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

 

☒ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 20172019

 

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)

 

SANTANDER (BRAZIL) BANK, INC.

(Translation of Registrant’s name into English)

 

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)

 

Mercedes Pacheco, Managing Director – Senior Legal Counsel
Banco Santander, S.A.
New York Branch
45 E. 53rd Street
New York, New York 10022
Tel: (212) 407-0953350-3604

(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

Trading Symbol 

Name of each exchange on which registered 

Units, each composed of 1 common share, no par value, and 1 preferred share, no par value

SANB11

New York Stock Exchange*

Common Shares, no par valueSANB3New York Stock Exchange*
Preferred Shares, no par valueSANB4New 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.

BSBR


New York Stock Exchange

*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.

 

Table of Contents

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:

 

Title of each class Class

7.375% Tier 1 Subordinated Perpetual Notes
6.000% Tier 2 Subordinated Notes due 2024

 

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 shares3,818,695,031
Preferred shares3,679,836,020

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

 

Yes☒No☐

Yes☒ 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☒

Yes☐ No☒

Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.

 

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☒No☐

Yes☒ 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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

Yes☒No☐

Yes☒ No☐

 

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

 

Large Accelerated Filer☒Accelerated Filer☐Non-accelerated Filer☐Emerging growth company☐

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act.☐

 

† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

 

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

☐U.S. GAAP

 

☒International Financial Reporting Standards as issued by the International Accounting Standards Board

 

☐Other

 

Table of Contents

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

☐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☒

Yes☐ No☒

 

Table of Contents

 

table of contents

 

Page

 

Presentation of Financial and Other InformationPRESENTATION OF FINANCIAL AND OTHER INFORMATION17
Forward-Looking StatementsFORWARD-LOOKING STATEMENTS39
PART I511
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS511
1A.Directors and Senior Management511
1B.Advisers511
1C. Auditors511
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE511
2A.Offer Statistics511
2B.Method and Expected Timetable511
ITEM 3. KEY INFORMATION511
3A.Selected Financial Data511
3B.Capitalization and Indebtedness1319
3C.Reasons for the Offer and Use of Proceeds1319
3D.Risk Factors1319
ITEM 4. INFORMATION ON THE COMPANY3551
4A.History and Development of the Company3551
4B.Business Overview4055
4C.Organizational Structure107121
4D.Property, Plant and Equipment109123
ITEM 4A. UNRESOLVED STAFF COMMENTS109124
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS109124
5A.Operating Results109124
5B.Liquidity and Capital Resources135148
5C.Research and Development, Patents and Licenses, etc.139152
5D.Trend Information139152
5E.Off-Balance Sheet Arrangements140153
5F.Contractual Obligations141153
5G.Safe Harbor141154
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES141154
6A.   6ABoard of Directors and Board of Executive Officers141154
6B.Compensation154167
6C.Board Practices158172
6D.Employees163179
6E.Share Ownership164180
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS165182
7A.  Major Shareholders165182

Table of Contents

7B.Related Party Transactions166183
7C.Interests of Experts and Counsel170184
ITEM 8. FINANCIAL INFORMATION171184
8A.Consolidated Statements and Other Financial Information171184
8B.Significant Changes179194
ITEM 9. THE OFFER AND LISTING179194
9A. Offering and Listing Details179194
9B.Plan of Distribution182197
9C. Markets182197
9D. Selling Shareholders185200
9E.  Dilution185200
9F.  Expenses of the Issue185200
ITEM 10. ADDITIONAL INFORMATION185200
10A.Share Capital185201
10B.By-Laws185202
10C.Material Contracts195212
10D.Exchange Controls195212

i

Table of Contents

10E.   Taxation196214
10F.   Dividends and Paying Agents204222
10G.   Statement by Experts204222
10H.  Documents on Display204223
10I. Subsidiary Information204223
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK204223
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES226246
12A.Debt Securities226246
12B.Warrants and Rights226246
12C.Other Securities226246
12D.American Depositary Receipts226246
PART II228248
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES228248
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS228248
ITEM 15. CONTROLS AND PROCEDURES228248
15A.   Disclosure Controls and Procedures228248
15B.  Management’s Annual Report on Internal Control over Financial Reporting228248
15C.   Audit Report of the Registered Public Accounting Firm229249
15D.   Changes in Internal Control over Financial Reporting229249
ITEM 16. [RESERVED]229249
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT229249

Table of Contents

ITEM 16B. SANTANDER BRASIL’S CODE OF ETHICAL CONDUCT229250
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES230250
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES230251
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS231251
ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT232252
ITEM 16G. CORPORATE GOVERNANCE232252
ITEM 16H. MINE SAFETY DISCLOSURE235255
PART III236256
ITEM 17. FINANCIAL STATEMENTS236256
ITEM 18. FINANCIAL STATEMENTS236256
ITEM 19. EXHIBITS236256

ii

Table of Contents

Presentation of Financial and Other InformationPRESENTATION 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$” are to the Brazilianreal, the official currency of Brazil. All references to “U.S. dollars,” “dollars” or “U.S.$” 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 fromreais 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, 2017,2019, which was R$3.30804.0307 to U.S.$1.00, or on the indicated dates (subject, on any applicable date, to rounding adjustments). We make no representation that thereal 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 inreais, our functional currency and the presentation currency for our consolidated financial statements.

 

This annual report contains our consolidated financial statements as of December 31, 2017, 20162019, 2018 and 2015,2017, and for the years ended December 31, 2017, 20162019, 2018 and 2015.2017. Such consolidated financial statements have been prepared in accordance with International Financial Reporting Standards, (“IFRS”)or “IFRS”, as issued by the International Accounting Standards Board, (“IASB”)or “IASB” and interpretations issued by the IFRS Interpretation Committee, (“IFRIC”)or “IFRIC”. Our consolidated financial statements as of December 31, 2017 and 2016 and for the yearyears ended December 31, 20172019, 2018 and 20162017 have been audited by PricewaterhouseCoopers Auditores Independentes, or “PwC.” Our consolidated financial statements as of December 31, 2015 and for the year ended December 31, 2015 have been audited by Deloitte Touche Tohmatsu Auditores Independentes, or “Deloitte.” PwC and Deloitte areis an independent registered public accounting firms,firm, whose reports arereport is included herein.

