||||||
| Banco RCI Brasil S.A. (5) | 14,175 | 85,221 | 54,414 | |||||||||
| Norchem Participações e Consultoria S.A.(1) | 2,637 | 1,976 | 4,434 | |||||||||
| Cibrasec - Companhia Brasileira de Securitização (1) (7) | 366 | 340 | 179 | |||||||||
| Estruturadora Brasileira de Projetos S.A. - EBP (1) | (430 | ) | (1,544 | ) | (2,768 | ) | ||||||
| BW Guirapá I S.A. (2) | - | - | (7,165 | ) | ||||||||
| Jointly Controlled by Santander Serviços | 28,990 | 29,309 | 40,823 | |||||||||
| Webmotors S.A. (3) (9) | 23,019 | 23,397 | 21,539 | |||||||||
| Tecnologia Bancária S.A. - TECBAN (1) (4) | 5,971 | 5,912 | 19,284 | |||||||||
| Jointly Controlled by Santander Participações S.A | 548 | - | - | |||||||||
| PSA Corretora de Seguros e Serviços Ltda. (8) | 548 | - | - | |||||||||
| Jointly Controlled by Getnet S.A. | (225 | ) | (491 | ) | (1,779 | ) | ||||||
| iZettle do Brasil (6) | (225 | ) | (491 | ) | (1,779 | ) | ||||||
| Significant Influence of Banco Santander | 1,476 | 1,501 | 2,958 | |||||||||
| Norchem Holding e Negócios S.A. (1) | 1,476 | 1,501 | 2,958 | |||||||||
| Total | 47,537 | 116,312 | 91,096 | |||||||||
| 2016 | ||||||||||||
| Total assets | Total liabilities | Total
profit(11) | ||||||||||
| Jointly Controlled by Banco Santander | 8,831,611 | 7,318,656 | 89,544 | |||||||||
| Banco RCI Brasil S.A. (5) | 8,603,844 | 7,276,320 | 79,223 | |||||||||
| Norchem Participações e Consultoria S.A.(1) | 78,833 | 26,228 | 5,274 | |||||||||
| Cibrasec - Companhia Brasileira de Securitização (1) (7) | 91,083 | 14,659 | 7,011 | |||||||||
| Estruturadora Brasileira de Projetos S.A. - EBP (1) | 57,851 | 1,449 | (1,964 | ) | ||||||||
| Jointly Controlled by Santander Serviços | 1,456,444 | 940,962 | 57,502 | |||||||||
| Webmotors S.A. (3) (9) | 145,499 | 35,231 | 29,934 | |||||||||
| Tecnologia Bancária S.A. - TECBAN (1) (4) | 1,310,945 | 905,731 | 27,568 | |||||||||
| Jointly Controlled by Santander Participações S.A | 3,382 | 2,066 | 1,093 | |||||||||
| PSA Corretora de Seguros e Serviços Ltda. (8) | 3,382 | 2,066 | 1,093 | |||||||||
| Significant Influence of Banco Santander | 127,598 | 31,136 | 6,792 | |||||||||
| Norchem Holding e Negócios S.A. (1) | 127,598 | 31,136 | 6,792 | |||||||||
| Total | 10,419,035 | 8,292,820 | 154,931 |
F-43
BANCO SANTANDER (BRASIL) S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Brazilian Reais - R$, unless otherwise stated)
| 2015 | ||||||||||||
| Total assets | Total liabilities | Total
profit(11) | ||||||||||
| Jointly Controlled by Banco Santander | 8,702,727 | 7,170,602 | 180,663 | |||||||||
| Banco RCI Brasil S.A. (5) | 8,474,418 | 7,125,614 | 174,629 | |||||||||
| Norchem Participações e Consultoria S.A. (1) | 73,288 | 25,958 | 3,953 | |||||||||
| Cibrasec - Companhia Brasileira de Securitização (1) (7) | 92,495 | 16,775 | 1,932 | |||||||||
| Estruturadora Brasileira de Projetos S.A. - EBP (1) | 62,526 | 2,255 | 149 | |||||||||
| Jointly Controlled by Santander Serviços | 1,531,883 | 890,028 | 83,902 | |||||||||
| Webmotors S.A. (3) (9) | 279,935 | 36,904 | 36,636 | |||||||||
| Tecnologia Bancária S.A. - TECBAN (1) (4) | 1,251,948 | 853,124 | 47,266 | |||||||||
| Jointly Controlled by Getnet S.A. | 20,210 | 25,747 | (2,420 | ) | ||||||||
| iZettle do Brasil (6) | 20,210 | 25,747 | (2,420 | ) | ||||||||
| Significant Influence of Banco Santander | 119,687 | 30,017 | 6,902 | |||||||||
| Norchem Holding e Negócios S.A. (1) | 119,687 | 30,017 | 6,902 | |||||||||
| Total | 10,374,507 | 8,116,394 | 269,047 |
| 2014 | ||||||||||||
| Total assets | Total liabilities | Total
profit(11) | ||||||||||
| Jointly Controlled by Banco Santander | 9,575,690 | 8,102,926 | 159,601 | |||||||||
| Banco RCI Brasil S.A. (5) | 9,316,712 | 8,049,342 | 148,644 | |||||||||
| Norchem Participações e Consultoria S.A. (1) | 81,395 | 25,220 | 8,868 | |||||||||
| Cibrasec - Companhia Brasileira de Securitização (1) (7) | 98,490 | 23,444 | 3,618 | |||||||||
| Estruturadora Brasileira de Projetos S.A. - EBP (1) | 79,093 | 4,920 | (1,529 | ) | ||||||||
| Jointly Controlled by Santander Serviços | 1,191,219 | 605,654 | 110,078 | |||||||||
| Webmotors S.A. (3) (9) | 260,531 | 20,275 | 31,097 | |||||||||
| Tecnologia Bancária S.A. - TECBAN (1) (4) | 930,688 | 585,379 | 78,981 | |||||||||
| Jointly Controlled by Getnet S.A. | 8,438 | 11,555 | (13,380 | ) | ||||||||
| iZettle do Brasil (6) | 8,438 | 11,555 | (13,380 | ) | ||||||||
| Significant Influence of Banco Santander | 156,942 | 67,674 | 13,602 | |||||||||
| Norchem Holding e Negócios S.A. (1) | 156,942 | 67,674 | 13,602 | |||||||||
| Total | 10,932,289 | 8,787,809 | 269,901 |
b) Changes
The changes in the balance of this item were as follows:
| 2016 | 2015 | 2014 | ||||||||||
| Jointly Controlled by Banco Santander | ||||||||||||
| Balance at beginning of year | 1,041,239 | 1,004,045 | 947,992 | |||||||||
| Change in the scope of consolidation (2) | (2,926 | ) | - | 7,165 | ||||||||
| Low/ Additions (6) (8) | 3,105 | (2,768 | ) | (4,393 | ) | |||||||
| Capital gains/reduction (9) | (76,860 | ) | - | 368 | ||||||||
| Income from companies accounted for by the equity method | 46,061 | 114,811 | 88,138 | |||||||||
| Dividends proposed/received | (39,424 | ) | (74,849 | ) | (35,197 | ) | ||||||
| Others | (2,098 | ) | - | (28 | ) | |||||||
| Balance at end of year | 969,097 | 1,041,239 | 1,004,045 | |||||||||
| Significant Influence of Banco Santander | ||||||||||||
| Balance at beginning of year | 19,504 | 19,416 | 115,811 | |||||||||
| Change in the scope of consolidation (2) | - | - | (88,715 | ) | ||||||||
| Income from companies accounted for by the equity method | 1,476 | 1,501 | 2,958 | |||||||||
| Dividends proposed/received | - | (1,413 | ) | (10,638 | ) | |||||||
| Balance at end of year | 20,980 | 19,504 | 19,416 |
(1) Companies with a lag of one month for the equity calculation. Accounting for equity income was used on 12/31/2016 the position of 11/30/2016.
(2) On September, 2014 the investment held in BW Guirapá I S.A. by Banco Santander was transferred to Santander Participações and was reclassified to non-current assets held for sale (Note 11). Investments transferred from the non-current assets item held for sale in September 2016.
(3) In March 7, 2014 was concluded acquisition by company Webmotors SA, 100% of the share capital of KM Locanet Ltd. - ME (Compreauto).
(4) On 18 July 2014 it was published a Notice to the Market with a view to inform that the country’s leading retail Banks, among them Banco Santander, by means of one of its subsidiaries, (“Shareholders”), executed on July 17, 2014 a new Shareholders’ Agreement of Tecban (“New Shareholders’ Agreement”). The New Shareholders’ Agreement establishes that, within approximately 4 years from its effective date, the Shareholders shall have replaced part of their own external-access Automated Teller Machines (“ATMs”) with ATMs from Rede Banco24Horas, which are and will continue to be managed by Tecban, thus enhancing the efficiency, quality and points of services to their clients. The effectiveness of the Shareholders’ Agreement is subject to certain conditions precedent, among which its approval by the competent regulatory body (The General Superintendency of CADE published in the Diário Oficial da União, on October 23, 2014, its decision in which approved, without restrictions, the related transaction).
(5) The EGM of July 21, 2015, approved the Company's transformation into a multiple bank, with investment portfolios, leasing and credit, financing and investment and also the change of the name of the Companhia de Arrendamento Mercantil RCI Brasil to Banco RCI Brasil S.A. This process was approved by the BACEN on October 28, 2015.
F-44
BANCO SANTANDER (BRASIL) S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Brazilian Reais - R$, unless otherwise stated)
(6) In June 2016 the interest held in iZetlle do Brasil S.A was sold.
(7) At the ESM held on April 29, 2016 was approved the reform in the distribution structure of the capital of Cibrasec through the creation of preferred shares issued by the Company with voting rights and the share conversion of the common shares of Company into preferred shares, this reform was ratified at the ESM held on May 30, 2016. Banco Santander became part of their ordinary shares held in the capital of Cibrasec, the corresponding amount to five thousand (5,000) common shares issued by Cibrasec 50 (fifty) preferred shares in the proportion of 100 (one hundred) common shares for each one (1) preferred share, and still held 4,000 (four thousand) common shares in the capital of Cibrasec. Each preferred share entitles the holder the right to one hundred (100) times the right to dividends of the common shares, so that the economic rights were maintained, however, the conversion resulted in reduction in the percentage shareholding in Cibrasec.
(8) Investment acquired on August 1, 2016.
(9) At the ESM realized in September 26, 2016, was approved the reduction of the capital of Webmotors S.A. without cancellation of shares in the amount of R$109,800 to be considered excessive to maintain its activities, and the capital of R$194,580 to R$84,780.
(10) On 31 December 2016, 2015 and 2014 the balances of Assets, Liabilities and Profit refer to 100% of the company balance sheet. There is not balance to the "Other Comprehensive Income" in these companies.
(*) The Bank does not have collateral with associates and joint ventures.
(**) The Bank does not have contingent liabilities with significant risk of possible losses related to investments in affiliates.
c) Impairment losses
No impairment losses were recognized on investments in associates and joint ventures in 2016, 2015 and 2014.
d) Other information
Details of the principal jointly controlled entities:
• Banco RCI Brasil S.A.: A company incorporated in the form of corporation headquartered in Parana, is primarily engaged in the practice of loans in order to sustain the growth of automotive brands Renault and Nissan in the Brazilian market by financing the dealer network and the end consumer. It is a financial institution that is part of the RCI Banque Group and the Santander Group, with operations conducted as part of a set of institutions that operate in the financial market. According to the Shareholders' Agreement, the key decisions that impact this society are taken jointly between Banco Santander and other controllers. On July 21, 2015 the Company's transformation into a Multiple Bank was approved, with investment portfolios, leasing and credit, financing and investment and also the change of company name of Companhia de Arrendamento Mercantil RCI Brasil to Banco RCI Brasil S.A. This process was approved by the Central Bank of Brazil on October 28, 2015. On January 29, 2016, the Companhia de Crédito, Financiamento e Investimento RCI Brasil was merged into its subsidiary Banco RCI Brasil S.A., with this process the interest previously held by RCI Brasil went to Banco Santander.
• Webmotors S.A.: A company incorporated in the form of capital company with headquarters in São Paulo and is engaged in the design, implementation and / or availability of electronic catalogs, space, products, services or means of marketing products and / or services related to the automotive industry, on the Internet through the "website" www.webmotors.com.br (owned by Webmotors) or other means related to e-commerce activities and other uses or Internet applications, as well as participation in capital in other companies and the management of business ventures and the like. It is a company of the Economic Conglomerate - Financial Santander (Santander Group) and Carsales.com Investments PTY LTD (Carsales), and operations conducted as part of a group of institutions that operate jointly. According to the Shareholders' Agreement, the key decisions that impact this society are taken jointly between Banco Santander and other controllers.
| In thousands of Reais | 2016 | 2015 | ||||||||||||||
| Banco RCI Brasil | Webmotors | Banco RCI Brasil | Webmotors | |||||||||||||
| Current assets | 4,103,866 | 23,071 | 5,038,181 | 85,552 | ||||||||||||
| Non-current assets | 4,499,978 | 122,428 | 3,436,237 | 194,383 | ||||||||||||
| Current liabilities | 3,629,575 | 32,601 | 3,998,536 | 30,877 | ||||||||||||
| Non-current liabilities | 3,646,745 | 2,630 | 3,127,078 | 6,027 | ||||||||||||
| Cash and cash equivalents | 23,612 | 1,663 | 38,217 | 681 | ||||||||||||
| Depreciation and amortization | (911 | ) | (12,295 | ) | (3,783 | ) | (9,883 | ) | ||||||||
| Revenue | 1,575,550 | 135,242 | 591,810 | 137,947 | ||||||||||||
| Interest income | 1,368,643 | 28,047 | 1,424,211 | 27,854 | ||||||||||||
| Interest expense | (903,061 | ) | - | (903,864 | ) | (69 | ) | |||||||||
| Tax Income / (expense) | (3,326 | ) | (13,370 | ) | (108,837 | ) | (16,086 | ) | ||||||||
| Current financial liabilities (excluding trade and other payables and provisions) | 3,629,575 | 31,707 | 3,436,699 | 30,110 | ||||||||||||
| Non-current financial liabilities (excluding trade and other payables and provisions) | 3,646,745 | 1,736 | 2,565,241 | 5,260 |
Tangible assets of the Bank relate to property, plant and equipment for the Bank own use. The Bank does not have tangible assets held as investment property nor leased out under operating leases. The Bank is also not a part of any financial lease contracts as of and during fiscal years ended December 31, 2016, 2015 and 2014.
F-45
BANCO SANTANDER (BRASIL) S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Brazilian Reais - R$, unless otherwise stated)
a) Breakdown
The detail, by class of asset, of the tangible assets in the consolidated balance sheets is as follows:
| In thousands of reais | Land and | IT equipment and | Furniture and | Works
in progress and | ||||||||||||||||
| Cost | buildings | fixtures | vehicles | others | Total | |||||||||||||||
| Balance at December 31, 2013 | 3,020,484 | 2,142,937 | 5,583,177 | 4,465 | 10,751,063 | |||||||||||||||
| Additions | 160,091 | 431,813 | 1,246,380 | - | 1,838,284 | |||||||||||||||
| Additions resulting mergers | - | 67,581 | 587,049 | - | 654,630 | |||||||||||||||
| Write-off | (20,574 | ) | (2,757 | ) | (277,438 | ) | - | (300,769 | ) | |||||||||||
| Transfers | (386,453 | ) | 49,416 | (171,866 | ) | - | (508,903 | ) | ||||||||||||
| Balance at December 31, 2014 | 2,773,548 | 2,688,990 | 6,967,302 | 4,465 | 12,434,305 | |||||||||||||||
| Additions | 15,997 | 120,378 | 933,913 | - | 1,070,288 | |||||||||||||||
| Additions resulting mergers | - | 2,723 | 4,739 | - | 7,462 | |||||||||||||||
| Write-off | (19,991 | ) | (12,233 | ) | (228,324 | ) | - | (260,548 | ) | |||||||||||
| Transfers | (44,695 | ) | 350,889 | (314,139 | ) | (706 | ) | (8,651 | ) | |||||||||||
| Balance at December 31, 2015 | 2,724,859 | 3,150,747 | 7,363,491 | 3,759 | 13,242,856 | |||||||||||||||
| Additions | 3,024 | 154,852 | 715,264 | - | 873,140 | |||||||||||||||
| Additions resulting mergers | - | 2,021 | 3,961 | - | 5,982 | |||||||||||||||
| Write-off | (29,174 | ) | (15,011 | ) | (141,442 | ) | - | (185,627 | ) | |||||||||||
| Change in the scope of consolidation | - | 45 | 257 | - | 302 | |||||||||||||||
| Transfers | 12,484 | 74,361 | (82,650 | ) | - | 4,195 | ||||||||||||||
| Balance at December 31, 2016 | 2,711,193 | 3,367,015 | 7,858,881 | 3,759 | 13,940,848 | |||||||||||||||
| Accumulated depreciation | ||||||||||||||||||||
| Balance at December 31, 2013 | (407,068 | ) | (1,412,264 | ) | (2,005,320 | ) | - | (3,824,652 | ) | |||||||||||
| Additions | (59,533 | ) | (332,629 | ) | (480,587 | ) | - | (872,749 | ) | |||||||||||
| Additions resulting mergers | - | - | (652,155 | ) | - | (652,155 | ) | |||||||||||||
| Write-off | 1,742 | 6,725 | 163,105 | - | 171,572 | |||||||||||||||
| Transfers | (310 | ) | (1,627 | ) | (152,052 | ) | - | (153,989 | ) | |||||||||||
| Balance at December 31, 2014 | (465,169 | ) | (1,739,795 | ) | (3,127,009 | ) | - | (5,331,973 | ) | |||||||||||
| Additions | (83,106 | ) | (343,642 | ) | (602,958 | ) | - | (1,029,706 | ) | |||||||||||
| Additions resulting mergers | - | (831 | ) | (3,357 | ) | - | (4,188 | ) | ||||||||||||
| Write-off | 17,353 | 10,531 | 207,420 | - | 235,304 | |||||||||||||||
| Transfers | (624 | ) | (19,143 | ) | (76,827 | ) | - | (96,594 | ) | |||||||||||
| Balance at December 31, 2015 | (531,546 | ) | (2,092,880 | ) | (3,602,731 | ) | - | (6,227,157 | ) | |||||||||||
| Additions | (82,963 | ) | (387,855 | ) | (683,770 | ) | - | (1,154,588 | ) | |||||||||||
| Additions resulting mergers | - | (1,594 | ) | (1,234 | ) | - | (2,828 | ) | ||||||||||||
| Write-off | 13,999 | 13,092 | 121,338 | - | 148,429 | |||||||||||||||
| Change in the scope of consolidation | - | (26 | ) | (76 | ) | - | (102 | ) | ||||||||||||
| Transfers | 6,300 | (39,836 | ) | (5,761 | ) | - | (39,297 | ) | ||||||||||||
| Balance at December 31, 2016 | (594,210 | ) | (2,509,099 | ) | (4,172,234 | ) | - | (7,275,543 | ) | |||||||||||
| Losses from non-recovery (impairment) | ||||||||||||||||||||
| Balance at December 31, 2013 | (40,484 | ) | - | - | - | (40,484 | ) | |||||||||||||
| Impacts on results | 9,188 | - | - | - | 9,188 | |||||||||||||||
| Balance at December 31, 2014 | (31,296 | ) | - | - | - | (31,296 | ) | |||||||||||||
| Impacts on results | (2,077 | ) | - | - | - | (2,077 | ) | |||||||||||||
| Write-off | 23,588 | - | - | - | 23,588 | |||||||||||||||
| Balance at December 31, 2015 | (9,785 | ) | - | - | - | (9,785 | ) | |||||||||||||
| Impacts on results | (3,246 | ) | - | (5,841 | ) | - | (9,087 | ) | ||||||||||||
| Balance at December 31, 2016 | (13,031 | ) | - | (5,841 | ) | - | (18,872 | ) | ||||||||||||
| Carrying amount | ||||||||||||||||||||
| Balance at December 31, 2014 | 2,277,083 | 949,195 | 3,840,293 | 4,465 | 7,071,036 | |||||||||||||||
| Balance at December 31, 2015 | 2,183,528 | 1,057,867 | 3,760,760 | 3,759 | 7,005,914 | |||||||||||||||
| Balance at December 31, 2016 | 2,103,952 | 857,916 | 3,680,806 | 3,759 | 6,646,433 |
The depreciation expenses has been included in the line item “Depreciation and amortization” in the income statement.
b) Tangible asset purchase commitments
On December 31, 2016 the Bank has contractual commitments for the acquisition of tangible assets amount of R$9.1 million (2015 - R$0 and 2014 R$0).
F-46
BANCO SANTANDER (BRASIL) S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Brazilian Reais - R$, unless otherwise stated)
14. Intangible assets - Goodwill
Goodwill is the difference between the acquisition cost and the Bank's participation in the net fair value of assets, liabilities and contingent liabilities of the acquire. When the difference is negative (negative goodwill), it is recognized immediately through profit or loss. In accordance with IFRS 3 Business Combinations, goodwill is stated at cost and is not amortized but tested annually for impairment or whenever there is an evidence of reduction on the recoverable value of the cash generating unit to which the goodwill was allocated. Goodwill is recognized at cost considering the accumulated impairment losses. Impairment losses related to goodwill are not reversible. Gains and losses related to the sale of an entity include the carrying amount of goodwill relating to the entity sold.
The goodwill recorded is subject to impairment test (note 2.o.i) and has been allocated according to the operating segments (note 46).
Based on the assumptions described above management has not identified any evidence of impairment(3) on December 31, 2016, 2015 and 2014.
| Thousands of Reais | 2016 | 2015 | 2014 | |||||||||
| Breakdown | ||||||||||||
| Banco ABN Amro Real S.A. (Banco Real) | 27,217,565 | 27,217,565 | 27,217,565 | |||||||||
| Olé Consignado (Current Company name of Banco Bonsucesso Consignado) | 62,800 | 62,800 | - | |||||||||
| Super Pagamentos e Administração de Meios Eletrônicos Ltda. (Super) | 13,050 | 13,050 | 14,086 | |||||||||
| Getnet Adquirência e Serviços para Meios de Pagamento S.A. (Santander Getnet) | 1,039,304 | 1,039,304 | 1,039,304 | |||||||||
| BW Guirapá I S.A. | 22,320 | - | - | |||||||||
| Total | 28,355,039 | 28,332,719 | 28,270,955 |
| Commercial Banking | ||||||||||||
| 2016 | 2015 | 2014 | ||||||||||
| Main assumptions: | ||||||||||||
| Basis of determining recoverable amounts | Value in use: cash flows | |||||||||||
| Period of the projections of cash flows (1) | 5 years | 5 years | 5 years | |||||||||
| Growth rate perpetual | 8.0 | % | 7.5 | % | 7.0 | % | ||||||
| Discount rate (2) | 15.2 | % | 15.2 | % | 14.4 | % | ||||||
(1) The projections of cash flow are prepared using growth plans and internal budget of the administration, based on historical data, market expectations and conditions such as industry growth, interest rate and inflation.
(2) The discount rate is calculated based on the capital asset pricing model (CAPM). The discount rate before tax is 20.23% (2015 - 20.11%).
(3) The recoverability test base date is December 31, 2016, since at the end of each reportable period or whenever there is any indication of impairment, goodwill (tested for impairment Recoverability).
The changes of goodwill in December, 31 2016, 2015 and 2014 were as follows:
| Thousands of Reais | 2016 | 2015 | 2014 | |||||||||
| Balance at beginning of the year | 28,332,719 | 28,270,955 | 27,217,565 | |||||||||
| Additions: | ||||||||||||
| Getnet S.A./Super/Bonsucesso/BW Guirapá (1) | 22,320 | 61,764 | 1,053,390 | |||||||||
| Balance at end of the year | 28,355,039 | 28,332,719 | 28,270,955 |
(1) In 2016 refers to goodwill of BW Guirapá. In 2015, investment contract which Banco Santander, through Aymoré CFI, became the controlling shareholder of Banco Bonsucesso Consignado, with 60% of capital. In 2014, includes the goodwill on the acquisition of all the shares issued by Getnet and the result of the acquisition by Aymoré in company Super Pagamentos e Administração de Meios Eletrônicos Ltda.
15. Intangible assets - Other intangible assets
The details by asset category of the "other intangible assets" of the consolidated balance sheets are as follow:
| Cost | IT developments | Other assets | Total | |||||||||
| Balance at December 31, 2013 | 3,892,521 | 345,343 | 4,237,864 | |||||||||
| Additions | 571,018 | 11,841 | 582,859 | |||||||||
| Additions resulting mergers | 171,071 | - | 171,071 | |||||||||
| Write-off | (10,651 | ) | (316 | ) | (10,967 | ) | ||||||
| Transfers | (46,885 | ) | - | (46,885 | ) | |||||||
| Balance at December 31, 2014 | 4,577,074 | 356,868 | 4,933,942 | |||||||||
| Additions | 607,642 | 3,647 | 611,289 | |||||||||
| Additions resulting mergers | 759 | 1 | 760 | |||||||||
| Write-off | (11,282 | ) | - | (11,282 | ) | |||||||
| Transfers | 28,307 | 37,200 | 65,507 | |||||||||
| Balance at December 31, 2015 | 5,202,500 | 397,716 | 5,600,216 | |||||||||
| Additions | 652,490 | 18,395 | 670,885 | |||||||||
| Additions resulting mergers | 250 | 89 | 339 | |||||||||
| Write-off | (450 | ) | (10,202 | ) | (10,652 | ) | ||||||
| Change in the scope of consolidation | 4 | - | 4 | |||||||||
| Transfers | 12,150 | - | 12,150 | |||||||||
| Balance at December 31, 2016 | 5,866,944 | 405,998 | 6,272,942 |
F-47
BANCO SANTANDER (BRASIL) S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Brazilian Reais - R$, unless otherwise stated)
| Accumulated amortization | IT developments | Other assets | Total | |||||||||
| Balance at December 31, 2013 | (1,891,927 | ) | (212,929 | ) | (2,104,856 | ) | ||||||
| Additions | (468,461 | ) | (20,919 | ) | (489,380 | ) | ||||||
| Additions resulting mergers | (110,193 | ) | - | (110,193 | ) | |||||||
| Write-off | 2,155 | 316 | 2,471 | |||||||||
| Transfers | 4,153 | - | 4,153 | |||||||||
| Balance at December 31, 2014 | (2,464,273 | ) | (233,532 | ) | (2,697,805 | ) | ||||||
| Additions | (413,450 | ) | (46,861 | ) | (460,311 | ) | ||||||
| Additions resulting mergers | (115 | ) | - | (115 | ) | |||||||
| Write-off | 10,169 | - | 10,169 | |||||||||
| Transfers | 18,675 | 13,614 | 32,289 | |||||||||
| Balance at December 31, 2015 | (2,848,994 | ) | (266,779 | ) | (3,115,773 | ) | ||||||
| Additions | (304,046 | ) | (24,005 | ) | (328,051 | ) | ||||||
| Additions resulting mergers | (249 | ) | - | (249 | ) | |||||||
| Write-off | 141 | 10,202 | 10,343 | |||||||||
| Change in the scope of consolidation | (1 | ) | - | (1 | ) | |||||||
| Transfers | 32,167 | 3,427 | 35,594 | |||||||||
| Balance at December 31, 2016 | (3,120,982 | ) | (277,155 | ) | (3,398,137 | ) | ||||||
| Losses from non-recovery (Impairment) - IT | ||||||||||||
| Balance at December 31, 2013 | (286,197 | ) | - | (286,197 | ) | |||||||
| Impact on net profit | (5,123 | ) | - | (5,123 | ) | |||||||
| Write-off | 5,486 | - | 5,486 | |||||||||
| Balance at December 31, 2014 | (285,834 | ) | - | (285,834 | ) | |||||||
| Impact on net profit (1) | (670,556 | ) | (8,698 | ) | (679,254 | ) | ||||||
| Write-off | (38,412 | ) | - | (38,412 | ) | |||||||
| Balance at December 31, 2015 | (994,802 | ) | (8,698 | ) | (1,003,500 | ) | ||||||
| Impact on net profit | 898 | (6,736 | ) | (5,838 | ) | |||||||
| Transfers | 16,193 | 143 | 16,336 | |||||||||
| Balance at December 31, 2016 | (977,711 | ) | (15,291 | ) | (993,002 | ) | ||||||
| Carrying amount | ||||||||||||
| Balance at December 31, 2014 | 1,826,967 | 123,336 | 1,950,303 | |||||||||
| Balance at December 31, 2015 | 1,358,704 | 122,239 | 1,480,943 | |||||||||
| Balance at December 31, 2016 | 1,768,251 | 113,552 | 1,881,803 |
(1) In 2015, includes impairment loss of assets in the acquisition and development of software in the amount of R$674,780. The loss in the acquisition and development of software was recorded due to obsolescence function and disruption of these systems.
The amortization expenses has been included in the line item “Depreciation and amortization” in the income statement.
The breakdown of the balance of “Other assets” is as follows:
| Thousands of Reais | 2016 | 2015 | 2014 | |||||||||
| Customer relationships (1) | 62,625 | 221,478 | 946,571 | |||||||||
| Prepayments and accrued income | 1,825,467 | 1,383,476 | 1,289,624 | |||||||||
| Contractual guarantees of former controlling stockholders (Note 24.c.5) | 814,925 | 789,974 | 783,909 | |||||||||
| Actuarial asset (Note 23) | 153,661 | - | 557 | |||||||||
| Amounts receivable of covenants | - | 8 | 530,311 | |||||||||
| Other receivables (2) | 2,247,334 | 1,407,182 | 1,515,754 | |||||||||
| Total | 5,104,012 | 3,802,118 | 5,066,726 |
(1) In 2015, the balance shown is net of provision for non-recoverable loss of the asset recorded for the purchase of rights to the provision of payroll services in the amount of R$534,281 recorded in "Impairment losses on other assets (net) - Others". The loss on the rights in the acquisition of payrolls was recorded due to the reduction of the expected return value in the management of payrolls and contracts break history.
(2) Corresponds mainly to receivables from third parties.
F-48
BANCO SANTANDER (BRASIL) S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Brazilian Reais - R$, unless otherwise stated)
17. Deposits from the Brazilian Central Bank and Deposits from credit institutions
The breakdown, by classification, type and currency, of the balances of these items is as follows:
| Thousands of Reais | 2016 | 2015 | 2014 | |||||||||
| Classification: | ||||||||||||
| Financial liabilities at amortized cost | 78,634,072 | 69,451,498 | 63,674,201 | |||||||||
| Total | 78,634,072 | 69,451,498 | 63,674,201 | |||||||||
| Type: | ||||||||||||
| Demand deposits (1) | 314,112 | 144,596 | 161,538 | |||||||||
| Time deposits (2) | 49,548,858 | 55,795,205 | 42,044,680 | |||||||||
| Repurchase agreements | 28,771,102 | 13,511,697 | 21,467,983 | |||||||||
| Of which: | ||||||||||||
| Backed operations with Private Securities (3) | 446,429 | 84,573 | 961,359 | |||||||||
| Backed operations with Government Securities | 28,324,673 | 13,427,124 | 20,506,624 | |||||||||
| Total | 78,634,072 | 69,451,498 | 63,674,201 | |||||||||
| Currency: | ||||||||||||
| Reais | 51,339,830 | 33,056,128 | 39,519,636 | |||||||||
| Euro | 576,994 | 528,465 | 66,735 | |||||||||
| US dollar | 26,546,404 | 35,612,670 | 24,085,176 | |||||||||
| Other currencies | 170,844 | 254,235 | 2,654 | |||||||||
| Total | 78,634,072 | 69,451,498 | 63,674,201 |
(1) Non-interest bearing accounts.
(2) It includes the operation with credit institution arising from export and import financing lines, BNDES and Finame on-lending and abroad and other credit lines abroad.
(3) Refers basically to repurchase agreements backed by debentures own issue.
Note 45-d contains a detail of the remaining maturity of financial liabilities at amortized cost and of the related average interest rates.
The breakdown, by classification and type, of the balance of “Customer deposits” is as follows:
| Thousands of Reais | 2016 | 2015 | 2014 | |||||||||
| Classification: | ||||||||||||
| Financial liabilities at amortized cost | 247,445,177 | 243,042,872 | 220,644,019 | |||||||||
| Total | 247,445,177 | 243,042,872 | 220,644,019 | |||||||||
| Type: | ||||||||||||
| Demand deposits | ||||||||||||
| Current accounts (1) | 15,868,201 | 15,579,923 | 15,507,604 | |||||||||
| Savings accounts | 36,051,476 | 35,984,838 | 37,938,936 | |||||||||
| Time deposits | 94,478,875 | 89,986,025 | 91,552,181 | |||||||||
| Repurchase agreements | 101,046,625 | 101,492,086 | 75,645,298 | |||||||||
| Of which: | ||||||||||||
| Backed operations with Private Securities (2) | 59,460,210 | 61,173,979 | 46,699,288 | |||||||||
| Backed operations with Government Securities | 41,586,415 | 40,318,107 | 28,946,010 | |||||||||
| Total | 247,445,177 | 243,042,872 | 220,644,019 |
(1) Non-interest bearing accounts.
(2) Refers basically to repurchase agreements backed by debentures own issue.
Note 45-d contains a detail of the residual maturity periods of financial liabilities at amortized cost and of the related average interest rates.
19. Marketable debt securities
The breakdown, by classification and type, of the balance of “Marketable debt securities” is as follows:
| Thousands of Reais | 2016 | 2015 | 2014 | |||||||||
| Classification: | ||||||||||||
| Financial liabilities at amortized cost | 99,842,955 | 94,658,300 | 70,355,249 | |||||||||
| Total | 99,842,955 | 94,658,300 | 70,355,249 | |||||||||
| Type: | ||||||||||||
| Real estate credit notes - LCI (1) | 23,983,429 | 23,795,322 | 22,669,332 | |||||||||
| Bonds and other securities | 7,721,646 | 13,465,373 | 11,784,701 | |||||||||
| Treasury Bills (2) | 61,157,037 | 55,300,989 | 33,998,433 | |||||||||
| Agribusiness credit notes - LCA (3) | 6,980,843 | 2,096,616 | 1,902,783 | |||||||||
| Total | 99,842,955 | 94,658,300 | 70,355,249 |
F-49
BANCO SANTANDER (BRASIL) S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Brazilian Reais - R$, unless otherwise stated)
| Indexes: | Domestic | Abroad |
| Treasury Bills | 97% to 108% of CDI | - |
| 100% of IGPM | - | |
| 100% of IPCA | - | |
| Pre fixed: 10.05% to 17.74% | - | |
| 104% to 105% of SELIC | - | |
| Real estate credit notes - LCI | 70% to 97% of CDI | - |
| Pre fixed: 8.27% of 14.91% | - | |
| 100% of IPCA | - | |
| 100% of TR | - | |
| Agribusiness credit notes - LCA | 87% to 94% of CDI | - |
| Eurobonds | 0.7% to 3% | 0.72% to 15.70% |
(1) Real Estate Credit Notes are fixed income securities pegged by mortgages and mortgage-backed securities or liens on property. On December 31, 2016, have maturities between 2017 to 2026 (12/31/2015 - there are maturities between 2016 to 2020).
(2) The main features of the Treasury Bills are the minimum period of two years, minimum notional of R$300 and permission for early redemption of only 5% of the issued amount. On December 31, 2016, have a maturity between 2017 to 2025 (2015 - have a maturity between 2016 to 2025 and 2014 - have a maturity between 2015 to 2025).
(3) Agribusiness credit notes are fixed income securities in which resources are allocated to the promotion of agribusiness. On December 31, 2016, have maturities between 2017 to 2018 (12/31/2015 - they have a maturity between 2016 to 2018).
The breakdown, by currency, of the balance of this account is as follows:
| Thousands of Reais | ||||||||||||
| Currency: | 2016 | 2015 | 2014 | |||||||||
| Real | 92,132,195 | 82,506,826 | 59,870,381 | |||||||||
| US dollar | 7,645,542 | 11,180,678 | 9,418,869 | |||||||||
| Swiss Francs | - | 603,889 | 940,256 | |||||||||
| Peso/Chile | - | 135,388 | 101,264 | |||||||||
| Iene | - | 35,743 | 24,479 | |||||||||
| Euro | 65,218 | 195,776 | - | |||||||||
| Total | 99,842,955 | 94,658,300 | 70,355,249 |
| Average interest (%) | ||||||||||||
| Currency: | 2016 | 2015 | 2014 | |||||||||
| Real | 11.7 | % | 12.1 | % | 9.6 | % | ||||||
| US dollar | 3.7 | % | 1.0 | % | 3.0 | % | ||||||
| Swiss Francs | - | - | 1.8 | % | ||||||||
| Peso/Chile | - | - | 4.6 | % | ||||||||
| Iene | - | 3.1 | % | 5.6 | % | |||||||
| Total | 12.1 | % | 11.3 | % | 9.6 | % |
The changes in the balance of Marketable debt instruments were as follows:
| Thousands of Reais | 2016 | 2015 | 2014 | |||||||||||
| Balance at beginning of the year | 94,658,300 | 70,355,249 | 65,300,548 | |||||||||||
| Issuances | 50,313,469 | 72,936,057 | 53,187,121 | |||||||||||
| Payments | (56,164,769 | ) | (63,516,234 | ) | (55,388,115 | ) | ||||||||
| Interest (Note 34) | 12,212,922 | 10,047,874 | 6,347,571 | |||||||||||
| Exchange differences and Others | (1,305,204 | ) | 4,835,354 | 1,125,481 | ||||||||||
| Transfer Held For Sale | - | - | (217,357 | ) | ||||||||||
| Additions arising from acquisitions of companies | 128,237 | - | - | |||||||||||
| Balance at end of the year | 99,842,955 | 94,658,300 | 70,355,249 | |||||||||||
At December 31, 2016, 2015 and 2014, none of these instruments was convertible into Bank shares or granted privileges or rights which, in certain circumstances, make them convertible into shares.
The note 45-d contains a detail of the residual maturity periods of financial liabilities at amortized cost and of the related average interest rates in each year.
F-50
BANCO SANTANDER (BRASIL) S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Brazilian Reais - R$, unless otherwise stated)
The breakdown of "Bonds and other securities" is as follows:
| Issuance | Maturity | Currency | Interest rate (p.a) | 2016 | 2015 | 2014 | ||||||||||||||||
| Eurobonds | apr and nov-10 | apr-15 | US$ | 4.5 | % | - | - | 2,173,398 | ||||||||||||||
| Eurobonds | jan and jun-11 | jan-16 | US$ | 4.3 | % | - | 3,268,431 | 2,256,237 | ||||||||||||||
| Eurobonds | feb and sep-12 | feb-17 | US$ | 4.6 | % | 4,116,309 | 5,025,982 | 3,575,617 | ||||||||||||||
| Eurobonds (2) | apr-12 | apr-16 | CHF | 3.3 | % | - | 603,889 | 412,596 | ||||||||||||||
| Eurobonds (2) | mar-13 | apr-18 | US$ | 4,5% a 8,4% (1) | - | - | 892,090 | |||||||||||||||
| Eurobonds (2) | mar and may-13 | mar-16 | R$ | 8.0 | % | - | 1,255,841 | 1,258,363 | ||||||||||||||
| Eurobonds (2) | jun-13 | jun-15 | CHF | 1.1 | % | - | - | 339,686 | ||||||||||||||
| Eurobonds (2) | mar-13 | mar-15 | CHF | 1.7 | % | - | - | 187,974 | ||||||||||||||
| Eurobonds (2) | apr-12 | apr-16 | CLP | 4.6 | % | - | 135,388 | 101,264 | ||||||||||||||
| Eurobonds | oct-14 | oct-16 | US$ | 2.0 | % | - | 102,708 | 51,488 | ||||||||||||||
| Eurobonds (2) | sep-14 | sep-16 | JPY | 1.8 | % | - | 35,743 | 24,480 | ||||||||||||||
| Eurobonds | dec-15 | jul-16 | US$ | 2.7 | % | - | 195,254 | - | ||||||||||||||
| Eurobonds | dec-15 | jun-16 | EUR | 1.0 | % | - | 170,053 | - | ||||||||||||||
| Eurobonds | jun-15 | jan-16 | US$ | 1.1 | % | - | 173,487 | - | ||||||||||||||
| Eurobonds | jul-15 | jan-16 | US$ | 1.1 | % | - | 839,956 | - | ||||||||||||||
| Eurobonds | aug-15 | feb-16 | US$ | 1.2 | % | - | 510,082 | - | ||||||||||||||
| Eurobonds | aug-15 | feb-16 | US$ | 1.1 | % | - | 291,345 | - | ||||||||||||||
| Eurobonds | feb-15 | feb-18 | US$ | 2.2 | % | 39,727 | 47,598 | - | ||||||||||||||
| Eurobonds | jul-15 | jul-20 | US$ | 3.0 | % | 10,206 | 11,877 | - | ||||||||||||||
| Eurobonds | feb-16 | mar-17 | US$ | 2.5 | % | 39,940 | - | - | ||||||||||||||
| Eurobonds | jun-16 | jun-17 | US$ | 1.0 | % | 475,424 | - | - | ||||||||||||||
| Eurobonds | apr-16 | apr-17 | US$ | 1.0 | % | 111,059 | - | - | ||||||||||||||
| Eurobonds | jul-16 | jul-17 | US$ | 2.0 | % | 761,129 | - | - | ||||||||||||||
| Eurobonds | aug-16 | aug-17 | US$ | 2.0 | % | 185,533 | - | - | ||||||||||||||
| Eurobonds | sep-16 | sep-17 | US$ | 2.0 | % | 195,206 | - | - | ||||||||||||||
| Eurobonds | sep-16 | mar-17 | US$ | 1.4 | % | 50,045 | - | - | ||||||||||||||
| Eurobonds | sep-16 | sep-17 | US$ | 2.1 | % | 35,562 | - | - | ||||||||||||||
| Eurobonds | oct-16 | jan-17 | US$ | 0.9 | % | 32,422 | - | - | ||||||||||||||
| Eurobonds | nov-16 | feb-17 | US$ | 0.9 | % | 93,498 | - | - | ||||||||||||||
| Eurobonds | dec-16 | mar-17 | US$ | 0.9 | % | 62,219 | - | - | ||||||||||||||
| Eurobonds | nov-16 | mai-17 | US$ | 1.4 | % | 34,720 | - | - | ||||||||||||||
| Eurobonds | dec-16 | jun-17 | US$ | 1.4 | % | 62,105 | - | - | ||||||||||||||
| Eurobonds | oct-16 | oct-17 | US$ | 2.2 | % | 249,214 | - | - | ||||||||||||||
| Eurobonds | oct-16 | oct-17 | EUR | 0.4 | % | 37,507 | - | - | ||||||||||||||
| Eurobonds | nov-16 | nov-17 | US$ | 2.0 | % | 130,791 | - | - | ||||||||||||||
| Eurobonds | nov-16 | nov-17 | US$ | 1.8 | % | 138,605 | - | - | ||||||||||||||
| Eurobonds | dec-16 | dec-17 | US$ | 1.8 | % | 48,448 | - | - | ||||||||||||||
| Others | 811,977 | 797,739 | 511,508 | |||||||||||||||||||
| Total | 7,721,646 | 13,465,373 | 11,784,701 | |||||||||||||||||||
(1) The transaction was settled in advance in the first quarter of 2015 and had compound interest flow: up to April 17, 2013 equal to 4.5% per year in the period from April 18, 2013 to October 17, 2017 equal to 8.4% pa and October 18, 2017 to April 17 2018 equal to 7.0% p.a.