 

IFRS differs in certain significant aspects in comparison with the generally accepted accounting principles in the United States, (“U.S.or “U.S. GAAP”). IFRS also differs in certain significant aspects in comparison with the Brazilian GAAP (as defined below). Appendix I to our audited consolidated financial statements for the years ended December 31, 2017, 20162019, 2018 and 2015,2017, 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 No. 6,404, dated December 15, 1976, as amended by Law 11,638, (“Brazilianor the “Brazilian Corporate Law”) and standards established by the

7 

Table of Contents

National Monetary Council (Conselho Monetário Nacional), or “CMN,” the Brazilian Central Bank and document template provided in the Accounting Chart for

1

Table of Contents

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 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. ThisThese data isare 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.

 

28 

Table of Contents

Forward-Looking StatementsFORWARD-LOOKING STATEMENTS

 

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;Brazil, and the policies of the administration of Brazil which took office on January 1, 2019;

 

·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;countries, including a global downturn;

·the future relationship of the United Kingdom with the European Union;

 

·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-performingnonperforming 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;

 

·restrictions on the distributions of dividends to holders of our shares and ADSs;

 

9 

Table of Contents

·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;

 

3

Table of Contents

·failure to adequately protect ourselves against risks relating to cybersecurity;

 

·our dependence on the proper functioning of information technology systems;

 

·our ability to protect personal data;

·our ability to protect ourselves against cybersecurity risks;

 

·our ability to protect our reputation;

 

·our ability to detect and prevent money laundering and other illegal activities;

 

·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.

 

410 

Table of Contents

PART I

 

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

 

1A.Directors and Senior Management

1A. Directors and Senior Management

Not applicable.

1B.Advisers

Not applicable.

1C.Auditors

 

Not applicable.

 

1B. AdvisersITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

2A.Offer Statistics

Not applicable.

2B.Method and Expected Timetable

 

Not applicable.

 

1C. Auditors

Not applicable.

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

2A. Offer Statistics

Not applicable.

2B. Method and Expected Timetable

Not applicable.

ITEM 3. KEY INFORMATION

 

3A. Selected Financial Data

3A.Selected Financial Data

 

Financial information for Santander Brasil atas of and for the years ended December 31, 2019, 2018, 2017, 2016 2015, 2014 and 20132015 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 inwithin this annual report.

 

Income Statement Data

 

  For the year ended December 31,
  2017 2017 2016 2015 2014 2013
  (in millions of U.S.$)(1) (in millions of R$)
Interest and similar income  21,589   71,418   77,146   69,870   58,924   51,217 
Interest expense and similar charges  (11,025)  (36,472)  (46,560)  (38,533)  (31,695)  (22,738)
Net interest income  10,564   34,946   30,586   31,337   27,229   28,479 
Income from equity instruments  25   83   259   143   222   81 
Income from companies accounted for by the equity method  22   72   48   116   91   91 
Fee and commission income  4,781   15,816   13,548   11,797   11,368   10,742 
Fee and commission expense  (935)  (3,094)  (2,571)  (2,314)  (2,602)  (2,641)
Gains (losses) on financial assets and liabilities (net)  293   969   3,016   (20,002)  2,748   (1,146)
Exchange differences (net)  183   605   4,575   10,084   (3,636)  551 
Other operating income (expenses)  (203)  (672)  (625)  (347)  (470)  (445)
Total income  14,729   48,725   48,837   30,814   34,950   35,712 
Administrative expenses  (4,873)  (16,121)  (14,920)  (14,515)  (13,942)  (13,850)
Depreciation and amortization  (502)  (1,662)  (1,483)  (1,490)  (1,362)  (1,252)
Provisions (net)(2)  (1,000)  (3,309)  (2,725)  (4,001)  (2,036)  (2,692)
Impairment losses on financial assets (net)(3)  (3,730)  (12,338)  (13,301)  (13,634)  (11,272)  (14,118)
Impairment losses on other assets (net)  (138)  (457)  (114)  (1,221)  4   (345)
Gains (losses) on disposal of assets not classified as non-current assets held for sale  (19)  (64)  4   781   87   460 
Gains (losses) on non-current assets held for sale not classified as discontinued operations  (79)  (260)  87   50   15   103 
Operating profit before tax  4,388   14,514   16,384   (3,216)  6,443   4,018 
Income taxes  (1,625)  (5,376)  (8,919)  13,050   (736)  (233)
Net Profit from Continuing Operations  2,762   9,138   7,465   9,834   5,708   3,785 
Discontinued Operations(4)  —   —   —   —   —   2,063 
Consolidated Profit for the Year  2,762   9,138   7,465   9,834   5,708   5,848 
  For the Year Ended December 31,
  2019 2019 2018 2017 2016 2015
  (in millions of U.S.$)(1) (in millions of R$)
Interest and similar income  18,072   72,841   70,478   71,418   77,146   69,870 
Interest expense and similar charges  (7,076)  (28,520)  (28,557)  (36,472)  (46,560)  (38,533)
Net interest income  10,996   44,321   41,921   34,946   30,586   31,337 
Income from equity instruments  5   19   33   83   259   143 
Income from companies accounted for by the equity method  37   149   66   72   48   116 
Fee and commission income  5,059   20,392   17,728   15,816   13,548   11,797 
Fee and commission expense  (1,161)  (4,679)  (3,596)  (3,094)  (2,571)  (2,314)
Gains (losses) on financial assets and liabilities (net)  611   2,463   (2,783)  969   3,016   (20,002)

11 

Table of Contents

Exchange differences (net)  (692)  (2,789)  (2,806)  605   4,575   10,084 
Other operating income (expenses)  (275)  (1,108)  (1,056)  (672)  (625)  (347)
Total income  14,580   58,769   49,507   48,725   48,837   30,814 
Administrative expenses  (4,203)  (16,942)  (16,792)  (16,121)  (14,920)  (14,515)
Depreciation and amortization  (593)  (2,392)  (1,740)  (1,662)  (1,483)  (1,490)
Provisions (net)(2)  (913)  (3,682)  (2,000)  (3,309)  (2,725)  (4,001)
Impairment losses on financial assets (net)(3)  (3,317)  (13,370)  (12,713)  (12,338)  (13,301)  (13,634)
Impairment losses on other assets (net)  (33)  (131)  (508)  (457)  (114)  (1,221)
Gains (losses) on disposal of assets not classified as non-current assets held for sale  3   11   (25)  (64)  4   781 
Gains (losses) on non-current assets held for sale not classified as discontinued operations  2   10   182   (260)  87   50 
Operating profit before tax  5,526   22,273   15,910   14,514   16,384   (3,216)
Income taxes  (1,400)  (5,642)  (3,110)  (5,376)  (8,919)  13,050 
Consolidated Profit for the Year  4,126   16,631   12,800   9,138   7,465   9,834 
(1)Translated for convenience only using the selling rate as reported by the Brazilian Central Bank as of December 31, 2017,2019, forreais into U.S. dollars of R$3.30804.0307 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 2322 and 2423 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.

5

Table of Contents

Earnings and Dividend per Share Information

 

 For the year ended December 31, For the Year Ended December 31,
 2017 2016 2015 2014 2013 2019 2018 2017 2016 2015
Basic and Diluted Earnings per 1,000 shares                              
From continuing and discontinued operations(1)                    From continuing and discontinued operations(1)        
Basic Earnings per shares (reais)                              
Common Shares  1,133.43   929.93   1,236.96   709.69   719.89   2,094.83   1,604.34   1,133.43   929.93   1,236.96 
Preferred Shares  1,246.77   1,022.92   1,360.66   780.66   791.87   2,304.32   1,764.78   1,246.77   1,022.92   1,360.66 
Diluted Earnings per shares (reais)                                        
Common Shares  1,132.44   929.03   1,235.79   709.40   719.60   2,094.83   1,604.34   1,132.44   929.03   1,235.79 
Preferred Shares  1,245.69   1,021.93   1,359.36   780.34   791.56   2,304.32   1,764.78   1,245.69   1,021.93   1,359.36 
Basic Earnings per shares (U.S. dollars) (2)                                        
Common Shares  342.63   285.34               519.72   414.05   342.63   285.34   316.78 
Preferred Shares  376.90   313.87               571.69   455.45   376.90   313.87   348.46 
Diluted Earnings per shares (U.S. dollars) (2)                                        
Common Shares  342.33   285.06               519.72   414.05   342.33   285.06   316.48 
Preferred Shares  376.57   313.57               571.69   455.45   376.57   313.57   348.13 
From continuing operations                                        
Basic Earnings per shares (reais)                                        
Common Shares  1,133.43   929.93   1,236.96   709.69   460.35   2,094.83   1,604.34   1,133.43   929.93   1,236.96 
Preferred Shares  1,246.77   1,022.92   1,360.66   780.66   506.38   2,304.32   1,764.78   1,246.77   1,022.92   1,360.66 
Diluted Earnings per shares (reais)                                        
Common Shares  1,132.44   929.03   1,235.79   709.40   460.16   2,094.83   1,604.34   1,132.44   929.03   1,235.79 
Preferred Shares  1,245.69   1,021.93   1,359.36   780.34   506.18   2,304.32   1,764.78   1,245.69   1,021.93   1,359.36 
Basic Earnings per shares (U.S. dollars) (2)                                        
Common Shares  342.63   285.34               519.72   414.05   342.63   285.34   316.78 
Preferred Shares  376.90   313.87               571.69   455.45   376.90   313.87   348.46 
Diluted Earnings per shares (U.S. dollars) (2)                                        
Common Shares  342.33   285.06               519.72   414.05   342.33   285.06   316.48 
Preferred Shares  376.57   313.57               571.69   455.45   376.57   313.57   348.13 
From discontinued operations                    
Basic Earnings per shares (reais)                    
Common Shares  —   —   —   —   259.54 
Preferred Shares  —   —   —   —   285.49 
Diluted Earnings per shares (reais)                    
Common Shares  —   —   —   —   259.43 
Preferred Shares  —   —   —   —   285.38 
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)  801.63   666.21   784.90   193.26   305.15 
Preferred Shares (reais)  881.80   732.83   863.39   212.59   332.36 
Common Shares (U.S. dollars)(2)  242.33   204.42   201.01   72.76   128.98 
Preferred Shares (U.S. dollars)(2)  266.57   224.86   221.11   80.03   141.88 
Weighted average share outstanding (in thousands) – basic                    
Common Shares  3,822,057   3,828,555   3,839,159   3,851,278   3,858,717 
Preferred Shares  3,683,145   3,689,696   3,700,299   3,710,746   3,719,858 
Weighted average shares outstanding (in thousands) – diluted(3)                    
Common Shares  3,825,313   3,832,211   3,842,744   3,852,823   3,860,239 
Preferred Shares  3,686,401   3,693,352   3,703,884   3,712,291   3,721,380 

12 

Table of Contents

Common Shares (reais)  1,378.87   841.68   801.63   666.21   784.90 
Preferred Shares (reais)  1,516.76   925.85   881.80   732.83   863.39 
Common Shares (U.S. dollars)(2)  342.09   217.22   242.33   204.42   201.01 
Preferred Shares (U.S. dollars)(2)  376.30   238.94   266.57   224.86   221.11 
Weighted average share outstanding (in thousands) – basic                    
Common Shares  3,802,303   3,807,386   3,822,057   3,828,555   3,839,159 
Preferred Shares  3,663,444   3,668,527   3,683,145   3,689,696   3,700,299 
Weighted average shares outstanding (in thousands) – diluted(3)                    
Common Shares  3,802,303   3,807,386   3,825,313   3,832,211   3,842,744 
Preferred Shares  3,663,444   3,668,527   3,686,401   3,693,352   3,703,884 
(1)Per share amounts reflect the effects of the bonus share issue and reverse share split for each period presented.

 

(2)Translated for convenience only using the selling rate as reported by the Brazilian Central Bank as of December 31, 2017,2019, forreais into U.S. dollars of R$3.30804.0307 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,
  2019 2019 2018 2017 2016 2015
  (in millions of U.S.$)(1) (in millions of R$)
Assets            
Cash and balances with the Brazilian Central Bank(2)  4,993   20,127   19,464   20,642   26,285   89,143 
Financial assets held for trading  -     -     -     86,271   131,245   50,537 
Financial Assets Measured At Fair Value Through Profit Or Loss  8,024   32,342   43,712   -     -     -   
Financial Assets Measured At Fair Value Through Profit Or Loss Held For Trading  14,147   57,021   68,852   -     -     -   
Non-Trading Financial Assets Mandatorily Measured At Fair Value Through Profit Or Loss  42   171   917   -     -     -   
Other financial assets at fair value through profit or loss  -     -     -     1,692   1,711   2,080 
Available-for-sale financial assets  -     -     -     85,823   57,815   68,265 
Financial Assets Measured At Fair Value Through Other Comprehensive Income  23,847   96,120   85,437   -     -     -   
Held to maturity investments  -     -     -     10,214   10,048   10,098 
Loans and receivables(2)  -     -     -     368,729   333,997   306,269 
Financial Assets Measured At Amortized Cost (2)  117,766   474,681   429,731   -     -     -   
Hedging derivatives  84   340   344   193   223   1,312 
Non-current assets held for sale  329   1,325   1,380   1,155   1,338   1,237 
Investments in associates and joint ventures  266   1,071   1,053   867   990   1,061 
Tax assets  8,336   33,599   31,566   28,826   28,753   34,770 
Other assets  1,256   5,061   4,800   4,578   5,104   3,802 
Tangible assets  2,427   9,782   6,589   6,510   6,646   7,006 
Intangible assets  7,591   30,596   30,019   30,202   30,237   29,814 
Total assets  189,108   762,237   723,865   645,703   634,393   605,395 
Average total assets*  182,476   735,507   685,531   637,511   605,646   571,918 
Liabilities                        
Financial liabilities held for trading  -     -     -     49,323   51,620   42,388 
Financial Liabilities Measured At Fair Value Through Profit Or Loss Held For Trading  11,428   46,065   50,939   -     -     -   
Financial Liabilities Measured At Fair Value Through Profit Or Loss  1,320   5,319   1,946   -     -     -   
Financial liabilities at amortized cost  142,712   575,230   547,295   478,881   471,579   457,282 