(2) On December 31, 2015 includes R$1,995,118 (2014 - R$1,960,197) in cash flow hedge operations, being R$1,255,841 indexed in Reais (2014 - R$1,258,363), R$603,889 indexed on foreign currency - Swiss Franc (2014 - R$600,570), R$R$135,388 in Chilean Peso (2014 - R$101,264) and R$35,743 for market risk hedge operations (2014 - R$364,166), being R$35.743 (2014 - R$24,480) indexed to foreign currency - YEN and the value at December 31,2014 R$339,686 indexed to foreign currency - Swiss Franc.
The detail of the balance of “Subordinated liabilities” is as follows:
| Thousands of Reais | ||||||||||||||||||||
| Issuance | Maturity (1) | Amount (millions) | Interest rate | 2016 | 2015 | 2014 | ||||||||||||||
| Subordinated Liabilities | jun-06 | jul-16 | R$1,500 | 105.0% CDI | - | 4,196,347 | 3,683,128 | |||||||||||||
| Subordinated Liabilities | oct-06 | sep-16 | R$850 | 104.5% CDI | - | 2,266,789 | 1,990,794 | |||||||||||||
| Subordinated Liabilities | jul-06 to oct-06 | jul-16 | R$447 | 104.5% CDI | - | 1,230,505 | 1,080,684 | |||||||||||||
| Subordinated Liabilities | may-08 | may-15 to may-18 | R$283 | CDI (2) | 98,378 | 114,467 | 114,050 | |||||||||||||
| Subordinated Liabilities | may-08 to jun-08 | may-15 to jun-18 | R$268 | IPCA (3) | 367,868 | 289,196 | 425,421 | |||||||||||||
| Total | 466,246 | 8,097,304 | 7,294,077 | |||||||||||||||||
(1) Subordinated certificates of deposit issued by Banco Santander S.A. with yield paid at the end of the term together with the principal.
(2) Indexed to 100% and 112% of the CDI.
(3) Indexed to the IPCA (extended consumer price index) plus interest of 8.3% p.a. to 8.4% p.a.
F-51
BANCO SANTANDER (BRASIL) S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Brazilian Reais - R$, unless otherwise stated)
The detail by currency, of the balance of “Subordinated liabilities” is as follows:
| Thousands of Reais | Average Interest Rate (%) | |||||||||||||||||||||||
| Currency: | 2016 | 2015 | 2014 | 2016 | 2015 | 2014 | ||||||||||||||||||
| Real | 466,246 | 8,097,304 | 7,294,077 | 9.6 | % | 14.6 | % | 11.2 | % | |||||||||||||||
| Total | 466,246 | 8,097,304 | 7,294,077 | 9.6 | % | 14.6 | % | 11.2 | % |
The changes in “Subordinated liabilities” were as follows:
| 2016 | 2015 | 2014 | ||||||||||
| Balance at beginning of year | 8,097,304 | 7,294,077 | 8,906,144 | |||||||||
| Payments | (8,362,652 | ) | (216,075 | ) | (2,495,282 | ) | ||||||
| Interest (Note 34) | 731,594 | 1,019,302 | 883,215 | |||||||||
| Balance at end of year | 466,246 | 8,097,304 | 7,294,077 |
Note 45-d contains a detail of the residual maturity periods of subordinated liabilities at each year-end and of the related average interest rates in each year.
21. Debt Instruments Eligible to Compose Capital
Details of the balance of "Debt Instruments Eligible to Compose Capital" for the issuance of such instruments to compose the Tier I and Tier II of regulatory capital due to the Regulatory Capital Optimization Plan (Note 29.e), are as follows:
| 2016 | 2015 | 2014 | ||||||||||||||||||||
| Issuance | Maturity | Issuance Value | Interest Rate (p.a.)(3) | |||||||||||||||||||
| Tier I (1) | jan-14 | no maturity (perpetual) | R$3,000 | 7.4 | % | 4,125,557 | 4,943,194 | 3,361,971 | ||||||||||||||
| Tier II (2) | jan-14 | jan-24 | R$3,000 | 6.0 | % | 4,186,361 | 5,015,843 | 3,411,341 | ||||||||||||||
| Total | 8,311,918 | 9,959,037 | 6,773,312 |
(1) Interest quarterly paid from April 29, 2014.
(2) Interest semiannually paid from July 29, 2014.
(3) The effective interest rate, considering the income tax source assumed by the issuer, is 8.676% and 7.059% for instruments Tier I and Tier II, respectively.
Changes in the balance of "Debt Instruments Eligible to Compose Capital" in twelve-months period ended December 31, 2016, 2015 and 2014 were as
| 2016 | 2015 | 2014 | ||||||||||
| Balance at beginning of the year | 9,959,037 | 6,773,312 | - | |||||||||
| Issues | - | - | 6,000,000 | |||||||||
| Interest payment Tier I (1) | 276,587 | 277,024 | 239,931 | |||||||||
| Interest payment Tier II (1) | 225,161 | 226,266 | 195,541 | |||||||||
| Exchange differences / Others | (1,447,196 | ) | 3,291,470 | 629,081 | ||||||||
| Payments of interest - Tier I | (379,039 | ) | (347,201 | ) | (191,466 | ) | ||||||
| Payments of interest - Tier II | (322,632 | ) | (261,834 | ) | (99,775 | ) | ||||||
| Balance at end of the year | 8,311,918 | 9,959,037 | 6,773,312 |
(1) The remuneration of interest relating to the Debt Instruments Eligible to Compose Capital Tier I and II were recorded against income for the period as "Interest expense and similar charges" (Note 34).
22. Other financial liabilities
The breakdown of the balances of these items is as follows:
| Thousands of Reais | 2016 | 2015 | 2014 | |||||||||
| Credit card obligations | 25,420,237 | 20,611,690 | 19,909,272 | |||||||||
| Unsettled financial transactions (2) | 3,829,374 | 5,814,199 | 1,106,011 | |||||||||
| Dividends payable | 4,346,128 | 2,846,433 | 849,322 | |||||||||
| Tax collection accounts - Tax payables | 1,157,386 | 879,834 | 676,405 | |||||||||
| Liability associated with the transfer of assets (Note 10.g) | 774,673 | 190,333 | 242,024 | |||||||||
| Other financial liabilities (1) | 1,351,301 | 1,730,156 | 662,701 | |||||||||
| Total | 36,879,099 | 32,072,645 | 23,445,735 |
(1) On December 31, 2016, 2015 and 2014 includes the financial liabilities in the amount of R$307 million related to the put option of the commitment of the shares held by Banco Bonsucesso and R$950 million related to the put option having as object the shares held by non-controlling of Getnet SA.
(2) Includes operations to liquidate with BM&FBovespa and payment orders in foreign currency.
Note 45-d contains a detail of the residual maturity periods of other financial assets and liabilities at each year-end.
F-52
BANCO SANTANDER (BRASIL) S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Brazilian Reais - R$, unless otherwise stated)
23. Provisions for pensions and similar obligations
On December 31, 2016 the balance of provisions for pension funds and similar obligations totaled R$2,710,627 (2015 - R$2,696,653 and 2014 - R$3,869,728).
i. Supplemental Pension Plan
The Banco Santander and its subsidiaries sponsor private pension entities and plans exclusive to employees and former employees, pension funds and cash assistance with the purpose of providing retirement and pension benefits that supplement those provided by the government, as defined in the basic regulations of each plan.
• Banesprev - Fundo Banespa de Seguridade Social (Banesprev)
- Plan I: defined benefit plan fully funded by Banco Santander, covers employees hired after May 22, 1975 called Participants Recipients, and those hired until May 22, 1975 called Participants Aggregates, who are also entitled to death benefits. Plan is closed to new employees since March 28, 2005.
- Plan II: defined benefit plan, constituted from July 27, 1994, effective of the new text of the Statute and Regulations of the Basic Plan II, Plan I participants who chose the new plan began to contribute to the rate of 44.9% stipulated by the actuary for funding each year, introduced in April 2012 extraordinary cost to the sponsor and participants, as agreed with the PREVIC - Superintendence of Pension Funds due Deficit in plan. Plan is closed to new entrants since June 3, 2005.
- Plan V: defined benefit plan fully defrayed by Banco Santander, covers employees hired until after May 22, 1975,closed and settled.
- Supplemental Pension Plan: defined benefit plan was created in view of the privatization of Banespa and is managed by Banesprev and offered only to employees hired before May 22, 1975, this Plan effective January 1, 2000. Plan is closed to new entrants since April 28, 2000.
- Plan III: variable contribution plan, for employees hired after May 22,1975, previously served by the Plans I and II. Under this plan contributions are made by Banco Santander and the participants. Plan structured as defined contribution during the period of contribution and defined benefit during the receipt of benefit, if paid as monthly income for life. Plan is closed to new entrants since September 1, 2005.
- Plan IV: variable contribution plan, designed for employees hired as of November 27, 2000, Sponsor funds risk benefits and administrative expenses only. In this plan the benefit is set in the form of defined contribution during the period of contribution and defined benefit during the receipt of benefits in the form of monthly income for life, in whole or in part of the benefit. Risk benefit modeled as defined benefits. Plan is closed to new entrants since July 23, 2010.
- Three plans (DCA, DAB and CACIBAN): additional retirement and former employees associated pension, arising from the process of acquisition of the former Banco Meridional, established under the defined benefit plan. The plans are closed to new participants.
• Sanprev - Santander Associação de Previdência (Sanprev)
- Plan I: defined benefit plan, established on September 27, 1979, covering employees enrolled in the plan sponsor and is in process of extinction since June 30, 1996.
- Plan II: plan that provides insurance risk, pension supplement temporary, disability retirement annuity and the supplemental death and sickness allowance and birth, including employees enrolled in the plan sponsor and is funded solely by sponsors through monthly contributions, as indicated by the actuary. Plan is closed to new entrants since March 10, 2010.
- Plan III: variable contribution plan covering employees of the sponsors who made the choice to contribute, by contributing freely chosen by participants from 2% of salary contribution. That the benefit plan is a defined contribution during the contribution and defined benefit during the receipt of the benefit, being in the form of monthly income for life, in whole or in part of the benefit. Plan is closed to new entrants since March 10, 2010.
• Bandeprev - Bandepe Previdência Social (Bandeprev)
Defined benefit plan, sponsored by Banco Bandepe and Banco Santander, managed by Bandeprev. The plans are divided into basic plan and special retirement supplement plan, with different eligibility requirements, contributions and benefits by subgroups of participants. The plans are closed to new entrants since 1999 for Banco Bandepe’s employees and for others since 2011.
• Other plans
SantanderPrevi - Sociedade de Previdência Privada (SantanderPrevi): it´s a closed pension entity, which aims at setting up and implementation of benefit plans pension character, complementary to the general welfare, in the form of actual legislation.
The Retirement Plan of SantanderPrevi is the only structured as Defined Contribution and open to new members, with contributions shared between sponsors and plan participants. The appropriate values by the sponsors in the year of 2016 was R$87,603 (2015 - R$79,365).
It has 10 cases of lifetime income with benefits arising from the previous plan.
ii. Actuarial Techniques
The amount of the defined benefit obligations was determined by independent actuaries using the following actuarial techniques:
• Valuation method:
Projected unit credit method, which sees each year of service as giving rise to an additional unit of benefit entitlement and measures each unit separately.
• Nominal discount rate for actuarial obligation and calculation of interest on assets:
- Banesprev, Sanprev, SantanderPrevi, Bandeprev and Other Plans - 10.9% (2015 - 12.3% and 2014 - 10.9%).
- Cabesp, Law 9,656 and others obligations - 10.8% (2014 - 12.03% and 2014 - 11.0%).
• Estimated long-term inflation rate:
- Banesprev, Sanprev, SantanderPrevi, Bandeprev and Other Plans - 4.5% (2015 - 4.5% and 2014 - 4.5%).
• Estimate salary increase rate:
- Banesprev, Sanprev, SantanderPrevi, Bandeprev Básico and Other Plans - 5.0% (2015 - 5.0% and 2014 - 5.0%).
F-53
BANCO SANTANDER (BRASIL) S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Brazilian Reais - R$, unless otherwise stated)
iii. Health and Dental Care Plan
• Cabesp - Caixa Beneficente dos Funcionários do Banco do Estado de São Paulo S.A.
Entity that covers health and dental care expenses of employees hired until Banespa privatization in 2000, as defined in the entity's bylaws.
• HolandaPrevi’s Retirees (current corporate name of SantanderPrevi)
For the health care plan Retirement has lifelong nature and is a closed group. In shutdown the employee should have completed 10 years of employment with Banco Real and 55 years of age. In this case it was offered continuity of health care plan where the employee bears 70% of the monthly and Bank subsidizes 30%. This rule lasted until December, 2002 and after this period that the employee was off like status Retired Holandaprevi, bears 100% of the monthly health plan.
• Former employees of Banco Real S.A. (retiree by Circulars)
It refers to health insurance for former Banco Real's employees, whose lifetime benefit has been granted in the same condition as the active employees, with the same coverage and plan characteristics.
Eligible only to plans basic and standard first apartment, opting for apartment he takes the difference between the plans more co-participation in the basic plan. Not allowed new additions of dependents. It has subsidizes of 90% of the plan.
• Bandeprev’s retirees
The health care plan retirees of Bandeprev’s pension plan beneficiaries is a lifetime benefit, for which Banco Santander is responsible for defraying 50% of the benefits of employees retired until November 27, 1998 and 30% of the benefits of employees retired after privatization.
• Officer with Lifetime Benefits (Lifetime Officers)
Lifetime health care benefit granted to former officers of Banco Sudameris Brasil S.A. In this case, no conclusion, being 100% funded by the Bank.
• Free Clinic
Health care plan (free clinic) is offered for life to retirees who have contributed to the Foundation Sudameris for at least 25 years and has difference in default if the user chooses apartment. The plan is only offered in standard ward where the cost is 100% of the Foundation Sudameris.
• Life insurance for Banco Real’s retirees
For Retirees from Circulars: indemnity in case of Natural Death, Disease Disability, Accidental Death. The subsidy is 45.28% of the value. This benefit is also granted to retirees Fundação Sudameris where cost is 100% of the retired. It is a closed group.
Additionally, it is assured to retired employees, since they meet to certain legal requirements and full pays their respective contributions, the right to be maintaining as a beneficiary of the Banco Santander health plan, in the same conditions for healthcare coverage, taken place during their employment contract. Banco Santander provisions related to this retired employees are accrued using actuarial calculations based in the present value of the current cost.
The funding status of the defined benefit obligations in 2016 and in the last 3 years are as follows:
| Thousands of Reais | 2016 | 2015 | 2014 | |||||||||
| Present value of the obligations - Post-employment plans: | ||||||||||||
| To current employees | 770,423 | 753,697 | 871,376 | |||||||||
| Vested obligations to retired employees | 19,998,703 | 16,772,102 | 17,019,976 | |||||||||
| 20,769,126 | 17,525,799 | 17,891,352 | ||||||||||
| Less: | ||||||||||||
| Fair value of plan assets | 20,116,916 | 16,275,269 | 16,067,029 | |||||||||
| Unrecognized assets (1) | (969,162 | ) | (963,031 | ) | (874,304 | ) | ||||||
| Provisions – Post-employment plans, net | 1,621,372 | 2,213,561 | 2,698,627 | |||||||||
| Present value of the obligations - Other similar obligations: | ||||||||||||
| To current employees | 200,009 | 315,474 | 340,123 | |||||||||
| Vested obligations to retired employees | 4,046,480 | 5,719,260 | 5,737,398 | |||||||||
| 4,246,489 | 6,034,734 | 6,077,521 | ||||||||||
| Less: | ||||||||||||
| Fair value of plan assets | 3,310,895 | 5,673,071 | 4,906,977 | |||||||||
| Unrecognized assets (1) | - | (121,429 | ) | - | ||||||||
| Provisions – Other similar obligations, net | 935,594 | 483,092 | 1,170,544 | |||||||||
| Total provisions for pension plans, net | 2,556,966 | 2,696,653 | 3,869,171 | |||||||||
| Of which: | ||||||||||||
| Actuarial provisions | 2,710,627 | 2,696,653 | 3,869,728 | |||||||||
| Actuarial assets (note 16) | 153,661 | - | 557 |
(1) Refers to fully funded plans Banesprev I and III, Sanprev I, II and III and Bandeprev.
F-54
BANCO SANTANDER (BRASIL) S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Brazilian Reais - R$, unless otherwise stated)
The amounts recognized in the consolidated income statement in relation to the aforementioned defined benefit obligations are as follows:
| Thousands of Reais | Post-Employment Plans | |||||||||||
| 2016 | 2015 | 2014 | ||||||||||
| Current service cost | 15,416 | 20,560 | 11,189 | |||||||||
| Interest cost (net) | 120,524 | 187,650 | 134,076 | |||||||||
| Interest on assets not recognized | 117,981 | 95,652 | - | |||||||||
| Other movements | 4,355 | (2,607 | ) | (3,481 | ) | |||||||
| Total | 258,276 | 301,255 | 141,784 | |||||||||
| Thousands of Reais | Other Similar Obligations | |||||||||||
| 2016 | 2015 | 2014 | ||||||||||
| Current service cost | 9,064 | 10,740 | 10,606 | |||||||||
| Interest cost (net) | 38,064 | 124,469 | (384,410 | ) | ||||||||
| Interest on assets not recognized | 14,608 | - | - | |||||||||
| Other movements | 55,943 | 27 | (77,165 | ) | ||||||||
| Total | 117,679 | 135,236 | (450,969 | ) | ||||||||
The changes in the present value of the accrued defined benefit obligations were as follows:
| Thousands of Reais | Post-Employment Plans | |||||||||||
| 2016 | 2015 | 2014 | ||||||||||
| Present value of the obligations at beginning of year | 17,525,799 | 17,891,352 | 16,497,830 | |||||||||
| Current service cost | 15,416 | 20,560 | 11,146 | |||||||||
| Interest cost | 2,046,949 | 1,877,942 | 1,770,565 | |||||||||
| Benefits paid | (1,679,794 | ) | (1,530,082 | ) | (1,445,736 | ) | ||||||
| Actuarial (gains)/losses | 2,844,733 | (753,155 | ) | 1,056,019 | ||||||||
| Others | 16,023 | 19,182 | 1,528 | |||||||||
| Present value of the obligations at end of year | 20,769,126 | 17,525,799 | 17,891,352 | |||||||||
| Thousands of Reais | Other Similar Obligations | |||||||||||
| 2016 | 2015 | 2014 | ||||||||||
| Present value of the obligations at beginning of year | 6,034,734 | 6,077,521 | 5,524,178 | |||||||||
| Current service cost | 9,064 | 10,740 | 10,607 | |||||||||
| Interest cost | 703,874 | 653,206 | 608,412 | |||||||||
| Benefits paid | (465,029 | ) | (421,429 | ) | (342,936 | ) | ||||||
| Actuarial (gains)/losses | 1,330,371 | (285,304 | ) | 279,855 | ||||||||
| Other (1) | (3,366,525 | ) | - | (2,595 | ) | |||||||
| Present value of the obligations at end of year | 4,246,489 | 6,034,734 | 6,077,521 | |||||||||
(1) In the fourth quarter of 2016, Banco Santander updated the procedures for recognizing its obligations to the entity CABESP, in accordance with its bylaws, which establishes the coverage of medical costs in the equality of proportion between associates and sponsor.
The changes in the fair value of the plan assets were as follows:
| Thousands of Reais | Post-Employment Plans | |||||||||||
| 2016 | 2015 | 2014 | ||||||||||
| Fair value of plan assets at beginning of year | 16,275,269 | 16,067,029 | 15,271,532 | |||||||||
| Interest (Expense) Income | 1,926,424 | 1,690,293 | 1,652,774 | |||||||||
| Remeasurement - Actual return (loss) on plan assets excluding the amounts included in net | 1,589,517 | (297,461 | ) | 241,663 | ||||||||
| interest expense | ||||||||||||
| Contributions | 2,001,806 | 298,198 | 300,624 | |||||||||
| Of which: | ||||||||||||
| By the Bank | 1,985,722 | 279,111 | 280,996 | |||||||||
| By plan participants | 16,084 | 19,087 | 19,627 | |||||||||
| Benefits paid | (1,676,116 | ) | (1,482,914 | ) | (1,399,142 | ) | ||||||
| Exchange differences and other items | 16 | 124 | (422 | ) | ||||||||
| Fair value of plan assets at end of year | 20,116,916 | 16,275,269 | 16,067,029 | |||||||||
| Thousands of Reais | Other Similar Obligations | |||||||||||
| 2016 | 2015 | 2014 | ||||||||||
| Fair value of plan assets at beginning of year | 5,673,071 | 4,906,977 | 4,629,910 | |||||||||
| Interest (Expense) Income | 665,811 | 528,737 | 496,373 | |||||||||
| Remeasurement - Actual return (loss) on plan assets excluding the amounts included in net interest expense | 718,628 | 581,755 | 187,841 | |||||||||
| Contributions | - | 52,894 | 50,468 | |||||||||
| Of which: | ||||||||||||
| By the Bank | - | 52,894 | 50,468 | |||||||||
| Benefits paid | (3,746,615 | ) | (397,292 | ) | (319,550 | ) | ||||||
| Exchange differences and other items | - | - | (138,065 | ) | ||||||||
| Fair value of plan assets at end of year | 3,310,895 | 5,673,071 | 4,906,977 | |||||||||
F-55
BANCO SANTANDER (BRASIL) S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Brazilian Reais - R$, unless otherwise stated)
Opening of gains (losses) Actuarial from experience, financial assumptions and demographic hypotheses:
| Thousands of Reais | Post-Employment Plans | |||||||||||
| 2016 | 2015 | 2014 | ||||||||||
| Experience Plan | (696,910 | ) | (1,299,660 | ) | (580,616 | ) | ||||||
| Changes in Financial Assumptions | (2,135,189 | ) | 2,049,061 | (475,403 | ) | |||||||
| Changes in Financial Demographic | (12,773 | ) | - | - | ||||||||
| Gain (Loss) Actuarial - Obligation | (2,844,872 | ) | 749,401 | (1,056,019 | ) | |||||||
| Return on Investment, Return Unlike Implied Discount Rate | 1,589,446 | (297,271 | ) | 241,663 | ||||||||
| Gain (Loss) Actuarial - Asset | 1,589,446 | (297,271 | ) | 241,663 | ||||||||
| Changes in Superavit Uncollectible | 111,926 | - | - | |||||||||
| Thousands of Reais | Other Similar Obligations | |||||||||||
| 2016 | 2015 | 2014 | ||||||||||
| Experience Plan | (1,116,845 | ) | (433,550 | ) | (80,468 | ) | ||||||
| Changes in Financial Assumptions | (537,952 | ) | 718,854 | (199,387 | ) | |||||||
| Changes in Financial Demographic | (379 | ) | - | - | ||||||||
| Gain (Loss) Actuarial - Obligation | (1,655,176 | ) | 285,304 | (279,855 | ) | |||||||
| Return on Investment, Return Unlike Implied Discount Rate | 718,628 | 581,755 | 187,841 | |||||||||
| Gain (Loss) Actuarial - Asset | 718,628 | 581,755 | 187,841 | |||||||||
| Changes in Superavit Uncollectible | 136,037 | - | - | |||||||||
| Effect without Risk Sharing | 380,434 | - | - | |||||||||
| The experience adjustments arising from plan assets and liabilities are shown below: | ||||||||||||
| Post - Employment Plans | ||||||||||||
| In thousands of reais | 2016 | 2015 | 2014 | |||||||||
| Experience in Net Assets Adjustments | 1,589,517 | (297,461 | ) | 241,663 | ||||||||
| Other Similar Obligations | ||||||||||||
| In thousands of reais | 2016 | 2015 | 2014 | |||||||||
| Experience in Net Assets Adjustments | 718,628 | 581,755 | 187,841 | |||||||||
The amounts of actuarial obligation of defined benefit plans uninsured and defined benefit plans partially or totally covered are shown below:
| In thousands of reais | 2016 | 2015 | 2014 | |||||||||
| Defined benefit plans uninsured | 555,160 | 826,963 | 878,550 | |||||||||
| Defined benefit plans partially or totally covered | 24,442,275 | 22,734,017 | 23,090,769 |
In 2017 the Bank expects to make contributions to fund these obligations for amounts similar to those made in 2016.
The main categories of plan assets as a percentage of total plan assets are as follows:
| 2016 | 2015 | 2014 | ||||||||||
| Equity instruments | 1.00 | % | 0.48 | % | 3.04 | % | ||||||
| Debt instruments | 98.16 | % | 98.54 | % | 93.94 | % | ||||||
| Properties | 0.30 | % | 0.28 | % | 0.32 | % | ||||||
| Other | 0.54 | % | 0.70 | % | 2.70 | % |
The expected return on plan assets was determined on the basis of the market expectations for returns over the duration of the related obligations.
The actual return on plan assets was R$4,900,380 (2015 - R$2,503,610 and 2014 - R$2,578,652).
The following table shows the estimated benefits payable at December 31, 2016 for the next ten years:
| Thousands of Reais | ||||
| 2017 | 2,016,693 | |||
| 2018 | 2,105,021 | |||
| 2019 | 2,196,158 | |||
| 2020 | 2,288,697 | |||
| 2021 to 2026 | 15,541,948 | |||
| Total | 24,148,517 |
Presumptions about the rates related to medical care costs have a significant impact on the amounts recognized in income. A change of one percentage point in the medical care cost rates would have the effects as follows:
| Thousands of Reais | ||||||||
| Sensitivity | ||||||||
| (+1,0%) | (-)1,0% | |||||||
| Effect on current service cost and interest on actuarial liabilities | 58,416 | (24,839 | ) | |||||
| Effects on present value of obligation | 527,586 | (451,242 | ) |
F-56
BANCO SANTANDER (BRASIL) S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Brazilian Reais - R$, unless otherwise stated)
The following table shows the duration of the actuarial liabilities of the plans sponsored by Banco Santander:
| Plans | Post - Employment Plans | |||||||
| Duration (in years) | ||||||||
| Banesprev Plans I | 11.47 | |||||||
| Banesprev Plans II | 11.42 | |||||||
| Banesprev Plans III | 8.44 | |||||||
| Banesprev Plans IV | 16.34 | |||||||
| Banesprev Plans V | 8.57 | |||||||
| Banesprev Pre-75 | 9.29 | |||||||
| Sanprev I | 6.29 | |||||||
| Sanprev II | 12.87 | |||||||
| Sanprev III | 9.12 | |||||||
| Bandeprev Basic | 9.11 | |||||||
| Bandeprev Special I | 6.54 | |||||||
| Bandeprev Special II | 6.48 | |||||||
| SantanderPrevi | 6.59 | |||||||
| CACIBAN / DAB / DCA | 6.58 / 5.56 / 6.22 | |||||||
| Plans | Other Similar Obligations | |||
| Cabesp | 12.93 | |||
| Law 9656 | - | |||
| Bandepe | 14.57 | |||
| Free Clinic | 11.03 | |||
| Lifetime officers | 9.12 | |||
| Circulars (1) | 12.91 / 10.05 | |||
| Life Insurance | 7.68 |
(1) The duration 12.91 refers to the plan of Former Employees of Banco ABN Amro and 10.05 to the plan of Former Employees of Banco Real.
| Actuarial Assumptions Adopted in Calculations | ||||||||||||||||||||||||
| 2016 | 2015 | 2014 | ||||||||||||||||||||||
| Pension | Health | Pension | Health | Pension | Health | |||||||||||||||||||
| Nominal Discount Rate for Actuarial Obligation | 10.9 | % | 10.8 | % | 12.3 | % | 12.0 | % | 10.9 | % | 11.0 | % | ||||||||||||
| Rate Calculation of Interest Under Assets to the | ||||||||||||||||||||||||
| Next Year | 10.9 | % | 10.8 | % | 12.3 | % | 12.0 | % | 10.9 | % | 11.0 | % | ||||||||||||
| Estimated Long-term Inflation Rate | 4.5 | % | 4.5 | % | 4.5 | % | 4.5 | % | 4.5 | % | 4.5 | % | ||||||||||||
| Estimated Salary Increase Rate | 5.0 | % | 5.0 | % | 5.0 | % | 5.0 | % | 5.0 | % | 5.0 | % | ||||||||||||
| Boards of Mortality | AT2000 | AT2000 | AT2000 | AT2000 | AT2000 | AT2000 |
(1) For Banesprev II, V and Pré 75 plans.
(2) For Cabesp plans.
24. Provisions for judicial and administrative proceedings, commitments and other provisions
a) Breakdown
The breakdown of the balance of “Provisions” is as follows:
| Thousands of Reais | 2016 | 2015 | 2014 | |||||||||
| Judicial and administrative proceedings under the responsibility of former controlling stockholders | 814,925 | 789,974 | 783,909 | |||||||||
| Judicial and administrative proceedings | 7,470,344 | 7,000,680 | 5,487,882 | |||||||||
| Of which: | ||||||||||||
| Civil | 1,842,549 | 1,986,602 | 1,755,367 | |||||||||
| Labor | 3,138,645 | 2,501,426 | 1,982,393 | |||||||||
| Tax and Social Security | 2,489,150 | 2,512,652 | 1,750,122 | |||||||||
| Others provisions (1) | 780,595 | 922,370 | 985,925 | |||||||||
| Total | 9,065,864 | 8,713,024 | 7,257,716 |
(1) In 2016, includes R$450,284 (2015 - R$301,447) relating to the expenses of projects aimed at improving operational productivity and efficiency.
F-57
BANCO SANTANDER (BRASIL) S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Brazilian Reais - R$, unless otherwise stated)
b) Changes
The changes in “Provisions” were as follows:
| Thousands of Reais | 2016 | |||||||||||
| Other | ||||||||||||
| Pensions | Provisions | Total | ||||||||||
| Balance at beginning of year | 2,696,653 | 8,713,024 | 11,409,677 | |||||||||
| Additions charged to income: | ||||||||||||
| Interest expense and similar charges (Note 33 & 34) | 287,576 | - | 287,576 | |||||||||
| Personnel Expenses (Note 41) | 24,481 | - | 24,481 | |||||||||
| Additions to provisions | 60,309 | 2,645,764 | 2,706,073 | |||||||||
| Other Comprehensive Income | 1,876,888 | - | 1,876,888 | |||||||||
| Payments to external funds | (2,074,873 | ) | - | (2,074,873 | ) | |||||||
| Amount used | - | (2,330,283 | ) | (2,330,283 | ) | |||||||
| Transfer to other assets - actuarial assets (Note 16) | (153,595 | ) | - | (153,595 | ) | |||||||
| Transfers, exchange differences and other changes | (6,812 | ) | 37,359 | 30,547 | ||||||||
| Balance at end of year | 2,710,627 | 9,065,864 | 11,776,491 |
| Thousands of Reais | 2015 | |||||||||||
| Other | ||||||||||||
| Pensions | Provisions(1) | Total | ||||||||||
| Balance at beginning of year | 3,869,728 | 7,257,716 | 11,127,444 | |||||||||
| Additions charged to income: | ||||||||||||
| Interest expense and similar charges (Note 34) | 404,171 | - | 404,171 | |||||||||
| Personnel Expenses (Note 41) | 31,332 | - | 31,332 | |||||||||
| Additions to provisions | (3,912 | ) | 3,997,463 | 3,993,551 | ||||||||
| Other Comprehensive Income | (1,201,893 | ) | - | (1,201,893 | ) | |||||||
| Payments to pensioners and early retirees with a charge to internal provisions | (47,682 | ) | - | (47,682 | ) | |||||||
| Payments to external funds | (354,534 | ) | - | (354,534 | ) | |||||||
| Amount used | - | (2,225,641 | ) | (2,225,641 | ) | |||||||
| Other Comprehensive Income | (557 | ) | - | (557 | ) | |||||||
| Transfers, exchange differences and other changes | - | (315,646 | ) | (315,646 | ) | |||||||
| Sale of companies (1) | - | (868 | ) | (868 | ) | |||||||
| Balance at end of year | 2,696,653 | 8,713,024 | 11,409,677 | |||||||||
| (1) Sale of Santander Securities. |
| Thousands of Reais | 2014 | |||||||||||
| Other | ||||||||||||
| Pensions | Provisions(1) | Total | ||||||||||
| Balance at beginning of year | 3,043,311 | 7,849,077 | 10,892,388 | |||||||||
| Additions charged to income: | ||||||||||||
| Interest expense and similar charges (Note 34) | 318,267 | - | 318,267 | |||||||||
| Personnel Expenses (Note 41) | 21,830 | - | 21,830 | |||||||||
| Additions to provisions | (3,833 | ) | 2,109,856 | 2,106,023 | ||||||||
| Payments to pensioners and early retirees with a charge to internal provisions | (66,250 | ) | - | (66,250 | ) | |||||||
| Payments to external funds | (354,117 | ) | - | (354,117 | ) | |||||||
| Amount used | - | (2,666,217 | ) | (2,666,217 | ) | |||||||
| Other Comprehensive Income | 910,859 | - | 910,859 | |||||||||
| Transfer to other assets - actuarial assets (Note 16) | (339 | ) | - | (339 | ) | |||||||
| Transfers, exchange differences and other changes | - | (35,000 | ) | (35,000 | ) | |||||||
| Balance at end of year | 3,869,728 | 7,257,716 | 11,127,444 |
(1) Includes, primarily, provisions for tax risks and legal obligations, and judicial and administrative proceedings of labor and civil lawsuits.
c) Provisions for civil, labor, tax and social security contingencies
Banco Santander and its subsidiaries are involved in litigation and administrative tax, labor and civil proceedings arising in the normal course of its activities.
The provisions were constituted based on the nature, complexity and history of actions and evaluation of successful businesses based on the opinions of internal and external legal advisors. The Santander has the policy to accrue the full amount of proceedings whose loss is probable. The legal obligation statutory tax and social security were fully recognized in the financial statements.
Management understands that the provisions recorded are sufficient to meet legal obligations and losses from lawsuits and administrative proceedings as follows:
c.1) Lawsuits and Administrative Proceedings - Tax and Social Security
The Bank and its subsidiaries adhered, in August 2014, to the program of amnesty established by Law 12.996/14.
Joining the program includes administrative charge resulting from the deduction of taxes expenses and interest, with preliminary decision that suspended payments related to the IRPJ and da CSLL between the years 2006 and 2008. Such case was pending from decision at the administrative level, risk classification was assessed as possible losses, according to legal counsel. Other administrative and judicial proceedings were also included this program.
F-58
BANCO SANTANDER (BRASIL) S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Brazilian Reais - R$, unless otherwise stated)
Tax and social security contingencies procedures included in payment were registered at the time of subscription on the program through financial settlement in the amount of R$412,602, after the recorded deferred tax assets, was zero in net income.
The main lawsuits related to tax legal obligations, recorded in the line "Tax Liabilities - Current", fully registered as obligation, are described below:
• PIS and Cofins - R$3,290,900 (2015 - R$3,015,147 and 2014 - R$10,463,919): Banco Santander and its subsidiaries filed lawsuits seeking to eliminate the application of Law 9,718/1998, which modified the calculation basis for PIS and Cofins to cover all revenues of legal entities and not only those arising from the provision of services and sale of goods. Regarding the Banco Santander Process, on April 23, 2015, a STF decision was issued admitting the Extraordinary Appeal filed by the Federal Government regarding PIS and denying the follow-up to the Extraordinary Appeal of the Federal Public Prosecutor regarding Cofins. Both appealed this decision, without any success, so that the suit relating to Cofins is defined, ruling the judgment of the Federal Regional Court of the 4th Region of August 2007, favorable to Banco Santander. The Banco Santander's PIS and the PIS and Cofins liabilities of the other controlled companies are pending final judgment by the STF. In fiscal year 2015, with the decision of the STF, Banco Santander reversed the balance of the provision constituted to cover legal obligations related to Cofins, in the amount of R$7,950 million (R$4,770 million, after tax effects).
• Increase in CSLL tax rate - R$851,744 (2015 - R$795,859 and 2014 - R$1,357,957) – The Bank and its subsidiaries are discussing the increase in the CSLL tax rate, from 9% to 15%, established by Executive Act 413/2008, which subsequently became Law 11,727/2008, in April 2008. Judicial proceedings are pending of judgment.
Banco Santander and its subsidiaries are parties to judicial and administrative proceedings related to tax and social security matters, which are classified based on the opinion of legal counsel as probable loss risk.
The main topics discussed in these lawsuits are:
• CSLL - equal tax treatment - R$54,245 (2015 - R$52,268 and 2014 - R$54,111) - The Bank and its subsidiaries filed a lawsuit challenging the application of an increased CSLL rate of 18% for financial companies, applicable until 1998, compared to the CSLL rate of 8% for non-financial companies on the basis of the constitutional principle of equal tax treatment.
• Tax on Services for Financial Institutions (ISS) - R$621,437 (2015 - R$755,211 and 2014 - R$722,366): The Bank and its subsidiaries filed lawsuits, in administrative and judicial proceedings, some municipalities collection of ISS on certain revenues derived from transactions not usually classified as services.
• Social Security Contribution (INSS) - R$266,391 (2015 - R$527,111 and 2014 - R$442.583): The Bank and its subsidiaries are involved in administrative and judicial proceedings regarding the collection of income tax on social security and education allowance contributions over several funds that, according to the evaluation of legal advisors, do not have nature of salary.
• Provisional Contribution on Financial Transactions (CPMF) on Customer Operations - R$689,987 (2015 – R$657,750 and 2014 – R$0): In May 2003, the Federal Revenue Service of Brazil issued an assessment notice in Santander Distribuidora de Títulos e Valores Mobiliários Ltda. (Santander DTVM) and another suit at Banco Santander Brasil S.A. The subject of the suit was the collection of CPMF on operations carried out by Santander DTVM in the administration of its clients' funds and compensation services provided by the Bank to Santander DTVM, which occurred during the years 2000, 2001 and 2002. In June 2015, the defenses were assessed with unfavorable decisions at the administrative level (CARF). On July 3, 2015, Banco and Produban Serviços de Informática S.A. (current name of Santander DTVM) filed a lawsuit seeking to cancel both tax debts, which in the period ended December 31, 2016 totaled R$1,382 million. Based on the assessment of the legal advisors, a provision was set up to cover the loss considered probable in the lawsuit.
c.2) Lawsuits and Administrative Proceedings - Labor
These are lawsuits brought by labor Unions, Associations, Public Prosecutors and former employees claiming labor rights they believe are due, especially payment for overtime and other labor rights, including retirement benefit lawsuits.