613 

Table of Contents

Balance Sheet Data

 

  As of December 31,
  2017 2017 2016 2015 2014 2013
  (in millions of U.S.$)(1) (in millions of R$)
Assets            
Cash and balances with the Brazilian Central Bank  30,492   100,866   110,605   89,143   55,904   51,714 
Financial assets held for trading  15,852   52,440   84,874   50,537   56,014   30,219 
Other financial assets at fair value through profit or loss  511   1,692   1,711   2,080   997   1,298 
Available-for-sale financial assets  25,944   85,823   57,815   68,265   75,164   46,287 
Held to maturity investments  3,088   10,214   10,048   10,098   —   — 
Loans and receivables  97,442   322,337   296,049   306,269   264,608   258,778 
Hedging derivatives  58   193   223   1,312   213   323 
Non-current assets held for sale  349   1,155   1,338   1,237   930   275 
Investments in associates and joint ventures  262   867   990   1,061   1,023   1,064 
Tax assets  8,714   28,826   28,753   34,770   23,020   22,060 
Other assets  1,384   4,578   5,104   3,802   5,067   5,085 
Tangible assets  1,968   6,510   6,646   7,006   7,071   6,886 
Intangible assets  9,130   30,202   30,237   29,814   30,221   29,064 
Total assets  195,194   645,703   634,393   605,395   520,231   453,053 
Average total assets*  192,718   637,511   605,646   571,918   478,560   435,286 
Liabilities                        
Financial liabilities held for trading  14,910   49,323   51,620   42,388   19,570   13,554 
Financial liabilities at amortized cost  144,764   478,881   471,579   457,282   392,186   329,701 
Deposits from the Brazilian Central Bank and deposits from credit institutions  23,995   79,375   78,634   69,451   63,674   34,032 
Customer deposits  83,447   276,042   247,445   243,043   220,644   200,156 
Marketable debt securities  21,235   70,247   99,843   94,658   70,355   65,301 
Subordinated debts  157   519   466   8,097   7,294   8,906 
Debt Instruments Eligible to Compose Capital  2,550   8,437   8,312   9,959   6,773   — 
Other financial liabilities  13,380   44,261   36,879   32,073   23,446   21,306 
Hedging derivatives  49   163   311   2,377   894   629 
Provisions(2)  4,228   13,987   11,776   11,410   11,127   10,892 
Tax liabilities  2,493   8,248   6,095   5,253   12,423   11,693 
Other liabilities  2,423   8,014   8,199   6,850   5,346   4,928 
Total liabilities  168,868   558,615   549,581   525,559   441,548   371,397 
Stockholders’ equity  26,428   87,425   85,435   83,532   80,105   83,340 
Other Comprehensive Income  (234)  (774)  (1,348)  (4,132)  (1,802)  (1,973)
Non-controlling interests  132   437   726   435   380   289 
Total Stockholders’ Equity  26,326   87,088   84,812   79,835   78,683   81,655 
Total liabilities and stockholders’ equity  195,194   645,703   634,393   605,395   520,231   453,053 
Average interest-bearing liabilities*  126,002   416,816   408,067   400,008   318,639   287,382 
Average total stockholders’ equity*  26,562   87,868   84,283   81,475   78,818   80,916 
Deposits from the Brazilian Central Bank and deposits from credit institutions  24,629   99,271   99,023   79,375   78,634   69,451 
Customer deposits  83,488   336,515   304,198   276,042   247,445   243,043 
Marketable debt securities  18,285   73,702   74,626   70,247   99,843   94,658 
Subordinated debts  -     -     9,886   519   466   8,097 
Debt Instruments Eligible to Compose Capital  2,525   10,176   9,780   8,437   8,312   9,959 
Other financial liabilities  13,786   55,566   49,783   44,261   36,879   32,073 
Hedging derivatives  50   201   224   163   311   2,377 
Provisions(3)  4,052   16,332   14,696   13,987   11,776   11,410 
Tax liabilities  2,719   10,960   8,075   8,248   6,095   5,253 
Other liabilities  2,709   10,921   9,095   8,014   8,199   6,850 
Total liabilities  164,991   665,028   632,270   558,615   549,581   525,559 
Stockholders’ equity  23,994   96,711   91,882   87,425   85,435   83,532 
Other Comprehensive Income  (21)  (86)  (879)  (774)  (1,348)  (4,132)
Non-controlling interests  145   583   593   437   726   435 
Total Stockholders’ Equity  24,117   97,209   91,595   87,088   84,812   79,835 
Total liabilities and stockholders’ equity  189,108   762,237   723,865   645,703   634,393   605,395 
Average interest-bearing liabilities*  121,861   491,187   463,388   416,816   408,067   400,008 
Average total stockholders’ equity*  23,777   95,836   89,263   87,868   84,283   81,475 
*The 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 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, 2019, forreais into U.S. dollars of R$4.0307 to U.S.$1.00.

(2)In the fiscal year ended December 31, 2019, the balances related to compulsory deposits were reclassified from cash and reserves at the Brazilian Central Bank to the item Loans and other amounts with credit institutions for better presentation and, consequently, the respective comparative balances also have been reclassified.

(3)Mainly provisions for tax risks and legal obligations, and judicial and administrative proceedings of labor and civil lawsuits.

Selected Consolidated Ratios (*)

  As of and for the Year Ended December 31,
  2019 2018 2017 2016 2015
  (%)
Profitability and performance          
Return on average total assets  2.3   1.9   1.4   1.2   1.7 
Asset quality                    
Impaired assets as a percentage of loans and advances to customers (gross)(1)  6.7   7.0   6.7   7.0   7.0 
Impaired assets as a percentage of total assets(1)  3.1   3.1   3.0   3.0   3.1 
Impairment losses to customers as a percentage of impaired assets(1) (4)  87.8   90.3   80.5   87.0   81.9 
Impairment losses to customers as a percentage of loans and advances to customers (gross) (5)  5.9   6.3   5.4   6.1   5.7 
Derecognized assets as a percentage of loans and advances to customers (gross)  4.3   3.5   4.7   4.3   4.4 
Impaired assets as a percentage of stockholders’ equity(1)  24.3   24.5   22.0   22.3   23.3 
Capital adequacy                    
Basel capital adequacy ratio(2)  15.0   15.1   15.8   16.3   15.7 
Efficiency                    
Efficiency ratio(3)  28.8   33.9   33.1   30.6   47.1 

*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.

(1)Translated for convenience only using the selling rate as reported by the Brazilian Central Bank as of December 31, 2017, forreais into U.S. dollars of R$3.3080 to U.S.$1.00.

(2)Mainly provisions for tax risks and legal obligations, and judicial and administrative proceedings of labor and civil lawsuits.

7

Table of Contents

Selected Consolidated Ratios (*)

  At and for the Year Ended December 31,
  2017 2016 2015 2014 2013
  in (%)
Profitability and performance                    
Return on average total assets  1.4   1.2   1.7   1.2   1.3 
Asset quality                    
Impaired assets as a percentage of loans and advances to customers (gross)(1)  6.7   7.0   7.0   5.6   6.2 
Impaired assets as a percentage of total assets(1)  3.0   3.0   3.1   2.7   3.1 
Impairment losses to customers as a percentage of impaired assets(1) (4)  80.5   87.0   81.9   95.8   96.1 
Impairment losses to customers as a percentage of loans and advances to customers (gross) (5)  5.4   6.1   5.7   5.4   6.0 
Derecognized assets as a percentage of loans and advances to customers (gross)  4.7   4.3   4.4   4.9   6.5 
Impaired assets as a percentage of stockholders’ equity(1)  22.0   22.3   23.3   17.8   17.2 
Capital adequacy                    
Basel capital adequacy ratio(2)  15.8   16.3   15.7   17.5   19.2 
Efficiency                    
Efficiency ratio(3)  33.1   30.6   47.1   39.9   38.8 

*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, seerefer to “Item 4. Information on the Company—B. Business Overview—Selected Statistical Information—Assets—Impaired Assets.”

 

(2)Basel capital adequacy ratio asis 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, net stable funding ratio, leverage ratio, 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.”

14 

Table of Contents

Supervision—Capital Adequacy and Leverage – Basel.”

 

(3)Efficiency ratio is determined by taking administrative expenses divided by total income.

 

(4)In 2017,2019, including the debt instruments accounted for in the loans and receivables, the ratio is 95.0%96.8%. For 20162018 the ratio was 95.2%78.1%. The debt instruments amount was not material in priorpreceding years.

 

(5)In 2017,2019, including the debt instruments accounted for in the loans and receivables the ratio is 5.3%5.8%. For 20162018, the ratio was 6.3%. The debt instruments amount was not material in priorpreceding years.

 

Selected Consolidated Ratios, Including Non-GAAP Ratios (*)

 

 At and for the Year Ended December 31, As of and for the Year Ended December 31,
 2017 2016 2015 2014 2013 2019 2018 2017 2016 2015
 in (%) (%)
Profitability and performance                              
Net yield(1)  6.4   6.2   6.6   6.9   8.1   6.8   6.9   6.4   6.2   6.6 
Return on average stockholders’ equity(2)  10.4   8.9   12.1   7.3   7.3   17.4   14.3   10.4   8.9   12.1 
Adjusted return on average stockholders’ equity(2)  15.4   13.3   18.5   11.3   10.9   24.7   21.0   15.4   13.3   18.5 
Average stockholders’ equity as a percentage of average total assets(2)(*)  13.8   13.9   14.2   16.4   18.5   13.0   13.0   13.8   13.9   14.2 
Average stockholders’ equity excluding goodwill as a percentage of average total assets excluding goodwill(2)(*)  9.8   9.7   9.8   11.3   13.1   9.6   9.3   9.8   9.7   9.8 
Asset quality                                        
Impaired assets as a percentage of credit risk exposure (3)  5.8   6.3   6.0   4.8   5.4   6.0   6.2   5.8   6.3   6.0 
Impaired assets as a percentage of stockholders’ equity excluding goodwill(2)(3)  32.6   33.5   36.1   27.5   25.9   34.4   35.5   32.6   33.5   36.1 
Liquidity                                        
Loans and advances to customers, net as a percentage of total funding(4)  62.7   58.0   59.3   63.9   69.0   62.9   60.6   62.7   58.0   59.3 
Efficiency                                        
Adjusted efficiency ratio(5)  32.5   34.9   34.8   38.1   36.4   28.2   30.3   32.5   34.9   34.8 

(*) 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.

(*)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 divided by average interest earning assets.

(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., or “GetNet” and Super Pagamentos e Administração de Meios Eletrônicos Ltda., or “Super”, both in 2014, Banco Olé Consignado S.A. (current name of Banco 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 Olé Consignado S.A. in 2015. 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,
  2019 2018 2017 2016 2015
  (in millions of R$, except percentages)
Effects of the hedge for investments held abroad  1,264   5,867   810  (6,140)  10,919 
Efficiency ratio  28.8%  33.9%  33.1%  30.6%  47.1%
Adjusted efficiency ratio  28.2%  30.3%  32.5%  34.9%  34.8%

 

815 

Table of Contents

(1)“Net yield” is defined as net interest income (including dividends on equity securities) divided by average interest earning assets.

(2)“Adjusted return on average 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. 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,
  2017 2016 2015 2014 2013
  (in millions of R$, except percentages)
Effects of the hedge for investments held abroad  810   (6,140)  10,919   1,668   2,367 
Efficiency ratio  33.1%  30.6%  47.1%  39.9%  38.8%
Adjusted efficiency ratio  32.5%  34.9%  34.8%  38.1%  36.4%

Reconciliation of Non-GAAP Measures and Ratios to Their Most Directly Comparable IFRS Financial Measures

 

Reconciliation of Non-GAAP Ratios to Their Most Directly Comparable IFRS Financial Measures

 

The information in the table below presents the calculation of specified non-GAAP financial measures from each of theirto the 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 Olé Bonsucesso Consignado 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.