For claims considered to be similar and usual, provisions are recognized based on the history of payments and successes. Claims that do not fit the previous criteria are accrued according to individual assessment performed, and provisions are based on the probable loss, the law and jurisprudence according to the assessment of loss made by legal counsel.
c.3) Lawsuits and Administrative Proceedings - Civil
These provisions are generally caused by: (1) Action with a request for revision of contractual terms and conditions or requests for monetary adjustments, including supposed effects of the implementation of various government economic plans, (2) action deriving of financing agreements, (3) execution action; and (4) action indemnity by loss and damage. For civil actions considered common and similar in nature, provisions are recorded based on the average of cases closed. Claims that do not fit the previous criteria are accrued according to individual assessment performed, and provisions are based on the probable loss, the law and jurisprudence according to the assessment of loss made by legal counsel.
The main lawsuits classified as probable loss are described below:
Lawsuits for indemnity - seeking indemnity for property damage and/or emotional distress, regarding the consumer relationship on matters related to credit cards, consumer credit, bank accounts, collection and loans and other operations. In the civil lawsuits considered to be similar and usual, provisions are recorded based on the average of cases closed. Civil lawsuits that do not fit into the previous criterion are accrued according to the individual assessment made, and provisions are recognized based on the probable loss, the law and jurisprudence according to the assessment of loss made by legal counsel.
Economic Plans - efforts to recover actions with collective the deficient inflation adjustments in savings accounts arising from the Economic Plans (Bresser, Verão, Collor I and II). These refer to the lawsuits filed by savings accountholders disputing the interest credited by the Banco Santander under such plans as they considered that such legal amendments infringed on the rights acquired with regard to the application of the inflation indexes. Provisions are recorded based on the average losses of cases closed.
F-59
BANCO SANTANDER (BRASIL) S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Brazilian Reais - R$, unless otherwise stated)
Civil lawsuits that do not fit into the previous criterion are accrued according to the individual assessment made, and provisions are recognized based on the probable loss, the law and jurisprudence according to the assessment of loss made by legal counsel. The Banco Santander is also a party in public class action suits on the same issue filed by consumer rights organizations, Public Prosecutor’s Offices and Public Defender’s Offices. In these cases, the provision is made only after the final unappeasable sentence is handed down on the lawsuits, based on the individual execution orders. The Superior Tribunal da Justiça (STJ - Justice Superior Court) decided against the bank’s. The STF is still analyzing the subject and has already ordered the suspension of all the procedures except those that were not already decided in trial courts and those who have a final decision. However, the assessment of this question is paralyzed in the Supreme Court for lack of quorum, considering that some of his ministers declared themselves unable to judge the matter and therefore is likely to judgment remains paralyzed for several years yet. There are decisions favorable to banks at the STF with regard to the economic phenomenon similar to that of savings accounts, as in the case of monetary restatement of time deposits - CDB and agreements (present value table).
Moreover, there are precedents at the STF regarding the constitutionality of the norms that changed Brazil’s monetary standard. On April 14, 2010, in the STJ was recently decided that the deadline for the filing of civil lawsuits that argue the government's purge of five years, but this decision not handed down on the lawsuits yet. Thus, with this decision, a majority stake, as was proposed after the period of 5 years is likely to be rejected, reducing the values involved. Still, the STF decided that the deadline for individual savers to qualify in the public civil litigations, also is five years, counted from the final judgment of their sentence. Banco Santander believes in the success of the arguments defended in these courts based on their content and the sound legal basis.
c.4) Civil, labor, tax and social security contingencies classified as possible loss risk
Refer to judicial and administrative proceedings involving civil, labor, tax and social security matters assessed by the legal counsels as possible loss risk, which were not accrued as a provision.
Tax lawsuits classified as possible loss risk, totaled R$18,653 million, including the following main lawsuits:
• Credit Losses - The Bank and its companies challenged the tax assessments issued by the Federal Revenue Services challenging the deduction for credit losses because they fail to meet the relevant requirements under applicable law. As of December 31, 2016 the amount related to this challenge is approximately R$730 million.
• INSS on Profit Sharing Payments – The Bank and the subsidiaries are involved in several legal and administrative proceedings against the tax authorities in connection with the taxation for social security purposes of certain items which are not considered to be employee remuneration. As of December 31, 2016 amounts related to these proceedings totaled approximately R$2,978 million.
• IRPJ and CSLL - Capital Gain - the Brazilian Federal Revenue Service issued infraction notices against Zurich Santander Brasil Seguros e Previdência S.A., successor company of ABN AMRO Brasil Dois Participações S.A. (AAB Dois Par), charging income Tax and Social Contribution to related to 2005 tax, claiming that capital gain in sales shares of Real Seguros S.A and Real Vida Previdência S.A. by AAB Dois Par should be taxed an rate of 34% instead 15%. The assessment was contested administratively based on understanding tax treatment adopted at the transaction was in compliance and capital gain tax paid was in compliance with the legislation. We had a partial favorable the decision on CARF, that disregard the fine and interest on this fine. Currently awaiting the assessment of a Amendment of Judgment by Zurich and the judgment of the Extraordinary Appeal filed by the Federal Government . The Banco Santander is responsible for any adverse outcome in this process as former controlling of Zurich Santander Brasil Seguros e Previdência S.A. As of December 31, 2016 the amount related to this proceeding is approximately R$279 million.
• Goodwill amortization of Banco Real – The Brazilian Internal Revenue Service issued a tax assessment notice against the Bank to require IRPJ and CSLL payments, including late payment charges, for the 2009 base period. The Tax Authorities considered that the goodwill related to the acquisition of Banco Real, amortized before its incorporation, could not be deducted by Banco Santander for tax purposes. The notice of infringement was duly challenged. On July 14, 2015, the RFB's Trial Division decided favorably to Banco Santander, which led to the filing of an Appeal (ex officio) by the Treasury. On November 10, 2016, the appeal was filed, prompting the Bank to lodge an appeal with CARF, which is awaiting judgment. As of December 31, 2016, the amount was R$1,259 million.
• Goodwill amortization of Banco Sudameris – The Tax Authorities have issued infraction notices to require the income tax and social contribution payments, including late charges, relating to tax deduction of amortization of goodwill from the acquisition of Banco Sudameris, related period of 2007 to 2012. Banco Santander timely presented their appeals, which are pending. On December 31, 2016, the figure was R$568 million.
The labor lawsuits classified as possible loss risk totaled R$15 million, excluding the lawsuit below:
Semiannual Bonus or Profit Sharing - a labor lawsuit relating to the payment of a semiannual bonus or, alternatively, profit sharing, to retired employees from the former Banco do Estado de São Paulo S.A. - Banespa, that had been hired up to May 22, 1975, filed as Banespa’s Retirees Association. This lawsuit was dismissed against the Bank by the Superior Labor Court. The STF rejected the extraordinary appeal of the Bank by a monocratic decision maintaining the earlier condemnation. Santander brought Regimental Appeal which awaits decision by the STF. The Regimental Appeal is an internal appeal filed in the STF itself, in order to refer the monocratic decision to a group of five ministers. The 1st Class of the STF upheld the appeal by the Bank and denied the Afabesp. The materials of the extraordinary appeal of the Bank now proceed to the STF for decision on overall impact and judgment. The amount related to this claim is not disclosed due to the current stage of the lawsuit and the possible impact such disclosure may have on the progress of the claim.
Readjustment of Banesprev retirement complements by the IGPDI - lawsuit filed in 2002 in Federal Court by the Association of Retired Employees of the Bank of the State of São Paulo requesting the readjustment of the supplementation of retirement by the IGPDI for Banespa retirees who have been admitted until May 22 Of 1975. The judgment granted the correction but only in the periods in which no other form of adjustment was applied. The Bank and Banesprev have appealed this decision and although the appeals have not yet been judged, the Bank's success rate in this regard in the High Courts is around 90%. In Provisional Execution, calculations were presented by the Bank and Banesprev with "zero" result due to the exclusion of participants who, among other reasons, are listed as authors in other actions or have already had some type of adjustment. The amount related to this action is not disclosed due to the current stage of the process and the possible impact that such disclosure may generate on the progress of the action.
F-60
BANCO SANTANDER (BRASIL) S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Brazilian Reais - R$, unless otherwise stated)
The liabilities related to civil lawsuits with possible loss risk totaled R$1,211 million, being the main processes as follows:
Indemnity lawsuit arising of the Banco Bandepe - related to mutual agreement on appeal to the Justice Superior Court (STJ - Superior Tribunal de Justiça)
Indemnity lawsuit related to custody services - provided by Banco Santander (Brasil) S.A. at an early stage and still not handed down;
Lawsuit arising out of a contractual dispute - the acquisition of Banco Geral do Comércio S.A. on appeal to the Court of the State of São Paulo (TJSP - Tribunal de Justiça do Estado de São Paulo).
c.5) Judicial and administrative proceedings under the responsibility of former controlling stockholders
Refer to tax, labor and civil lawsuits in the amounts of R$810,383, R$712 and R$3,830 (2015 - R$785,837, R$890 and R$3,247 and 2014 - R$773,304, R$2,520 and R$8,085), with responsibility of the former controlling stockholders of the banks and acquired entities. Based on the agreements signed these lawsuits have guarantees of full reimbursement by the former controlling stockholders, and amounts reimbursable were recorded under other assets.
25. Tax assets and liabilities
a) Income and Social Contribution Taxes
The total charge for the year can be reconciled to accounting profit as follows:
| Thousands of Reais | 2016 | 2015 | 2014 | |||||||||
| Operating Profit Before Tax | 16,383,902 | (3,215,718 | ) | 6,443,329 | ||||||||
| Interest on capital (1) | (3,850,000 | ) | (1,400,000 | ) | (690,000 | ) | ||||||
| Unrealized profits | - | - | (142 | ) | ||||||||
| Operating Profit Before Tax | 12,533,902 | (4,615,718 | ) | 5,753,187 | ||||||||
| Rates (25% income tax and 20% social contribution tax in 2015 and 15% social contribution tax in 2014) | (5,640,256 | ) | 2,077,073 | (2,301,275 | ) | |||||||
| PIS and COFINS (net of income and social contribution taxes) (2) (8) | (1,641,181 | ) | 1,861,767 | (813,814 | ) | |||||||
| Non-taxable/Non-deductible: | ||||||||||||
| Equity in affiliates | 21,392 | 52,340 | 36,438 | |||||||||
| Goodwill(3) | 734,952 | 1,252,578 | 1,471,590 | |||||||||
| Exchange variation - foreign branches (4) | (3,561,133 | ) | 5,913,741 | 920,694 | ||||||||
| Adjustments: | ||||||||||||
| Constitution of income and social contribution taxes on temporary differences (5) | 605,058 | 1,266,588 | 29,257 | |||||||||
| Effects of change in rate of social contribution taxes (6) | (613,202 | ) | 52,145 | 11,419 | ||||||||
| Other adjustments (7) (9) | 1,175,386 | 573,312 | (89,862 | ) | ||||||||
| Income taxes | (8,918,984 | ) | 13,049,544 | (735,553 | ) | |||||||
| Of which: | ||||||||||||
| Current tax (8) | (3,575,099 | ) | 3,631,631 | (2,791,425 | ) | |||||||
| Deferred taxes | (5,343,885 | ) | 9,417,913 | 2,055,872 | ||||||||
| Taxes paid in the year | (4,240,115 | ) | (1,170,020 | ) | (573,684 | ) |
(1) Amount distributed to shareholders as interest attributable to shareholders’ equity. For accounting purposes, although the interest should be reflected in the statement of income for tax deduction, the charge is reversed before the calculation of the net income in the statutory financial statements and deducted from the shareholders’ equity since is considered as dividend.
(2) PIS and COFINS are considered a profit-base component (net basis of certain revenues and expenses), therefore and accordingly to IAS 12 it is recorded as income taxes.
(3) Tax-deductible goodwill originating from the acquisition of Banco ABN Amro Real S.A. (in 2007) as a result of a subsequent group restructuring. The amortization of the tax deductible goodwill is expected to continue until 2017 and the income tax benefit is shown in the income tax reconciliation. The tax-deductible goodwill is not considered to generate taxable temporary difference and thus no deferred income tax liability is recorded.
(4) Permanent difference related of foreign currency exchange variation on investments abroad nontaxable/ deductible (see details below).
(5) In 2015, includes the increase in CSLL tax rate
(6) Effect of rate differences for the other non-financial corporations, which the social contribution tax rate is 9%.
(7) In 2016, includes the IAS 21 amounted to R$575,131 (see Hedge of Investments Abroad below) and non-taxable income/non-deductible expenses R$349,120.
Cofins (8)
In June 2015, Banco Santander recorded the reversal of legal liabilities (recorded under tax liabilities - current) amounted to R$7,950 million related to Cofins. On the Consolidated Income Statements the registration occurred on "Interest expense and similar charges" amounted to R$2,057 million and "Income Taxes", amounted to R$5,893 million (Note 23-c.1). Such gain taxed at the current rates of IR and CSLL, resulted in a R$3,180 of tax expense also recorded in "Income taxes."
With this decision handed down on the lawsuits , the Bank also recognizes the right to offset COFINS paid in the period 1999-2006, under the Income taxes of R $381,597 and under Interest and similar income update as to tax offset the amount of R$383,560. The amount of taxes on these revenues amounted to R$306,102.
Hedge of Investments abroad (9)
Banco Santander operate a branch in the Cayman Islands and subsidiary called Santander Brasil Establecimiento Financiero de Credito, EFC, or “Santander EFC” (independent subsidiary in Spain) which used primarily for sourcing funds in the international banking and capital markets to provide credit lines, which are extended to our customers for working capital and trade-related financings.
F-61
BANCO SANTANDER (BRASIL) S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Brazilian Reais - R$, unless otherwise stated)
The functional currency of Santander EFC is the Euro, so the exchange rate differences generated for converting that investment to the real are recorded in "Other comprehensive income". In the case of the Cayman branch, its functional currency is the Real. Thus, the foreign exchange differences of operations that are carried out in US dollars are recorded as a result. To hedge exposure to foreign exchange variations, the Bank uses derivative. According to Brazilian tax rules, gains or losses resulting from the impact of the appreciation or depreciation of the real on foreign investment are not taxable for PIS/ COFINS / IR / CSLL purposes while gains or losses from derivatives used as hedges are taxable. The purpose of these derivatives is to protect the net result after tax. Whereas the effect of exchange rate changes are not taxable, and the effect of changes in these derivatives suffer taxation, the notional of the derivative contracts is greater than the amount of net assets protected.
In the case of Santander EFC, the Bank uses hedge accounting (Net Investment Hedge). Changes in the value of derivatives, as well as related tax effect, are recorded in other comprehensive income, offsetting the exchange differences produced by the conversion of the investment for real when the hedges are effective.
In the case of the Cayman Islands branch, the Bank does not use hedge accounting. Exchange differences of operations in dollars and the effects of derivatives used for economic protection (futures contracts) are recorded in income. The different tax treatment of such exchange differences result in volatility in Operating Profit Before Tax and Tax on income account. Exchange rate variations recorded in results from operations in dollars in the Cayman branch in the nine months ended December 31, 2016, resulted in a loss of R$6,770 million. On the other hand, contracts for derivatives contracted to cover these positions generated a gain in earnings account (losses) on financial assets and liabilities of R$12,910 million. The tax effect of these derivatives impacted the line Income taxes, generating a tax loss of R$6,140 million consisting of R$600 million PIS/COFINS and R$5,539 million IR and CSLL.
b) Effective tax rate calculation
The effective tax rate is as follows:
| Thousands of Reais | 2016 | 2015 | 2014 | |||||||||
| Operating Profit Before Tax | 16,383,902 | (3,215,718 | ) | 6,443,329 | ||||||||
| Income tax | 8,918,984 | (13,049,544 | ) | 735,553 | ||||||||
| Effective tax rate (1) | 54.44 | % | 405.80 | % | 11.42 | % |
(1) In 2016, 2015 and 2014, considering the tax effect of the exchange variation over foreign branches and the economic hedge, accounted in the Gains (losses) on financial assets and liabilities (net) (note 37) the effective tax rate would have been 27.1%, -18.3% and 29.6%, respectively. In 2015 there were the gain on the Cofins judicial action (see disclosure above), which excluding the effects the effective tax rate would be 19.1%.
c) Tax recognized in equity
In addition to the income tax recognized in the consolidated income statement, the Bank recognized the following amounts in consolidated equity:
| Thousands of Reais | 2016 | 2015 | 2014 | |||||||||
| Tax credited to equity | 2,955,552 | 4,943,957 | 2,477,167 | |||||||||
| Measurement of available-for-sale securities | 963,990 | 2,743,797 | 756,760 | |||||||||
| Measurement of cash flow hedges | 4,145 | 267,511 | 4,667 | |||||||||
| Measurement of investment hedges | 562,353 | 1,137,484 | 467,992 | |||||||||
| Defined benefit plan | 1,425,064 | 795,165 | 1,247,748 | |||||||||
| Tax charged to equity | (1,795,115 | ) | (1,255,867 | ) | (748,528 | ) | ||||||
| Measurement of available-for-sale securities | (1,701,732 | ) | (1,251,773 | ) | (654,582 | ) | ||||||
| Measurement of cash flow hedges | (87,929 | ) | (2,250 | ) | (86,675 | ) | ||||||
| Defined benefit plan | (5,454 | ) | (1,844 | ) | (7,271 | ) | ||||||
| Total | 1,160,437 | 3,688,090 | 1,728,639 |
d) Deferred taxes
The detail of the balances of “Tax assets – Deferred” and “Tax liabilities – Deferred” is as follows:
| Thousands of Reais | 2016 | 2015 | 2014 | |||||||||
| Deferred Tax assets | 24,437,112 | 30,575,504 | 20,038,000 | |||||||||
| Of which: | ||||||||||||
| Temporary differences (1) | 23,398,886 | 29,538,257 | 18,333,315 | |||||||||
| Tax loss carry forwards | 382,867 | 381,888 | 1,049,326 | |||||||||
| Social contribution taxes 18% | 655,359 | 655,359 | 655,359 | |||||||||
| Tax offset | - | - | - | |||||||||
| Total deferred tax assets | 24,437,112 | 30,575,504 | 20,038,000 | |||||||||
| Deferred tax liabilities | 1,268,037 | 817,125 | 312,420 | |||||||||
| Of which: | ||||||||||||
| Excess depreciation of leased assets | 144,623 | 185,531 | 245,471 | |||||||||
| Adjustment to fair value of trading securities and derivatives | 1,123,414 | 631,594 | 66,949 | |||||||||
| Total deferred tax liabilities | 1,268,037 | 817,125 | 312,420 |
(1) Temporary differences relate mainly to impairment losses on loans and receivables and provisions for judicial and administrative proceedings, and the effect of the fair value of financial instruments.
F-62
BANCO SANTANDER (BRASIL) S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Brazilian Reais - R$, unless otherwise stated)
Accordingly, Banco Santander (Brasil) recognizes the tax credits based on the projection of taxable income for the Bank and each subsidiary individually, based on a history of profitability over a foreseeable horizon of up to 10 years considered as a reasonable level of security, given the economic scenario where the Bank operates. In the case of the tax loss was also considered the fiscal limitation of use of 30% of the taxable income of each year.
It was not recorded deferred tax assets related to tax loss and temporary differences in amount of R$1,085,272 in 2016 (2015 - R$1,438,349), R$1,084,230 on tax loss of Banco Santander (2015 - R$1,234,794) . Based on a technical study for the realization of deferred tax assets and liabilities drawn up by the Directors of Banco Santander, these tax credits should be accounted to the extent that it becomes probable that future taxable profit will allow their recovery.
The changes in the balances of “Tax Assets – Deferred” and “Tax Liabilities – Deferred” in the last three years were as follows:
Thousands of Reais | Balances at December 31, 2015 | Adjustment to Income | Valuation adjustments(1) | Other(2) | Acquisition / Merger | Balances at December 31, 2016 | ||||||||||||||||||
| Deferred tax assets | 30,575,504 | (5,318,219 | ) | (1,580,025 | ) | 652,599 | 107,253 | 24,437,112 | ||||||||||||||||
| Temporary differences | 29,538,257 | (5,319,198 | ) | (1,580,025 | ) | 652,599 | 107,253 | 23,398,886 | ||||||||||||||||
| Tax loss carry forwards | 381,888 | 979 | - | - | - | 382,867 | ||||||||||||||||||
| Social contribution taxes 18% | 655,359 | - | - | - | - | 655,359 | ||||||||||||||||||
| Deferred tax liabilities | 817,125 | 25,666 | 947,628 | (523,182 | ) | 800 | 1,268,037 | |||||||||||||||||
| Temporary differences | 817,125 | 25,666 | 947,628 | (523,182 | ) | 800 | 1,268,037 | |||||||||||||||||
| Total | 29,758,379 | (5,343,885 | ) | (2,527,653 | ) | 1,175,781 | 106,453 | 23,169,075 |
| Thousands of Reais | Balances at December 31, 2014 | Adjustment to Income | Valuation adjustments(1) | Other(2) | Acquisition / Merger | Balances at December 31, 2015 | ||||||||||||||||||
| Deferred tax assets | 20,038,000 | 8,866,221 | 1,575,891 | 93,991 | 1,401 | 30,575,504 | ||||||||||||||||||
| Temporary differences | 18,333,315 | 9,535,994 | 1,575,891 | 93,991 | (934 | ) | 29,538,257 | |||||||||||||||||
| Tax loss carry forwards | 1,049,326 | (669,773 | ) | - | - | 2,335 | 381,888 | |||||||||||||||||
| Social contribution taxes 18% | 655,359 | - | - | - | - | 655,359 | ||||||||||||||||||
| Deferred tax liabilities | 312,420 | (551,692 | ) | 962,406 | 93,991 | - | 817,125 | |||||||||||||||||
| Temporary differences | 312,420 | (551,692 | ) | 962,406 | 93,991 | - | 817,125 | |||||||||||||||||
| Total | 19,725,580 | 9,417,913 | 613,485 | - | 1,401 | 29,758,379 |
Thousands of Reais | Balances at December 31, 2013 | Adjustment to Income | Valuation adjustments(1) | Other(2) | Acquisition / Merger | Balances at December 31, 2014 | ||||||||||||||||||
| Deferred tax assets | 19,195,626 | 1,807,815 | 105,838 | (1,187,475 | ) | 116,196 | 20,038,000 | |||||||||||||||||
| Temporary differences | 17,131,721 | 2,222,326 | 105,838 | (1,187,475 | ) | 60,905 | 18,333,315 | |||||||||||||||||
| Tax loss carry forwards | 1,366,178 | (372,143 | ) | - | - | 55,291 | 1,049,326 | |||||||||||||||||
| Social contribution taxes 18% | 697,727 | (42,368 | ) | - | - | - | 655,359 | |||||||||||||||||
| Deferred tax liabilities | 1,623,593 | (248,057 | ) | 124,359 | (1,187,475 | ) | - | 312,420 | ||||||||||||||||
| Temporary differences | 1,623,593 | (248,057 | ) | 124,359 | (1,187,475 | ) | - | 312,420 | ||||||||||||||||
| Total | 17,572,033 | 2,055,872 | (18,521 | ) | - | 116,196 | 19,725,580 |
(1) It relates to tax recognized in equity.
(2) In 2016, it mainly refers to net of deferred taxes amounted to R$523,182 (2015 - R$93,991 and 2014 - R$1,187,475), which have the same counterparty and realization period and R$1,343,410 related taxes to compensate.
e) Expected realization of deferred tax assets
| Temporary | Tax loss carry | Social contribution | ||||||||||
| Year | differences | forwards | taxes 18% | |||||||||
| 2017 | 6,903,158 | 104,401 | 32,254 | |||||||||
| 2018 | 5,438,202 | 66,406 | 537 | |||||||||
| 2019 | 6,516,520 | 35,755 | 18,998 | |||||||||
| 2020 | 2,973,550 | 77,469 | 103,069 | |||||||||
| 2021 | 273,869 | 41,564 | 451,685 | |||||||||
| 2022 to 2024 | 564,872 | 45,813 | 48,816 | |||||||||
| 2025 to 2026 | 728,715 | 11,459 | - | |||||||||
| Total | 23,398,886 | 382,867 | 655,359 |
Projections of future taxable income include estimates referring to macroeconomic variables, exchange rate and interest rate fluctuations, the history of recent tax losses, among others, which may vary from the actual amounts.
f) Current Taxes
The current tax assets refers to the balance of Income, Social Contribution Taxes, PIS/COFINS Offset.
F-63
BANCO SANTANDER (BRASIL) S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Brazilian Reais - R$, unless otherwise stated)
The breakdown of the balance of “Other Liabilities” is as follows:
| Thousands of Reais | 2016 | 2015 | 2014 | |||||||||
| Accrued expenses and deferred income (1) | 2,925,598 | 2,480,666 | 2,444,231 | |||||||||
| Transactions in transit | 916,844 | 900,089 | 631,611 | |||||||||
| Provision for share-based payment | 212,384 | 186,526 | 250,062 | |||||||||
| Liabilities for insurance contracts | 1,584,303 | 1,365,793 | - | |||||||||
| Other (2) | 2,559,970 | 1,917,122 | 2,020,981 | |||||||||
| Total | 8,199,099 | 6,850,196 | 5,346,885 |
(1) Corresponds, mainly, the payments to be made - personnel expenses.
(2) Includes credits for funds to be released.
27. Other Comprehensive Income
The balances of Other Comprehensive Income include the amounts, net of the related tax effect, of the adjustments to assets and liabilities recognized temporarily in equity stated in the Consolidated Statement of Changes in Equity and Consolidated Statements of Comprehensive Income until they are extinguished or realized, when they are recognized in the consolidated income statement. The amounts attributable to subsidiaries, investments in associates and joint ventures are presented, on a line by line basis, in the appropriate items based on their nature.
It should be noted that the consolidated Statements of Comprehensive Income includes the changes to Other Comprehensive Income as follows:
- Revaluation gains (losses): This includes the amount of the gains, net of losses incurred in the year, recognized directly in equity. The amounts recognized in equity in the year remain under this item, even if in the same year they are transferred to the income statement or to the initial carrying amount of the assets or liabilities or are reclassified to another line item.
- Amounts transferred to income statement: This includes the amount of the revaluation gains (losses) previously recognized in equity, even in the same year, which are subsequently recognized in the income statement.
- Amounts transferred to the initial carrying amount of hedged items: This includes the amount of the revaluation gains (losses) previously recognized in Equity, even in the same year, which are recognized in the initial carrying amount of assets or liabilities as a result of cash flow hedges.
- Other transfers: This includes the amount of the transfers made in the year between the various Other Comprehensive Income items.
In the Consolidated Statements of Comprehensive Income the amounts in "Other Comprehensive Income" are recognized gross, including the amount relating to non-controlling interests, and the corresponding tax effect is presented under a separate item, except in the case of entities accounted for using the equity method, the amounts for which are presented net of the tax effect.
a) Available-for-sale financial assets
Other Comprehensive Income - Available-for -sale financial assets includes the net amount of unrealized changes in the fair value of assets classified as available-for-sale financial assets (see Notes 7 and 8), net of taxes.
The breakdown, by type of instrument and geographical origin of the issuer, of Other Comprehensive Income Available-for-sale financial assets at December 31, 2016, 2015 and 2014 is as follows:
| 2016 | ||||||||||||||||
In thousands of reais | Revaluation gains | Revaluation losses | Net revaluation gains/(losses) | Fair value | ||||||||||||
| Debt Instruments | ||||||||||||||||
| Government debt securities | 454,609 | (31,288 | ) | 423,321 | 50,384,382 | |||||||||||
| Private-sector debt securities | 101,593 | (6,501 | ) | 95,092 | 5,445,190 | |||||||||||
| Equity instruments | ||||||||||||||||
| Domestic | 220,535 | (72,758 | ) | 147,777 | 1,985,473 | |||||||||||
| Of which: | ||||||||||||||||
| Listed | 147,844 | (50,269 | ) | 97,575 | 1,024,505 | |||||||||||
| Unlisted | 72,691 | (22,489 | ) | 50,202 | 960,968 | |||||||||||
| Total | 776,737 | (110,547 | ) | 666,190 | 57,815,045 |
| 2015 | ||||||||||||||||
In thousands of reais | Revaluation gains | Revaluation losses | Net revaluation gains/(losses) | Fair value | ||||||||||||
| Debt Instruments | ||||||||||||||||
| Government debt securities | 2,110 | (2,692,507 | ) | (2,690,397 | ) | 57,720,858 | ||||||||||
| Private-sector debt securities | 10,585 | (67,277 | ) | (56,692 | ) | 9,382,416 | ||||||||||
| Equity instruments | ||||||||||||||||
| Domestic | 213,299 | (111,627 | ) | 101,672 | 1,162,332 | |||||||||||
| Of which: | ||||||||||||||||
| Listed | 119,436 | (99,357 | ) | 20,079 | 77,299 | |||||||||||
| Unlisted | 93,863 | (12,270 | ) | 81,593 | 1,085,033 | |||||||||||
| Total | 225,994 | (2,871,411 | ) | (2,645,417 | ) | 68,265,606 |
F-64
BANCO SANTANDER (BRASIL) S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Brazilian Reais - R$, unless otherwise stated)
| In thousand of reais | 2014 | |||||||||||||||
Revaluation gains | Revaluation losses | Net revaluation gains/(losses) | Fair value | |||||||||||||
| Debt Instruments | ||||||||||||||||
| Government debt securities | 137,165 | (286,905 | ) | (149,740 | ) | 52,557,244 | ||||||||||
| Private-sector debt securities | 283,541 | (124,230 | ) | 159,311 | 20,953,454 | |||||||||||
| Equity instruments | ||||||||||||||||
| Domestic | 535,849 | (472,128 | ) | 63,721 | 1,653,644 | |||||||||||
| Of which: | ||||||||||||||||
| Listed | 467,854 | (431,239 | ) | 36,615 | 542,188 | |||||||||||
| Unlisted | 67,995 | (40,889 | ) | 27,106 | 1,111,456 | |||||||||||
| Total | 956,555 | (883,263 | ) | 73,292 | 75,164,342 |
At each reporting date, the Bank assesses whether there is any objective evidence indicating that the available-for-sale financial assets (debt securities and equity instruments) are impaired.
This assessment includes but is not limited to an analysis of the following information: i) the issuer’s economic and financial position, any default or late payments, issuer’s solvency, the evolution of its business, short-term projections, trends observed with respect to its earnings and, if applicable, its dividend distribution policy; ii) market-related information such as changes in the general economic situation, changes in the issuer’s industry which might affect its ability to pay; iii) changes in the fair value of the security analyzed, and analysis of the reasons of such changes—whether they are specific to the security or the result of the general uncertainty concerning the economy or the country—and iv) independent analysts’ reports and forecasts and other independent market information.
In the case of equity instruments, when the changes in the fair value of the equity instrument being evaluated are assessed, the duration and significance of the decline in its market price below cost is taken into account. Nevertheless, it should be noted that the Bank assesses, on a case-by-case basis each of the equity instruments that have incurred losses, and monitors the performance of their market prices, recognizing an impairment loss as soon as it is determined that the recoverable amount could be decreased.
If, after completing the above assessment, the Bank considers that the presence of one or more of these factors affect recovery of the cost of the financial asset, an impairment loss is recognized in the consolidated income statement for the amount of the loss in equity under Other Comprehensive Income. Also, where the Bank does not intend and/or is not able to hold the investment for a sufficient amount of time to recover the cost, the financial asset is written down to its fair value.
b) Cash flow hedges
Other Comprehensive Income—Cash flow hedges includes the gains or losses attributable to hedging instruments that qualify as effective hedges. These amounts will remain under this heading until they are recognized in the consolidated income statement in the periods in which the hedged items affect it (see Note 9).
Accordingly, amounts representing valuation losses will be offset in the future by gains generated by the hedged items.
c) Hedges of net investments in foreign operations and Translation adjustments foreign investment
Other Comprehensive Incomes—Hedges of net investments in foreign operations includes the net amount of changes in the value of hedging instruments in hedges of net investments in foreign operations, for the portion of these changes considered as effective hedges (Note 9).
Other Comprehensive Income—Exchange differences includes the net amount of the differences arising on the translation to Reais of the balances of the consolidated entities whose functional currency is not the Reais (Note 2.a).
The Bank has recorded a transaction of investment hedge on its investment in Santander EFC, an independent subsidiary in Spain. Accordingly, amounts representing valuation losses will be offset in the future by gains generated by the hedged instruments.
“Non-controlling interests” include the net amount of the equity of subsidiaries attributable to equity instruments that do not belong, directly or indirectly, to the Bank, including the portion attributed to them of profit for the year.
a) Breakdown
The detail, by company, of the balance of “Equity - Non-controlling interests” is as follows:
| Thousands of Reais | 2016 | 2015 | 2014 | |||||||||
| Santander Leasing S.A. Arrendamento Mercantil | 441 | 421 | 408 | |||||||||
| Santander Brasil Advisory Services S.A | 529 | 516 | 473 | |||||||||
| Super Pagamentos e Administração de Meios Eletrônicos S.A. | - | 14,664 | - | |||||||||
| Getnet S.A. | 168,863 | 176,278 | 155,217 | |||||||||
| Banco Olé Bonsucesso Consignado S.A. (Olé Consignado) (Current Company Name of Banco Bonsucesso Consignado) | 30,425 | 5,014 | - | |||||||||
| Santander Serviços Técnicos, Administrativos e de Corretagem de Seguros | 318,498 | 238,169 | 224,075 | |||||||||
| BW Guirapá S.A. | 68,691 | - | - | |||||||||
| Banco PSA Finance Brasil S.A. | 138,057 | - | - | |||||||||
| Total | 725,504 | 435,062 | 380,173 |
F-65
BANCO SANTANDER (BRASIL) S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Brazilian Reais - R$, unless otherwise stated)
| Thousands of Reais | 2016 | 2015 | 2014 | |||||||||
| Profit attributable to non-controlling interests | 130,355 | 50,086 | 77,753 | |||||||||
| Of which: | ||||||||||||
| Santander Leasing S.A. Arrendamento Mercantil | 41 | 38 | 17 | |||||||||
| Santander Brasil Advisory Services S.A | 34 | 49 | 24 | |||||||||
| Super Pagamentos e Administração de Meios Eletrônicos S.A. | - | (2,379 | ) | - | ||||||||
| Getnet S.A. | 27,209 | 35,932 | 37,912 | |||||||||
| Banco Olé Bonsucesso Consignado S.A. (Olé Consignado) (Current Company Name of Banco Bonsucesso Consignado) | 5,432 | 4,996 | - | |||||||||
| Santander Serviços Técnicos, Administrativos e de Corretagem de Seguros | 98,717 | 10,859 | 40,182 | |||||||||
| BW Guirapá S.A. | (2,957 | ) | - | - | ||||||||
| Banco PSA Finance Brasil S.A. | 1,879 | - | - | |||||||||
| Other companies | - | 591 | (382 | ) |
b) Changes
The changes in the balance of “Non-controlling interests” are summarized as follows:
| Thousands of Reais | 2016 | 2015 | 2014 | |||||||||
| Balance at beginning of year | 435,062 | 380,173 | 289,101 | |||||||||
| Change in the scope of consolidation (1) (2) | 159,469 | 16,608 | 60,744 | |||||||||
| Dividends paid / Interest on Capital | (18,140 | ) | (2,754 | ) | (47,216 | ) | ||||||
| Capital increase (3) | 20,000 | - | - | |||||||||
| Profit attributable to non-controlling interests | 130,355 | 50,086 | 77,753 | |||||||||
| Transition Adjustments to the amendments to the IAS 19 | (1,604 | ) | 5,916 | (209 | ) | |||||||
| Others | 362 | (14,967 | ) | - | ||||||||
| Balance at end of year | 725,504 | 435,062 | 380,173 |
(1) In 2016 refers to the participation of non - controlling of BW Guirapá and Banco PSA Finance Brasil, in and 2014 refers to Getnet S.A., in 2015 refers to Super and in 2014 refers to Getnet S.A..
(2) Includes the acquisition of the shares representing the remaining 50% of the voting capital of Super by Aymoré CFI (note 4.b).
(3) Increase in the share capital of Olé Consignado.
a) Capital
According to the by-laws, Banco Santander's capital stock may be increased up to the limit of its authorized capital, regardless of statutory reform, by resolution of the Board of Directors and through the issuance of up to 9,090,909,090 (nine billion, ninety million, nine hundred and nine thousand and ninety) shares, subject to the established legal limits on the number of preferred shares. Any capital increase that exceeds this limit will require shareholders` approval.
The capital stock, fully subscribed and paid, is divided into registered book-entry shares with no par value.
| Thousands of shares | ||||||||||||||||||||||||
| 2016 | 2015 | |||||||||||||||||||||||
| Common | Preferred | Total | Common | Preferred | Total | |||||||||||||||||||
| Brazilian residents | 67,498 | 92,949 | 160,447 | 56,306 | 81,280 | 137,586 | ||||||||||||||||||
| Foreign residents | 3,783,473 | 3,619,163 | 7,402,636 | 3,794,666 | 3,630,833 | 7,425,499 | ||||||||||||||||||
| Total shares | 3,850,971 | 3,712,112 | 7,563,083 | 3,850,972 | 3,712,113 | 7,563,085 | ||||||||||||||||||
| (-) Treasury shares | (25,786 | ) | (25,786 | ) | (51,572 | ) | (20,218 | ) | (20,218 | ) | (40,436 | ) | ||||||||||||
| Total outstanding | 3,825,185 | 3,686,326 | 7,511,511 | 3,830,754 | 3,691,895 | 7,522,649 | ||||||||||||||||||
| Thousands of shares | ||||||||||||
| 2014 | ||||||||||||
| Common | Preferred | Total | ||||||||||
| Brazilian residents | 127,192 | 153,105 | 280,297 | |||||||||
| Foreign residents | 3,742,658 | 3,577,885 | 7,320,543 | |||||||||
| Total shares | 3,869,850 | 3,730,990 | 7,600,840 | |||||||||
| (-) Treasury shares | (29,612 | ) | (29,612 | ) | (59,224 | ) | ||||||
| Total outstanding | 3,840,238 | 3,701,378 | 7,541,616 | |||||||||
In 2015, issuance costs of the Global Offering of Shares held in October 2009, have been reclassified from Capital to Reserves heading for a better presentation amounted to R$193,616.
b) Dividends and Interest on Capital
According to the Bank’s bylaws, shareholders are entitled to a minimum dividend equivalent to 25% of net income for the year, adjusted according to legislation. Preferred shares are nonvoting and nonconvertible, but have the same rights and advantages granted to common shares, in addition to priority in the payment of dividends at a rate that is 10% higher than those paid on common shares, and in the capital reimbursement, without premium, in the event of liquidation of the Bank.
Dividend have been and will continue to be calculated and paid in accordance with Brazilian Corporate Law.
Prior to the annual shareholders meeting, the Board of Directors may resolve on the declaration and payment of dividends on earnings based on (i) balance sheets or earning reserves shown in the last balance sheet; or (ii) balance sheets issued in the period shorter than 6 months, provided that the total dividends paid in each half of the fiscal year shall not exceed the amount of capital reserves. These dividends are fully attributed to the mandatory dividend.
F-66
BANCO SANTANDER (BRASIL) S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Brazilian Reais - R$, unless otherwise stated)
| 2016 | ||||||||||||||||
| Thousands of | Real per Thousand Shares / Units | |||||||||||||||
| Reais | Common | Preferred | Units | |||||||||||||
| Interest on Capital (1) (4) | 500,000 | 63.4290 | 69.7719 | 133.2009 | ||||||||||||
| Intermediate Dividends (2) (5) | 700,000 | 88.8309 | 97.7140 | 186.5448 | ||||||||||||
| Intercalary Dividends (2) (5) | 700,000 | 88.8309 | 97.7140 | 186.5448 | ||||||||||||
| Interest on Capital (3) (5) | 3,350,000 | 425.1192 | 467.6311 | 892.7503 | ||||||||||||
| Total | 5,250,000 | |||||||||||||||
(1) Established by the Board of Directors in June 2016, Common Shares - R$53.9146, preferred - R$59.3061 and Units - R$113.2207 net of taxes.
(2) Established by the Board of Directors in December 2016.
(3) Established by the Board of Directors in December 2016, Common Shares- R$361.3513, preferred - R$397.4864 and Units - R$758.8377 net of taxes.
(4) The amount of the interest on capital will be fully input into the mandatory dividends for the year 2016 and were be paid from August 26, 2016 without any compensation as monetary correction.