 

  As of and for the Year Ended December 31,
  2019 2018 2017 2016 2015
  (in millions of R$, except as otherwise indicated)
Return on average stockholders’ equity:          
Consolidated profit for the year  16,631   12,800   9,138   7,465   9,834 
Average stockholders’ equity (*)  95,836   89,263   87,868   84,283   81,475 
Return on average stockholders’ equity (*)  17.4%  14.3%  10.4%  8.9%  12.1%
Adjusted return on average stockholders’ equity(*):                    
Consolidated profit for the year  16,631   12,800   9,138   7,465   9,834 
Average stockholders’ equity(*)  95,836   89,263   87,868   84,283   81,475 
Average goodwill(*)  28,213   28,176   28,360   28,343   28,376 
Average stockholders’ equity excluding goodwill(*)  67,623   61,087   59,508   55,940   53,130 
Adjusted return on average stockholders’ equity(*)(3)  24.6%  21.0%  15.4%  13.3%  18.5%
Average stockholders’ equity as a percentage of average total assets(*):                    
Average stockholders’ equity(*)  95,836   89,263   87,868   84,283   81,475 
Average total assets(*)  735,507   685,531   637,511   605,646   571,918 
Average stockholders’ equity as a percentage of average total assets(*)  13.0%  13.0%  13.8%  13.9%  14.2%
Average stockholders’ equity excluding goodwill as a percentage of average total assets excluding goodwill(*):                    
Average stockholders’ equity(*)  95,836   89,263   87,868   84,283   81,475 
Average goodwill(*)  28,213   28,176   28,360   28,343   28,376 
Average stockholders’ equity excluding goodwill(*)  67,623   61,087   59,508   55,940   53,130 
Average total assets(*)  735,507   685,531   637,511   605,646   571,918 
Average goodwill(*)  28,213   28,176   28,360   28,343   28,376 
Average total assets excluding goodwill(*)  707,294   657,355   609,151   577,334   543,542 
Average stockholders’ equity excluding goodwill as a percentage of average total assets excluding goodwill(*)  9.6%  9.3%  9.8%  9.7%  9.8%
Impaired assets as a percentage of stockholders’ equity:                    
Impaired assets  23,426   22,426   19,145   18,887   18,599 
Stockholders’ equity  97,209   91,595   87,088   84,813   79,835 
Impaired assets as a percentage of stockholders’ equity  24.1%  24.5%  22.0%  22.3%  23.3%

916 

Table of Contents

  At and for the year ended December 31,
  2017 2016 2015 2014 2013
  (in millions of R$, except as otherwise indicated)
Return on average stockholders’ equity:                    
Consolidated profit for the year  9,138   7,465   9,834   5,708   5,848 
Average stockholders’ equity(*)  87,868   84,283   81,475   78,818   80,916 
Return on average stockholders’ equity(*)  10.4%  8.9%  12.1%  7.3%  7.3%
Adjusted return on average stockholders’ equity(*):                    
Consolidated profit for the year  9,138   7,465   9,834   5,708   5,848 
Average stockholders’ equity(*)  87,868   84,283   81,475   78,818   80,916 
Average goodwill(*)  28,360   28,343   28,376   27,747   27,218 
Average stockholders’ equity excluding goodwill(*)  59,508   55,940   53,130   51,071   53,698 
Adjusted return on average stockholders’ equity(*)  15.4%  13.3%  18.5%  11.3%  10.9%
Average stockholders’ equity as a percentage of average total assets(*):                    
Average stockholders’ equity(*)  87,868   84,283   81,475   78,818   80,916 
Average total assets(*)  637,511   605,646   571,860   478,560   435,283 
Average stockholders’ equity as a percentage of average total assets(*)  13.8%  13.9%  14.2%  16.5%  18.5%
Average stockholders’ equity excluding goodwill as a percentage of average total assets excluding goodwill(*):                    
Average stockholders’ equity(*)  87,868   84,283   81,475   78,818   80,916 
Average goodwill(*)  28,360   28,343   28,376   27,747   27,218 
Average stockholders’ equity excluding goodwill(*)  59,508   55,940   53,130   51,071   53,698 
Average total assets(*)  637,511   605,646   571,860   478,560   435,283 
Average goodwill(*)  28,360   28,343   28,376   27,747   27,218 
Average total assets excluding goodwill(*)  609,151   577,303   543,515   450,813   408,065 
Average stockholders’ equity excluding goodwill as a percentage of average total assets excluding goodwill(*)  9.8%  9.7%  9.8%  11.3%  13.1%
Impaired assets as a percentage of stockholders’ equity:                    
Impaired assets  19,145   18,887   18,599   14,011   14,022 
Stockholders’ equity  87,088   84,813   79,835   78,683   81,655 
Impaired assets as a percentage of stockholders’ equity  22.0%  22.3%  23.3%  17.8%  17.2%
Impaired assets as a percentage of stockholders’ equity excluding goodwill:                    
Impaired assets  19,145   18,887   18,599   14,011   14,022 
Stockholders’ equity  87,088   84,813   79,835   78,683   81,655 
Goodwill  28,364   28,355   28,333   28,271   27,218 
Stockholders’ equity excluding goodwill  58,723   56,458   51,502   50,412   54,437 
Impaired assets as a percentage of stockholders’ equity excluding goodwill  32.6%  33.5%  36.1%  27.8%  25.9%
Impaired assets as a percentage of loans and receivables:                    
Loans and advances to customers, gross  287,829   268,438   267,266   249,110   226,206 
Impaired assets  19,145   18,887   18,599   14,011   14,022 
Impaired assets as a percentage of loans and receivables  6.7%  7.0%  7.0%  5.6%  6.2%
Impaired assets as a percentage of credit risk exposure:                    
Loans and advances to customers, gross  287,829   268,438   267,266   249,110   226,206 
Guarantees  42,645   33,265   43,611   39,334   31,150 
Credit risk exposure  330,474   301,703   310,877   288,445   257,357 
Impaired assets  19,145   18,887   18,599   14,011   14,022 
Impaired assets as a percentage of credit risk exposure  5.8%  6.3%  6.0%  4.9%  5.4%
Loans and advances to customers, net as a percentage of total funding:                    
Loans and advances to customers, gross  287,829   268,438   267,266   249,110   226,206 
Impairment losses(1)  15,409   16,435   15,233   13,421   13,472 
Total Funding(2)  434,620   434,700   425,209   368,741   308,395 
Loans and advances to customers, net as a percentage of total funding(2)  62.7%  58.0%  59.3%  63.9%  69.0%