(5) The amount of intermediate, intercalary dividends and interest on capital will be fully attributed to supplementary and mandatory dividends for the year 2016 and will be paid from February 23, 2017, without any compensation to the restatement.
| 2015 | ||||||||||||||||
| Thousands of | Real per Thousand Shares / Units | |||||||||||||||
| Reais | Common | Preferred | Units | |||||||||||||
| Intercalary Dividends (1) (3) | 150,000 | 18.9474 | 20.8421 | 39.7895 | ||||||||||||
| Intermediary Dividends (2) (4) | 3,050,000 | 385.8116 | 424.3927 | 810.2043 | ||||||||||||
| Intercalary Dividends (3) (7) | 1,600,000 | 202.7412 | 223.0153 | 425.7564 | ||||||||||||
| Interest on Capital (4) (7) | 1,400,000 | 177.3985 | 195.1384 | 372.5369 | ||||||||||||
| Total | 6,200,000 | |||||||||||||||
(1) Established by the Board of Directors in March 2015.
(2) Established by the Board of Directors in September 2015.
(3) Established by the Board of Directors in December 2015.
(4) Established by the Board of Directors in December 2015, Common Shares - R$150.7887, preferred - R$165.8676 and Units - R$316.6563 net of taxes.
(5) The amount of the interim dividend were fully attributed to supplementary and mandatory dividends, respectively, for the year 2015 and were paid from August 28, 2015, without any compensation to the restatement.
(6) The amount of the interim dividend were fully attributed to supplementary and mandatory dividends, respectively, for the year 2015 and were paid from October 05, 2015, without any compensation to the restatement.
(7) The amount of the interim dividends and interest on capital were fully input into the mandatory dividends for the year 2015 and were paid from February 25, 2016, without any compensation as monetary correction.
| 2014 | ||||||||||||||||
| Thousands of | Reais per Thousand Shares / Units | |||||||||||||||
| Reais | Common | Preferred | Units | |||||||||||||
| Interim Dividends (1) (5) | 99,807 | 12.6008 | 13.8609 | 26.4617 | ||||||||||||
| Intercalary Dividends (1)(5) | 120,193 | 15.1745 | 16.6919 | 31.8664 | ||||||||||||
| Intercalary Dividends (2)(5) | 400,000 | 50.5005 | 55.5505 | 106.0510 | ||||||||||||
| Intercalary Dividends (3)(6) | 220,000 | 27.7738 | 30.5512 | 58.3250 | ||||||||||||
| Interest on Capital (4) (6) | 690,000 | 87.2120 | 95.9332 | 183.1452 | ||||||||||||
| Total | 1,530,000 | |||||||||||||||
(1) Established by the Board of Directors in March 2014.
(2) Established by the Board of Directors in June 2014.
(3) Established by the Board of Directors in September 2014.
(4) Established by the Board of Directors in December 2014, common R$74.1309, preferred - R$81.5442 e units - R$155.6751, net of taxes.
(5) The amount of interim and intercalary dividends were fully attributed to supplementary and mandatory dividends for the year 2014 and were paid from August 28, 2014, without any compensation to the restatement.
(6) The amount of intercalary dividends were fully attributed to supplementary and mandatory dividends for the year 2014 and were paid from February 26, 2015, without any compensation to the restatement.
c) Reserves
The reserves are allocated as follows after the deductions and statutory provisions, from the net income:
Legal reserve
In accordance with Brazilian Corporate Law, 5% is transferred to the legal reserve, until it reaches 20% of the share capital. This reserve is designed to ensure the integrity of the capital and can only be used to offset losses or increase capital.
Capital reserve
The Bank´s capital reserve consists of: reserve of goodwill for the subscription of shares and other capital reserves, and can only be used to absorb losses that exceed retained earnings and profit reserves, redemption, repayment or purchase of shares of our treasury; incorporation of the capital, or payment of dividends to preferred shares in certain circumstances.
Reserve for equalization dividend
After the destination of dividends, the remaining balance if any, may, upon proposal of the Executive Board and approved by the Board of Directors, be designated to constitute a reserve for equalization of dividends, which is limited to 50% of the Capital. This reserve aims to ensure funds for the payment of dividends, including the form of Interest on Capital, or any interim payment to maintain the flow of shareholders remuneration.
F-67
BANCO SANTANDER (BRASIL) S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Brazilian Reais - R$, unless otherwise stated)
d) Treasury shares
In the meeting held on November 3, 2016, the Bank’s Board of Directors approved, in continuation of the buyback program that expired on November 4, 2016, the buyback program of its Units and ADRs, by the Bank or its agency in Cayman, to be held in treasury or subsequently sold.
The Buyback Program will cover the acquisition up to 38,402,972 Units, representing 38,402,972 common shares and 38,402,972 preferred shares, or the ADRs, which, on September 30, 2016, corresponded to approximately 1.02% of the Bank’s share capital. On September 30, 2016, the Bank held 384,029,725 common shares and 411,834,140 preferred shares being traded.
The Buyback has the purpose to (1) maximize the value creation to shareholders by means of an efficient capital structure management; and (2) enable the payment of officers, management level employees and others Bank’s employees and companies under its control, according to the Long Term Incentive Plans.
The term of the Buyback Program is 365 days counted from November 4, 2016, and will expire on November 3, 2017.
| 2016 | 2015 | 2014 | ||||||||||||||||||||||
| Quantity | Quantity | Quantity | ||||||||||||||||||||||
| Units | ADRs | Units | ADRs | Units | ADRs | |||||||||||||||||||
| Treasury shares at beginning of the period | 7,080,068 | 13,137,665 | 16,531,177 | 13,080,565 | 11,823,638 | 6,748,347 | ||||||||||||||||||
| Shares Acquisitions | 14,284,400 | - | 13,873,413 | 57,100 | 7,425,000 | 6,332,218 | ||||||||||||||||||
| Cancellation of ADRs (1) | 13,137,665 | -13,137,665 | - | - | - | - | ||||||||||||||||||
| Cancellation of Shares (2) | - | - | (18,878,954 | ) | - | - | - | |||||||||||||||||
| Payment - Share-based compensation | (8,716,213 | ) | - | (4,445,568 | ) | - | (2,717,461 | ) | - | |||||||||||||||
| Treasury shares at end of period | 25,785,920 | - | 7,080,068 | 13,137,665 | 16,531,177 | 13,080,565 | ||||||||||||||||||
| Balance of Treasury Shares in thousands of reais (2) (3) | R$ 513,889 | R$ 0 | R$ 106,764 | R$ 317,094 | R$ 230,420 | R$ 215,036 | ||||||||||||||||||
| Cost/Market Value | Units | ADRs | Units | ADRs | Units | ADRs | ||||||||||
| Minimum cost | R$ 7.55 | US$ 4,37 | R$ 11.01 | US$ 4,37 | R$ 11.01 | US$ 4,61 | ||||||||||
| Weighted average cost | R$ 16.43 | US$ 6,17 | R$ 14.28 | US$ 6,17 | R$ 14.23 | US$ 6,18 | ||||||||||
| Maximum cost | R$ 26.81 | US$ 10,21 | R$ 18.51 | US$ 10,21 | R$ 18.52 | US$ 10,21 | ||||||||||
| Market value | R$ 28.32 | US$ 8,58 | R$ 16.04 | US$ 3,89 | R$ 13.46 | US$ 5,02 | ||||||||||
(1) In January 2016 was the transformation of all ADRs that were held in treasury for UNIT's.
(2) Extraordinary General Meeting held on December 14, 2015 the cancellation of 18,878,954 Units was approved (18,878,954 ON and 18,878,954 PN totaling 37,757,908 treasury shares) equivalent to R$268,573.
(3) The total number of treasury shares on December 31, 2016 is R$514,034 (2015 - R$423,953 and 2014 - R$445,501) and includes issuance costs amounted to R$145 (2015 - R$95 and 2014 - R$45).
Additionally, in the year ended December 31, 2016, treasury shares were sold, that resulted in a loss of R$11,574 (2015 - R$3,918 and 2014 - R$4,926) recorded directly in equity in capital reserves.
e) Plan to Optimize the Regulatory Capital
On September 26, 2013, the Bank disclosed a Material Fact announcing that, in order to optimize its capital structure, the Board of Directors submitted a proposal to optimize the composition of Banco Santander’s regulatory capital to the shareholders for their approval ("PR Optimization Plan"). The aim is to establish a more efficient capital structure, consistent with the new prudent capital rules and aligned with Banco Santander’s business plan and asset growth. The PR Optimization Plan had the following items: (i) the redistribution of equity to the shareholders of Banco Santander in the total amount of R$6,000,000, with no reduction in the number of shares; (ii) the issuance abroad of capital instruments to compose Tier I and Tier II of Banco Santander’s regulatory capital and; (iii) a bonus share program and an adjustment in the composition of the Units, followed by a reverse share split (inplit), with the purpose of eliminating trading in cents.
Equity Distributions
On November 1, 2013, the proposals for return of funds to shareholders was approved on Shareholders’ Meeting. In January 2014, conditions for effective recovery of resources (end of the period of opposition from unsecured creditors, approval by the Bacen and filing the minutes of the meeting at the Junta Comercial do Estado de São Paulo - JUCESP) were satisfied. The Equity Distributions to shareholders occurred on January 29, 2014, and the Bank's shares and Units have been traded ex-rights to the Equity Distributions since January 15, 2014.
Issuance Notes
On January 14, 2014 the Board of Directors approved the issuance of notes outside Brazil, in dollars, amounting to R$6,000,000. The issuance of Notes held on January 29, 2014.
The specific characteristics of the Notes issued to compose the Tier I are: (a) Notional: US$1,247,713, equivalent to R$3,000,000, (b) Interest Rate: 7.375% p.a. (c) Maturity: The Tier I Notes shall be perpetual; (d) Frequency of interest payment: interest will be paid quarterly from April 29, 2014; (e) Discretion: Banco Santander can cancel the distribution of interest at any time, for an unlimited period, with no accumulation rights and this suspension shall not be considered as a default event; (f) Subordination: in the case of insolvency, the Notes' financial settlement is subordinated to all Tier II capital instruments. The specific characteristics of the Notes issued to form the Tier II are: (a) Notional: US$1,247,713, equivalent to R$3,000,000 (b) Interest Rate: 6.0% p.a. (c) Maturity: the Tier II Notes will mature on January 29, 2024, and (d) Frequency of interest payment: interest payable semi-annually from July 29, 2014.
On April 15, 2014, the Bacen approved the issued notes to compose the Tier I and Tier II of Bank’s regulatory capital since the issuance date.
F-68
BANCO SANTANDER (BRASIL) S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Brazilian Reais - R$, unless otherwise stated)
Bonus Shares and Share Reverse Split (inplit)
With the purposes of eliminating the trading in cents of SANB3 (common) and SANB4 (preferred) shares, increasing liquidity and reducing costs of transaction thereof, on March 18, 2014, our shareholders, in the extraordinary general meeting approved, (i) a bonus share of 19,002,100,957 preferred shares to our shareholders, at the ratio of 0.047619048 preferred shares for each common share (SANB3) or preferred share (SANB4), which results in bonus share of five (5) preferred shares for each Unit (SANB11), through the capitalization of reserves in the amount of R$171,799; and (ii) share reverse split (inplit) of the totality of our common shares and preferred shares in a ratio of 1:55, so that each fifty-five (55) common shares and fifty-five (55) preferred shares will henceforth correspond to one (1) common share and one (1) preferred share, respectively. As a result, each Unit (SANB11) will be comprised of one common share and one preferred share. These events were implemented on June 2, 2014.
Exchange Offer
On April 29, 2014 the Bank published Material Fact in order to inform that it was informed by its indirect controlling shareholder, Banco Santander Spain, that it would launch a voluntary exchange offer in Brazil and United States for acquisition of up to the totality of the shares of Banco Santander that are not held by Banco Santander Spain, which represented approximately 25% of Banco Santander’s share capital, with payment in shares of Banco Santander Spain. As a result of the Transaction, Bank would continue to be a listed company, although it would change from the Level 2 (Nivel 2) of Corporate Governance of BM&FBovespa to the traditional segment.
On June 9, 2014, it was held an extraordinary shareholder meeting, which resolved on the following Agenda: (a) the exit of the Bank from Level 2 of Corporate Governance; and (b) the selection of the specialized firm NM Rothschild & Sons (Brasil) Ltda., to be hired to prepare a valuation report, called a “laudo”, based on the Bank’s economic value, for purposes of the Exchange Offer and the consequent exit from Level 2.
On June 13, 2014, the Bank published Material Fact, in order to inform that the valuation report, called a “laudo”, prepared by N M Rothschild & Sons (Brasil) Ltda., was duly filed on the date hereof with (i) the CVM; (ii) the BM&FBovespa; and (iii) the U.S. Securities and Exchange Commission - SEC. The Company informed as well that an application for registration of the Exchange Offer was duly filed with the CVM on the date hereof.
On October 2, 2014 Banco Santander´s Board of Directors issued an opinion regarding the Offer and Banco Santander filed with the U.S. Securities and Exchange Commission its position with respect to the proposed transaction by means of a Schedule 14D-9. On October 16, 2014 Banco Santander Spain and Banco Santander disclosed to the market the adjustment of exchange ratio of the Voluntary Exchange Tender Offer referred to in the Public Notice (edital) published on September 18, 2014. In accordance with the Public Notice, the exchange ratio, and consequently the amount of BDR that entitles each Subscription Receipt, was adjusted from 0.70 BDR for each Unit BDR and 0.35 BDR for each share, either ordinary or preferred, to 0.7152 BDR each Unit and 0.3576 BDR for each share, either ordinary or preferred, in view of the compensation declared by Banco Santander Spain on October 16, 2014, under the Santander Dividendo Elección program, with record date on October 17, 2014.
On October 31, 2014, Banco Santander together with Banco Santander Spain has published a Material Fact regarding the Exchange Offers Results. Banco Santander Spain acquired 1,640,644 shares and 517,827,702 Units, representing, together, 13.65% of the share capital of Bank, thereby, the participation of Grupo Santander in Banco Santander would be 88.30% of its total share capital, 88.87% of its common shares and 87.71% of its preferred shares, considering also the American Depositary Receipts - ADRs representative of Units acquired in the Exchange in the USA. As consequence of the Offer, Santander Brasil´s shares are no longer listed on Level 2 of BM&FBovespa, and are trading on the traditional listing segment.
a) Basic earnings per share
Basic earnings per share is calculated by dividing the net profit attributable to the Parent by the weighted average outstanding shares during the year average number, excluding the average number of own shares held during the year and held in treasury.
| 2016 | 2015 | 2014 | ||||||||||
| Profit attributable to the Parent | 7,334,563 | 9,783,740 | 5,630,023 | |||||||||
| Earnings per share (Brazilian Reais) | ||||||||||||
| Basic earnings per 1,000 shares (Brazilian Reais) | ||||||||||||
| Common shares | 929.93 | 1,236.96 | 709.69 | |||||||||
| Preferred shares | 1,022.92 | 1,360.66 | 780.66 | |||||||||
| Net Profit attributable - Basic (Brazilian Reais) | ||||||||||||
| Common shares | 3,560,288 | 4,748,896 | 2,733,205 | |||||||||
| Preferred shares | 3,774,275 | 5,034,844 | 2,896,818 | |||||||||
| Weighted average shares outstanding - Basic | ||||||||||||
| Common shares | 3,828,555 | 3,839,159 | 3,851,278 | |||||||||
| Preferred shares | 3,689,696 | 3,700,299 | 3,710,746 |
b) Diluted earnings per share
The diluted earnings per share is calculated by dividing the net profit attributable to the Parent by the weighted average outstanding shares during the year average number, excluding the average number of own shares held during the year and held in treasury, including the effect of dilutive potential programs long-term compensation.
F-69
BANCO SANTANDER (BRASIL) S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Brazilian Reais - R$, unless otherwise stated)
| 2016 | 2015 | 2014 | ||||||||||
| Profit attributable to the Parent | 7,334,563 | 9,783,740 | 5,630,023 | |||||||||
| Earnings per share (Brazilian Reais) | ||||||||||||
| Diluted earnings per 1,000 shares (Brazilian Reais) | ||||||||||||
| Common shares | 929.03 | 1,235.79 | 709.40 | |||||||||
| Preferred shares | 1,021.93 | 1,359.36 | 780.34 | |||||||||
| Net Profit attributable - Basic (Brazilian Reais) | ||||||||||||
| Common shares | 3,560,222 | 4,748,810 | 2,733,184 | |||||||||
| Preferred shares | 3,774,341 | 5,034,930 | 2,896,839 | |||||||||
| Weighted average shares outstanding (in thousands) - Diluted | ||||||||||||
| Common shares | 3,832,211 | 3,842,744 | 3,852,823 | |||||||||
| Incremental shares from stock options granted under Stock Option Plan - Units | 3,656 | 3,585 | 1,545 | |||||||||
| Preferred shares | 3,693,352 | 3,703,884 | 3,712,291 | |||||||||
| Incremental shares from stock options granted under Stock Option Plan - Units | 3,656 | 3,585 | 1,545 |
31. Fair value of financial assets and liabilities
Under IFRS 13, fair value measurement using a fair value hierarchy that reflects the model used in the measurement process should be in accordance with the following hierarchical levels:
Level 1: Determined on the basis of public (unadjusted) prices in active markets for identical assets and liabilities, these include public debt securities, stocks, derivatives listed.
Level 2: Are those derived from inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (as prices) or indirectly (derived from prices).
Level 3: Are those derived from valuation techniques that include inputs for the asset or liability that are not based on observable market data (unobservable inputs).
Trading Financial Assets, Others financial assets at fair value on through profit or loss, Available-for-sale financial assets and Financial liabilities held for trading.
Level 1: The securities with high liquidity and observable prices in an active market are classified as level 1. At this level were classified most of the Brazilian Government Securities (mainly LTN, LFT, NTN-B, NTN-C and NTN-F), shares in stocks and other securities traded in an active market.
Level 2: When price quotations cannot be observed, the Management, using their own internal models, make their best estimate of the price that would be set by the market. These models use data based on observable market parameters as an important reference. Various techniques are used to make these estimates, including the extrapolation of observable market data and extrapolation techniques. The best evidence of fair value of a financial instrument on initial recognition is the transaction price, unless the fair value of the instrument can be obtained from other market transactions carried out with the same instrument or similar instruments or can be measured using a valuation technique in which the variables used include only data from observable market, especially interest rates. These securities are classified within Level 2 of the fair value hierarchy and are composed mainly by Private Securities (prominently on Debenture portfolio) in a market with less liquidity than those classified at Level 1.
Level 3: When there is information that is not based on observable market data, Banco Santander uses internally developed models, from curves generated according to the internal model. Level 3 comprises mainly unlisted shares that are not generally traded in an active market.
Derivatives
Level 1: Derivatives traded on exchanges are classified in Level 1 of the hierarchy.
Level 2: For the valuation derivatives traded over the counter, and the valuation of financial instruments (primarily swaps and options), are usually used as observable market data: exchange rates, interest rates, volatility, correlation between indexes and market liquidity.
When pricing the financial instruments mentioned, uses the method of the Black-Scholes model (exchange rate options, interest rate options; caps and floors) and the method of present value (discount of future values by market curves).
Level 3: Derivatives not traded in the stock market and that do not have an observable data in a active market were classified as Level 3, these and are composed of complex derivatives.
The following table shows a summary of the fair values of financial assets and liabilities for the years ended December 31, 2016, 2015 and 2014, classified based on several measurement methods adopted by the Bank to determine fair value:
| In thousands of Reais | 2016 | |||||||||||||||
| Level 1 (1) | Level 2 (1) | Level 3 | Total | |||||||||||||
| Financial assets held for trading | 59,410,908 | 25,462,755 | - | 84,873,663 | ||||||||||||
| Debt instruments | 59,034,363 | 960,583 | - | 59,994,946 | ||||||||||||
| Equity instruments | 376,545 | 21,916 | - | 398,461 | ||||||||||||
| Trading derivatives | - | 24,480,256 | - | 24,480,256 | ||||||||||||
| Other financial assets at fair value through profit or loss | 1,597,660 | 76,035 | 37,509 | 1,711,204 | ||||||||||||
| Debt instruments | 1,592,714 | 76,035 | - | 1,668,749 | ||||||||||||
| Equity instruments | 4,946 | - | 37,509 | 42,455 | ||||||||||||
| Available-for-sale financial assets | 51,160,044 | 5,703,389 | 951,612 | 57,815,045 | ||||||||||||
| Debt instruments | 50,172,609 | 5,656,963 | - | 55,829,572 | ||||||||||||
| Equity instruments | 987,435 | 46,426 | 951,612 | 1,985,473 | ||||||||||||
| Hedging derivatives (assets) | - | 222,717 | - | 222,717 | ||||||||||||
| Financial liabilities held for trading | 31,694,269 | 19,925,600 | - | 51,619,869 | ||||||||||||
| Trading derivatives | - | 19,925,600 | - | 19,925,600 | ||||||||||||
| Short positions | 31,694,269 | - | - | 31,694,269 | ||||||||||||
| Hedging derivatives (liabilities) | - | 311,015 | - | 311,015 | ||||||||||||
(1) There was no transfer between levels 1 and 2.
F-70
BANCO SANTANDER (BRASIL) S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Brazilian Reais - R$, unless otherwise stated)
| In thousands of Reais | 2015 | |||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Financial assets held for trading | 24,952,744 | 25,583,987 | - | 50,536,731 | ||||||||||||
| Debt instruments | 24,579,100 | 614,498 | - | 25,193,598 | ||||||||||||
| Equity instruments | 373,644 | 31,329 | - | 404,973 | ||||||||||||
| Trading derivatives | - | 24,938,160 | - | 24,938,160 | ||||||||||||
| Other financial assets at fair value through profit or loss | 1,420,332 | 86,238 | 573,664 | 2,080,234 | ||||||||||||
| Debt instruments | 1,420,332 | 86,238 | - | 1,506,570 | ||||||||||||
| Equity instruments | - | - | 573,664 | 573,664 | ||||||||||||
| Available-for-sale financial assets | 56,497,320 | 10,910,469 | 857,817 | 68,265,606 | ||||||||||||
| Debt instruments | 56,250,013 | 10,853,261 | - | 67,103,274 | ||||||||||||
| Equity instruments | 247,307 | 57,208 | 857,817 | 1,162,332 | ||||||||||||
| Hedging derivatives (assets) | - | 1,312,202 | - | 1,312,202 | ||||||||||||
| Financial liabilities held for trading | 20,047,631 | 22,340,137 | - | 42,387,768 | ||||||||||||
| Trading derivatives | - | 22,340,137 | - | 22,340,137 | ||||||||||||
| Short positions | 20,047,631 | - | - | 20,047,631 | ||||||||||||
| Hedging derivatives (liabilities) | - | 2,376,822 | - | 2,376,822 |
| In thousands of Reais | 2014 | |||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Financial assets held for trading | 46,771,577 | 9,238,697 | 3,329 | 56,013,603 | ||||||||||||
| Debt instruments | 46,478,155 | 628,656 | - | 47,106,811 | ||||||||||||
| Equity instruments | 293,422 | 94,905 | 3,329 | 391,656 | ||||||||||||
| Trading derivatives | - | 8,515,136 | - | 8,515,136 | ||||||||||||
| Other financial assets at fair value through profit or loss | - | 93,900 | 902,794 | 996,694 | ||||||||||||
| Debt instruments | - | 93,900 | - | 93,900 | ||||||||||||
| Equity instruments | - | - | 902,794 | 902,794 | ||||||||||||
| Available-for-sale financial assets | 54,241,121 | 20,025,265 | 897,956 | 75,164,342 | ||||||||||||
| Debt instruments | 53,668,491 | 19,842,207 | - | 73,510,698 | ||||||||||||
| Equity instruments | 572,630 | 183,058 | 897,956 | 1,653,644 | ||||||||||||
| Hedging derivatives (assets) | - | 212,552 | - | 212,552 | ||||||||||||
| Financial liabilities held for trading | 11,285,431 | 8,284,360 | - | 19,569,791 | ||||||||||||
| Trading derivatives | - | 8,284,360 | - | 8,284,360 | ||||||||||||
| Short positions | 11,285,431 | - | - | 11,285,431 | ||||||||||||
| Hedging derivatives (liabilities) | - | 893,902 | - | 893,902 |
Certain financial instruments in 2014 and 2015 have been reclassified in the table above in line with the submission of 2016.
Movements in fair value of Level 3
The following tables demonstrate the movements during 2016, 2015 and 2014 for the financial assets and liabilities classified as Level 3 in the fair value hierarchy:
| In thousands of reais | Fair
Value 2015 | Gains/ losses (Realized-Not Realized) | Transfers in and/ or out of Level 3 | Additions | Settled | Fair
value 2016 | ||||||||||||||||||
| Other financial assets at fair value through profit or loss | 573,664 | 2,806 | (14,345 | ) | 111 | (524,727 | ) | 37,509 | ||||||||||||||||
| Available-for-sale financial assets | 857,817 | (60,934 | ) | (3,085 | ) | 461,185 | (303,371 | ) | 951,612 | |||||||||||||||
| In thousands of reais | Fair
Value 2014 | Gains/ losses (Realized-Not Realized) | Transfers in and/ or out of Level 3 | Additions | Settled | Fair
value 2015 | ||||||||||||||||||
| Financial assets held for trading | 3,329 | - | - | - | (3,329 | ) | - | |||||||||||||||||
| Other financial assets at fair value through profit or loss | 902,794 | (329,130 | ) | - | - | - | 573,664 | |||||||||||||||||
| Available-for-sale financial assets | 897,956 | (58,008 | ) | - | 54,785 | (36,916 | ) | 857,817 | ||||||||||||||||
| In thousands of reais | Fair
Value 2013 | Gains/ losses (Realized-Not Realized) | Transfers in and/ or out of Level 3 | Additions | Settled | Fair
value 2014 | ||||||||||||||||||
| Financial assets held for trading | 3,453 | (124 | ) | - | - | - | 3,329 | |||||||||||||||||
| Other financial assets at fair value through profit or loss | 1,192,334 | 138,016 | - | 35,426 | (462,982 | ) | 902,794 | |||||||||||||||||
| Available-for-sale financial assets | 553,355 | 24,133 | - | 320,468 | - | 897,956 | ||||||||||||||||||
Financial assets and liabilities not measured at fair value
The financial assets owned by the Bank are measured at fair value in the accompanying consolidated balance sheets, except for loans and receivables.
F-71
BANCO SANTANDER (BRASIL) S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Brazilian Reais - R$, unless otherwise stated)
Similarly, the Bank’s financial liabilities except for financial liabilities held for trading and those measured at fair value - are measured at amortized cost in the consolidated balance sheets.
i) Financial assets measured at other than fair value
Following is a comparison of the carrying amounts of the Bank’s financial assets measured at other than fair value and their respective fair values at December 31, 2016, 2015 and 2014:
| Thousands of Reais | 2016 | |||||||||||||||||||
| Assets | Carrying Amount | Fair Value | Level 1 | Level 2 | Level 3 | |||||||||||||||
| Money market investments - Brazilian Central Bank (note 5) | 46,371,814 | 46,341,971 | - | 46,341,971 | - | |||||||||||||||
| Held to maturity investments (note 7) | 10,048,761 | 10,555,437 | 6,942,173 | 3,613,264 | - | |||||||||||||||
| Loans and receivables: | ||||||||||||||||||||
| Loans and amounts due from credit institutions (note 6) | 27,762,473 | 27,757,607 | - | 27,757,607 | - | |||||||||||||||
| Loans and advances to customers (note 10) | 252,002,774 | 253,860,027 | - | - | 253,860,027 | |||||||||||||||
| Loans and receivables - Debt instruments (note 7) | 16,283,259 | 16,003,885 | - | 16,003,885 | - | |||||||||||||||
| Total | 352,469,081 | 354,518,927 | 6,942,173 | 93,716,727 | 253,860,027 |
| Thousands of Reais | 2015 | |||||||||||||||||||
| Assets | Carrying Amount | Fair Value | Level 1 | Level 2 | Level 3 | |||||||||||||||
| Money market investments - Brazilian Central Bank (note 5) | 31,316,917 | 31,310,136 | - | 31,310,136 | - | |||||||||||||||
| Held to maturity investments (note 7) | 10,097,836 | 9,257,519 | 5,698,211 | 3,559,308 | - | |||||||||||||||
| Loans and receivables: | ||||||||||||||||||||
| Loans and amounts due from credit institutions (note 6) | 42,422,638 | 42,381,130 | - | 42,381,130 | - | |||||||||||||||
| Loans and advances to customers (note 10) | 252,033,449 | 251,319,173 | - | - | 251,319,173 | |||||||||||||||
| Loans and receivables - Debt instruments (note 7) | 11,812,701 | 11,457,378 | - | 11,457,378 | - | |||||||||||||||
| Total | 347,683,541 | 345,725,336 | 5,698,211 | 88,707,952 | 251,319,173 |
| Thousands of Reais | 2014 | |||||||||||||||||||
| Assets | Carrying Amount | Fair Value | Level 1 | Level 2 | Level 3 | |||||||||||||||
| Money market investments - Brazilian Central Bank (note 5) | 22,473,056 | 22,467,107 | - | 22,467,107 | - | |||||||||||||||
| Loans and receivables: | ||||||||||||||||||||
| Loans and amounts due from credit institutions (note 6) | 28,917,397 | 28,878,632 | - | 28,878,632 | - | |||||||||||||||
| Loans and advances to customers (note 10) | 235,690,349 | 235,086,295 | - | - | 235,086,295 | |||||||||||||||
| Total | 287,080,802 | 286,432,034 | - | 51,345,739 | 235,086,295 |
Certain financial instruments in 2014 and 2015 have been reclassified in the table above in line with the submission of 2016.
ii) Financial liabilities measured at other than fair value
Following is a comparison of the carrying amounts of the Bank’s financial liabilities measured at other than fair value and their respective fair values at December 31, 2016, 2015 and 2014:
| Thousands of Reais | 2016 | |||||||||||||||||||
| Liabilities | Carrying Amount | Fair Value | Level 1 | Level 2 | Level 3 | |||||||||||||||
| Financial liabilities at amortized cost: | ||||||||||||||||||||
| Deposits from Bacen and credit institutions (note 17) | 78,319,960 | 78,323,271 | - | - | 78,323,271 | |||||||||||||||
| Customer deposits (note 18) | 231,079,303 | 231,125,526 | - | - | 231,125,526 | |||||||||||||||
| Marketable debt securities (note 19) | 99,842,955 | 99,671,288 | - | 7,321,870 | 92,349,418 | |||||||||||||||
| Subordinated liabilities (note 20) | 466,246 | 452,439 | - | - | 452,439 | |||||||||||||||
| Debt Instruments Eligible to Compose Capital (note 21) | 8,311,918 | 8,311,918 | - | 8,311,918 | - | |||||||||||||||
| Other financial liabilities (note 22) | 36,879,099 | 35,622,099 | - | - | 35,622,099 | |||||||||||||||
| Total | 454,899,481 | 453,506,541 | - | 15,633,788 | 437,872,753 |
| Thousands of Reais | 2015 | |||||||||||||||||||
| Liabilities | Carrying Amount | Fair Value | Level 1 | Level 2 | Level 3 | |||||||||||||||
| Financial liabilities at amortized cost: | ||||||||||||||||||||
| Deposits from Bacen and credit institutions (note 17) | 69,306,902 | 69,307,617 | - | - | 69,307,617 | |||||||||||||||
| Customer deposits (note 18) | 227,462,949 | 227,422,985 | - | - | 227,422,985 | |||||||||||||||
| Marketable debt securities (note 19) | 94,658,300 | 95,486,114 | - | 13,712,057 | 81,774,057 | |||||||||||||||
| Subordinated liabilities (note 20) | 8,097,304 | 8,142,296 | - | - | 8,142,296 | |||||||||||||||
| Debt Instruments Eligible to Compose Capital (note 21) | 9,959,037 | 9,959,037 | - | 9,959,037 | - | |||||||||||||||
| Other financial liabilities (note 22) | 32,072,645 | 30,815,646 | - | - | 30,815,646 | |||||||||||||||
| Total | 441,557,137 | 441,133,695 | - | 23,671,094 | 417,462,601 |
F-72
BANCO SANTANDER (BRASIL) S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Brazilian Reais - R$, unless otherwise stated)
| Thousands of Reais | 2014 | |||||||||||||||||||
| Liabilities | Carrying Amount | Fair Value | Level 1 | Level 2 | Level 3 | |||||||||||||||
| Financial liabilities at amortized cost: | ||||||||||||||||||||
| Deposits from Bacen and credit institutions (note 17) | 63,512,663 | 63,536,717 | - | - | 63,536,717 | |||||||||||||||
| Customer deposits (note 18) | 205,136,415 | 205,292,422 | - | - | 205,292,422 | |||||||||||||||
| Marketable debt securities (note 19) | 70,355,249 | 71,058,657 | - | 12,353,107 | 58,705,550 | |||||||||||||||
| Subordinated liabilities (note 20) | 7,294,077 | 7,382,396 | - | - | 7,382,396 | |||||||||||||||
| Debt Instruments Eligible to Compose Capital (note 21) | 6,773,312 | 6,773,312 | - | 6,773,312 | - | |||||||||||||||
| Other financial liabilities (note 22) | 23,445,735 | 22,495,735 | - | - | 22,495,735 | |||||||||||||||
| Total | 376,517,451 | 376,539,239 | - | 19,126,419 | 357,412,820 |
Certain financial instruments in 2014 and have been reclassified in the table above in line with the submission of 2016.
The methods and assumptions to estimate the fair value are defined below:
- Money market investments - Brazilian Central Bank - The carrying amount is approximated to the fair value.
- Loans and amounts due from credit institutions and from customers – Fair value are estimated for groups of loans with similar characteristics. The fair value was measured by discounting estimated cash flow using the interest rate of new contracts.
That is, the future cash flow of the current loan portfolio is estimated using the contractual rates, and then the new loans spread over the risk free interest rate are incorporated to the risk free yield curve in order to calculate the loan portfolio fair value. In terms of behavior assumptions, it is important to underline that a prepayment rate is applied to the loan portfolio, thus a more realistic future cash flow is achieved.
- Deposits from Bacen and credit institutions and Customer deposits – The fair value of deposits was calculated by discounting the difference between the cash flows on a contractual basis and current market rates for instruments with similar maturities. For variable-rate deposits, the carrying amount was considered to approximates fair value.
- Marketable debt securities, Subordinated liabilities and Debt Instruments Eligible to Compose Capital – The fair value of long-term loans were estimated by cash flow discounted at the interest rate offered on the market with similar terms and maturities.
The valuation techniques used to estimate each level are defined in note 2.e.
Financial institutions are required to maintain Regulatory Capital (PR), Tier I and Principal Capital consistent with their risk activities, higher to the minimum requirement of the Regulatory Capital Requirement, represented by the sum of the partial credit risk, market risk and operational risk.
The minimum Regulatory Capital requirement (PR) was 11% until December 31, 2015, reducing gradually to 8% on January 1, 2019.The minimum Regulatory Capital requirement until December 31, 2016 is 9.875%. The minimum Total Capital Tier I requirement is 6% from January 1, 2015 and the minimum Principal Capital requirement is 4.5% from October 1, 2013.
In July 2008 came into force the rules on regulatory capital measurement by the Standardized Approach of Basel II. These rules were repealed by Resolution 4,192/2013 and 4,278/2013 which took effect on October 01, 2013. And the Resolution 4,193 and 4,281 of 2013, establishing the model for calculating the minimum Regulatory Capital requirements (PR), Tier I and Principal Capital. These resolutions state that the composition of the Regulatory Capital is done through equity, subordinated debt, hybrid capital instruments. The index is calculated on a consolidated basis, as shown below:
| Financial Conglomerate | ||||||||||||
| Thousands of Reais | 2016 (1) | 2015 (1) | 2014 (2) | |||||||||
| Tier I Regulatory Capital | 56,264,021 | 52,785,049 | 58,592,358 | |||||||||
| Principal Capital | 52,136,837 | 47,840,179 | 55,228,661 | |||||||||
| Supplementary capital | 4,127,184 | 4,944,870 | 3,363,697 | |||||||||
| Tier II Regulatory Capital | 4,280,864 | 5,182,065 | 4,970,999 | |||||||||
| Regulatory Capital (Tier I and II) | 60,544,885 | 57,967,114 | 63,563,357 | |||||||||
| Required Regulatory Capital | 36,669,570 | 40,531,194 | 40,010,083 | |||||||||
| Portion of Credit Risk (3) | 31,309,944 | 36,355,897 | 35,527,889 | |||||||||
| Market Risk Portions (4) | 2,388,626 | 2,300,969 | 2,807,798 | |||||||||
| Operational Risk Portion | 2,971,000 | 1,874,328 | 1,674,396 | |||||||||
| Basel I Ratio | 15.2 | 14.3 | 16.1 | |||||||||
| Basel Principal Capital | 14.0 | 13.0 | 15.2 | |||||||||
| Basel | 16.3 | % | 15.7 | % | 17.5 | % | ||||||
(1) Amounts calculated based on the consolidated information provided by the Consolidated Prudencial.
(2) Amounts calculated based on the consolidated information provided by the financial institutions (Financial Conglomerate).
(3) To calculate the capital allocation for credit risk were considered modifications and inclusions of Bacen Circular 3,714 of August 20, 2014, Bacen Circular 3,770 of October 29,2015, which amending Circular 3,644 of March 4, 2013.
(4) Includes portions for market risk exposures subject to variations in rates of foreign currency coupons (PJUR2), price indexes (PJUR3) and interest rate (PJUR1/PJUR4), the price of commodities (PCOM), the price of shares classified as trading portfolios (PACS), and portions for gold exposure and foreign currency transactions subject to foreign exchange (PCAM).
The risk activity is governed by the following basic principles, which are aligned with the strategy and business model of the Santander Group, and takes into account the recommendations of the supervisory authorities, regulators and the best market practices.
• Integration in the Culture of Risks;
• Management Involvement;
• Independence of the Risk Function;
• Formulation of Risk Appetite;
F-73
BANCO SANTANDER (BRASIL) S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Brazilian Reais - R$, unless otherwise stated)
• Fully Risk Consideration;
• Anticipation and Predictability;
• Common Management Instruments;
• Decision and Collegiate Bodies;
• Organizational structure;
• Limits Authority and Responsibilities;
• Risks Limitation;
• Efficient Information Channels.
The fundamental principles governing the risk governance model are:
• Independence of the risk function in relation to the business area;
• Management involvement in decision-making;
• Collegiate decisions and consensus on credit operations.
Based on these principles, the governance structure of the decision-making process is composed by committees that act in accordance to pre-defined levels of authority. The ERC - Executive Risk Committee is the local decision forum, which has representatives of the management, including the CEO, the Risk Executive Vice President and Executive Vice Presidents that are member of the executive committee and officers that report to them . The main responsibilities of this committee are:
• Follow the evolution of credit and market portfolios;
• Decide on credit proposals;
• Define and follow the Risk Appetite fulfilment;
• Define the actions regarding the recommendations formulated by the local regulator;
• Approve the risk regulation as well as the changes in risk policies that impact revenues, margin or provision expenses.
The Capital Policies of Banco Santander establish the general guidelines that should govern the areas involved operations in the capital management and control processes.
The content is structured as follows:
• Strategic Capital Policies;
• Capital Management and Control Policies;
• Operational Capital Policies;
• Organizational Structure and Governance Policies.
All processes related to capital issues follow a governance of approval that is aligned with the standards established in the Risk Governance Model mentioned above.
The definition of committees and approvals are established from the lines of defense:
• 1st Line of Defense: the main functions is the process of capital management coordination, annual capital planning definition, capital structure establishment, annual capital budgets monitoring, etc. .;
• 2nd Line of Defense: must ensure effective control of capital risk management and certify that the level of risk appetite is covering the institution's capital;
• 3rd Line of Defense: represents the role of independent reviewer.
Banco Santander, quarterly disclose information relating to risk management and Required Regulatory Capital (PRE) which is not an extension of the Financial Statements and it isn't audited. A report with further details of the structure and methodology will be disclosed at the website www.santander.com.br/ri.
Financial institutions are required to maintain investments in tangible assets compatible with adjusted regulatory capital. Funds invested in tangible assets, calculated on a consolidated basis, are limited to 50% of adjusted regulatory capital, as per prevailing regulation. On December 31, 2016, 2015 and 2014 Banco Santander classifies for said index.
33. Interest and similar income
“Interest and similar income” in the consolidated income statement comprises the interest accruing in the year on all financial assets with an implicit or explicit return, calculated by applying the effective interest method, irrespective of measurement at fair value; and the rectifications of income as a result of hedge accounting. Interest is recognized gross, without deducting any tax withheld at source.
The breakdown of the main items of interest and similar charges accrued in 2016, 2015 and 2014 is as follows:
| Thousands of Reais | 2016 | 2015 | 2014 | |||||||||
| Cash and balances with the Brazilian Central Bank | 7,315,570 | 4,625,467 | 5,951,667 | |||||||||
| Loans and amounts due from credit institutions | 7,472,729 | 5,075,636 | 4,114,877 | |||||||||
| Loans and advances to customers | 43,977,981 | 41,844,940 | 37,083,942 | |||||||||
| Debt instruments | 14,783,164 | 14,872,834 | 10,419,408 | |||||||||
| Pensions (note 24.b) | 3,344 | - | - | |||||||||
| Other interest | 3,593,289 | 3,451,323 | 1,354,022 | |||||||||
| Total | 77,146,077 | 69,870,200 | 58,923,916 |
F-74
BANCO SANTANDER (BRASIL) S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Brazilian Reais - R$, unless otherwise stated)
34. Interest expense and similar charges
“Interest expense and similar charges” in the consolidated income statement includes the interest accruing in the year on all financial liabilities with an implicit or explicit return, including remuneration in kind, calculated by applying the effective interest method, irrespective of measurement at fair value; the rectifications of cost as a result of hedge accounting; and the interest cost attributable to pension funds.
The breakdown of the main items of interest expense and similar charges accrued in 2016, 2015 and 2014 is as follows:
| Thousands of Reais | 2016 | 2015 | 2014 | |||||||||
| Deposits from credit institutions | 3,369,931 | 4,584,244 | 3,216,162 | |||||||||
| Customer deposits | 25,693,236 | 20,666,382 | 18,079,417 | |||||||||
| Marketable debt securities and subordinated liabilities: | ||||||||||||
| Marketable debt securities (note 19) | 12,212,922 | 10,047,874 | 6,347,571 | |||||||||
| Subordinated liabilities (note 20) | 731,594 | 1,019,302 | 883,215 | |||||||||
| Debt Instruments Eligible to Compose Capital (note 21) | 501,748 | 503,290 | 435,472 | |||||||||
| Pensions (note 24.b) | 290,920 | 404,171 | 318,267 | |||||||||
| Other interest (1) | 3,759,233 | 1,307,826 | 2,415,300 | |||||||||
| Total | 46,559,584 | 38,533,089 | 31,695,404 |
(1) Include R$2,057 million related to the reversal of legal obligations realized in June 2015.
35. Income from equity instruments
“Income from equity instruments” includes the dividends and payments on equity instruments out of profits generated by investees after the acquisition of the equity interest.
The breakdown of the balance of this item is as follows:
| Thousands of Reais | 2016 | 2015 | 2014 | |||||||||
| Equity instruments classified as: | ||||||||||||
| Financial assets held for trading | 21,489 | 44,312 | 52,910 | |||||||||
| Available-for-sale financial assets | 237,056 | 85,703 | 75,762 | |||||||||
| Other financial instruments at fair value through profit or loss | - | 12,866 | 93,630 | |||||||||
| Total | 258,545 | 142,881 | 222,302 |
“Fee and commission income” comprises the amount of all fees and commissions accruing in favor of the Bank in the year, except those that form an integral part of the effective interest rate on financial instruments.
The breakdown of the balance of this item is as follows:
| Thousands of Reais | 2016 | 2015 | 2014 | |||||||||
| Collection and payment services: | ||||||||||||
| Bills | 789,996 | 654,340 | 572,886 | |||||||||
| Demand accounts | 1,786,175 | 1,496,535 | 1,364,654 | |||||||||
| Cards (Credit and Debit) and Acquiring Services | 4,090,766 | 3,479,361 | 3,562,098 | |||||||||
| Checks and other | 169,100 | 154,400 | 160,486 | |||||||||
| Orders | 364,102 | 318,322 | 303,149 | |||||||||
| Total | 7,200,139 | 6,102,958 | 5,963,273 | |||||||||
| Marketing of non-Banking financial products: | ||||||||||||
| Investment funds | 1,014,401 | 982,533 | 954,697 | |||||||||
| Insurance | 2,114,316 | 2,156,230 | 1,693,475 | |||||||||
| Capitalization | 325,531 | 15,765 | 275,569 | |||||||||
| Total | 3,454,248 | 3,154,528 | 2,923,741 | |||||||||
| Securities services: | ||||||||||||
| Securities underwriting and placement | 357,513 | 280,471 | 278,926 | |||||||||
| Securities trading | 115,334 | 105,979 | 123,731 | |||||||||
| Administration and custody | 65,667 | 81,154 | 91,321 | |||||||||
| Asset management | 1,863 | 1,705 | 1,771 | |||||||||
| Total | 540,377 | 469,309 | 495,749 | |||||||||
| Other: | ||||||||||||
| Foreign exchange | 722,912 | 597,620 | 441,347 | |||||||||
| Financial guarantees | 634,375 | 507,921 | 378,698 | |||||||||
| Other fees and commissions | 996,430 | 964,855 | 1,165,290 | |||||||||
| Total | 2,353,717 | 2,070,396 | 1,985,335 | |||||||||
| Total | 13,548,481 | 11,797,191 | 11,368,098 |
37. Fee and commission expense
“Fee and commission expense” shows the amount of all fees and commissions paid or payable in the year, except those that form an integral part of the effective interest rate on financial instruments.
F-75
BANCO SANTANDER (BRASIL) S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Brazilian Reais - R$, unless otherwise stated)
The breakdown of the balance of this item is as follows:
| Thousands of Reais | 2016 | 2015 | 2014 | |||||||||
| Fees and commissions assigned to third parties (1) | 1,620,812 | 1,520,480 | 1,539,947 | |||||||||
| Other fees and commissions | 950,073 | 793,202 | 1,062,265 | |||||||||
| Total | 2,570,885 | 2,313,682 | 2,602,212 |
(1) Composite, principally, by Credit cards.
38. Gains (losses) on financial assets and liabilities (net)
Gains (losses) on financial assets and liabilities (net) includes the amount of the valuation adjustments of financial instruments, except those attributable to interest accrued as a result of application of the effective interest method and to allowances, and the gains or losses derived from the sale and purchase thereof.
The breakdown of the balance of this item, by type of instrument, is as follows:
| Thousands of Reais | 2016 | 2015 | 2014 | |||||||||
| Held for trading (1) | 3,166,399 | (19,936,801 | ) | 2,270,059 | ||||||||
| Other financial instruments at fair value through profit or loss (2) | 82,638 | 46,859 | (77,624 | ) | ||||||||
| Financial instruments not measured at fair value through profit or loss | (115,202 | ) | (120,523 | ) | 512,190 | |||||||
| Of which: Available-for-sale financial assets | ||||||||||||
| Debt instruments | (108,318 | ) | 385,605 | 528,824 | ||||||||
| Equity instruments | (6,884 | ) | (506,128 | ) | (16,634 | ) | ||||||
| Hedging derivatives and other | (117,679 | ) | 7,606 | 43,538 | ||||||||
| Total | 3,016,156 | (20,002,859 | ) | 2,748,163 |
(1) Includes the economic hedge of the Bank’s position in Cayman, which is a non-autonomous subsidiary (note 25).
(2) Includes the net gain arising from transactions involving debt securities, equity instruments and derivatives included in this portfolio, since the Bank manages its risk in these instruments on a global basis.
39. Exchange differences (net)
"Exchange differences" demonstrate the gains or losses on foreign currency transactions, the differences that arise on translations of monetary items in foreign currencies to the functional currency, and those disclosed on non-monetary assets in foreign currency at the time of their disposal. On December 31, 2016 the amount was R$4,574,814, of which R$16,634,809 Revenue with Exchange variations and R$12,059,995 of expenses with Exchange Variations (2015 - R$52,013,425 of revenue and R$41,929,005 of expenses and 2014 - R$13,920,938 of revenue and R$17,556,537 of expenses).
40. Other operating expense (net)
The breakdown of "Other operating income (expense)" is as follows:
| Thousands of Reais | 2016 | 2015 | 2014 | |||||||||
| Other operating income | 690,310 | 566,006 | 332,343 | |||||||||
| Other operating expense | (1,067,560 | ) | (668,444 | ) | (572,539 | ) | ||||||
| Contributions to fund guarantee of credit - FGC | (247,321 | ) | (244,685 | ) | (230,281 | ) | ||||||
| Total | (624,571 | ) | (347,123 | ) | (470,477 | ) |
a) Breakdown
The breakdown of “Personnel expenses” is as follows:
| Thousands of Reais | 2016 | 2015 | 2014 | |||||||||
| Wages and salaries | 5,377,284 | 4,655,400 | 4,512,303 | |||||||||
| Social security costs | 1,273,486 | 1,316,282 | 1,203,028 | |||||||||
| Benefits | 1,277,781 | 1,183,902 | 1,092,996 | |||||||||
| Defined benefit pension plans (note 24) | 24,481 | 31,332 | 21,830 | |||||||||
| Contributions to defined contribution pension plans | 86,576 | 78,785 | 65,434 | |||||||||
| Share-based compensation | 86,963 | 175,976 | 74,148 | |||||||||
| Training | 62,518 | 92,883 | 98,963 | |||||||||
| Other personnel expenses | 188,176 | 264,232 | 134,740 | |||||||||
| Total | 8,377,265 | 7,798,792 | 7,203,442 |
b) Share-Based Compensation
Banco Santander has long-term compensation plans linked to the market price of the shares . The members of the Executive Board of Banco Santander are eligible for these plans, besides the members selected by the Board of Directors and informed to the Human Resources, may also be eligible according to the seniority of the group. For the Board of Directors members in order to be eligible, they are required to exercise Executive Board functions. These amounts are recorded under Other liabilities (note 26) and personnel expenses (Note 41).
F-76
BANCO SANTANDER (BRASIL) S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Brazilian Reais - R$, unless otherwise stated)
b.1) Local Program
The Local Program Banco Santander is divided into two types of independent plans: (i) share purchase plans and (ii) Share Delivery Plans.
On 25 October 2011, Banco Santander held an EGM, which approved the grant of the Incentive Long - Term Incentive Plan (SOP 2014) - Investment in Certificates of Deposit Shares ("Units") to certain directors and Managerial level employees of the Bank and companies under its control.
On 29 April, 2013, Banco Santander held an EGM, which approved the grant of the Banco Santander’s share-based compensation program - Stock Option Plan for Share Deposit Certificates – Units (SOP 2013) and the Long-Term Incentive Plan - Investment in Share Deposit Certificates (PSP 2013).
(i) Share purchase plans
The share purchase plans correspond to the Option Plans of Purchase Share Deposit Certificates - Units (SOP).
The characteristic of each plan are:
Long-Term Incentive Plan - SOP 2014: It was a 3 year Call Option Plan. The period for exercise was between June 30, 2014 to June 30, 2016. The number of Units exercisable by the participants were determined according to the result of the determination of a performance parameter of the Bank: total Shareholder Return (TSR) and adjusted by the indicator the Return on Risk Adjusted Capital (RORAC), comparison made between realized and budgeted in each year, as determined by the Board of Directors. The final result of the plan was 15%.
Long-Term Incentive Plan – SOP 2013: It is a call option plan with 3 years of vesting. The period for the exercise comprises is between June 30, 2016 to June 30, 2018. The number of Units to be exercised by the participants were determined according to the result of measurement of a performance parameter of the Bank: Total Shareholder Return (TSR) and adjusted by the indicator Return on Assets by Risk (RoRWA), comparison between realized and budgeted in each year. The final result of the plan was 89.61%.
(ii) Stock Delivery Plans
The stock delivery plans consist of the Long Term Incentive Plan - Investment in Share Deposit Certificates - Units (PSP).
Long-Term Incentive Plan – PSP 2013: Share-based compensation plan, promoting a commitment of executives with the long-term results. The Plan had as its object the variable compensation by the Bank to Participants, 100% (one hundred percent) in Units.
b.1.1) Fair Value and Plans Performance Parameters
For accounting of the Local Program plans, an independent consultant promoted simulations based on Monte Carlo methodology's, as presented the performance parameters used to calculate the shares to be granted. Such parameters are associated with their respective probabilities of occurrence, which are updated at the close of each period.
| PSP 2013/SOP 2013 (1) | ||||
| Total Shareholder Return (TSR) rank | % of Exercisable Shares | |||
| 1st | 100 | % | ||
| 2nd | 75 | % | ||
| 3th | 50 | % |
(1) The percentage of shares determined at the position of TSR is subject to a penalty according to the implementation of the RoRWA.
| SOP 2014 (1) | ||||
| Total Shareholder Return (TSR) rank | % of Exercisable Shares | |||
| 1st | 100 | % | ||
| 2nd | 70 | % | ||
| 3th | 50 | % | ||
| 4th | 25 | % |
(1) The percentage of shares determined at the position of TSR is subject to a penalty according to the implementation of the Return on Risk Adjusted Capital (RORAC).
For measurement of the fair value the following premises was used:
| PSP 2013 | ||||
| Method of Assessment | Binomial | |||
| Volatility | 40.00 | % | ||
| Probability of Occurrence | 60.27 | % | ||
| Risk-Free Rate | 11.80 | % | ||
| SOP 2013 | SOP 2014 | |||||||
| Method of Assessment | Black&Scholes | Black&Scholes | ||||||
| Volatility | 40.00 | % | 40.00 | % | ||||
| Rate of Dividends | 3.00 | % | 3.00 | % | ||||
| Vesting Period | 3 years | 3 years | ||||||
| Average Exercise Time | 5 years | 5 years | ||||||
| Risk-Free Rate | 11.80 | % | 10.50 | % | ||||
| Probability of Occurrence | 60.27 | % | 71.26 | % | ||||
| Fair Value of the Option Shares | R$5,96 | R$6,45 |
The average value of shares SANB11(Shares of the Bank in BM&FBovespa) of the year is R$19.94 (2015 - R$14.96 and 2014 - R$15.06).
In 2016, daily pro-rata expenses amounted to R$15,789 (2015 - R$R$11,642 and 2014 - R$85,898), relating to the SOP plan and expenses amounted to R$9,798 (2015 - R$7,775 and 2014 - R$2,692) relating to the PSP plan.
F-77
BANCO SANTANDER (BRASIL) S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Brazilian Reais - R$, unless otherwise stated)
Number of Units | Exercise Price in Reais | Year Granted | Employees | Date of Commencement of Exercise Period | Expiration Date of Exercise Period | |||||||||||||||||||
| Final Balance on December 31, 2014 | 13,830,464 | |||||||||||||||||||||||
| Cancelled options (SOP - 2013) | (748,408 | ) | 14.43 | 2013 | Managers | 06/30/16 | 06/30/18 | |||||||||||||||||
| Cancelled options (PSP - 2013) | (117,453 | ) | 2013 | Managers | 08/13/13 | 06/30/16 | ||||||||||||||||||
| Cancelled options (SOP delivery 2014) | (52,500 | ) | 14.31 | 2011 | Managers | 06/30/14 | 06/30/16 | |||||||||||||||||
| Exercised options (SOP delivery 2014) | (248,499 | ) | 2011 | Managers | 06/30/14 | 06/30/16 | ||||||||||||||||||
| Final Balance on December 31, 2015 | 12,663,604 | |||||||||||||||||||||||
| Cancelled options (SOP - 2013) | (1,346,779 | ) | 12.84 | 2013 | Managers | 06/30/16 | 06/30/18 | |||||||||||||||||
| Exercised options (SOP - 2013) | (5,386,523 | ) | 12.84 | 2013 | Managers | 06/30/16 | 06/30/18 | |||||||||||||||||
| Granted options (SOP - 2013) | 220,606 | 12.84 | 2013 | Managers | 06/30/16 | 06/30/18 | ||||||||||||||||||
| Cancelled options (PSP - 2013) | (298,446 | ) | 2013 | Managers | 08/13/13 | 06/30/16 | ||||||||||||||||||
| Granted options (PSP - 2013) | (2,147,515 | ) | 2013 | Managers | 08/13/13 | 06/30/16 | ||||||||||||||||||
| Cancelled options (SOP - 2014) | (34,196 | ) | 14.31 | 2011 | Managers | 06/30/14 | 06/30/16 | |||||||||||||||||
| Exercised options (SOP - 2014) | (693,230 | ) | 12.72 | 2011 | Managers | 06/30/14 | 06/30/16 | |||||||||||||||||
| Final Balance on December 31, 2016 | 2,977,521 | |||||||||||||||||||||||
| SOP 2014 | - | 12.72 | 2011 | Managers | 06/30/14 | 06/30/16 | ||||||||||||||||||
| SOP 2013 | 2,977,521 | 12.84 | 2013 | Managers | 06/30/16 | 06/30/18 | ||||||||||||||||||
| PSP 2013 | - | 2013 | Managers | 08/13/13 | 06/30/16 | |||||||||||||||||||
| Total | 2,977,521 |
b.2) Global Program
Long-Term Incentive Policy
In 2014, it was released a share delivery plan called 1st Long Term Incentive Global CRDIV - Grant 2014. This plan is subject to achievement of performance indicator Total Shareholder Return (TSR) of the Santander Group, comparing the evolution of the Group in this indicator for the main global competitors and the settlement will be in the World Group Santander shares.
In 2016 it was launched a stock delivery plan called 2nd Long -Term Incentive Global Plan CRDIV - Grant 2015.
Fair Value of Global Plan
1st Long-Term Incentive Global Plan Grant 2014 - ILP CRDIV
It was assumed that the grantee will not leave the Bank’s employment during the term of each plan. The fair value of the 50% linked to the Bank’s relative TSR position was calculated, on the grant date, on the basis of the report provided by external valuators whose assessment was carried out using a Monte Carlo valuation model, performing 10 thousand simulations to determine the TSR of each of the companies in the Benchmark Group, taking into account the variables set forth below. The results (each of which represents the delivery of a number of shares) are classified in decreasing order by calculating the weighted average and discounting the amount at the risk-free interest rate.
In view of the high correlation between TSR and EPS, it was considered feasible to extrapolate that (in a high percentage of cases) the TSR value is also valid for EPS. Therefore, it was initially determined that the fair value of the portion of the plans linked to the Bank’s relative EPS position, i.e. of the remaining 50% of the options granted, was the same as that of the 50% corresponding to the TSR. Since this valuation refers to a non-market condition, it is reviewed and adjusted on a yearly basis.
Long Term Incentive Global CRDIV - Grant 2014
| 2 years | 3 years | 4 years | ||||||||||||||
| Future income Dividend | 11.1% | 10.8% | 9.5% | |||||||||||||
| Expected Volatility | 32.7% | 34.7% | 36.9% | |||||||||||||
| Volatility comparator | 12% -52% | 16% - 56% | 16% - 52% | |||||||||||||
| Risk-free interest rate | 1.7% | 2.1% | 2.5% | |||||||||||||
| Correlation | 0.55 | 0.55 | 0.55 | |||||||||||||
The indicator will be used to measure the achievement of targets will be the comparison of the Total Shareholder Return (TSR) of the Santander Group with the RTA of fifteen leading the Group's global competitors.
The indicator is calculated in two stages: initially for program verification in 2014 and a second time in the annual payment of each installment (2015, 2016 and 2017).
Each executive has a target in dollars. If the indicators are reached, the target will be converted to Group's shares awarded in installments in the years 2016, 2017 and 2018, with sale restriction of one (1) year after each delivery.
2nd Long -Term Incentive Global Plan CRDIV - Grant 2015.
The agreed ILP values for each participant will be obtained from the verification of the achievement of indicators in two moments: the first time to determine the eligibility (2015-2016) and a second time to calculate the number of actions due (2016, 2017 and 2018).
Indicators - First time
| 1. | RTA vs. Competitors |
| 2. | ROTE Bank vs. Budget |
| 3. | Employee satisfaction |
| 4. | Customer satisfaction |
| 5. | Binding of Companies vs. Budget |
Each executive has a target in reais, converted to Santander Group's shares (SAN) for a price of R$17,473, which will be delivered in 2019, with a restriction of one (1) year after delivery.
Number of Shares | Granted Year | Employees | Commencement of the Period | Data of Expiry of Period | ||||||||||||||||
| 1st Long Term Incentive Global CRDIV - Grant 2014 | 1,613,057 | 2014 | Executives | jan - 2014 | dec - 2017 | |||||||||||||||
| 2nd Long -Term Incentive Global Plan CRDIV - Grant 2015 | 1,775,049 | 2016 | Executives | jan - 2015 | dec - 2018 | |||||||||||||||
| Balance Plans on December 31, 2016 | 3,388,106 |
F-78
BANCO SANTANDER (BRASIL) S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Brazilian Reais - R$, unless otherwise stated)
In 2016, were recognized daily pro-rata expenses amounted to R$8,873 (2015 - R$6,760 and 2014 - R$7,491), related to costs to the respective dates of the above cycles, for total plans of the Global Program.
Plans do not result in dilution of the share capital of the Bank, because they are paid in shares of Banco Santander Spain.
b.3) Variable Remuneration based in shares
The Annual stockholders’ Meeting of Banco Santander Spain, held on June 11, 2010, approved the new policy for executive compensation through a referenced variable remuneration in shares plan effective for all the companies of the Group, including Banco Santander. This new policy, subject to adjustments applicable to Banco Santander, were approved by Appointment and Compensation Committee and Board of Directors at the meeting held on February 2, 2011.
The plan's objectives are: (i) to align the compensation program with the principles of the “Financial Stability Board” (FSB) agreed upon at the G20; (ii) to align Banco Santander’s interests with those of the plan’s participants (to achieve the sustainable and recurring growth and profitability of Banco Santander’s businesses and to recognize the participants’ contributions); (iii) to allow the retention of participants; and (iv) to improve Banco Santander’s performance and defend the interests of stockholders' via a long-term commitment.
The purpose of the plan is the cash or shares payment of part of the variable compensation owed by Banco Santander to the plan’s participants pursuant to the Bank’s compensation policy, based on the future performance of the bank’s shares.
The referenced variable remuneration in shares is within the limits of the overall management compensation approved by Banco Santander's Annual Stockholders' Meeting.
The total number of shares on which the compensation plan is based will be settled in three installments and equally allocated to each of the three fiscal years following the reference year.
On December 19, 2012, the Board of Directors approved the proposed new incentive plan (deferred) for payment of the variable remuneration of directors and certain employees, which will be subject to resolution of the ordinary general meeting on February 15, 2013.
On April 24, 2013, the Board of Directors approved the proposed new incentive plan (deferred) for payment of the variable remuneration of directors and certain employees, which was approved in AGE (Extraordinary General Meeting) of June 3, 2013.
On March 18, 2015, the Board of Directors approved the proposed new incentive plan (deferred) for payment of the variable remuneration of directors and certain employees, which was approved in AGE (Extraordinary General Meeting) of April 30, 2015.
On September 29, 2015, the Board of Directors approved the proposed new incentive plan (deferred) for payment of the variable remuneration of directors and certain employees, which was approved in AGE (Extraordinary General Meeting) of December 14, 2015.
On October 25, 2016, the Board of Directors approved the proposed new incentive plan (deferred) for payment of the variable remuneration of directors and certain employees, which was approved in AGE (Extraordinary General Meeting) of December 21, 2016.
This proposal includes certain requirements for deferred payment of part of the future variable compensation due to its managers and other employees, given the financial basis for sustainable long-term adjustments in future payments due to the risks assumed and fluctuations in cost of capital.
The variable compensation plan Banco Santander has been assessed and became divided into two programs: (i) Collective Identified and (ii) Collective unidentified.
a) Identified Collective - Participants of the Executive Committee, Statutory Officers and other executives who take significant risks in the Bank and are responsible for the control areas. The payment deferral will be held in two ways: 50% in cash, indexed to 100% of CDI and 50% in shares (Units SANB11). On the period ended on December 31, 2016, was recorded loss amounted to R$52,500 (2015 - R$89,961 and 2014 - R$28,371), regarding the provision of the deferral plan in shares.
b) Collective Unidentified - managerial employees and other employees of the organization that will be benefited from the deferral plan. The deferred amount will be paid 100% cash, indexed to 100% of CDI. On the year ended on December 31, 2016, there were expense of R$79,794 (2014 - R$59,797 and 2014 - R$41,553).
42. Other administrative expenses a) Breakdown
The breakdown of the balance of this item is as follows:
| Thousands of Reais | 2016 | 2015 | 2014 | |||||||||
| Property, fixtures and supplies | 1,278,556 | 1,268,498 | 1,209,401 | |||||||||
| Technology and systems | 1,246,809 | 1,192,533 | 1,106,392 | |||||||||
| Advertising | 486,772 | 523,343 | 467,096 | |||||||||
| Communications | 488,799 | 481,217 | 501,419 | |||||||||
| Per diems and travel expenses | 133,123 | 160,135 | 140,986 | |||||||||
| Taxes other than income tax | 84,932 | 128,022 | 78,389 | |||||||||
| Surveillance and cash courier services | 622,362 | 614,596 | 573,697 | |||||||||
| Insurance premiums | 21,308 | 20,975 | 17,004 | |||||||||
| Specialized and technical services | 1,744,726 | 1,820,657 | 2,004,874 | |||||||||
| Technical reports | 437,683 | 406,755 | 404,548 | |||||||||
| Others specialized and technical services | 1,307,043 | 1,413,902 | 1,600,326 | |||||||||
| Other administrative expenses | 435,758 | 506,364 | 639,116 | |||||||||
| Total | 6,543,145 | 6,716,340 | 6,738,374 |
F-79
BANCO SANTANDER (BRASIL) S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Brazilian Reais - R$, unless otherwise stated)
b) Other information
The balance of “Technical reports” includes the fees paid by the consolidated companies to their respective auditors, the detail being as follows:
| Millions of Reais | 2016 | 2015 | 2014 | |||||||||
| Audit of the annual financial statements of the companies audited by external audit (1) (constant scope of consolidation) | 9.2 | 12.0 | 10.4 | |||||||||
| Audit Related | 0.1 | 1.5 | 1.3 | |||||||||
| Taxes | - | - | 0.1 | |||||||||
| Others | 0.7 | 1.7 | 0.4 | |||||||||
| Total | 10.0 | 15.2 | 12.2 |
(1) On March 18, 2016, the Banco Santander contracted PricewaterhouseCoopers Auditores Independentes (PWC), to act as an independent audit of the Bank and the companies that make up the Conglomerate Santander in Brazil, to replace Deloitte Touche Tohmatsu Auditores Independentes (Deloitte), which provided an independent audit service until December 2015.
The approximate value of taxes according to law 12,741/2012 totaled R$1.8 million.
Services provided by other audit firms totaled R$4.9 million (2015 - R$4.2 million and 2014 - R$6.2 million).
43. Gains (losses) on disposal of assets not classified as non-current assets held for sale
The breakdown of the balance of this item is as follows:
| Thousands of Reais | 2016 | 2015 | 2014 | |||||||||
| Gains | 12,584 | 787,628 | 87,696 | |||||||||
| On disposal of tangible assets | 12,575 | 30,478 | 87,696 | |||||||||
| On disposal of investments (1) | 9 | 757,150 | - | |||||||||
| Losses | (8,768 | ) | (7,013 | ) | (850 | ) | ||||||
| On disposal of tangible assets | (7,547 | ) | (502 | ) | (143 | ) | ||||||
| On disposal of investments | (1,221 | ) | (6,511 | ) | (707 | ) | ||||||
| Total | 3,816 | 780,615 | 86,846 |
(1) In 2015 includes a gain of R$750,550, related to the operation with the sale of Santander Securities Services Brasil DTVM S.A. (note 4.a).
44. Gains (losses) on disposal and expenses of non-current assets held for sale not classified as discontinued operations
It refers basically to the result on disposal of property received in the processes of recovery of loans to customers and the provision of the recoverable value of these assets.
a) Guarantees and commitments
The Bank provides a variety of guarantees to its customers to improve their credit standing and allow them to compete. The following table summarizes at December 31, 2016, 2015 and 2014 all of the guarantees.
As required, the “maximum potential amount of future payments” represents the notional amounts that could be lost if there were a total default by the guaranteed parties, without consideration of possible recoveries from collateral held or pledged, or recoveries under recourse provisions. There is no relationship between these amounts and probable losses on these guarantees. In fact, "maximum potential amount of future payments" significantly exceeds inherent losses.
| Thousands of Reais | 2016 | 2015 | 2014 | |||||||||
| Maximum potential amount of future payments | ||||||||||||
| Contingent liabilities | ||||||||||||
| Guarantees and other sureties | 32,629,975 | 42,836,334 | 38,386,017 | |||||||||
| Financial guarantees | 24,475,507 | 41,183,159 | 37,034,862 | |||||||||
| Performance guarantees | 532,232 | 521,373 | 565,032 | |||||||||
| Financial letters of credit | 7,462,761 | 874,661 | 523,608 | |||||||||
| Other | 159,475 | 257,141 | 262,515 | |||||||||
| Other contingent exposures | 635,055 | 774,383 | 948,300 | |||||||||
| Documentary Credits | 635,055 | 774,383 | 948,300 | |||||||||
| Total Contingent Liabilities | 33,265,030 | 43,610,717 | 39,334,317 | |||||||||
| Commitments | ||||||||||||
| Loan commitments draw able by third parties (1) | 91,251,198 | 91,960,299 | 98,592,601 | |||||||||
| Total Commitments | 91,251,198 | 91,960,299 | 98,592,601 | |||||||||
| Total | 124,516,228 | 135,571,016 | 137,926,918 |
(1) Includes the approved limits and unused overdraft, credit card and others.
Financial guarantees are provided to our clients in respect of their obligations to third parties. We have the right to seek reimbursement from our clients for any amount we shall have to pay under such guarantee. Additionally, we may hold cash or other highly liquid collateral for these guarantees. These guarantees are subject to the same credit evaluation performed on the origination of loans.
F-80
BANCO SANTANDER (BRASIL) S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Brazilian Reais - R$, unless otherwise stated)
We expect many of these guarantees to expire without the need to disburse any cash. Therefore, in the ordinary course of business, we expect that these guarantees will have virtually no impact on our liquidity.
Performance guarantees are issued to guaranteed customers obligations such as to make contractually specified investments, to supply specified products, commodities, or maintenance or warranty services to a third party, completion of projects in accordance with contract terms, etc. Financial standby letters of credit include guarantees of payment of loans, credit facilities, promissory notes and trade acceptances. The Bank always requires collateral to grant this kind of financial guarantees. In Documentary Credits, the Bank acts as a payment intermediary between trading companies located in different countries (import-export transactions). Under a documentary credit transaction, the parties involved deal with the documents rather than the commodities to which the documents may relate. Usually the traded commodities are used as collateral to the transaction and the Bank may provide some credit facilities. Loan commitments draw able by third parties include mostly credit card lines and commercial commitments. Credit card lines are unconditionally cancelable by the issuer. Commercial commitments are mostly 1 year facilities subject to information requirements to be provided by our customers.
The risk criteria followed to issue all kinds of guarantees, financial standby letters of credit, documentary credits and any risks of signature are in general the same as those used for other products of credit risk, and therefore subject to the same admission and monitoring standards. The guarantees granted on behalf of our customers are subject to the same credit quality review process as any other risk product. On a regular basis, at least once a year, the solvency of the mentioned customers is checked as well as the probability of those guarantees to be executed. In case that any doubt on the customer’s solvency may arise we create allowances with charge to net income, by the amount of the inherent losses even if there is no claim to us.
The provision for losses on the non-recovery guarantees and other securities (Note 10.c) is recorded as "Impairment losses on financial assets (net)” on consolidated income statement and its calculation is described in note 2.i.
Additionally, the liability recognized as deferred revenue for the premium received for providing the above guarantees, which is being amortized into income over the life of the related guarantees is R$476,564 (2015 - R$385,169 and 2014 - R$325,039).
b) Off-balance-sheets funds under management
Banco Santander has under its management investment funds for which we do not hold any substantial participation interests and we do not act as principal over the funds, and therefore no ownership in such funds. Based on the contractual relationship governing the management of such funds, third parties who hold the participation interests in such funds are those who are exposed to, or have rights, to variable returns and have the ability to affect those returns through power over the fund. Moreover, though the Bank acts as fund manager, in analyzing the fund manager’s remuneration regime, the remuneration regime is proportionate to the service rendered, and therefore does not create exposure of such importance to indicate that the fund manager is acting as the principal (Note 2.w).
The detail of off-balance-sheets funds managed by the Bank is as follows:
| Thousands of Reais | 2016 | 2015 | 2014 | |||||||||
| Funds under management | 1,533,620 | 2,542,286 | 4,591,810 | |||||||||
| Total | 1,533,620 | 2,542,286 | 4,591,810 |
c) Third-party securities held in custody
At December 31, 2016, the Bank held in custody debt securities and equity instruments totaling R$27,772,714 (2015 - R$38,412,152 and 2014 - R$398,499,007) entrusted to it by third parties.
d) Residual maturity periods and Average interest rates
The breakdown, by maturity, of the balances of certain items in the consolidated balance sheets is as follows:
| 2016 | ||||||||||||||||||||||||||||||||
| Thousands of Reais | ||||||||||||||||||||||||||||||||
| On
Demand | Up
to 3 Months | 3
to 12 Months | 1
to 3 Years | 3
to 5 Years | After
5 Years | Total | Average Interest Rate | |||||||||||||||||||||||||
| Assets: | ||||||||||||||||||||||||||||||||
| Cash and balances with the Brazilian Central Bank | 14,917,634 | 42,538,383 | 3,833,431 | - | - | 49,315,463 | 110,604,911 | 13.5 | % | |||||||||||||||||||||||
| Debt instruments (2) | - | 21,709,350 | 10,136,133 | 26,674,215 | 28,135,295 | 30,838,274 | 117,493,267 | 14.2 | % | |||||||||||||||||||||||
| Equity instruments | 593,594 | 48,054 | 252,087 | 486,408 | 21,313 | 1,024,933 | 2,426,389 | - | ||||||||||||||||||||||||
| Loans and amounts due from credit institutions | 13,614,198 | 2,849,696 | 923,308 | 532,399 | 34,458 | 9,808,414 | 27,762,473 | 8.6 | % | |||||||||||||||||||||||
| Loans and advances to customer | 30,408,851 | 68,218,474 | 60,047,442 | 54,558,381 | 17,357,244 | 21,412,382 | 252,002,774 | 26.5 | % | |||||||||||||||||||||||
| Loans and Receivables - Debt instruments | 822,874 | 1,287,372 | 2,960,099 | 5,044,803 | 4,472,758 | 1,695,353 | 16,283,259 | 13.6 | % | |||||||||||||||||||||||
| Held to maturity investments | - | - | 12,378 | 371,621 | 1,173,360 | 8,491,402 | 10,048,761 | 4.0 | % | |||||||||||||||||||||||
| Derivatives | 620,422 | 9,209,421 | 3,571,126 | 3,813,687 | 5,481,210 | 2,007,107 | 24,702,973 | |||||||||||||||||||||||||
| Total | 60,357,151 | 136,651,329 | 78,164,878 | 87,667,827 | 51,194,428 | 122,586,221 | 536,621,834 | 18.4 | % | |||||||||||||||||||||||
F-81
BANCO SANTANDER (BRASIL) S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Brazilian Reais - R$, unless otherwise stated)
| 2016 | ||||||||||||||||||||||||||||||||
| Thousands of Reais | ||||||||||||||||||||||||||||||||
| On
Demand | Up
to 3 Months | 3
to 12 Months | 1
to 3 Years | 3
to 5 Years | After
5 Years | Total | Average Interest Rate | |||||||||||||||||||||||||
| Liabilities: | ||||||||||||||||||||||||||||||||
| Financial liabilities at amortized cost: | ||||||||||||||||||||||||||||||||
| Deposits from credit institutions(1) | 770,467 | 40,581,025 | 23,315,006 | 8,215,378 | 2,818,095 | 2,934,101 | 78,634,072 | 16.0 | % | |||||||||||||||||||||||
| Customer deposits(1) | 60,919,032 | 64,154,475 | 68,505,808 | 39,630,274 | 14,003,821 | 231,767 | 247,445,177 | 13.3 | % | |||||||||||||||||||||||
| Marketable debt securities (1) | - | 21,833,927 | 56,637,880 | 20,620,077 | 312,143 | 438,928 | 99,842,955 | 12.7 | % | |||||||||||||||||||||||
| Subordinated liabilities | - | - | - | 466,246 | - | - | 466,246 | 9.6 | % | |||||||||||||||||||||||
| Debt Instruments Eligible to Compose Capital | - | 113,995 | - | - | - | 8,197,923 | 8,311,918 | - | ||||||||||||||||||||||||
| Other financial liabilities | 3,004,041 | 33,559,710 | 356 | 7,992 | - | 307,000 | 36,879,099 | - | ||||||||||||||||||||||||
| Financial liabilities held for trading: | ||||||||||||||||||||||||||||||||
| Short positions | - | 743 | 2,887,723 | 8,333,584 | 3,344,083 | 17,128,136 | 31,694,269 | 9.8 | % | |||||||||||||||||||||||
| Derivatives | 333,287 | 8,052,349 | 2,506,131 | 2,523,506 | 5,376,180 | 1,445,162 | 20,236,615 | - | ||||||||||||||||||||||||
| Total | 65,026,827 | 168,296,224 | 153,852,904 | 79,797,057 | 25,854,322 | 30,683,017 | 523,510,351 | 12.0 | % | |||||||||||||||||||||||
| Difference (assets less liabilities) | (4,669,676 | ) | (31,644,895 | ) | (75,688,026 | ) | 7,870,770 | 25,340,106 | 91,903,204 | 13,111,483 | - | |||||||||||||||||||||
| 2015 | ||||||||||||||||||||||||||||||||
| Thousands of Reais | ||||||||||||||||||||||||||||||||
| On
Demand | Up
to 3 Months | 3
to 12 Months | 1
to 3 Years | 3
to 5 Years | After
5 Years | Total | Average Interest Rate | |||||||||||||||||||||||||
| Assets: | ||||||||||||||||||||||||||||||||
| Cash and balances with the Brazilian Central Bank | 57,826,436 | 26,530,459 | 4,786,458 | - | - | - | 89,143,353 | 14.5 | % | |||||||||||||||||||||||
| Debt instruments | 109,808 | 5,094,088 | 11,456,643 | 30,805,793 | 14,821,110 | 53,426,537 | 115,713,979 | 9.6 | % | |||||||||||||||||||||||
| Equity instruments | 2,140,969 | - | - | - | - | - | 2,140,969 | - | ||||||||||||||||||||||||
| Loans and amounts due from credit institutions | 29,064,151 | 781,340 | 1,298,609 | 2,448,123 | 133,299 | 8,697,116 | 42,422,638 | 9.5 | % | |||||||||||||||||||||||
| Loans and advances to customer | 22,662,559 | 73,674,326 | 59,527,021 | 54,371,603 | 18,227,451 | 23,570,489 | 252,033,449 | 22.2 | % | |||||||||||||||||||||||
| Total | 111,803,923 | 106,080,213 | 77,068,731 | 87,625,519 | 33,181,860 | 85,694,142 | 501,454,388 | 17.2 | % | |||||||||||||||||||||||
| Liabilities: | ||||||||||||||||||||||||||||||||
| Financial liabilities at amortized cost: | ||||||||||||||||||||||||||||||||
| Deposits from credit institutions(1) | 943,539 | 29,303,606 | 24,374,967 | 8,819,650 | 3,346,250 | 2,663,486 | 69,451,498 | 12.1 | % | |||||||||||||||||||||||
| Customer deposits(1) | 52,009,232 | 74,456,462 | 39,245,968 | 62,868,721 | 14,305,045 | 157,444 | 243,042,872 | 14.1 | % | |||||||||||||||||||||||
| Marketable debt securities(1) | - | 16,639,669 | 26,833,967 | 50,815,528 | 298,178 | 70,958 | 94,658,300 | 8.7 | % | |||||||||||||||||||||||
| Subordinated liabilities | - | - | 7,685,328 | 411,976 | - | - | 8,097,304 | 14.6 | % | |||||||||||||||||||||||
| Debt Instruments Eligible to Compose Capital | - | - | - | - | - | 9,959,037 | 9,959,037 | - | ||||||||||||||||||||||||
| Other financial liabilities | 199,805 | 30,095,592 | 1,438,387 | 31,862 | - | 307,000 | 32,072,646 | - | ||||||||||||||||||||||||
| Financial liabilities held for trading: | ||||||||||||||||||||||||||||||||
| Short positions | - | - | - | 2,865,813 | 7,915,932 | 9,265,886 | 20,047,631 | 11.8 | % | |||||||||||||||||||||||
| Derivatives | 5,600 | 2,666,788 | 1,863,221 | 2,953,682 | 2,122,437 | 12,728,409 | 22,340,137 | - | ||||||||||||||||||||||||
| Total | 53,158,176 | 153,162,117 | 101,441,838 | 128,767,232 | 27,987,842 | 35,152,220 | 499,669,425 | 12.4 | % | |||||||||||||||||||||||
| Difference (assets less liabilities) | 58,645,747 | (47,081,904 | ) | (24,373,107 | ) | (41,141,713 | ) | 5,194,018 | 50,541,922 | 1,784,963 | ||||||||||||||||||||||
F-82
BANCO SANTANDER (BRASIL) S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Brazilian Reais - R$, unless otherwise stated)
| 2014 | ||||||||||||||||||||||||||||||||
| Thousands of Reais | ||||||||||||||||||||||||||||||||
| On
Demand | Up
to 3 Months | 3
to 12 Months | 1
to 3 Years | 3
to 5 Years | After
5 Years | Total | Average Interest Rate | |||||||||||||||||||||||||
| Assets: | ||||||||||||||||||||||||||||||||
| Cash and balances with the Brazilian Central Bank | 33,434,065 | 22,168,842 | 300,941 | - | - | - | 55,903,848 | 10.9 | % | |||||||||||||||||||||||
| Debt instruments | - | 15,337,090 | 20,758,336 | 34,258,870 | 17,315,307 | 33,041,806 | 120,711,409 | 10.5 | % | |||||||||||||||||||||||
| Equity instruments | 2,948,094 | - | - | - | - | - | 2,948,094 | - | ||||||||||||||||||||||||
| Loans and amounts due from credit institutions | 14,735,346 | 1,333,206 | 4,844,420 | 1,430,260 | 466,904 | 6,107,261 | 28,917,397 | 11.5 | % | |||||||||||||||||||||||
| Loans and advances to customer | 9,110,511 | 66,015,934 | 71,124,998 | 57,395,636 | 14,967,223 | 17,076,047 | 235,690,349 | 22.6 | % | |||||||||||||||||||||||
| Total | 60,228,016 | 104,855,072 | 97,028,695 | 93,084,766 | 32,749,434 | 56,225,114 | 444,171,097 | 17.0 | % | |||||||||||||||||||||||
| Liabilities: | ||||||||||||||||||||||||||||||||
| Financial liabilities at amortized cost: | ||||||||||||||||||||||||||||||||
| Deposits from credit institutions(1) | 182,108 | 31,587,311 | 19,689,042 | 8,331,404 | 2,228,999 | 1,655,337 | 63,674,201 | 11.1 | % | |||||||||||||||||||||||
| Customer deposits(1) | 54,303,688 | 59,729,834 | 25,106,427 | 68,866,674 | 12,637,396 | - | 220,644,019 | 11.2 | % | |||||||||||||||||||||||
| Marketable debt securities(1) | - | 17,563,577 | 30,819,783 | 19,969,449 | 1,907,628 | 94,812 | 70,355,249 | 10.8 | % | |||||||||||||||||||||||
| Subordinated liabilities | - | - | 199,124 | 6,747,305 | 347,648 | - | 7,294,077 | 11.2 | % | |||||||||||||||||||||||
| Debt Instruments Eligible to Compose Capital | - | 147,165 | - | - | - | 6,626,147 | 6,773,312 | 0.0 | % | |||||||||||||||||||||||
| Other financial liabilities | 60,649 | 21,614,192 | 1,430,693 | 103,355 | 9,923 | 226,923 | 23,445,735 | - | ||||||||||||||||||||||||
| Total | 54,546,445 | 130,642,079 | 77,245,069 | 104,018,187 | 17,131,594 | 8,603,219 | 392,186,593 | 10.9 | % | |||||||||||||||||||||||
| Difference (assets less liabilities) | 5,681,571 | (25,787,007 | ) | 19,783,626 | (10,933,421 | ) | 15,617,840 | 47,621,895 | 51,984,504 | |||||||||||||||||||||||
(1) Include obligations which may be subject to early repayment, being: sight and time deposits, repurchase agreements with customers, LCI and LCA.