Impaired assets as a percentage of stockholders’ equity excluding goodwill:                    
Impaired assets  23,426   22,426   19,145   18,887   18,599 
Stockholders’ equity  97,209   91,595   87,088   84,813   79,835 
Goodwill  28,375   28,378   28,364   28,355   28,333 
Stockholders’ equity excluding goodwill  68,834   63,217   58,724   56,458   51,502 
Impaired assets as a percentage of stockholders’ equity excluding goodwill  34.0%  35.5%  32.6%  33.5%  36.1%
Impaired assets as a percentage of loans and receivables:                    
Loans and advances to customers, gross  347,257   321,933   287,829   268,438   267,266 
Impaired assets  23,426   22,426   19,145   18,887   18,599 
Impaired assets as a percentage of loans and receivables  6.7%  7.0%  6.7%  7.0%  7.0%
Impaired assets as a percentage of credit risk exposure:                    
Loans and advances to customers, gross  347,257   321,933   287,829   268,438   267,266 
Guarantees  44,313   42,260   42,645   33,265   43,611 
Credit risk exposure  391,569   364,182   330,474   301,703   310,887 
Impaired assets  23,426   22,426   19,145   18,887   18,599 
Impaired assets as a percentage of credit risk exposure  6.0%  6.2%  5.8%  6.3%  6.0%
Loans and advances to customers, net as a percentage of total funding:                    
Loans and advances to customers, gross  347,257   321,933   287,829   268,438   267,266 
Impairment losses(1)  20,557   20,242   15,409   16,435   15,233 
Total Funding(2)  519,664   497,513   434,620   434,502   425,209 
Loans and advances to customers, net as a percentage of total funding(2)  62.4%  60.6%  62.7%  58.0%  59.3%
(*)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.

 

10

Table of Contents

The table below presents the reconciliation of our adjusted efficiency ratio to the most directly comparable IFRS financial measures for each of the periods presented.

 

 At and for the year ended December 31, As of and for the Year Ended December 31,
 2017 2016 2015 2014 2013 2019 2018 2017 2016 2015
 (in millions of R$, except as otherwise indicated) (in millions of R$, except as otherwise indicated)
Efficiency ratio                              
Administrative expenses  16,121   14,920   14,515   13,942   13,850   16,942   16,792   16,121   14,920   14,515 
Total income  48,725   48,837   30,814   34,950   35,712   58,769   49,507   48,725   48,837   30,814 
of which:                                        
Gains (losses) on financial assets and liabilities (net) and exchange differences (net)  1,574   7,591   (9,918)  (888)  (595)  (326)  (5,589)  1,574   7,591   (9,918)
Efficiency ratio  33.1%  30.6%  47.1%  39.9%  38.8%  28.8%  33.9%  33.1%  30.6%  47.1%
Total Income  48,725   48,837   30,814   34,950   35,712   58,769   49,507   48,725   48,837   30,814 
Effects of the hedge for investments held abroad  (810)  6,140   (10,919)  (1,668)  (2,367)  1,264   5,867   810  6,140   (10,919)
Total income excluding effects of the hedge for investments held abroad  49,535   42,697   41,733   36,618   38,079   57,505   43,640   47,915   42,697   41,733 
Administrative expenses  16,121   14,920   14,515   13,942   13,850   16,942   16,792   16,121   14,920   14,515 
Efficiency ratio adjusted for effects of the hedge for investments held abroad  32.5%  34.9%  34.8%  38.1%  36.4%  29.5%  38.5%  33.6%  34.9%  34.8%

 

Reconciliation of Non-GAAP Measures to Their Most Directly Comparable IFRS Financial Measures

 

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 effects of the hedge for investments held abroad. The limitation associated with the exclusion of effects of the hedge for investments held abroad is that it has the effect

17 

Table of Contents

of excluding a portion of gains/losses on financial assets and liabilities (net) plus exchange differences (net) line item, which is offset by excluding a portion in the Income tax line item. 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.

  At and for the year ended December 31,
  2017 2016 2015 2014 2013
  (in millions of R$, except as otherwise indicated)
           
Gains/losses on financial assets and liabilities (net) plus exchange differences (net)  1,574   7,591   (9,918)  (888)  (595)
Effects on hedge for investment held abroad  (810)  6,140   (10,919)  (1,668)  (2,367)
Adjusted Gains/losses on financial assets and liabilities (net) plus exchange differences (net)  2,384   1,451   1,001   780   1,772 
Total Income  48,725   48,837   30,814   34,950   35,712 
Effects on hedge for investment held abroad  (810)  6,140   (10,919)  (1,668)  (2,367)
Adjusted Total Income  49,535   42,697   41,733   36,618   38,079 
Operating profit before tax  14,514   16,384   (3,216)  6,443   4,018 
Effects on hedge for investment held abroad  (810)  6,140   (10,919)  (1,668)  (2,367)
Adjusted Operating profit before tax  15,324   10,244   7,703   8,111   6,385 
Income Tax  (5,376)  (8,919)  13,050   (736)  (233)
Effects on hedge for investment held abroad  810   (6,140)  10,919   1,668   2,367 
Adjusted Income tax  (6,186)  (2,779)  2,130   (2,404)  (2,600)
Operating profit before tax – Commercial Banking  11,220   12,652   (5,565)  4,231   1,510 
Effects on hedge for investment held abroad  (810)  6,140   (10,919)  (1,668)  (2,367)
Adjusted Operating Profit before tax – Commercial Banking  12,030   6,512   5,354   5,899   3,877 

11

Table of Contents

  As of and for the year ended December 31,
  2019 2018 2017 2016 2015
  (in millions of R$, except as otherwise indicated)
           
Gains/losses on financial assets and liabilities
(net) plus exchange differences (net)
  (326)  (5,589)  1,574   7,591   (9,918)
Effects on hedge for investment held abroad  1,264   5,867   810   (6,140)  10,919 

Adjusted Gains/losses on financial assets and

liabilities (net) plus exchange differences (net)

  (938)  (11,456)  764   1,451   1,001 
Total Income  58,769   49,507   48,725   48,837   30,814 
Effects on hedge for investment held abroad  1,264   5,867   810   6,140   (10,919)
Adjusted Total Income  57,505   43,640   47,915   42,697   41,733 
Operating profit before tax  22,273   15,910   14,514   16,384   (3,216)
Effects on hedge for investment held abroad  1,264   5,867   810   6,140   (10,919)
Adjusted Operating profit before tax  21,009   10,043   13,704   10,244   7,703 
Income Tax  (5,642)  (3,110)  (5,376)  (8,919)  13,050 
Effects on hedge for investment held abroad  (1,264)  (5,867)  (810)  6,140   (10,919)
Adjusted Income tax   (6,906)  (8,977)  (6,186)  (2,779)  2,130 
Operating profit before tax – Commercial Banking  18,375   12,397   11,220   12,652   (5,565)
Effects on hedge for investment held abroad  1,264   5,867   810   6,140   (10,919)
Adjusted Operating Profit before tax – Commercial Banking  17,111   6,530   10,411   6,512   5,354 

Exchange Rates

 

The Brazilian foreign exchange system allows the purchase and sale of foreign currency and the international transfer ofreaisby any person or legal entity, regardless of the amount, subject to certain regulatory procedures.