(2) In 2015, includes Held to maturity investments.
e) Equivalent value in Reais of assets and liabilities
The main foreign currency balances in the consolidated balance sheets, based on the nature of the related items, is as follows:
| Equivalent Value in Thousands of Reais | 2016 | 2015 | 2014 | |||||||||||||||||||||
| Assets | Liabilities | Assets | Liabilities | Assets | Liabilities | |||||||||||||||||||
| Cash and balances with the Brazilian Central Bank | 174,605 | - | 230,881 | - | 206,750 | - | ||||||||||||||||||
| Financial assets/liabilities held for trading | 402,186 | 371,100 | 2,109,665 | 2,276,540 | 52,511 | 1,423,571 | ||||||||||||||||||
| Available-for-sale financial assets | 9,787,622 | - | 4,142,821 | - | 7,112,048 | - | ||||||||||||||||||
| Loans and receivables | 28,061,831 | - | 36,418,917 | - | 35,662,235 | - | ||||||||||||||||||
| Financial liabilities at amortized cost | - | 39,465,409 | - | 58,294,796 | - | 33,775,217 | ||||||||||||||||||
| Total | 38,426,244 | 39,836,509 | 42,902,284 | 60,571,336 | 43,033,544 | 35,198,788 |
f) Other Obligations
The Banco Santander rents properties, mainly used for branches, based on a standard contract which may be cancelled at its own criterion and includes the right to opt for renewals and adjustment clauses. The leases are classified as operating leases. Total future minimum payments of non-cancelable operating leases as of December 31, 2016 is R$2,933,276 (2015 - R$3,199,111 and 2014 - R$2,521,985), of which R$646,804 (2015 - R$640,132 and 2014 - R$654,925) up to 1 year, R$1,789,670 (2015 - R$1,873,889 and 2014 - R$1,497,161) from 1 year to up to 5 years and R$496,802 (2015 - R$685,090 and 2014 - R$369,899) after 5 years. Additionally, Banco Santander has contracts for a matures indeterminate, totaling R$1,013 (2015 - R$696 and 2014 - R$967) monthly rent corresponding to the contracts with this feature. Payment of operating leases recognized as expenses in 2016 fiscal year were R$663,801 (2015 - R$659,332 and 2014 - R$679,379).
Monthly rental contracts will be adjusted on an annual basis, as per prevailing legislation, at Índice Geral de Preços do Mercado (IGPM) variation. The lessee is entitled to unilaterally rescind the agreement, at any time, as contractual clauses and legislation.
F-83
BANCO SANTANDER (BRASIL) S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Brazilian Reais - R$, unless otherwise stated)
g) Obligation offset and settlement agreements
Obligation offset and settlement agreements - Resolution CMN 3,263/2005 – The Bank has an obligation offset and settlement agreement within the ambit of national financial institutions (SFN), entered into with individuals and legal entities which may or may not be members of SFN, resulting in improved assurance of financial settlement, with the parties with which it has this type of agreement. These agreements establish that payment obligations with the Bank, arising from loans and derivative transactions, in case of default of the counterparty, will be offset against payment obligations of the Bank with the counterparty.
h) Contingent assets
On December 31, 2016, 2015 and 2014 no contingent assets were recorded.
46. Business segment reporting
In accordance with IFRS 8, an operating segment is a component of an entity:
(a) that engages in business activities from which it may earn revenues and incur expenses (including revenues and expenses relating to transactions with other components of the same entity),
(b) whose operating results are regularly reviewed by the entity’s Management responsible to make decisions about resources to be allocated to the segment and assess its performance, and
(c) For which discrete financial information are available.
Based on these guidelines the Bank has identified, the following reportable operating segments:
• Commercial Banking,
• Global Wholesale Banking,
The Bank operates in Brazil and abroad, through the Cayman branch and its subsidiary in Spain, with Brazilian clients and therefore has no geographical segments.
The Commercial Banking segment encompasses the entire commercial banking business (except for the Corporate Banking business managed globally using the Global Relationship Model). The Global Wholesale Banking segment reflects the returns on the Global Corporate Banking business, those on Investment Banking and Markets worldwide, including all treasury departments and the equities business.
The income statements and other significant data are as follows:
| Thousands of Reais | 2016 | |||||||||||
| Global | ||||||||||||
| Commercial | Wholesale | |||||||||||
| (Condensed) Income Statement | Banking | Banking | Total | |||||||||
| NET INTEREST INCOME | 27,365,857 | 3,220,636 | 30,586,493 | |||||||||
| Income from equity instruments | 258,545 | - | 258,545 | |||||||||
| Income from companies accounted for by the equity method | 47,537 | - | 47,537 | |||||||||
| Net fee and commission income | 9,580,332 | 1,397,264 | 10,977,596 | |||||||||
| Gains (losses) on financial assets and liabilities (net) and Exchange differences (net) (1) | 5,619,356 | 1,971,614 | 7,590,970 | |||||||||
| Other operating expense (net) | (611,051 | ) | (13,520 | ) | (624,571 | ) | ||||||
| TOTAL INCOME | 42,260,576 | 6,575,994 | 48,836,570 | |||||||||
| Personnel expenses | (7,638,124 | ) | (739,141 | ) | (8,377,265 | ) | ||||||
| Other administrative expenses | (6,272,987 | ) | (270,158 | ) | (6,543,145 | ) | ||||||
| Depreciation and amortization | (1,381,742 | ) | (100,897 | ) | (1,482,639 | ) | ||||||
| Provisions (net) | (2,685,278 | ) | (39,464 | ) | (2,724,742 | ) | ||||||
| Impairment losses on financial assets (net) | (11,607,468 | ) | (1,693,977 | ) | (13,301,445 | ) | ||||||
| Impairment losses on non-financial assets (net) | (114,154 | ) | (167 | ) | (114,321 | ) | ||||||
| Other non-financial gains (losses) | 90,889 | - | 90,889 | |||||||||
| OPERATING PROFIT BEFORE TAX (1) | 12,651,712 | 3,732,190 | 16,383,902 | |||||||||
| Other: | ||||||||||||
| Total assets | 557,624,385 | 76,768,855 | 634,393,240 | |||||||||
| Loans and advances to customers | 191,433,209 | 60,569,565 | 252,002,774 | |||||||||
| Customer deposits | 228,923,947 | 18,521,230 | 247,445,177 |
(1) Includes in the Commercial Bank, the fiscal hedge of investment in dollar (a strategy to mitigate the effects of fiscal and exchange rate variation of offshore investments on net income), the result of which is recorded in "Gains (losses) on financial assets and liabilities" net of taxes. Adjusted for an amounted to R$6,139,714 due to the effects of the valuation of the Real against the Dollar in 2016, the Operating Profit before Tax for the Commercial Bank segment was R$6,511,998.
F-84
BANCO SANTANDER (BRASIL) S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Brazilian Reais - R$, unless otherwise stated)
| Thousands of Reais | 2015 | |||||||||||
| Global | ||||||||||||
| Commercial | Wholesale | |||||||||||
| (Condensed) Income Statement | Banking | Banking | Total | |||||||||
| NET INTEREST INCOME | 27,040,507 | 4,296,604 | 31,337,111 | |||||||||
| Income from equity instruments | 142,881 | - | 142,881 | |||||||||
| Income from companies accounted for by the equity method | 116,312 | - | 116,312 | |||||||||
| Net fee and commission income | 8,240,868 | 1,242,641 | 9,483,509 | |||||||||
| Gains (losses) on financial assets and liabilities (net) and Exchange differences (net) (1) | (9,068,985 | ) | (849,454 | ) | (9,918,439 | ) | ||||||
| Other operating expense (net) | (335,318 | ) | (11,805 | ) | (347,123 | ) | ||||||
| TOTAL INCOME | 26,136,265 | 4,677,986 | 30,814,251 | |||||||||
| Personnel expenses | (7,123,390 | ) | (675,402 | ) | (7,798,792 | ) | ||||||
| Other administrative expenses | (6,449,732 | ) | (266,608 | ) | (6,716,340 | ) | ||||||
| Depreciation and amortization | (1,361,330 | ) | (128,687 | ) | (1,490,017 | ) | ||||||
| Provisions (net) | (4,012,922 | ) | 11,628 | (4,001,294 | ) | |||||||
| Impairment losses on financial assets (net) | (12,365,037 | ) | (1,268,952 | ) | (13,633,989 | ) | ||||||
| Impairment losses on non-financial assets (net) | (1,220,161 | ) | (484 | ) | (1,220,645 | ) | ||||||
| Other non-financial gains (losses) | 831,108 | - | 831,108 | |||||||||
| OPERATING PROFIT BEFORE TAX (1) | (5,565,199 | ) | 2,349,481 | (3,215,718 | ) | |||||||
| Other: | ||||||||||||
| Total assets | 524,192,046 | 81,202,482 | 605,394,528 | |||||||||
| Loans and advances to customers | 185,371,651 | 66,661,798 | 252,033,449 | |||||||||
| Customer deposits | 223,165,976 | 19,876,896 | 243,042,872 |
(1) Includes in the Commercial Bank, the fiscal hedge of investment in dollar (a strategy to mitigate the effects of fiscal and exchange rate variation of offshore investments on net income), the result of which is recorded in "Gains (losses) on financial assets and liabilities" net of taxes. Adjusted for losses amounted to R$11,531,844 due to the effects of the devaluation of the Real against the Dollar in 2015, the Operating Profit before Tax for the Commercial Bank segment was R$5,966,645.
| Thousands of Reais | 2014 | |||||||||||
| Global | ||||||||||||
| Commercial | Wholesale | |||||||||||
| (Condensed) Income Statement | Banking | Banking | Total | |||||||||
| NET INTEREST INCOME | 25,042,170 | 2,186,342 | 27,228,512 | |||||||||
| Income from equity instruments | 222,302 | - | 222,302 | |||||||||
| Income from companies accounted for by the equity method | 91,096 | - | 91,096 | |||||||||
| Net fee and commission income | 7,748,888 | 1,016,998 | 8,765,886 | |||||||||
| Gains (losses) on financial assets and liabilities (net) and Exchange differences (net) (1) | (1,480,288 | ) | 592,852 | (887,436 | ) | |||||||
| Other operating expense (net) | (450,936 | ) | (19,541 | ) | (470,477 | ) | ||||||
| TOTAL INCOME | 31,173,232 | 3,776,651 | 34,949,883 | |||||||||
| Personnel expenses | (6,597,680 | ) | (605,762 | ) | (7,203,442 | ) | ||||||
| Other administrative expenses | (6,493,024 | ) | (245,350 | ) | (6,738,374 | ) | ||||||
| Depreciation and amortization | (1,226,196 | ) | (135,933 | ) | (1,362,129 | ) | ||||||
| Provisions (net) | (2,030,408 | ) | (5,829 | ) | (2,036,237 | ) | ||||||
| Impairment losses on financial assets (net) | (10,710,448 | ) | (561,157 | ) | (11,271,605 | ) | ||||||
| Impairment losses on non-financial assets (net) | 13,943 | (10,192 | ) | 3,751 | ||||||||
| Other non-financial gains (losses) | 101,482 | - | 101,482 | |||||||||
| OPERATING PROFIT BEFORE TAX (1) | 4,230,901 | 2,212,428 | 6,443,329 | |||||||||
| Other: | ||||||||||||
| Total assets | 447,099,883 | 73,131,027 | 520,230,910 | |||||||||
| Loans and advances to customers | 177,426,688 | 58,263,661 | 235,690,349 | |||||||||
| Customer deposits | 199,721,072 | 20,922,947 | 220,644,019 |
(1) Includes in the Commercial Bank, the fiscal hedge of investment in dollar (a strategy to mitigate the effects of fiscal and exchange rate variation of offshore investments on net income), the result of which is recorded in "Gains (losses) on financial assets and liabilities" net of taxes. Adjusted for losses amounted to R$1,668,111 due to the effects of the devaluation of the Real against the Dollar in 2014, the Operating Profit before Tax for the Commercial Bank segment was R$5,899,012.
47. Related party transactions
The parties related to the Bank are deemed to include, in addition to its subsidiaries, associates and jointly controlled entities, the Bank’s key management personnel and the entities over which the key management personnel may exercise significant influence or control.
Following is a detail of the business transactions performed by the Bank with its related parties on December 31, 2016, 2015 and 2014:
F-85
BANCO SANTANDER (BRASIL) S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Brazilian Reais - R$, unless otherwise stated)
a) Key-person management compensation
The Board of Directors' meeting held on March 22, 2016, was approved in accordance with the Compensation and Appointment Committee the global compensation proposal of directors (Board of Directors and Executive Officers) for the year 2016, amounting to R$300,000, covering fixed remuneration, variable and equity-based and other benefits. The proposal was approved by the extraordinary stockholders' meeting held on April 29, 2016.
i) Long-term benefits
The Banco Santander as well as Banco Santander Spain, as other subsidiaries of Santander Group, have long-term compensation programs tied to their share's performance, based on the achievement of goals.
ii) Short-term benefits
The following table shows the Board of Directors’ and Executive Board’s:
| Thousands of Reais | 2016 | 2015 | 2014 | |||||||||
| Fixed compensation | 90,169 | 69,779 | 53,170 | |||||||||
| Variable compensation | 120,443 | 108,087 | 86,990 | |||||||||
| Other | 14,579 | 15,246 | 14,971 | |||||||||
| Total Short-term benefits | 225,191 | 193,112 | 155,131 | |||||||||
| Share-based payment | 49,488 | 11,777 | 23,697 | |||||||||
| Total Long-term benefits | 49,488 | 11,777 | 23,697 | |||||||||
| Total (1) | 274,679 | 204,889 | 178,828 |
(1) Refers to the amount paid by Banco Santander to its executives officers for the positions which they hold in the Bank and other companies of the conglomerate.
Additionally, in 2016, withholding taxes were collected on management compensation in the amount of R$30,312 (2015 - R$28,044 and 2014 - R$28,493).
iii) Contract termination
The termination of the employment relationship for non-fulfillment of obligations or voluntarily does not entitle executives to any financial compensation.
b) Lending operations
Under current law, it is not granted loans or advances involving:
I - directors, members of board of directors and audit committee as well as their spouses and relatives up to the second degree;
II - individuals or legal entities of Banco Santander, which hold more than 10% of the share capital;
III - Legal entities which hold more than 10% of the share capital, Banco Santander and its subsidiaries;
IV - legal entities which hold more than 10% of the share capital, any of the directors or members of the Board of Directors and Audit Committee or management's own financial institution, as well as their spouses or relatives up to the second degree.
c) Ownership Interest
The table below shows the direct interest (common shares and preferred shares) as of December 31, 2016, 2015 and 2014:
| 2016 | ||||||||||||||||||||||||
| Common | Preferred | Total | ||||||||||||||||||||||
| Shares | Common | Shares | Preferred | Shares | Total | |||||||||||||||||||
| Stockholders' | (thousands) | Shares (%) | (thousands) | Shares (%) | (thousands) | Shares (%) | ||||||||||||||||||
| Grupo Empresarial Santander, S.L. (1) | 1,107,673 | 28.8 | % | 1,019,645 | 27.5 | % | 2,127,318 | 28.1 | % | |||||||||||||||
| Sterrebeeck B.V. (1) | 1,809,583 | 47.0 | % | 1,733,644 | 46.7 | % | 3,543,227 | 46.9 | % | |||||||||||||||
| Banco Santander, S.A. (1) | 521,965 | 13.6 | % | 519,268 | 14.0 | % | 1,041,233 | 13.8 | % | |||||||||||||||
| Qatar Holding, LLC | 207,812 | 5.4 | % | 207,812 | 5.6 | % | 415,624 | 5.5 | % | |||||||||||||||
| Employees | 3,914 | 0.1 | % | 3,929 | 0.1 | % | 7,843 | 0.1 | % | |||||||||||||||
| Members of the Board of Directors | (*) | (*) | (*) | (*) | (*) | (*) | ||||||||||||||||||
| Members of the Executive Board | (*) | (*) | (*) | (*) | (*) | (*) | ||||||||||||||||||
| Other | 174,238 | 4.5 | % | 202,028 | 5.5 | % | 376,266 | 5.0 | % | |||||||||||||||
| Total | 3,825,185 | 99.4 | % | 3,686,326 | 99.4 | % | 7,511,511 | 99.4 | % | |||||||||||||||
| Treasury shares | 25,786 | 0.6 | % | 25,786 | 0.6 | % | 51,572 | 0.6 | % | |||||||||||||||
| Total | 3,850,971 | 199.4 | % | 3,712,112 | 199.4 | % | 7,563,083 | 199.4 | % | |||||||||||||||
| Free Float (2) | 385,964 | 10.0 | % | 413,769 | 11.1 | % | 799,733 | 10.6 | % |
F-86
BANCO SANTANDER (BRASIL) S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Brazilian Reais - R$, unless otherwise stated)
| 2015 | ||||||||||||||||||||||||
| Common | Preferred | Total | ||||||||||||||||||||||
| Shares | Common | Shares | Preferred | Shares | Total | |||||||||||||||||||
| Stockholders' | (thousands) | Shares (%) | (thousands) | Shares (%) | (thousands) | Shares (%) | ||||||||||||||||||
| Grupo Empresarial Santander, S.L. (1) | 1,107,673 | 28.8 | % | 1,019,645 | 27.5 | % | 2,127,318 | 28.1 | % | |||||||||||||||
| Sterrebeeck B.V. (1) | 1,809,583 | 47.0 | % | 1,733,644 | 46.7 | % | 3,543,227 | 46.9 | % | |||||||||||||||
| Banco Santander, S.A. (1) | 518,207 | 13.5 | % | 519,089 | 14.0 | % | 1,037,296 | 13.7 | % | |||||||||||||||
| Santander Insurance Holding (1) | 3,758 | 0.1 | % | 179 | - | 3,937 | 0.1 | % | ||||||||||||||||
| Qatar Holding, LLC | 207,812 | 5.4 | % | 207,812 | 5.6 | % | 415,624 | 5.5 | % | |||||||||||||||
| Employees | 3,066 | 0.1 | % | 3,088 | 0.1 | % | 6,154 | 0.1 | % | |||||||||||||||
| Members of the Board of Directors | (*) | (*) | (*) | (*) | (*) | (*) | ||||||||||||||||||
| Members of the Executive Board | (*) | (*) | (*) | (*) | (*) | (*) | ||||||||||||||||||
| Other | 180,655 | 4.7 | % | 208,438 | 5.6 | % | 389,093 | 5.1 | % | |||||||||||||||
| Total | 3,830,754 | 99.5 | % | 3,691,895 | 99.5 | % | 7,522,649 | 99.5 | % | |||||||||||||||
| Treasury shares | 20,218 | 0.5 | % | 20,218 | 0.5 | % | 40,436 | 0.5 | % | |||||||||||||||
| Total | 3,850,972 | 100.0 | % | 3,712,113 | 100.0 | % | 7,563,085 | 100.0 | % | |||||||||||||||
| Free Float (2) | 391,533 | 10.2 | % | 419,338 | 11.3 | % | 810,871 | 10.7 | % |
| 2014 | ||||||||||||||||||||||||
| Common | Preferred | Total | ||||||||||||||||||||||
| Shares | Common | Shares | Preferred | Shares | Total | |||||||||||||||||||
| Stockholders' | (thousands) | Shares (%) | (thousands) | Shares (%) | (thousands) | Shares (%) | ||||||||||||||||||
| Grupo Empresarial Santander, S.L. (1) | 1,107,673 | 28.6 | % | 1,019,645 | 27.3 | % | 2,127,318 | 28.0 | % | |||||||||||||||
| Sterrebeeck B.V. (1) | 1,809,583 | 46.8 | % | 1,733,644 | 46.5 | % | 3,543,227 | 46.6 | % | |||||||||||||||
| Banco Santander, S.A. (1) | 518,207 | 13.4 | % | 519,089 | 13.9 | % | 1,037,296 | 13.6 | % | |||||||||||||||
| Santander Insurance Holding (1) | 3,758 | 0.1 | % | 179 | 0.0 | % | 3,937 | 0.1 | % | |||||||||||||||
| Qatar Holding, LLC | 207,812 | 5.1 | % | 207,812 | 5.3 | % | 415,624 | 5.2 | % | |||||||||||||||
| Employees | 4,098 | 0.1 | % | 4,121 | 0.1 | % | 8,219 | 0.1 | % | |||||||||||||||
| Members of the Board of Directors | (*) | (*) | (*) | (*) | (*) | (*) | ||||||||||||||||||
| Members of the Executive Board | (*) | (*) | (*) | (*) | (*) | (*) | ||||||||||||||||||
| Other | 189,107 | 5.2 | % | 216,888 | 6.2 | % | 405,995 | 5.7 | % | |||||||||||||||
| Total | 3,840,238 | 99.3 | % | 3,701,378 | 99.3 | % | 7,541,616 | 99.3 | % | |||||||||||||||
| Treasury shares | 29,612 | 0.7 | % | 29,612 | 0.7 | % | 59,224 | 0.7 | % | |||||||||||||||
| Total | 3,869,850 | 100.0 | % | 3,730,990 | 100.0 | % | 7,600,840 | 100.0 | % | |||||||||||||||
| Free Float (2) | 401,017 | 10.4 | % | 428,821 | 11.5 | % | 829,838 | 10.9 | % |
(1) Companies of the Santander Spain Group.
(2) Composed of Employees, Qatar Holding and other.
(*) None of the members of the Board of Directors and the Executive Board holds 1.0% or more of any class of shares.
d) Related-Party Transactions
The transactions and compensation for services among Banco Santander companies are carried out under usual market value, rates and terms, and on an arm´s length basis.
Banco Santander has the Policy on Related Party Transactions approved by the Board of Directors, which aim to ensure that all transactions are made on the policy typified in view the interests of Banco Santander and its stockholders'. The policy defines powers to approve certain transactions by the Board of Directors. The rules laid down are also applied to all employees and directors of Banco Santander and its subsidiaries.
F-87
BANCO SANTANDER (BRASIL) S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Brazilian Reais - R$, unless otherwise stated)
The principal transactions and balances are as follows:
| Thousands of Reais | 2016 | |||||||||||
| Joint- controlled | Other Related- | |||||||||||
| Parent (1) | companies | Party (2) | ||||||||||
| Assets | 10,919,116 | 794,800 | 556,248 | |||||||||
| Financial assets for trading - Derivatives net | (184,304 | ) | - | (400,570 | ) | |||||||
| Banco Santander, S.A. – Spain | (184,304 | ) | - | - | ||||||||
| Abbey National Treasury Services Plc | - | - | (91,828 | ) | ||||||||
| Real Fundo de Investimento Multimercado Santillana | - | - | (308,742 | ) | ||||||||
| Credito Privado | ||||||||||||
| Loans and other values with credit institutions - Cash and overnight operations in foreign currency | 10,900,941 | - | 94,530 | |||||||||
| Banco Santander, S.A. – Spain (3) (5) | 10,900,941 | - | - | |||||||||
| Banco Santander Totta, S.A. | - | - | 1,261 | |||||||||
| Abbey National Treasury Services Plc | - | - | 92,118 | |||||||||
| Bank Zachodni | - | - | 117 | |||||||||
| Banco Santander, S.A. – Mexico | - | - | 1,034 | |||||||||
| Loans and advances to customers | - | 136,354 | 862,288 | |||||||||
| Zurich Santander Brasil Seguros e Previdência S.A. | - | - | 862,553 | |||||||||
| Webmotors S.A. | - | 136,354 | - | |||||||||
| Santander Brasil Gestão de Recursos Ltda | - | - | (265 | ) | ||||||||
| Loans and other values with credit institutions (1) | 25,546 | 656,806 | - | |||||||||
| Banco Santander – Spain | 25,546 | - | - | |||||||||
| Banco RCI Brasil S.A. (Current Company Name of Social da RCI Brasil Leasing) (8) | - | 656,806 | - | |||||||||
| Other Assets | 176,933 | 1,640 | - | |||||||||
| Banco Santander – Spain | 176,933 | - | - | |||||||||
| Banco RCI Brasil S.A. (Current Company Name of Social da RCI Brasil Leasing) (8) | - | 1,640 | - | |||||||||
| Liabilities | (11,984,199 | ) | (106,527 | ) | (1,222,556 | ) | ||||||
| Deposits of Brazil Central Bank and deposits of credit institutions | (327,466 | ) | (40,202 | ) | (980,702 | ) | ||||||
| Banco Santander, S.A. – Spain (4) | (327,466 | ) | - | - | ||||||||
| Santander Securities | - | - | (208,059 | ) | ||||||||
| Santander Brasil Asset | - | - | (12,079 | ) | ||||||||
| Real Fundo de Investimento Multimercado Santillana Credito Privado | - | - | (757,874 | ) | ||||||||
| Banco Santander, S.A. – Uruguay | - | - | (2,158 | ) | ||||||||
| Banco RCI Brasil S.A. (Current Company Name of Social da RCI Brasil Leasing) (8) | - | (40,202 | ) | - | ||||||||
| Others | - | - | (532 | ) | ||||||||
| Customer deposits | - | (66,325 | ) | (189,794 | ) | |||||||
| ISBAN Brasil S.A. | - | - | (22,232 | ) | ||||||||
| Santander Securities | - | - | (52,484 | ) | ||||||||
| Produban Serviços de Informática S.A. | - | - | (19,653 | ) | ||||||||
| Zurich Santander Brasil Seguros e Previdência S.A. | - | - | (44,840 | ) | ||||||||
| Santander Brasil Gestão de Recursos Ltda. | - | - | (39,361 | ) | ||||||||
| Webmotors S.A. | - | (66,325 | ) | - | ||||||||
| Others | - | - | (11,224 | ) | ||||||||
| Other financial liabilities - Dividends and interest on capital Payable | (3,794,130 | ) | - | (16,494 | ) | |||||||
| Banco Santander – Spain | (589,227 | ) | - | - | ||||||||
| Grupo Empresarial Santander, S.L. (1) | (1,201,612 | ) | - | - | ||||||||
| Sterrebeeck B.V. (1) | (2,003,291 | ) | - | - | ||||||||
| Banco Madesant - Sociedade Unipessoal, S.A. | - | - | (1,075 | ) | ||||||||
| Santusa Holding, S.L. | - | - | (15,419 | ) | ||||||||
| Other Payables | (2,954 | ) | - | (35,566 | ) | |||||||
| Banco Santander, S.A. – Spain | (2,954 | ) | - | - | ||||||||
| Santander Brasil Asset | - | - | (70 | ) | ||||||||
| ISBAN Brasil S.A. | - | - | (339 | ) | ||||||||
| Santander Securities | - | - | (4,430 | ) | ||||||||
| Zurich Santander Brasil Seguros e Previdência S.A. | - | - | (30,684 | ) | ||||||||
| Others | - | - | (43 | ) | ||||||||
| Debt Instruments Eligible to Compose Capital | (7,859,649 | ) | - | - | ||||||||
| Banco Santander – Spain (2) (7) | (7,859,649 | ) | - | - |
F-88
BANCO SANTANDER (BRASIL) S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Brazilian Reais - R$, unless otherwise stated)
| Thousands of Reais | 2015 | |||||||||||
| Joint- controlled | Other Related- | |||||||||||
| Parent (1) | companies | Party (2) | ||||||||||
| Assets | 23,245,276 | 954,190 | 805,572 | |||||||||
| Financial assets for trading - Derivatives net | (265,491 | ) | - | (536,215 | ) | |||||||
| Banco Santander, S.A. – Spain | (265,491 | ) | - | - | ||||||||
| Abbey National Treasury Services Plc | - | - | (156,976 | ) | ||||||||
| Real Fundo de Investimento Multimercado Santillana | - | - | (379,239 | ) | ||||||||
| Credito Privado | ||||||||||||
| Loans and other values with credit institutions - Cash and overnight operations in foreign currency | 23,248,821 | - | 136,634 | |||||||||
| Banco Santander, S.A. – Spain (3) (5) | 23,248,821 | - | - | |||||||||
| Banco Santander Totta, S.A. | - | - | 1,303 | |||||||||
| Abbey National Treasury Services Plc | - | - | 135,165 | |||||||||
| Bank Zachodni | - | - | 101 | |||||||||
| Banco Santander, S.A. – Mexico | - | - | 65 | |||||||||
| Loans and advances to customers | - | 11,112 | 1,205,153 | |||||||||
| Zurich Santander Brasil Seguros e Previdência S.A. | - | - | 753,581 | |||||||||
| Webmotors S.A. | - | 11,112 | - | |||||||||
| Santander Brasil Gestão de Recursos Ltda. | - | - | 186 | |||||||||
| BW Guirapá | - | - | 451,386 | |||||||||
| Loans and other values with credit institutions (1) | 26,414 | 940,236 | - | |||||||||
| Banco Santander – Spain | 26,414 | - | - | |||||||||
| Companhia de Crédito, Financiamento e Investimento RCI Brasil (8) | - | 939,861 | - | |||||||||
| Banco RCI Brasil S.A. (Current Company Name of Social da RCI Brasil Leasing) (8) | - | 375 | - | |||||||||
| Other Assets | 235,532 | 2,842 | - | |||||||||
| Banco Santander – Spain | 235,532 | - | - | |||||||||
| Companhia de Crédito, Financiamento e Investimento RCI Brasil (8) | - | 2,276 | - | |||||||||
| Banco RCI Brasil S.A. (Current Company Name of Social da RCI Brasil Leasing) (8) | - | 566 | - | |||||||||
| Liabilities | (12,155,786 | ) | (255,330 | ) | (937,572 | ) | ||||||
| Deposits of Brazil Central Bank and deposits of credit institutions | (219,037 | ) | (37,796 | ) | (650,620 | ) | ||||||
| Banco Santander, S.A. – Spain (4) | (219,037 | ) | - | - | ||||||||
| Companhia de Crédito, Financiamento e Investimento RCI Brasil (8) | - | (31,656 | ) | - | ||||||||
| Santander Brasil Asset | - | - | (12,360 | ) | ||||||||
| Real Fundo de Investimento Multimercado Santillana Credito Privado | - | - | (616,399 | ) | ||||||||
| Banco Santander, S.A. – Uruguay | - | - | (20,533 | ) | ||||||||
| Banco RCI Brasil S.A. (Current Company Name of Social da RCI Brasil Leasing) (8) | - | (6,140 | ) | - | ||||||||
| Others | - | - | (1,328 | ) | ||||||||
| Marketable debt securities | (12,416 | ) | - | - | ||||||||
| Banco Santander, S.A. – Spain (6) | (12,416 | ) | - | - | ||||||||
| Customer deposits | - | (217,534 | ) | (285,870 | ) | |||||||
| ISBAN Brasil S.A. | - | - | (43,842 | ) | ||||||||
| Santander Securities | - | - | (679 | ) | ||||||||
| Produban Serviços de Informática S.A. | - | - | (29,993 | ) | ||||||||
| Zurich Santander Brasil Seguros e Previdência S.A. | - | - | (109,506 | ) | ||||||||
| Santander Brasil Gestão de Recursos Ltda | - | - | (72,182 | ) | ||||||||
| Webmotors S.A. | - | (217,534 | ) | - | ||||||||
| Others | - | - | (29,668 | ) | ||||||||
| Other financial liabilities - Dividends and interest on capital Payable | (2,488,510 | ) | - | (705 | ) | |||||||
| Banco Santander – Spain | (385,067 | ) | - | - | ||||||||
| Grupo Empresarial Santander, S.L. (1) | (788,119 | ) | - | - | ||||||||
| Santander Insurance Holding, S.L. | (1,398 | ) | - | - | ||||||||
| Sterrebeeck B.V. (1) | (1,313,926 | ) | - | - | ||||||||
| Banco Madesant - Sociedade Unipessoal, S.A. | - | - | (705 | ) | ||||||||
| Other Payables | - | - | (377 | ) | ||||||||
| Santander Brasil Asset | - | - | (68 | ) | ||||||||
| ISBAN Brasil S.A. | - | - | (309 | ) | ||||||||
| Debt Instruments Eligible to Compose Capital | (9,435,823 | ) | - | - | ||||||||
| Banco Santander – Spain (2) (7) | (9,435,823 | ) | - | - |
F-89
BANCO SANTANDER (BRASIL) S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Brazilian Reais - R$, unless otherwise stated)
| Thousands of Reais | 2014 | |||||||||||
| Joint- controlled | Other Related- | |||||||||||
| Parent (1) | companies | Party (2) | ||||||||||
| Assets | 11,033,229 | 1,880,176 | 546,856 | |||||||||
| Financial assets for trading - Derivatives net | (98,286 | ) | - | (87,161 | ) | |||||||
| Banco Santander, S.A. – Spain | (98,286 | ) | - | - | ||||||||
| Santander Benelux, S.A., N.V. | - | - | 381,956 | |||||||||
| Abbey National Treasury Services Plc | - | - | (871 | ) | ||||||||
| Real Fundo de Investimento Multimercado Santillana Credito Privado | - | - | (468,246 | ) | ||||||||
| Loans and other values with credit institutions - Cash and overnight operations in foreign currency | 10,913,872 | - | 2,787 | |||||||||
| Banco Santander, S.A. – Spain (3) (5) | 10,913,872 | - | - | |||||||||
| Banco Santander Totta, S.A. | - | - | 2,787 | |||||||||
| Loans and advances to customers | - | 10,340 | 631,149 | |||||||||
| Zurich Santander Brasil Seguros e Previdência S.A. | - | - | 630,694 | |||||||||
| Webmotors S.A. | - | 10,340 | - | |||||||||
| Santander Brasil Gestão de Recursos Ltda | - | - | 455 | |||||||||
| Loans and other values with credit institutions (1) | 11,900 | 1,867,750 | 81 | |||||||||
| Banco Santander – Spain | 11,900 | - | - | |||||||||
| Companhia de Crédito, Financiamento e Investimento RCI Brasil (8) | - | 1,867,138 | - | |||||||||
| Banco RCI Brasil S.A. (Current Company Name of Social da RCI Brasil Leasing) (8) | - | 612 | - | |||||||||
| Real Fundo de Investimento Multimercado Santillana Credito Privado | - | - | 81 | |||||||||
| Other Assets | 205,743 | 2,086 | - | |||||||||
| Banco Santander – Spain | 205,743 | - | - | |||||||||
| Companhia de Crédito, Financiamento e Investimento RCI Brasil (8) | - | 2,086 | - | |||||||||
| Liabilities | (7,375,101 | ) | (161,871 | ) | (612,659 | ) | ||||||
| Deposits of Brazil Central Bank and deposits of credit institutions | (416,969 | ) | (19,186 | ) | (286,348 | ) | ||||||
| Banco Santander, S.A. – Spain (4) | (416,969 | ) | - | - | ||||||||
| Companhia de Crédito, Financiamento e Investimento RCI Brasil (8) | - | (15,699 | ) | - | ||||||||
| Santander Brasil Asset | - | - | (16,742 | ) | ||||||||
| Real Fundo de Investimento Multimercado Santillana Credito Privado | - | - | (261,865 | ) | ||||||||
| Banco Santander, S.A. – Uruguay | - | - | (7,741 | ) | ||||||||
| Banco RCI Brasil S.A. (Current Company Name of Social da RCI Brasil Leasing) (8) | - | (3,487 | ) | - | ||||||||
| Marketable debt securities | (6,082 | ) | - | - | ||||||||
| Banco Santander, S.A. – Spain (7) | (6,082 | ) | - | - | ||||||||
| Customer deposits | - | (142,685 | ) | (271,753 | ) | |||||||
| ISBAN Brasil S.A. | - | - | (70,449 | ) | ||||||||
| Produban Serviços de Informática S.A. | - | - | (41,646 | ) | ||||||||
| Zurich Santander Brasil Seguros e Previdência S.A. | - | - | (49,526 | ) | ||||||||
| Santander Brasil Gestão de Recursos Ltda | - | - | (89,830 | ) | ||||||||
| Webmotors S.A. | - | (142,685 | ) | - | ||||||||
| Others | - | - | (20,302 | ) | ||||||||
| Other financial liabilities - Dividends and interest on capital Payable | (538,636 | ) | - | (47,271 | ) | |||||||
| Banco Santander, S.A. – Spain | (25,084 | ) | - | - | ||||||||
| Grupo Empresarial Santander, S.L. (1) | (134,413 | ) | - | - | ||||||||
| Santander Insurance Holding, S.L. | (403 | ) | - | - | ||||||||
| Sterrebeeck B.V. (1) | (378,736 | ) | - | - | ||||||||
| Banco Madesant - Sociedade Unipessoal, S.A. | - | - | (55 | ) | ||||||||
| Santusa Holding, S.L. | - | - | (47,216 | ) | ||||||||
| Other Payables | (7,719 | ) | - | (7,287 | ) | |||||||
| Banco Santander – Spain | (7,719 | ) | - | - | ||||||||
| Produban Serviços de Informática S.A. | - | - | (441 | ) | ||||||||
| Zurich Santander Brasil Seguros e Previdência S.A. | - | - | (35 | ) | ||||||||
| Santander Brasil Asset | - | - | (6,811 | ) | ||||||||
| Debt Instruments Eligible to Compose Capital | (6,405,695 | ) | - | - | ||||||||
| Banco Santander – Spain (2) (7) | (6,405,695 | ) | - | - |
(*) All loans and amounts to related parties were made in our ordinary course of business and on sustainable basis, including interest rates and collateral and did not involve more than the normal risk of collectability or present other unfavorable features.
(1) Banco Santander (Brasil) S.A. is indirectly controlled by Banco Santander Spain (note 1-a), through its subsidiary Grupo Empresarial Santander, S.L. and Sterrebeeck B.V.
(2) Refers to the Company's subsidiaries (Banco Santander Spain).
(3) In December 31, 2016, refers to the cash of R$582,571 (2015 - R$1,866,683 and 2014 - R$410,193).
(4) As at December 31, 2016, refers to raising funds through operations transfers abroad amounted to R$327,466 (2015 - R$219,037 and 2014 - R$416,969), with maturity until November, 2017 and interest between 0.56% and 12.95%p.a.
(5) On December 30, 2016, include foreign currency investments (overnight applications) due on January 03, 2017 in the amount of R$10,269,812 (2015 - R$20,699,539 and 2014 - R$10,663,319) and interest of 0.68% p.a held at Santander Establishment Credit Financial, Banco Santander Brazil and its Grand Cayman Branch.
(6) Refers the emissions of Eurobonds of Grand Cayman Branch, maturing between from January 16 2016 to February 13, 2017 and interest of 3.152% p.a and 4.625% p.a.
(7) Refers to the portion acquired by the controller with the PR Optimization Plan held in the first half of 2014.
(8) In February, 2016 the Cia de Crédito, Financiamento e Investimentos Renault was acquired by Banco RCI Brasil.
F-90
BANCO SANTANDER (BRASIL) S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Brazilian Reais - R$, unless otherwise stated)
| Thousands of Reais | 2016 | |||||||||||
| Joint- controlled | Other Related- | |||||||||||
| Parent (1) | companies | Party (2) | ||||||||||
| Income | (798,022 | ) | 136,111 | 1,197,489 | ||||||||
| Interest and similar income - Loans and amounts due from credit institutions | 39,677 | 114,909 | 396 | |||||||||
| Banco Santander, S.A. – Spain | 39,677 | - | - | |||||||||
| Banco RCI Brasil S.A. (Current Company Name of Social da RCI Brasil Leasing) (6) | - | 114,909 | - | |||||||||
| Abbey National Treasury Services Plc | - | - | 396 | |||||||||
| Interest expense and similar charges - Customer deposits | (4,192 | ) | (26,996 | ) | (49,420 | ) | ||||||
| ISBAN Brasil S.A. | - | - | (3,560 | ) | ||||||||
| Banco Santander, S.A. – Spain | (4,192 | ) | - | - | ||||||||
| Santander Brasil Gestão de Recursos Ltda | - | - | (12,417 | ) | ||||||||
| Santander Cultural | - | - | (11 | ) | ||||||||
| Real Fundo de Investimento Multimercado Santillana Credito Privado | - | - | (31,097 | ) | ||||||||
| Webmotors S.A. | - | (26,996 | ) | - | ||||||||
| Produban Serviços de Informática S.A. | - | - | (2,117 | ) | ||||||||
| Others | - | - | (218 | ) | ||||||||
| Interest expense and similar charges - Deposits from credit institutions | (512 | ) | (10,959 | ) | (115,458 | ) | ||||||
| Banco Santander, S.A. – Spain | (512 | ) | - | - | ||||||||
| Banco RCI Brasil S.A. (Current Company Name of Social da RCI Brasil Leasing) (6) | - | (10,959 | ) | - | ||||||||
| Santander Securities | - | - | (20,979 | ) | ||||||||
| SAM Brasil Participações | - | - | (133 | ) | ||||||||
| Real Fundo de Investimento Multimercado Santillana Credito Privado | - | - | (88,467 | ) | ||||||||
| Santander Securities | - | - | (4,119 | ) | ||||||||
| Santander Asset Management, S.A. SGIIC. | - | - | (1,760 | ) | ||||||||
| Fee and commission income (expense) | 5,334 | 20,133 | 1,955,255 | |||||||||
| Banco Santander, S.A. – Spain | 5,334 | - | - | |||||||||
| Banco RCI Brasil S.A. (Current Company Name of Social da RCI Brasil Leasing) (6) | - | 19,211 | - | |||||||||
| Banco Santander International | - | - | 20,959 | |||||||||
| Santander Securities | - | - | 1,896 | |||||||||
| Webmotors S.A. | - | 922 | - | |||||||||
| Zurich Santander Brasil Seguros S.A. | - | - | 218,773 | |||||||||
| Zurich Santander Brasil Seguros e Previdência S.A. | - | - | 1,711,138 | |||||||||
| Others | - | - | 2,489 | |||||||||
| Gains (losses) on financial assets and liabilities (net) and exchange differences (net) | (613,168 | ) | 39,024 | 267,983 | ||||||||
| Banco Santander, S.A. – Spain | (613,168 | ) | - | - | ||||||||
| Real Fundo de Investimento Multimercado Santillana Credito Privado | - | - | 257,475 | |||||||||
| Abbey National Treasury Services Plc | - | - | 38,274 | |||||||||
| Banco RCI Brasil S.A. (Current Company Name of Social da RCI Brasil Leasing) (6) | - | 39,024 | - | |||||||||
| Santander Securities | - | - | (16,038 | ) | ||||||||
| Santander Investment Securities Inc. | - | - | (15,115 | ) | ||||||||
| Others | - | - | 3,387 | |||||||||
| Administrative expenses and Amortization | - | - | (840,739 | ) | ||||||||
| ISBAN Brasil S.A. | - | - | (290,430 | ) | ||||||||
| Produban Serviços de Informática S.A. | - | - | (209,253 | ) | ||||||||
| ISBAN Chile S.A. | - | - | (26 | ) | ||||||||
| Aquanima Brasil Ltda. | - | - | (24,557 | ) | ||||||||
| TECBAN - Tecnologia Bancaria Brasil | - | - | (213,194 | ) | ||||||||
| Produban Servicios Informaticos Generales, S.L. | - | - | (21,525 | ) | ||||||||
| Ingeniería de Software Bancario, S.L. | - | - | (42,519 | ) | ||||||||
| Santander Securities | - | - | (35,882 | ) | ||||||||
| Others | - | - | (3,353 | ) | ||||||||
| Others Administrative expenses - Donation | - | - | (20,528 | ) | ||||||||
| Santander Cultural | - | - | (2,737 | ) | ||||||||
| Fundacao Santander | - | - | (3,452 | ) | ||||||||
| Instituto Escola Brasil | - | - | (939 | ) | ||||||||
| Fundação Sudameris | - | - | (13,400 | ) | ||||||||
| Debt Instruments Eligible to Compose Capital | (225,161 | ) | - | - | ||||||||
| Banco Santander Espanha (2)(8) | (225,161 | ) | - | - |
F-91
BANCO SANTANDER (BRASIL) S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Brazilian Reais - R$, unless otherwise stated)
| Thousands of Reais | 2015 | |||||||||||
| Joint- controlled | Other Related- | |||||||||||
| Parent (1) | companies | Party (2) | ||||||||||
| Income | (761,189 | ) | 189,182 | 2,509,524 | ||||||||
| Interest and similar income - Loans and amounts due from credit institutions | 31,930 | 163,684 | 104 | |||||||||
| Banco Santander, S.A. – Spain | 31,930 | - | - | |||||||||
| Companhia de Crédito, Financiamento e Investimento RCI Brasil (6) | - | 163,684 | - | |||||||||
| Abbey National Treasury Services Plc | - | - | 104 | |||||||||
| Interest expense and similar charges - Customer deposits | - | (25,330 | ) | (28,508 | ) | |||||||
| ISBAN Brasil S.A. | - | - | (7,841 | ) | ||||||||
| Santander Brasil Gestão de Recursos Ltda | - | - | (14,302 | ) | ||||||||
| Webmotors S.A. | - | (25,330 | ) | - | ||||||||
| Produban Serviços de Informática S.A. | - | - | (3,752 | ) | ||||||||
| Others | - | - | (2,613 | ) | ||||||||
| Interest expense and similar charges - Deposits from credit institutions | (311 | ) | (1,447 | ) | (89,636 | ) | ||||||
| Banco Santander, S.A. – Spain | (311 | ) | - | - | ||||||||
| Banco RCI Brasil S.A. (Current Company Name of Social da RCI Brasil Leasing) (6) | - | (1,447 | ) | - | ||||||||
| Real Fundo de Investimento Multimercado Santillana Credito Privado | - | - | (15,584 | ) | ||||||||
| Santander Securities | - | - | (71,939 | ) | ||||||||
| Santander Asset Management, S.A. SGIIC. | - | - | (2,113 | ) | ||||||||
| Fee and commission income (expense) | (8,022 | ) | 21,376 | 1,889,138 | ||||||||
| Banco Santander, S.A. – Spain | (8,022 | ) | - | - | ||||||||
| Banco RCI Brasil S.A. (Current Company Name of Social da RCI Brasil Leasing) (6) | - | 3,863 | - | |||||||||
| Companhia de Crédito, Financiamento e Investimento RCI Brasil (6) | - | 16,579 | - | |||||||||
| Banco Santander International | - | - | 8,804 | |||||||||
| Webmotors S.A. | - | 934 | - | |||||||||
| Zurich Santander Brasil Seguros S.A. | - | - | 248,824 | |||||||||
| Zurich Santander Brasil Seguros e Previdência S.A. | - | - | 1,626,288 | |||||||||
| Others | - | - | 5,222 | |||||||||
| Gains (losses) on financial assets and liabilities (net) and exchange differences (net) | (406,523 | ) | 30,899 | 953,678 | ||||||||
| Banco Santander, S.A. – Spain | (406,523 | ) | - | - | ||||||||
| Santander Benelux, S.A., N.V. | - | - | 424,182 | |||||||||
| Real Fundo de Investimento Multimercado Santillana Credito Privado | - | - | 602,557 | |||||||||
| Abbey National Treasury Services Plc | - | - | (88,881 | ) | ||||||||
| Companhia de Crédito, Financiamento e Investimento RCI Brasil (6) | - | 30,899 | - | |||||||||
| Others | - | - | 15,820 | |||||||||
| Administrative expenses and Amortization | - | - | (982,135 | ) | ||||||||
| ISBAN Brasil S.A. | - | - | (406,662 | ) | ||||||||
| Produban Serviços de Informática S.A. | - | - | (205,137 | ) | ||||||||
| ISBAN Chile S.A. | - | - | (1,024 | ) | ||||||||
| Aquanima Brasil Ltda. | - | - | (24,075 | ) | ||||||||
| TECBAN - Tecnologia Bancaria Brasil | - | - | (160,563 | ) | ||||||||
| Produban Servicios Informaticos Generales, S.L. | - | - | (22,834 | ) | ||||||||
| Konecta Brazil Outsourcing Ltda | - | - | (98,492 | ) | ||||||||
| Ingeniería de Software Bancario, S.L. | - | - | (57,293 | ) | ||||||||
| Others | - | - | (6,055 | ) | ||||||||
| Others Administrative expenses - Donation | - | - | (18,071 | ) | ||||||||
| Santander Cultural | - | - | (3,231 | ) | ||||||||
| Fundacao Santander | - | - | (3,500 | ) | ||||||||
| Instituto Escola Brasil | - | - | (1,140 | ) | ||||||||
| Fundação Sudameris | - | - | (10,200 | ) | ||||||||
| Debt Instruments Eligible to Compose Capital | (378,263 | ) | - | - | ||||||||
| Banco Santander Espanha (2)(8) | (378,263 | ) | - | - | ||||||||
| Gain on disposal of non-current assets held for sale not classified as discontinued operations | - | - | 784,954 | |||||||||
| Capital Riesgo Global (3) | - | - | 34,404 | |||||||||
| Santander Securities Services Brasil Participações S.A. (5) | - | - | 750,550 |
F-92
BANCO SANTANDER (BRASIL) S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Brazilian Reais - R$, unless otherwise stated)
| Thousands of Reais | 2014 | |||||||||||
| Joint- controlled | Other Related- | |||||||||||
| Parent (1) | companies | Party (2) | ||||||||||
| Income | (1,165,021 | ) | 147,917 | 1,178,208 | ||||||||
| Interest and similar income - Loans and amounts due from credit institutions | 11,523 | 117,531 | 9 | |||||||||
| Banco Santander, S.A. – Spain | 11,523 | - | - | |||||||||
| Abbey National Treasury Services Plc | - | - | 5 | |||||||||
| Companhia de Crédito, Financiamento e Investimento RCI Brasil (6) | - | 117,531 | - | |||||||||
| Santander Benelux, S.A., N.V. | - | - | 4 | |||||||||
| Interest expense and similar charges - Customer deposits | - | (14,187 | ) | (20,064 | ) | |||||||
| ISBAN Brasil S.A. | - | - | (7,342 | ) | ||||||||
| Produban Serviços de Informática S.A. | - | - | (3,075 | ) | ||||||||
| Webmotors S.A. | - | (14,187 | ) | - | ||||||||
| Santander Brasil Gestão de Recursos Ltda | - | - | (8,528 | ) | ||||||||
| Others | - | - | (1,119 | ) | ||||||||
| Interest expense and similar charges - Deposits from credit institutions | (125 | ) | (5,669 | ) | (62,396 | ) | ||||||
| Banco Santander, S.A. – Spain | (125 | ) | - | - | ||||||||
| Companhia de Crédito, Financiamento e Investimento RCI Brasil (6) | - | (5,669 | ) | - | ||||||||
| Real Fundo de Investimento Multimercado Santillana Credito Privado | - | - | (51,313 | ) | ||||||||
| Santander Asset Management, S.A. SGIIC. | - | - | (11,083 | ) | ||||||||
| Expense and similar charges - Marketable debt securities | (364 | ) | - | - | ||||||||
| Banco Santander, S.A. – Spain | (364 | ) | - | - | ||||||||
| Fee and commission income (expense) | (40,549 | ) | 27,704 | 1,708,494 | ||||||||
| Companhia de Crédito, Financiamento e Investimento RCI Brasil (6) | - | 21,899 | - | |||||||||
| Banco RCI Brasil S.A. (Current Company Name of Social da RCI Brasil Leasing) (6) | - | 4,038 | - | |||||||||
| Banco Santander, S.A. – Spain | (40,549 | ) | - | - | ||||||||
| Webmotors S.A. | - | 1,767 | - | |||||||||
| Zurich Santander Brasil Seguros S.A. | - | - | 36,799 | |||||||||
| Zurich Santander Brasil Seguros e Previdência S.A. | - | - | 1,668,597 | |||||||||
| Others | - | - | 3,098 | |||||||||
| Gains (losses) on financial assets and liabilities (net) and exchange differences (net) | (786,665 | ) | 22,538 | 477,107 | ||||||||
| Banco Santander, S.A. – Spain | (786,665 | ) | - | - | ||||||||
| Santander Benelux, S.A., N.V. | - | - | 473,512 | |||||||||
| Real Fundo de Investimento Multimercado Santillana Credito Privado | - | - | (15,355 | ) | ||||||||
| Abbey National Treasury Services Plc | - | - | 16,117 | |||||||||
| Companhia de Crédito, Financiamento e Investimento RCI Brasil (6) | - | 22,538 | - | |||||||||
| Others | - | - | 2,833 | |||||||||
| Administrative expenses and Amortization | - | - | (903,073 | ) | ||||||||
| ISBAN Chile S.A. | - | - | (2,461 | ) | ||||||||
| ISBAN Brasil S.A. | - | - | (396,611 | ) | ||||||||
| Produban Serviços de Informática S.A. | - | - | (213,703 | ) | ||||||||
| Ingeniería de Software Bancario, S.L. | - | - | (49,783 | ) | ||||||||
| Produban Servicios Informaticos Generales, S.L. | - | - | (26,230 | ) | ||||||||
| TECBAN - Tecnologia Bancaria Brasil | - | - | (129,057 | ) | ||||||||
| Konecta Brazil Outsourcing Ltda | - | - | (51,033 | ) | ||||||||
| Aquanima Brasil Ltda. | - | - | (24,075 | ) | ||||||||
| Others | - | - | (10,120 | ) | ||||||||
| Others Administrative expenses - Donation | - | - | (21,869 | ) | ||||||||
| Santander Cultural | - | - | (4,929 | ) | ||||||||
| Fundacao Santander | - | - | (3,440 | ) | ||||||||
| Instituto Escola Brasil | - | - | (1,500 | ) | ||||||||
| Fundação Sudameris | - | - | (12,000 | ) | ||||||||
| Debt Instruments Eligible to Compose Capital | (348,841 | ) | - | - | ||||||||
| Banco Santander Espanha (2)(7) | (348,841 | ) | - | - |
(1) Banco Santander (Brasil) S.A. is indirectly controlled by Banco Santander Spain, through its subsidiary Grupo Empresarial Santander, S.L. and Sterrebeeck B.V.
(2) Refers to the Company's subsidiaries (Banco Santander, S.A .- Spain).
(3) Refers the profit on disposal of the company MS Participações.
(4) Refers the profit on disposal of the company Santander Brasil Asset Management.
(5) Refers the profit on disposal of the company Santander Securities Services Brasil DTVM S.A.
(6) In February, 2016 the Cia de Crédito, Financiamento e Investimentos Renault was acquired by Banco RCI Brasil.
F-93
BANCO SANTANDER (BRASIL) S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Brazilian Reais - R$, unless otherwise stated)
Risk management at Banco Santander is based on the following principles:
1. Independence of the management activities related to the business;
2. Involvement of the Senior Management in decision-making;
3. Consensus in the decision making on credit operations between the areas of Risk and Business;
4. Collegiate decision-making, which includes the branch network, aiming to encourage opinion diversity and avoiding the attribution of individual decisions;
5. 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;
6. 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;
7. Common management tools
8. Organizational structure
9. Scopes and responsibilities
10. Risk limitation
11. Recognition
12. Effective information channel
13. Maintenance of a medium-low risk profile, and low volatility by:
• The portfolio diversification, limiting concentration in customers, 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:
a) 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.
b) Identification of risks through the constant review and monitoring of exposures, the assessment of new products, businesses and deals (singular transactions);
c) Risks measurement using methods and models periodically tested.
d) Preparation and distribution of a complete set of reports that are reviewed daily by the heads at all levels of Banco Santander management.
e) 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 (abovementioned) already in use at Banco Santander are in different stages of maturity regarding the level of implementation and use in Bank. For wholesale segment, these techniques are quite 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.
f) Internal ratings- and scorings-based models which, by assessing the various qualitative and quantitative risk components by customer and transaction, making it possible to estimate, firstly, the probability of default and, subsequently, the expected loss, based on Loss Given Default (LGD) estimates.
g) Economic capital, as a homogeneous measurement of the assumed risk and the basis for the measurement of the performance management.
h) 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).
i) VaR, which is used for controlling and setting the market risk limits for the various treasury portfolios.
j) 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:
- Integrate and adapt the Bank's risk to local level, as well as risk management strategy and the willingness and level of risk tolerance, previously approved by the executive committee and board of directors, all matched with corporate standards of Banco Santander Spain;
- Approve the proposals, operations and limits of clients and portfolio;
- Authorize the use of management tools and local risk models and being aware of the result of their internal validation.
- Keeping updated, assessing and monitoring any observations and recommendations periodically formulated by the supervisory authorities regarding their functions.
F-94
BANCO SANTANDER (BRASIL) S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Brazilian Reais - R$, unless otherwise stated)
The organizational structure of the executive vice-presidency consists of areas which are responsible for credit risk management, market and structural, operational and risk model. The credit risk management structure is composed of directors who act from the point of view of retail and wholesale portfolios management. A specific area has the mission to consolidate the portfolios and their respective risks, supporting the management with the integrated risk vision. In addition to this award, it is also responsible for compliance with regulators, external and internal auditors, as well as the Group's headquarters in Spain.
It has a department called risk architecture, which includes a set of transverse functions of all risk factors necessary for the construction of an advanced management model. Methodology (development, parameterization models that reach all areas of risk), Governance, Policy and Risk Culture, Capital, Stress Test and Risk MI (responsible for the generation, exploitation and dissemination of information beyond the project information systems) are areas part of this structure.
Further details of the structure, methodologies and control system related to risk management is described in the report available on the website www.santander.com.br.
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 risk analyst set, which prepares the analysis, and forwards it to the Risk Committee and monitors the client's progress. It covers the Wholesale segment customers (Corporate and GB&M), financial institutions and certain companies;
• Standardized management: Aimed at individuals and companies not classified as individualized customers. 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 customer 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, with the exception of certain portfolios classified as “low default portfolios”. Rating/Scores models are used in the Bank’s loan approval and risk monitoring process.
In some cases the observable data required to estimate the amount of an impairment loss on a financial asset may be limited or no longer fully relevant to current circumstances. In such cases, an entity uses its experienced judgment to estimate the amount of any impairment loss. Similarly an entity uses its experienced judgment to adjust observable data for a group of financial assets to reflect current circumstances.
The classification of loans into different categories is made according to the analysis of economic and financial situation of the client and any other registered 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 reviewed to qualifications by them awarded are progressively cleared.
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 area. 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 thereof.
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.
F-95
BANCO SANTANDER (BRASIL) S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Brazilian Reais - R$, unless otherwise stated)
The Bank use 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 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 below shows our loans portfolio by the internal risk rating levels and their corresponding probability of default:
| Internal Risk Model | 2016 | 2015 | 2014 | |||||||||
| Low | 207,922,810 | 211,645,463 | 199,200,968 | |||||||||
| Medium-low | 32,104,167 | 29,500,790 | 27,043,995 | |||||||||
| Medium | 10,940,879 | 8,638,914 | 7,934,964 | |||||||||
| Medium - high | 6,976,969 | 8,552,474 | 5,899,116 | |||||||||
| High | 10,492,731 | 8,928,808 | 9,031,838 | |||||||||
| Loans and advances to customers, gross | 268,437,556 | 267,266,449 | 249,110,881 |
b.3) Observed loss: measures of credit cost
The Bank monthly 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 of year and to the average loans portfolio of the 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 accompanied 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 in the global risk limit plan, an agreed-upon comprehensive document for the integrated management of the balance sheets and its inherent risks. The risk limits are founded on two basic structures: customers/segments and products.
Within the Bank's strategic planning, the limits of risk appetite are based. Business proposals have to be aligned with the limits set by management. It defines a document with the limits previously agreed with the management, these limits have to be observed for the preparation of business proposals.
For individualized risks, customers represent the most basic level, to which individual limits are established (pre-classification), defining the maximum acceptable level of credit risk with the customer and minimum return required on the basis of allocated capital.
For large corporate groups we use a pre-classification model, based on an economic capital allocated.
For other groups of companies, we use a simplified pre-classification model in maximum nominal amounts of credit for each period.
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 customers 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 customer’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 yearly, 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 them and adopt resolutions, taking into account interest risks (risk appetite) and any important elements of operation to offset the risk and return.
The Banco Santander uses, among others, the RORAC methodology (return on risk-adjusted capital), for risk analysis and pricing in the decision-making process on transactions and deals.
Risk monitoring and control
In addition to the tasks performed by the Internal Audit Division, the Vice Presidency of Risks has a specific area of risk monitoring function for adequate credit quality control, formed by local and global teams with specific resources, for adequate credit quality control.
This monitoring function is based on process of permanent observation to enable early detection of any incidents that might arise in the evolution of the risk, the transactions, the customers and their environment, and the adoption of preventive actions. The risk monitoring function is specialized by customer segment.
F-96
BANCO SANTANDER (BRASIL) S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Brazilian Reais - R$, unless otherwise stated)
For this purpose a system called “firms under special surveillance” (FEVE, using the Spanish acronym) was designed that we can distinguish in four categories based on the degree of concern raised by the circumstances observed (extinguish, secure, reduce and monitor. The inclusion of a company in the FEVE system does not mean that there has been a losses due to default, but rather that has deemed advisable to adopt a specific policy for this company, to place a person in charge and to set the policy implementation period. Customers classified as FEVE are revised at least every six months, or every three months for those classified in the most severe categories. A company is classified as FEVE by different ways, such as a result of the monitoring process itself, a review performed by Internal Audit, a decision made by the sales manager responsible for that company or the triggering of the automatic warning system. The assigned rating is avoided at least once a year.
For exposures to standardized customers, the key indicators are monitored in order to detect any variance in the performance of the loan portfolio in respect to the forecasts contained in the credit management programs.
Risk control function
The control function is performed by assessing risks from various complementary perspectives, the main pillars being 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. Get 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 against budgets, limits and benchmarks, and 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 customers. All customers with severe or rescheduled credits delays values have internal restrictions.
Customers with higher risk have a model of recovery, with a commercial follow-up and a recovery specialist.
b.6) Credit risk from other outlook
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 in the area of credit risk management. The Bank constantly monitors the degree of concentration of its credit risk portfolios, by geographical area/country, economic sector, product and customer 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 Bank’s Risk Area works closely with the Finance Area in the active management of credit portfolios, which includes reducing the concentration of exposures through several techniques, such as the arrangement of credit derivatives for hedging 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 customers, 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 customers.
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
Environmental Risk management for the Wholesale Bank is performed through the analysis of social and environmental practices of customers who have limits or credit risk over R$1 million. This analysis considers items such as contaminated land, deforestation, working conditions and other possible points of environmental attention where you can have possibility of penalties and losses. The procedure is performed by a specialized team, trained in Biology, Health and Safety Engineering, Geology and Chemistry Engineering. A team of financial analysis considers the potential damage and impact that unfavorable environmental condition may compromise the financial condition and customer guarantees. The analysis focuses on preserving capital and reputation in the market and the spread of the practice is achieved through the constant training of commercial and credit areas on the application of social and environmental risk patterns in the credit approval process for corporate clients in the Wholesale Bank.
The environmental risk management for suppliers is done throughout the purchasing process and is based on the 10 principles of the Global Compact of the United Nations which considers items such as: human rights, working conditions, environmental and ethical issues. To participate in a bidding process, the company must show respect to these principles. During the approval, the Bank does a technical evaluation that includes social and environmental criteria. Beyond this step, suppliers classified as high impact, include a more detailed assessment of the operational, financial, administrative, fiscal, legal, governance, social and environmental. This step includes a visit to verify the evidence and obtain answers provided by the company during the evaluation.
F-97
BANCO SANTANDER (BRASIL) S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Brazilian Reais - R$, unless otherwise stated)
b.7) Variations in main aggregates in 2016 (unaudited)
The trends observed in 2016 were consistent with those of 2015, where under a challenging economic environment, the Santander model proved to be effective. The Bank succeeded in preserving the quality of our business decreasing the default rates from 7.0% in December, 2015 to 6.2% in December, 2016.
This income was possible thanks to a combination of factors. Among them, a credit mix with focus on safer lines; partnerships; a deep knowledge and monitoring of the customer’s financial life; and the deployment of strong debt renegotiation campaigns.
The involvement of senior management in decision making (held collectively at our Committees), besides independence Risks relating to the business, allow more assertive decisions and reducing credit risk.
The analysis of credit for projects and companies in the Wholesale segment, continue to integrate opinions of our area of Environmental Risk. Below the table (audited) of the evolution of the main indicators of credit.
| 2016 | 2015 | 2014 | ||||||||||
| Credit risk exposure - customers (Thousands of Reais) | 301,702,586 | 310,877,166 | 288,445,198 | |||||||||
| Loans and advances to customers, gross (note 10) | 268,437,556 | 267,266,449 | 249,110,881 | |||||||||
| Contingent Liabilities - Guarantees and other sureties (note 44) | 33,265,030 | 43,610,717 | 39,334,317 | |||||||||
| Non-performing loans ratio (%) | 7.04 | % | 7.00 | % | 5.62 | % | ||||||
| Impairment coverage ratio (%) | 96.31 | % | 82.86 | % | 96.80 | % | ||||||
| Specific credit loss provisions, net of RAWO (*) (Thousands of Reais) | 18,191,126 | 15,411,760 | 13,562,809 | |||||||||
| Cost of credit (% of risk) | 4.52 | % | 5.07 | % | 3.79 | % |
Data prepared on the basis of management criteria and the accounting criteria of the controller unit.
(*) RAWO = Recoveries of Assets Derecognized.
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 Committee 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:
- Trading: this item includes financial services for customers, trading operations and positioning mainly in fixed-income, equity , foreign currency products and shares.
- 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.
- Structural risks:
i. 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).
| ii. | Structural equities risk: this item includes equity investments in non-consolidated financial and non-financial companies that give rise to equities risk. |
The Treasury area is responsible for managing the positions taken in the trading activity.
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.
F-98
BANCO SANTANDER (BRASIL) S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Brazilian Reais - R$, unless otherwise stated)
Interest rate Risk
The following table aggregates by product the operations cash flows of companies’ perimeter that have interest income. The transactions are demonstrated book balance for the ending date for the years 2015 and 2016. It is not associated to the risk management of changes in interest rates or index mismatches, which is done by using Market Risk metrics. However, it allows the analyses of maturity concentrations and possible risks, and below it, the amounts of the same products are allocated by their maturity, except for the account about receivables and obligations linked to derivative contracts.
| 2016 | ||||||||||||||||||||||||
| 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 | 26,960 | 5,242 | 4,593 | 31,938 | 14,918 | 83,651 | ||||||||||||||||||
| Debt instruments | 20,232 | 2,370 | 2,711 | 23,479 | 10,335 | 59,127 | ||||||||||||||||||
| Equity instruments | 397 | - | - | - | - | 397 | ||||||||||||||||||
| Trading derivatives | 6,331 | 2,872 | 1,882 | 8,459 | 4,582 | 24,126 | ||||||||||||||||||
| Available-For-Sale Financial Assets | 2,940 | 1,350 | 1,761 | 42,683 | 11,046 | 59,780 | ||||||||||||||||||
| Debt instruments | 954 | 1,350 | 1,761 | 42,683 | 11,046 | 57,794 | ||||||||||||||||||
| Equity instruments | 1,985 | - | - | - | - | 1,985 | ||||||||||||||||||
| Or Loss | 80 | 14 | 50 | 486 | 981 | 1,611 | ||||||||||||||||||
| Debt instruments | 38 | 14 | 50 | 486 | 981 | 1,569 | ||||||||||||||||||
| Equity instruments | 42 | - | - | - | - | 42 | ||||||||||||||||||
| Non-Current Assets Held For Sale | 79 | 168 | 220 | 2,920 | 6,549 | 9,936 | ||||||||||||||||||
| Reserves from Brazilian Central Bank | 58,594 | - | - | - | - | 58,594 | ||||||||||||||||||
| Loans and Receivables | 16,435 | 99,924 | 32,590 | 79,467 | 68,120 | 296,536 | ||||||||||||||||||
| Total | 105,088 | 106,698 | 39,214 | 157,494 | 101,614 | 510,108 | ||||||||||||||||||
| Interest-bearing liabilities: | ||||||||||||||||||||||||
| Deposits from credit institutions | 135,457 | 49,973 | 46,686 | 69,605 | 4,987 | 306,708 | ||||||||||||||||||
| Subordinated debts | - | 268 | 255 | 8,260 | - | 8,783 | ||||||||||||||||||
| Marketable debt securities | 6,214 | 40,229 | 33,336 | 23,647 | 495 | 103,921 | ||||||||||||||||||
| Trading derivatives | 6,046 | 1,308 | 1,268 | 7,123 | 4,167 | 19,912 | ||||||||||||||||||
| Short positions | 31,551 | - | - | - | - | 31,551 | ||||||||||||||||||
| Total | 179,268 | 91,778 | 81,545 | 108,635 | 9,649 | 470,875 | ||||||||||||||||||
| 2015 | ||||||||||||||||||||||||
| 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 | 3,399 | 5,288 | 6,917 | 21,436 | 8,149 | 45,189 | ||||||||||||||||||
| Debt instruments | 1,225 | 1,806 | 4,542 | 12,038 | 4,182 | 23,793 | ||||||||||||||||||
| Equity instruments | 405 | - | - | - | - | 405 | ||||||||||||||||||
| Trading derivatives | 1,769 | 3,482 | 2,374 | 9,398 | 3,967 | 20,990 | ||||||||||||||||||
| Available-For-Sale Financial Assets | 2,210 | 3,109 | 8,643 | 31,242 | 21,842 | 67,046 | ||||||||||||||||||
| Debt instruments | 1,047 | 3,109 | 8,643 | 31,242 | 21,842 | 65,883 | ||||||||||||||||||
| Equity instruments | 1,162 | - | - | - | - | 1,162 | ||||||||||||||||||
| Or Loss | 611 | 12 | 48 | 427 | 893 | 1,991 | ||||||||||||||||||
| Debt instruments | 38 | 12 | 48 | 427 | 893 | 1,418 | ||||||||||||||||||
| Equity instruments | 574 | - | - | - | - | 574 | ||||||||||||||||||
| Non-Current Assets Held For Sale | 80 | 163 | 215 | 2,096 | 7,327 | 9,881 | ||||||||||||||||||
| Reserves from Brazilian Central Bank | 52,183 | - | - | - | - | 52,183 | ||||||||||||||||||
| Loans and Receivables | 20,259 | 79,073 | 40,635 | 82,695 | 59,986 | 282,648 | ||||||||||||||||||
| Total | 78,742 | 87,645 | 56,458 | 137,896 | 98,197 | 458,938 | ||||||||||||||||||
| Interest-bearing liabilities: | ||||||||||||||||||||||||
| Deposits from credit institutions | 116,365 | 39,972 | 36,960 | 95,602 | 5,764 | 294,663 | ||||||||||||||||||
| Subordinated debts | 44 | 87 | 7,990 | 9,694 | - | 17,815 | ||||||||||||||||||
| Marketable debt securities | 8,070 | 24,823 | 12,484 | 52,032 | 52 | 97,461 | ||||||||||||||||||
| Trading derivatives | 1,550 | 3,671 | 1,430 | 7,122 | 2,854 | 16,627 | ||||||||||||||||||
| Short positions | 20,899 | - | - | - | - | 20,899 | ||||||||||||||||||
| Total | 146,928 | 68,553 | 58,864 | 164,450 | 8,670 | 447,465 | ||||||||||||||||||
F-99
BANCO SANTANDER (BRASIL) S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Brazilian Reais - R$, unless otherwise stated)
Currency Risk
| 2016 | ||||||||||||||||
| Position of accounts subject to currency risk | In millions of Reais | |||||||||||||||
| Asset: | Dollar | Euro | Others | Total | ||||||||||||
| Cash/Applications/Securities (FC/foreign) | 4,839 | - | - | 4,839 | ||||||||||||
| Loans Operations and Leasing, net | 3,485 | - | - | 3,485 | ||||||||||||
| Foreign Permanent Asset | 34,337 | 2,662 | - | 36,999 | ||||||||||||
| Derivatives | 166,626 | 24,173 | 11,241 | 202,040 | ||||||||||||
| Others | 25,273 | 1,020 | - | 26,293 | ||||||||||||
| Total | 234,560 | 27,855 | 11,241 | 273,656 | ||||||||||||
| Liabilities: | Dollar | Euro | Others | Total | ||||||||||||
| Funding in foreign currency | 32,255 | 640 | - | 32,895 | ||||||||||||
| Derivatives | 183,277 | 27,973 | 11,426 | 222,676 | ||||||||||||
| Others | 19,198 | - | 104 | 19,302 | ||||||||||||
| Total | 234,730 | 28,613 | 11,530 | 274,873 |
c.2) Methodologies
Trading
The Bank calculates its market risk capital requirement using a standard model provided by Central Bank of Brazil.
The standard methodology applied to trading activities by the Banco Santander in 2016 was the value at risk (VaR), which measures the maximum expected loss with a given confidence level and time horizon. This methodology was based on a standard historical simulation with a 99% confidence level and a one-day time horizon. Statistical adjustments were made to enable the swift and efficient incorporation of 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. It is used because it is easy to calculate and because it provides a good reference of the level of risk incurred by the Bank. However, other measures are simultaneously being implemented to enable the Bank to exercise greater risk control in all the markets in which it operates.
One of these measures is scenario analysis, which consists of defining behavior scenarios for various financial variables and determining the impact on results of applying them to the Bank’s activities. These scenarios can replicate past events (such as crisis) or, conversely, 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 changes in the portfolios, aiming to detect possible incidents and correct them immediately. The daily preparation of an income statement is an excellent risk indicator, once it allows us to observe and detect the impact of changes in financial variables on the portfolios. The daily calculation of the result is also an excellent indicator of the risk, as it allows us to observe and detect the impact of changes in financial variables in the portfolios.
Lastly, due to their atypical nature, derivatives and credit trading management (actively traded credit – Trading Book) activities are controlled by assessing specific measures on a daily basis. In the case of derivatives, these measures are sensitive to fluctuations in the price of the underlying (delta and gamma), in volatility (vega) and in time (theta). For credit trading management activities, the measures controlled include sensitivity to spread, jump-to-default and position concentrations by rating level.
In respect to the credit risk inherent in the trading portfolios (Credit Trading portfolios), and in keeping with the recommendations made by the Basel Committee of Banking Supervision, an additional measure has been introduced, the Incremental Risk Charge (IRC), in order to cover the default risk which is not properly captured in the VaR, through the variation of the related market prices of credit spreads. The instruments affected are basically fixed-income bonds, , derivatives on bonds (forwards, options, etc.) and credit derivatives (credit default swaps, asset-backed securities, etc.). The method used to calculate the IRC, is defined globally at Group level.
c.3) Balance-sheets 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) and scenario analysis.
F-100
BANCO SANTANDER (BRASIL) S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Brazilian Reais - R$, unless otherwise stated)
Interest rate gap of assets and liabilities
The interest rate gap analysis focuses on the mismatches between the interest reset periods of on-balance-sheets assets and liabilities and of off-balance-sheets items. This analysis facilitates a basic snapshot of the balance sheets 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-sheets aggregates must be broken down and placed at the point of repricing or maturity. The duration and sensitivity of aggregates that do not have a contractual maturity date 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 being the difference between the two margins so 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)
The value at risk for balance sheets aggregates and investment portfolios is calculated by applying the same standard as that used for trading: historical simulation with a confidence interval of 99% . Statistical adjustments were made to enable the swift and efficient incorporation of the most recent events that condition the level of risk assumed.
c.4) Liquidity risk
Liquidity risk is associated with the Bank’s ability to finance its commitments at reasonable market prices and to carry out its business plans with stable sources of funding. The Bank permanently monitors maximum gap profiles.
The measures used to control liquidity risk in balance sheets management are the liquidity gap, liquidity ratios, stress scenarios and contingency plans.
Liquidity gap
The liquidity gap determines the inflow and outflow of funds for assets, liabilities (note 45.d) and off-balance sheets accounts at a given time horizon, making it possible to analyze mismatches between the Bank's expected inflow and outflow of funds.
A liquidity gap may be prepared and analyzed as divided into local currency liquidity gap and foreign currency liquidity gap, under which cash and cash equivalents, inflows and outflows and strategies are segregated into local and foreign currency, respectively.
The Bank prepares three types of Liquidity Gap analysis:
1 - Contractual liquidity gap
The Contractual Liquidity Gap determines the contractual maturity flows of the Bank’s major products on a consolidated basis, and any existing mismatches. It also informs the available liquidity in one day and the consumption of or increase in liquidity in the period.
2 - Operational liquidity gap
Daily cash monitoring and management considering the market situation, maturities and renewal of assets and liabilities, liquidity requirement and specific events.
3 - Projected liquidity gap
Based on the Contractual Liquidity Gap, new maturity flows are projected considering the Bank’s budget plan.
Liquidity ratios
In addition to the Liquidity Gap analysis, a Structure Liquidity model is also prepared to assess the structure profile of the sources and uses of the Bank’s funds, which includes Liquidity Ratio studies.
The key Liquidity Ratios analyzed are as follows:
• Deposits / Lending operations – measures the Institution’s ability to finance lending operations with more stable and lower-cost funding.
• Stable Liabilities / Permanent Assets – measures the ration between Capital + Other Stable Liabilities and Investments + Other Permanent Assets.
• Market Funding / Total Assets – measures the percentage of the Group’s assets financed with less stable and higher-cost funding.
• Short-term market funding / Market Funding – measures the percentage of probable liquidity loss (less than 90 days) on total less stable funding.
• Net Assets / Short-term Market Funding – measures the commitment ratio of highly-liquid assets and probable liquidity loss(less than 90 days).
Banco Santander uses in its liquidity risk management the Liquidity Coverage Ratio (LCR). LCR (Liquidity Coverage Ratio) is a short-term liquidity ratio for a 30-day stress scenario. Represents the result of the division of the high quality assets and the net cash outflows.
F-101
BANCO SANTANDER (BRASIL) S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Brazilian Reais - R$, unless otherwise stated)
The total of the High Quality Liquidity Assets – HQLA is composed mainly by Brazilian federal government bonds and reserve requirements returns. The Net Outflows are mainly composed by losses of deposits, compensated in part by Inflows, which are mainly credits.
Throughout the three observations in this disclosure (exercise with end of October, November and December 2016) the institution presented a surplus (difference between net assets and net outflows) of R$32.1 billion, which resulted in an LCR of 174% (1) (2015 - 136%), comfortably above the regulatory requirement of 70%.
(1) Refers to the average of the quarter as indicated in the publication of Circular 3,678 of the local regulator.
Customers Funding
Santander has different sources of funding, both in terms of products and the mix of customers, with emphasis on retail operations of the Time Deposits. Total customer funds are currently at the level of R$364,788 million and showed stability compared to volumes at the end of 2015.
| In millions of Reais | ||||||||||||||||||||||||
| Customers Funding | 2016 | 2015 | ||||||||||||||||||||||
| 0 a 30 days | Total | % | 0 a 30 days | Total | % | |||||||||||||||||||
| Demand deposits | 15,794 | 15,794 | 100 | % | 14,990 | 14,990 | 100 | % | ||||||||||||||||
| Savings accounts | 35,901 | 35,901 | 100 | % | 35,842 | 35,842 | 100 | % | ||||||||||||||||
| Time deposits | 24,452 | 150,686 | 16 | % | 22,048 | 148,682 | 15 | % | ||||||||||||||||
| InterBank deposit | 944 | 2,379 | 40 | % | 1,896 | 2,855 | 66 | % | ||||||||||||||||
| Funds from acceptances and issuance of securities | ||||||||||||||||||||||||
| 6,304 | 105,120 | 6 | % | 8,126 | 98,246 | 8 | % | |||||||||||||||||
| Borrowings and Onlendings | 4,114 | 46,124 | 9 | % | 2,836 | 52,769 | 5 | % | ||||||||||||||||
| Subordinated Debts / Debt Instruments | ||||||||||||||||||||||||
| Eligible to Compose Capital | - | 8,784 | 0 | % | 234 | 18,006 | 1 | % | ||||||||||||||||
| Total | 87,509 | 364,788 | 24 | % | 85,972 | 371,390 | 23 | % | ||||||||||||||||
Assets and liabilities in accordance with the remaining contractual maturities, considering the undiscounted flows are as follows:
| 2016 | ||||||||||||||||||||||||
| 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 | 27,093 | 5,262 | 4,749 | 36,135 | 25,573 | 98,812 | ||||||||||||||||||
| Debt instruments | 20,762 | 2,390 | 2,867 | 27,676 | 20,991 | 74,686 | ||||||||||||||||||
| Trading derivatives | 6,331 | 2,872 | 1,882 | 8,459 | 4,582 | 24,126 | ||||||||||||||||||
| Available-For-Sale Financial Assets | 1,492 | 1,373 | 1,819 | 55,056 | 29,854 | 89,594 | ||||||||||||||||||
| Debt instruments | 1,492 | 1,373 | 1,819 | 55,056 | 29,854 | 89,594 | ||||||||||||||||||
| Other Financial Assets At Fair Value Through Profit | 38 | 14 | 52 | 586 | 1,824 | 2,514 | ||||||||||||||||||
| Or Loss | ||||||||||||||||||||||||
| Debt instruments | 38 | 14 | 52 | 586 | 1,824 | 2,514 | ||||||||||||||||||
| Non-Current Assets Held For Sale | 79 | 170 | 227 | 3,307 | 9,979 | 13,762 | ||||||||||||||||||
| Reserves from Brazilian Central Bank | 58,594 | - | - | - | - | 58,594 | ||||||||||||||||||
| Loans and Receivables | 18,151 | 112,337 | 42,763 | 106,518 | 82,770 | 362,539 | ||||||||||||||||||
| Total | 105,447 | 119,156 | 49,610 | 201,602 | 150,000 | 625,815 | ||||||||||||||||||
| Interest-bearing liabilities: | ||||||||||||||||||||||||
| Deposits from credit institutions | 135,725 | 51,098 | 50,024 | 86,535 | 7,444 | 330,826 | ||||||||||||||||||
| Subordinated Debts / Debt Instruments Eligible to | ||||||||||||||||||||||||
| Compose Capital | - | 347 | 330 | 10,633 | - | 11,310 | ||||||||||||||||||
| Marketable debt securities | 6,234 | 41,431 | 35,390 | 27,344 | 521 | 110,920 | ||||||||||||||||||
| Trading derivatives | 6,046 | 1,308 | 1,268 | 7,123 | 4,167 | 19,912 | ||||||||||||||||||
| Short positions | 31,551 | - | - | - | - | 31,551 | ||||||||||||||||||
| Total | 179,556 | 94,184 | 87,012 | 131,635 | 12,132 | 504,519 | ||||||||||||||||||
F-102
BANCO SANTANDER (BRASIL) S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Brazilian Reais - R$, unless otherwise stated)
| 2015 | ||||||||||||||||||||||||
| 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 | 2,831 | 4,125 | 7,031 | 24,032 | 16,623 | 54,642 | ||||||||||||||||||
| Debt instruments | 1,226 | 1,860 | 4,761 | 15,430 | 13,151 | 36,428 | ||||||||||||||||||
| Trading derivatives | 1,605 | 2,265 | 2,270 | 8,602 | 3,472 | 18,214 | ||||||||||||||||||
| Available-For-Sale Financial Assets | 1,048 | 3,185 | 9,475 | 41,894 | 55,640 | 111,242 | ||||||||||||||||||
| Debt instruments | 1,048 | 3,185 | 9,475 | 41,894 | 55,640 | 111,242 | ||||||||||||||||||
| Other Financial Assets At Fair Value Through Profit Or Loss | 38 | 12 | 48 | 427 | 893 | 1,418 | ||||||||||||||||||
| Debt instruments | 38 | 12 | 48 | 427 | 893 | 1,418 | ||||||||||||||||||
| Non-Current Assets Held For Sale | 80 | 163 | 219 | 2,360 | 10,358 | 13,180 | ||||||||||||||||||
| Reserves from Brazilian Central Bank | 52,183 | - | - | - | - | 52,183 | ||||||||||||||||||
| Loans and Receivables | 22,717 | 89,907 | 51,196 | 110,204 | 73,132 | 347,156 | ||||||||||||||||||
| Total | 78,897 | 97,392 | 67,969 | 178,917 | 156,646 | 579,821 | ||||||||||||||||||
| Interest-bearing liabilities: | ||||||||||||||||||||||||
| Deposits from credit institutions | 116,525 | 40,676 | 40,453 | 128,627 | 8,594 | 334,875 | ||||||||||||||||||
| Subordinated Debts / Debt Instruments Eligible to | ||||||||||||||||||||||||
| Compose Capital | 297 | 113 | 8,845 | 12,606 | - | 21,861 | ||||||||||||||||||
| Marketable debt securities | 8,093 | 25,732 | 13,900 | 67,049 | 116 | 114,890 | ||||||||||||||||||
| Trading derivatives | 1,230 | 1,937 | 1,265 | 6,915 | 2,604 | 13,951 | ||||||||||||||||||
| Short positions | 20,899 | - | - | - | - | 20,899 | ||||||||||||||||||
| Total | 147,044 | 68,458 | 64,463 | 215,197 | 11,314 | 506,476 | ||||||||||||||||||
Scenario analysis / Contingency plan
Liquidity management requires an analysis of financial scenarios where possible liquidity issues are evaluated. For this, crisis scenarios are built and then studied. The model used for this analysis is the Liquidity Stress Test.
The Liquidity Stress Test assesses the institution’s financial structure and ability to resist and respond to the most extreme situations.
The purpose of the Liquidity Stress Test is to simulate adverse market conditions, making it possible assess impacts on the institution’s liquidity and payment ability, so as to take preventive actions or avoid positions that may adversely affect liquidity in worst-case scenarios.
Scenarios are determined based on an analysis of the market commitment during prior crisis and future estimates. Four scenarios with different intensity levels are prepared.
Based on an analysis of the stress models, the Minimum Liquidity concept was determined, which is the minimum liquidity required to support the liquidity losses of up to 90% for 90 days in all crisis scenarios simulated.
Based on the results obtained through the Liquidity Stress Test, the Bank prepares its Liquidity Contingency Plan, which is a formal combination of preventive and corrective actions to be taken in liquidity crisis scenarios.
The Liquidity Contingency Plan is primarily intended to the following:
• Crisis identification – the preparation of a Liquidity Contingency Plan requires the determination in advance of a measurable parameter determining the institution’s liquidity condition and structure. This parameter is the Liquidity Minimum Limit determined by the Liquidity Stress Test. When this limit is exceeded, there is a liquidity crisis environment, and thus, the Contingency Plan is used.
• Internal Communication – after the crisis is identified, it is necessary to establish clear communication channels to mitigate the problems raised. People held accountable for taking these contingency actions should be notified of the extent of the contingency and measures to be taken.
• Corrective actions – Actions intended to actually generate the funds required to solve or mitigate the effects of crisis, as follows:
- Assess the type and severity of the crisis;
- Identify the most impacted segment;
- Put in practice the measures planned to generate funds, considering the required amount and cost of the additional resource, either financial or image cost.
ALCO reviews and approves stress models, Minimum Liquidity and Contingency Plan on a semi-annual basis.
If adverse market conditions occur, ALCO may review and approve new models, Minimum Liquidity and Contingency Plan when needed.
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.
F-103
BANCO SANTANDER (BRASIL) S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Brazilian Reais - R$, unless otherwise stated)
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 give flexibility to the business areas for the efficient and timely assumption of financial risks, depending on market changes, and for the implementation of the business strategies, provided that the acceptable levels of risk are not exceeded.
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, taking into account features such as assessment model and systems, liquidity of the instruments involved, etc.
c.7) Risks and results in 2016
Financial Intermediation Activities
The average VaR from negotiation portfolio of the bank in 2016 ended in R$804 thousands (2015 - R$525 million and 2014 – R$32,3 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 (1)
Interest rate risk
Convertible currencies
At 2016 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$385 million.
Also at 2016 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$1,680 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, decreased R$140 million over 2016, reaching a maximum of R$569 million in April. The sensitivity value decreased R$120 million during 2016, reaching a maximum of R$2,204 million in July. The main factors that occurred in 2016 and influenced in sensitivity were the volatility of the exchange rate (convexity effect), portfolio’s decay, update of implicit methodology on cash flow of the Bank’s products and liquidity.
| Thousands of Reais | 2016 | 2015 | 2014 | |||||||||
| Sensibilities | ||||||||||||
| Net Interest Margin | 385 | 525 | 490 | |||||||||
| Market Value of Equity | 1,680 | 1,800 | 1,846 | |||||||||
| Value at Risk - Balance | ||||||||||||
| VaR | 804 | 926 | 605 |
(1) Includes the balance sheets total, except for the financial assets and liabilities held for trading.
Structural liquidity management
Structural liquidity management seeks to finance the Bank’s recurring business with optimal maturity and cost conditions, avoiding the need to assume undesired liquidity risks.
The main features of the structural liquidity management in 2016 were as follows:
• Ample structural liquidity position. Since Banco Santander is basically a commercial Bank, customer deposits constitute the main source of liquidity in its financing structure. These deposits, combined with capital and other similar instruments, enable the Bank to cover most of its liquidity requirements and, as a result, the financing raised in wholesale markets is moderate with respect to the size of its balance sheets.
• In Brazil, the legal reserve requirement takes a considerable part of the funding.
• Obtainment of liquidity through diversification in instruments. Additionally, subordinated and senior debts have an overall long maturity.
• The local balance sheets should be self-funded.
• Based on stress test results, a minimum liquidity buffer is maintained.
• Banco Santander reliance in international funding is not considerable.
• The aim is that hard currency related activities be funded with third parties hard currency funding.
• Though, given the potential disruptions in this market, Banco Santander has mechanisms to use the local liquidity in order to support hard currency activities.
• High capacity to obtain on-balance-sheets liquidity. Government bond positions are held for liquidity management purposes.
• The Bank performs control and management functions, which involves planning its funding requirements, structuring the sources of financing to achieve optimum diversification in terms of maturities and instruments, and defining contingency plans.
F-104
BANCO SANTANDER (BRASIL) S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Brazilian Reais - R$, unless otherwise stated)
In practice, the liquidity management performed by the Bank consists of the following:
• Each year, a liquidity plan is prepared on the basis of the financing needs arising from the budgets of each business. Based on these liquidity requirements and taking into account certain prudential limits on the obtainment of short-term market financing, the Bank establishes an issue and securitization plan for the year.
• Throughout the year the Bank periodically monitors the actual changes in financing requirements and updates this plan accordingly.
• Control and analysis of liquidity risk. The primary objective is to guarantee that the Bank has sufficient liquidity to meet its short- and long-term financing requirements in normal market situations. To this end, the Bank employs certain balance-sheets control measures, such as the liquidity gap and liquidity ratios.
Simultaneously, various scenario (or stress-scenario) analysis are conducted which consider the additional requirements that could arise if certain extreme but plausible events occur. The aim pursued is to cover a broad spectrum of situations that are more or less likely to affect the Bank, thus enabling it to prepare the related contingency plans.
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 at December 31, 2016.
Trading portfolio
| 2016 | ||||||||||||||
| Risk Factor | Description | Scenario 1 | Scenario 2 | Scenario 3 | ||||||||||
| Interest Rate - Reais | Exposures subject to changes in interest fixed rate | (6,274 | ) | (242,001 | ) | (484,003 | ) | |||||||
| Coupon Interest Rate | Exposures subject to changes in coupon rate of interest rate | (3,458 | ) | (39,970 | ) | (79,939 | ) | |||||||
| Inflation | Exposures subject to change in coupon rates of price indexes | (5,428 | ) | (88,258 | ) | (176,515 | ) | |||||||
| Coupon - US Dollar | Exposures subject to changes in coupon US Dollar rate | (21 | ) | (5,106 | ) | (10,212 | ) | |||||||
| Coupon - Other Currencies | Exposures subject to changes in coupon foreign currency rate | (357 | ) | (6,048 | ) | (12,097 | ) | |||||||
| Foreign currency | Exposures subject to foreign exchange | (6,547 | ) | (163,687 | ) | (327,373 | ) | |||||||
| Eurobond/Treasury/Global | Exposures subject to changes in interest rate negotiated roles in international | (2 | ) | (90 | ) | (179 | ) | |||||||
| market | ||||||||||||||
| Shares and Indexes | Exposures subject to change in shares price | (618 | ) | (15,458 | ) | (30,915 | ) | |||||||
| Other | Exposures not meeting the previous settings | (17,786 | ) | (2,276 | ) | (4,551 | ) | |||||||
| Total (1) | (40,491 | ) | (562,894 | ) | (1,125,784 | ) |
(1) Amounts net of taxes.
Scenario 1: a shock of 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
| 2016 | ||||||||||||||
| Risk Factor | Description | Scenario 1 | Scenario 2 | Scenario 3 | ||||||||||
| Interest Rate - Reais | Exposures subject to changes in interest fixed rate | (53,558 | ) | (1,376,404 | ) | (2,621,638 | ) | |||||||
| TR and Long-Term Interest Rate - | ||||||||||||||
| (TJLP) | Exposures subject to changes in Exchange of TR in TJLP | (3,128 | ) | (82,938 | ) | (177,829 | ) | |||||||
| Inflation | Exposures subject to change in coupon rates of price indexes | (11,551 | ) | (206,934 | ) | (354,086 | ) | |||||||
| Coupon - US Dollar | Exposures subject to changes in coupon US Dollar rate | (412 | ) | (57,174 | ) | (103,108 | ) | |||||||
| Coupon - Other Currencies | Exposures subject to changes in coupon foreign currency rate | (7,224 | ) | (45,407 | ) | (91,225 | ) | |||||||
| Interest Rate Markets International | Exposures subject to changes in interest rate negotiated roles in international market | (13,143 | ) | (190,043 | ) | (352,433 | ) | |||||||
| Foreign Currency | Exposures subject to Foreign Exchange | (722 | ) | (18,048 | ) | (36,097 | ) | |||||||
| Total (1) | (89,738 | ) | (1,976,948 | ) | (3,736,416 | ) |
(1) Amounts net of taxes.
Scenario 1: a shock of 10 base points in interest rate curves and 1% price variance (currency);
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) Independent Structure
The local corporative area, called Non-Financial Risks, is responsible for implementing the management and control model of Operational Risks and Internal Controls of Banco Santander. It is subordinated to Executive Vice-President of Risks and count with people, structure, standards, methodologies and tools for ensuring adequacy of the management and control model.
The Administration is an acting part and is aligned with the mission of the areas, recognizing, participating and sharing responsibility for the continuous improvement of the operational and technological risk management culture and structure as well as of the internal control system. Then they can ensure compliance with the established objectives and goals, as well as the security and quality of the products and services provided by the Bank.
F-105
BANCO SANTANDER (BRASIL) S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Brazilian Reais - R$, unless otherwise stated)
The Bank's Board of Directors Santander opted to adopt the Alternative Standardized Approach (ASA) to calculate the installment of Required Notional Equity (PRE) related to operational risk.
d.1) Non-Financial Risks
It has as mission towards Banco Santander: Support for the achievement of the strategic objectives and the decision-making process, the adequacy and attendance mandatory requirements, the maintenance of solidity, reliability, reduction and mitigation of losses due to operational risks, further on to the implementation, dissemination of the culture of operational risks and internal controls.
Acts in preventing the operational risk and supports for the continued strengthening of the internal control system, attending the requirements of regulatory agencies, New Basel Agreement – BIS II and Sarbanes Oxley requirements and resolutions of the National Monetary Council. This model also follows the guidelines established by Santander Spain, which was based on COSO-Committee of Sponsoring Organizations of the Tread way Commission-Internal Control – Integrated Framework 2013.
The procedures developed and adopted are intended to ensure Santander Bank continuous presence among the select group of financial institutions recognized as having the best operational risk management practices, thereby helping to continuously improve its reputation, solidity and reliability in the local and international markets.
In the second half of 2014, was consolidated the adoption if the approaches by lines of defense, which started in April, 2014 and approved in the Executive Committee.
Defence Line Model
Non-financial risks is the second line of defense in Santander's model and aims to maintain the fulfillment, alignment and compliance with corporate guidelines of the Santander group, the Basle Accord and resolutions of the National Monetary Council. Also acts in the control and challenge of the activities performed by the first line of Defense, contributing to its strengthening.
In line with the strengthening of an independent structure and glimpsing an integrated approach to risk management, the Internal Controls area became part of the structure of non-financial Risks.
The internal control Model ("MCI") deployed at Banco Santander is based on the methodology developed by the Committee of Sponsoring Organizations of the Tread way Commission ("COSO"), which covers for strategic components, operational, financial and compliance, disclosure that were set within the framework of internal control. The Bank has adapted its MCI to the most demanding international standards established by COSO (Internal Control – Integrated Framework 2013) having as main goals the mitigation of risks, providing transparency to the preparation and disclosure of financial statements and comply with the requirements of current legislation and of the regulatory agencies. The MCI is based on self- assessment by responsible of activities, processes, sub-processes, and controls (control self assessment- CSA) and disseminates within the Bank through regulatory, internal notes and instruction guides available on the local Intranet, Internal Controls Portal and the Norms Portal.
The system supports the Administration in the management of MCI, besides documenting the sub-processes, risks and associated control, indicators, and also in certification by the managers responsible for controls activities, sub-processes, processes, activities and subgroups, which provides comfort as to the financial statements for certification for the CEO and the Director Executive Vice President.
d.2) Comprehensiveness and Sustainability
The scope of operational risk control and management, exceeds the allocation of regulatory capital, ensuring its sustainable development, including:
• Improvement of operational efficiency and productivity in the activities and processes.
• Compliance with existing regulations: Bacen, Susep, CVM and BIS, as well as new requirements and monitoring the timely fulfillment of requests from regulators.
• Strengthening of the reputation and improvement in the relation of Risk x Return to the public with whom the Bank maintains relationship.
• Maintenance and preservation of the quality and reliability of products and services.
• Identifying and addressing timely the corrections of identified vulnerabilities in processes.
• Dissemination of culture of advanced management and control of Operational Risks, by means of internal communication (intranet, personal course, "online" courses and monthly communication by “Boletim de RO” and “Boletim Flash de RO”), with reinforcement in the "Accountability".
This solid and efficient structure permits the continuous enhancement of existing methodologies and the further dissemination of the culture of responsibility in regard to the advanced management of operational risk.
F-106
BANCO SANTANDER (BRASIL) S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Brazilian Reais - R$, unless otherwise stated)
d.3) Differential factor
The Non-financial Risk 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 to perform risk control and self-assessment exercises (RCSA), and training for the capture of operational losses, among others.
This has made a significant contribution to Santander Bank consistently achieving 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 stand out:
• Annual Operational and Technological Risk Prevention and Control Week;
• Training on the necessary procedures for evaluating the internal control environment;
• Mandatory training for all Banco Santander employees through NetCurses, addressing the issue of operational risks and business continuity;
• 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 ensure absolute and relative analyses based on volumetric and market analysis;
• Composition of lines of defense creating new functions for the role of operational risk representative: "Coordinator" and "Coordinator Assist" Operational Risk covering the perimeter of RO and "experts" in cases where the operational risk is transverse to the organization.
• Six-monthly review of Internal Controls of the company by the responsible managers for the controls, sub processes, processes and activities documented in MCI to support the Chief Executive Officer and Executive Vice President of Finance.
• Accession to the new model released by COSO - Framework 2013 with the adequacy of existing controls to 17 new principles.
d.4) Communication Policy
The Non-Financial Risk area is part of Santander’s governance structure and produces a series of specific monthly reports for management detailing events that occurred, the main activities undertaken, and the corrective and precautionary action plans identified and monitored, ensuring transparency and providing knowledge for governance forums.
Semiannually, it prepares the Management Report and Control of Operational, Technological Risk , the Management of Business Continuity and the Evaluation of Internal Controls. Which is presented to the Bank’s Board of Directors and the Quality Assessment Report and Adequacy of the Internal Control Model presented on the Executive Committee for its awareness and to enable it to take resolutions on the results and activities developed in the period.
Additional information can be obtained from the Bank’s Social and Annual Reports on its website.
e) Reputational Risk
e.1) Reputational Risk
Reputational risk is the exposure arising from negative public opinion, irrespective of whether this opinion is based on facts or merely on public perception. The reputational risk management is accomplished through responsible involvement in the right business with the right client.
Accordingly Banco Santander aims to offer the most suitable product according to the each customer profile.
e.2) Compliance
The Compliance Risk is the legal risk or regulatory sanctions, financial loss, or damages to the Bank reputation that may suffer as a result of failure to comply with laws, regulations, codes of conduct and good Banking practices in the exercise of their activity. The Compliance at Banco Santander has a proactive approach, working in educational processes, monitoring and corporate communications.
The Compliance area operates independently, reporting to Management and Regulatory Compliance Panel, contributing for the maintenance of the reputation and integrity of Banco Santander.
e.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. Money Laundering Prevention
The Bank’s money Laundering Prevention policies and terrorism financing prevention are based on the knowledge and rigorousness of the acceptance of new clients, the Bank 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 trimester 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 debated/analyzed internally at various levels until their risks have been fully mitigated, and subsequently approved by the Commercialization Local Committee (CLC), composed of Santander executives. After review and approval, the new products and services are monitored trying to identify them so timely events that may pose reputational risk, which if identified, are reported to the CLC.
F-107
BANCO SANTANDER (BRASIL) S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Brazilian Reais - R$, unless otherwise stated)
f) Compliance with the new regulatory framework
The Banco Santander has assumed from the outset 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 Santander 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 qualified professionals from the Bank’s different areas: 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, Santander 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 for 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 Bank intends to apply, over the next five years, the advanced internal ratings-based (AIRB) approach under Basel II for substantially all its Banks, until the percentage of net exposure of the loan portfolio covered by this approach is close to 100%.
The additional capital requirements derived from the self assessment process (Pillar II) should be offset by the risk profile that characterizes the Bank's business activities (low average risk), due to its focus on Banco Comercial (small and medium-sized enterprises and Individuals) and the diversification of the business. The Pillar 2 which takes into account the impact of risks not addressed under Pillar I (regulatory capital) and the benefits arising from the diversification among risks, businesses and geographical locations.
The Banco Santander continued in 2014 with the project for the progressive implementation of the technology platforms and methodological developments required for the roll-out of the AIRB approaches for regulatory capital calculation purposes.
Regarding the other risks addressed under Pillar I of Basel II, Banco Santander is developing 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 presented his candidacy in the second half of 2011, pending approval with the regulators for the use of internal models for calculating regulatory capital.
Pillar II is another significant line of action under the Basel Corporate Framework. In addition to reviewing and strengthening the methodology supporting the economic capital model, 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, as standards released 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 drive 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 valued at 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 event.
f.1) Internal validation of risk models
Internal validation is a pre-requisite for the supervisory validation process by Basel II implementation. A specialized unit 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 unit must also assess whether the risk management and control procedures are adequate for the Entity’s risk strategy and profile.
In addition to complying with the regulatory requirement, the internal validation area provides an essential support to the risk committee and management, as they are responsible for ensuring that appropriate procedures and systems are in place to monitor and control the entity's risks. In this case, 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 aim 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 area are the following:
i. Establish general validation principles, conducting an independent evaluation process including (I) data quality, (II) use of the methodology and (III) functioning of the models;
ii. Propose documents and model validation guides;
iii. 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;
iv. Issue a technical opinion on the adequacy of internal models for the intended internal and regulatory effects, concluding on their usefulness and effectiveness; and
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BANCO SANTANDER (BRASIL) S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Brazilian Reais - R$, unless otherwise stated)
v. 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 provisions of Circular 3,648 dated March 4, 2013 (Chapter III), Circular Letter 3,565 of September 6, 2012 and Circular 3,547 of July 2011. In this case, the Bank maintains a Segregation of functions between internal validation and internal audit, which is the last layer of validation of Bank control.
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 .
f.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. The capital management includes securitization, sale of assets and raise capital through issuing shares, subordinated liabilities and hybrid instruments.
From an economic standpoint, capital management seeks to optimize value creation at the Bank and at its different business segment. To this end, the economic capital, RORAC (return on risk-adjusted capital) and data about the value creation of each business segment are generated. Within the framework of the internal capital adequacy assessment process (Pillar II of the Basel Capital Accord) the Group uses an economic capital measurement model with the objective of ensuring that there is sufficient capital available to support all the risks of its activity in different economic scenarios, with the solvency levels agreed upon by the Group.
In order to adequately manage the Bank’s capital, it is essential to estimate and analyze future needs, in anticipation of the various phases of the business cycle. Projections of regulatory and economic capital are made based on financial projections (balance sheets, income statement, etc.) and on macroeconomic scenarios estimated by the Economic Research Service. These estimative are used by the Bank as a reference to plan the management actions (issues, securitizations, etc.) required to achieve its capital targets and ensure adequate solvency levels.
g) Economic capital
g.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 areas where the Bank operates in the review process of Pillar II by supervisors.
g.2) The Economic Capital Model
In calculating the economic capital, is the Bank's definition of losses to be covered. Thus, is used a confidence interval necessary to ensure business continuity. The confidence interval for the Banco Santander is 99.90% higher than required by Basel II.
The risk profile in Brazil is distributed by Credit risk, Market, ALM, Business, Operations and fixed assets. However, to successfully anticipate the changes proposed in Basel III, new risks have been incorporated to model: Intangibles, pension funds (defined benefit) and tax credits, which allow the Bank to adopt a position even more conservative and prudent.
| % Capital | 2016 | 2015 | 2014 | |||||||||
| Risk Type | New Methodology | New Methodology | New Methodology | |||||||||
| Credit | 62 | % | 56 | % | 60 | % | ||||||
| Market | 5 | % | 4 | % | 5 | % | ||||||
| ALM | 9 | % | 9 | % | 9 | % | ||||||
| Business | 8 | % | 8 | % | 4 | % | ||||||
| Operational | 6 | % | 5 | % | 7 | % | ||||||
| Fixed Assets | 2 | % | 1 | % | 1 | % | ||||||
| Intangible Assets | 1 | % | 6 | % | 2 | % | ||||||
| Pension Funds | 1 | % | 2 | % | 2 | % | ||||||
| Deferred Tax Assets | 6 | % | 9 | % | 10 | % | ||||||
| TOTAL | 100 | % | 100 | % | 100 | % |
F-109
BANCO SANTANDER (BRASIL) S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Brazilian Reais - R$, unless otherwise stated)
Still, for being a commercial Bank, credit is the main source of risk in Banco Santander and the evolution of this portfolio is a leading factor for oscillation.
Banco Santander periodically evaluates the level and evolution of RORAC (risk-adjusted return) of the main business units. The RORAC is the quotient of the profit generated on allocated capital, using the following formula:
RoRAC=Profit/Economic Capital
Banco Santander also makes the planning of capital in order to obtain future projections of economic and regulatory capital. The estimative obtained for the Bank are incorporated to different scenarios consistently, including its strategic objectives (organic growth, M & A, payout ratio, credits, etc.). Possible management strategies leading to optimize capital and solvency return of the Bank are identified.
RoRAC
Banco Santander has used the RORAC, with the following objectives:
1 – Analyze and set a minimum price for operations (admission) and clients (monitoring).
2 – Estimate capital consumption of each customer, economic groups, portfolio or business segment, in order to optimize the allocation of economic capital, maximizing the efficiency of the Bank.
3 – Measure and monitor business performance.
To evaluate the operations of global customers, the calculation of economic capital takes into account some variables used in the calculation of expected and unexpected losses.
Among these variables are:
1 – Counterparty rating;
2 – Maturity;
3 – Guarantees;
4 – Type of financing;
The return on capital is determined by the cost of capital. To create value for shareholders, the minimum return operation must exceed the cost of capital of Banco Santander.
F-110
BANCO SANTANDER (BRASIL) S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Brazilian Reais - R$, unless otherwise stated)
APPENDIX I – RECONCILIATION OF SHAREHOLDERS’ EQUITY AND NET INCOME - BRGAAP vs IFRS
The table below presents a conciliation of stockholders' equity and net income attributed to the parent between standards adopted in Brazil (BRGAAP) and IFRS, with the conceptual description of the main adjustments:
| Thousands of Reais | Note | 2016 | 2015 | 2014 | ||||||||||
| Shareholders' equity attributed under to the Parent Brazilian GAAP | 57,771,524 | 54,819,073 | 57,320,685 | |||||||||||
| IFRS adjustments, net of taxes, when applicable: | ||||||||||||||
| Impairment on loans and receivables | a | 124,787 | 132,878 | 128,080 | ||||||||||
| Category transfers | b | 650,109 | 704,519 | - | ||||||||||
| Deferral of financial fees, commissions and inherent costs under effective interest rate method | c | 216,192 | 138,314 | 114,780 | ||||||||||
| Reversal of goodwill amortization | d | 25,123,410 | 23,344,320 | 20,560,813 | ||||||||||
| Realization on purchase price adjustments | e | 778,882 | 798,776 | 874,738 | ||||||||||
| Recognition of fair value in the partial sale in subsidiaries | f | 112,052 | 112,052 | 112,052 | ||||||||||
| Option for Acquisition of Equity Instrument | g | (1,017,000 | ) | (1,017,000 | ) | (950,000 | ) | |||||||
| Negative goodwill PSA | h | 52,686 | - | - | ||||||||||
| Others | 274,413 | 367,290 | 141,972 | |||||||||||
| Shareholders' equity attributed to the parent under IFRS | 84,087,055 | 79,400,222 | 78,303,120 | |||||||||||
| Non-controlling interest under IFRS | 725,504 | 435,062 | 380,173 | |||||||||||
| Shareholders' equity (including non-controlling interest) under IFRS | 84,812,559 | 79,835,284 | 78,683,293 | |||||||||||
| Thousands of Reais | Note | 2016 | 2015 | 2014 | ||||||||||
| Net income attributed to the Parent under Brazilian GAAP | 5,532,962 | 6,998,196 | 2,161,170 | |||||||||||
| IFRS adjustments, net of taxes, when applicable: | ||||||||||||||
| Impairment on loans and receivables | a | (8,091 | ) | 4,798 | 36,998 | |||||||||
| Deferral of financial fees, commissions and inherent costs under effective interest rate method | c | 77,878 | 23,534 | (11,053 | ) | |||||||||
| Reversal of goodwill amortization | d | 1,756,587 | 2,783,507 | 3,683,391 | ||||||||||
| Realization on purchase price adjustments | e | (76,247 | ) | (75,962 | ) | (75,151 | ) | |||||||
| Negative goodwill PSA | h | 52,686 | - | - | ||||||||||
| Others | (1,212 | ) | 49,667 | (165,332 | ) | |||||||||
| Net income attributed to the parent under IFRS | 7,334,563 | 9,783,740 | 5,630,023 | |||||||||||
| Non-controlling interest under IFRS | 130,355 | 50,086 | 77,753 | |||||||||||
| Net income (including non-controlling interest) under IFRS | 7,464,918 | 9,833,826 | 5,707,776 |
a) Impairment on loans and receivables:
On the income refers to the adjust based on estimated losses on loans and receivables portfolio, which was established with based on historical loss of impairment and other circumstances known at the time of evaluation, according to the guidance provided by IAS 39 "Financial Instruments: Recognition and Measurement. These criteria differ in certain aspects of the criteria adopted under BRGAAP, which uses certain regulatory limits set by the Central Bank.
b) Transfer of category
The IAS 39 permits reclassification of the category "available for sale" to "held to maturity" and "available for sale" to "loans and receivables" at any time, provided that the entity has the intention and ability to hold the financial asset in this category. However, for the purpose of local books (BR GAAP), pursuant to art. 5 of BACEN Circular 3,068, the revaluation regarding the classification into categories of securities may only be made when preparing the half-yearly and the yearly financial statements. For purposes of IFRS financial statements of December 2015 Banco Santander reclassified some securities therefore July 1, 2015 and to Brazilian GAAP purposes due to local requirements mentioned above such change occurred at December 31, 2015.
c) Deferral of financial fees, commissions and other costs under effective interest rate method:
Under IFRS, in accordance with IAS 39 “Financial Instruments: Recognition and Measurement”, financial fees, commissions and other costs that are integral part of effective interest rate of financial instruments measured at amortized cost are recognized in profit or loss over the term of the corresponding contracts. Under BRGAAP these fees and expenses are recognized directly as income when received or paid.
d) Reversal of goodwill amortization:
Under BRGAAP, goodwill is amortized systematically over a period up to 10 years and additionally, the goodwill recorded is measured annually or whenever there is any indication that the asset may be impaired. Under IFRS, in accordance with IAS 38 “Intangible Assets”, goodwill is not amortized, but instead, is tested for impairment, at least annually, and whenever there is an indication that the goodwill may be impaired; comparing its recoverable amount with its carrying value. The tax amortization of goodwill of Banco ABN Amro Real SA represents a difference between book and tax basis of a permanent nature and definitive as the possibility of future use of resources to settle a tax liability is considered remote by management, supported by the opinion of expert external advisors. The tax amortization of goodwill is permanent and definitive, and therefore does not apply to the recognition of a deferred tax liability in accordance with IAS 12, on temporary differences.
e) Realization on purchase price adjustments:
As part of the allocation of the purchase price related to the acquisition of Banco Real, following the requirements of IFRS 3, the Bank has recognized the assets and liabilities of the acquiree to fair value, including identifiable intangible assets with finite lives. Under BRGAAP, in a business combination, the assets and liabilities are kept at their book value. This purchase price adjustment relates substantially to the following items:
F-111
BANCO SANTANDER (BRASIL) S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Brazilian Reais - R$, unless otherwise stated)
• The allocation related to the value of assets in the loan portfolio. The initial recognition of value of the loans at fair value, adjustment to the yield curve of the loan portfolio in comparison to its nominal value, which is apportion by its average realization period.
• The amortization of the identified intangible assets with finite lives over their estimated useful lives.
f) Recognition of fair value in the partial disposal of investments in subsidiaries
Under IFRS, in accordance with IFRS 10 "Consolidated Financial Statements" on partial disposal of a permanent investment, fair value is recognized over the remaining portion (Webmotors). Under BRGAAP, this type of operation, ongoing participation is accounted for by its book value.
g) Option for Acquisition of Equity Instrument
Within the context of transaction, Banco Santander has granted to the members of Getnet S.A. and Banco Bonsucesso a put option over all shares of Getnet S.A. and Banco Bonsucesso held by them. The overall out in IAS 32, a financial liability was recognized for this commitment, with a specific charge in an account in stockholders' equity in the amount of R$950 million and R$67 million, respectively.
h) Negative goodwill PSA
Aymoré Crédito e Financiamento acquired 100% of PSA Leasing and therefore a negative goodwill in the amount of R$93 million was identified in this acquisition. In accordance with IFRS 3 (Business Combinations), negative goodwill is understood as the greater of the net value, at the acquisition date, of the identifiable assets acquired and the amount actually paid, and is recognized against income.
APPENDIX II – STATEMENTS OF VALUE ADDED
The following Statements of value added is not required under IFRS but being presented as supplementary information as required by Brazilian Corporate Law for publicly-held companies, and has been derived from the Bank´s consolidated financial statements prepared in accordance with IFRS.
| 2016 | ||||||||
| Thousands of Reais | ||||||||
| Interest and similar income | 77,146,077 | |||||||
| Net fee and commission income | 10,977,596 | |||||||
| Impairment losses on financial assets (net) | (13,301,445 | ) | ||||||
| Other income and expense | (751,727 | ) | ||||||
| Interest expense and similar charges | (46,559,584 | ) | ||||||
| Third-party input | (5,804,939 | ) | ||||||
| Materials, energy and others | (510,961 | ) | ||||||
| Third-party services | (4,589,468 | ) | ||||||
| Impairment of assets | (114,321 | ) | ||||||
| Other | (590,189 | ) | ||||||
| Gross added value | 21,705,978 | |||||||
| Retention | ||||||||
| Depreciation and amortization | (1,482,639 | ) | ||||||
| Added value produced | 20,223,339 | |||||||
| Investments in affiliates and subsidiaries | 47,537 | |||||||
| Added value to distribute | 20,270,876 | |||||||
| Added value distribution | ||||||||
| Employee | 7,378,374 | 36.4 | % | |||||
| Compensation | 5,455,374 | |||||||
| Benefits | 1,397,711 | |||||||
| Government severance indemnity funds for employees - FGTS | 352,939 | |||||||
| Other | 172,350 | |||||||
| Taxes | 4,659,989 | 23.0 | % | |||||
| Federal | 4,101,629 | |||||||
| State | 717 | |||||||
| Municipal | 557,643 | |||||||
| Compensation of third-party capital - rental | 767,595 | 3.8 | % | |||||
| Remuneration of interest on capital | 7,464,918 | 36.8 | % | |||||
| Dividends and interest on capital | 4,550,000 | |||||||
| Profit Reinvestment | 2,784,563 | |||||||
| Profit (loss) attributable to non-controlling interests | 130,355 | |||||||
| Total | 20,270,876 | 100.0 | % |
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BANCO SANTANDER (BRASIL) S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Brazilian Reais - R$, unless otherwise stated)
| 2015 | 2014 | |||||||||||||||
| Thousands of Reais | ||||||||||||||||
| Interest and similar income | 69,870,200 | 58,923,916 | ||||||||||||||
| Net fee and commission income | 9,483,509 | 8,765,886 | ||||||||||||||
| Impairment losses on financial assets (net) | (13,633,989 | ) | (11,271,605 | ) | ||||||||||||
| Other income and expense | (3,867,959 | ) | (1,350,357 | ) | ||||||||||||
| Interest expense and similar charges | (38,533,089 | ) | (31,695,404 | ) | ||||||||||||
| Third-party input | (7,061,296 | ) | (5,958,217 | ) | ||||||||||||
| Materials, energy and others | (520,831 | ) | (511,384 | ) | ||||||||||||
| Third-party services | (4,632,346 | ) | (4,653,478 | ) | ||||||||||||
| Impairment of assets | (1,220,645 | ) | 3,751 | |||||||||||||
| Other | (687,474 | ) | (797,106 | ) | ||||||||||||
| Gross added value | 16,257,376 | 17,414,219 | ||||||||||||||
| Retention | ||||||||||||||||
| Depreciation and amortization | (1,490,017 | ) | (1,362,129 | ) | ||||||||||||
| Added value produced | 14,767,359 | 16,052,090 | ||||||||||||||
| Added value received from transfer | ||||||||||||||||
| Investments in affiliates and subsidiaries | 116,312 | 91,096 | ||||||||||||||
| Added value to distribute | 14,883,671 | 16,143,186 | ||||||||||||||
| Added value distribution | ||||||||||||||||
| Employee | 6,829,965 | 45.9 | % | 6,312,224 | 39.1 | % | ||||||||||
| Compensation | 4,824,615 | 4,578,960 | ||||||||||||||
| Benefits | 1,300,788 | 1,187,751 | ||||||||||||||
| Government severance indemnity funds for employees - FGTS | 391,608 | 310,561 | ||||||||||||||
| Other | 312,954 | 234,952 | ||||||||||||||
| Taxes | (2,527,787 | ) | -17.0 | % | 3,425,169 | 21.2 | % | |||||||||
| Federal | (3,023,224 | ) | 3,366,835 | |||||||||||||
| State | 659 | 1,235 | ||||||||||||||
| Municipal | 494,778 | 57,099 | ||||||||||||||
| Compensation of third-party capital - rental | 747,667 | 5.0 | % | 698,017 | 4.3 | % | ||||||||||
| Remuneration of interest on capital | 9,833,826 | 66.1 | % | 5,707,776 | 35.4 | % | ||||||||||
| Dividends and interest on capital | 6,200,000 | 1,430,193 | ||||||||||||||
| Profit Reinvestment | 3,583,740 | 4,199,830 | ||||||||||||||
| Profit (loss) attributable to non-controlling interests | 50,086 | 77,753 | ||||||||||||||
| Total | 14,883,671 | 100.0 | % | 16,143,186 | 100.0 | % |
F-113