 

Since 1999, the Brazilian Central Bank has allowed thereal/U.S. dollar exchange rate to float freely, which resulted in increasing exchange rate volatility. Until early 2003, thereal declined against the U.S. dollar. Between 2004 and 2008, thereal strengthened against the U.S. dollar, except in the most severe periods of the global economic crisis. Given the turmoil in international markets and the current Brazilian macroeconomic outlook, thereal depreciated against the U.S. dollar from mid-2011 to early 2016. Beginning in early 2016 through the end of 2016, thereal 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, thereal 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 Brazilian Central Bank or the Brazilian government will continue to permit thereal to float freely or will intervene in the exchange rate market through the return of a currency band system or otherwise. In the future, thereal 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,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.American Depositary Receipts, or “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 inreais on the São Paulo Stock Exchange, B3 S.A. – Brasil, Bolsa, Balcão, or “B3” (the current corporate name of BM&FBOVESPA S.A. – Bolsa de Valores, Mercadorias e Futuros) as well as the U.S. dollar equivalent of any distributions we make with respect to our shares, which will be made exclusively inreais. 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.us.”

 

18 

Table of Contents

The following tables set forth the selling rate, expressed inreais per U.S. dollar (R$/U.S.$), for the periods indicated:

 

 

Period-end

Average(1)

Low

High

 (per U.S. dollar)
Year:    
20132.342.161.952.45
20142.662.362.192.74
20153.903.342.574.19
20163.263.483.124.16
20173.313.193.053.38
Month Ended:    
September 20173.173.133.083.19
October 20173.283.193.133.28
November 20173.263.263.213.29
December 20173.313.293.233.33
January 20183.163.213.143.31
February 20183.253.243.173.28
March 20183.323.283.223.34

  Period-endAverage(1)LowHigh
  (per U.S. dollar)
Year:     
2015 3.903.342.574.19
2016 3.263.483.124.16
2017 3.313.193.053.38
2018 3.873.683.144.19
2019 4.034.114.024.22
Month Ended:     
August 2019 4.154.033.844.17
September 2019 4.164.124.064.19
October 2019 4.024.093.994.18
November 2019 4.244.163.994.26
December 2019 4.034.114.024.22
January 2020 4.284.154.024.28
February 2020 4.504.344.244.50
March 2020 (through March 5, 2020) 4.624.534.494.62

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, 2017,2019, the exchange rate foreuro toreal was R$3.96934.4097 per €1.00.

 

12

Table of Contents

3B. Capitalization and Indebtedness

3B.Capitalization and Indebtedness

 

Not applicable.

 

3C. Reasons for the Offer and Use of Proceeds

3C.Reasons for the Offer and Use of Proceeds

 

Not applicable.

 

3D. Risk Factors

3D.Risk Factors

 

Our business, financial condition and results of operationsThe below risks could be materially and adversely affected if any of the risks described below occur. As a result, the market pricefinancial and operational state of our unitsCompany, and as result, could impact the American Depositary Receipts (“ADRs”) could decline, and you could lose all or partinvestment of your investment.our shareholders.

 

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;

 

19 

Table of Contents

·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.

 

13

Table of Contents

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.

 

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 affecteconomy by impacting the confidence of investors and the general public, and havewhich has historically resulted in economic deceleration and heightened volatility in the securities issued by Brazilian companies.

 

TheIn recent economic instabilityyears, there has been significant political turmoil in Brazil has contributedconnection with the impeachment of the former president (who was removed from office in August 2016) and ongoing investigations of her successor (who left office in January 2019) as part of the ongoingLava Jato investigations.

There are uncertainties regarding the ability of the current government to a decline in market confidence in the Brazilian economyimplement policies and reforms, as well as to a deteriorating political environment. Despite the ongoing recovery of the Brazilian economy, weak macroeconomic conditions in Brazil are expected to continue in 2018. 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 impactedexternal perception regarding the Brazilian economy and political environment.

In August 2016, the Brazilian Senate approved the removalenvironment, all 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 had previously assumed the interim presidency of Brazil in a caretaker role since the former President’s suspension in May, was sworn in by the Brazilian Senate to serve out the remainder of the presidential term until December 2018 (the next general election is in October 2018). There was 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. On June 9, 2017, the Brazilian Higher Electoral Court absolved the former Vice-President (current President of Brazil) of wrongdoing, however, he remains under investigation in connection with the ongoing “Lava Jato” investigations. See “—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 andwhich could have a material adverse effect on us.” We cannot predict which policies the current President of Brazil may adopt or change during his mandate or the effect that any such policies might havenegative impact on our business and the price of our securities. In addition, the revocation of the income tax exemption on the payment of dividends, which, if enacted, would increase the tax expenses associated with any dividend or distribution by Brazilian economy.companies, could impact our capacity to receive future cash dividends or distributions net of taxes from our subsidiaries. Any such new policies or changes to current policies may have a material adverse effect on us.

 

Presidential electionsFurthermore, Brazil’s federal budget has been in deficit since 2014. Similarly, the governments of Brazil’s constituent states are also facing fiscal concerns due to be held in Brazil in October 2018. We cannot predict the outcome of those elections, including whether any successor to the current President of Brazil will adopt policies or changes to current policies, which may have a material adverse effect on us. Furthermore, the political uncertainty resulting from the presidential elections may have an adverse effect on our business, results of operationstheir high debt burdens, declining revenues and financial condition.

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) and the perception of widespread corruption. Additionally, the “Lava Jato” 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 until showing signs of recovery in late 2017 and early 2018 due, in part, to political uncertainty and 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.inflexible expenditures.

 

1420 

Table of Contents

Uncertainty about the Brazilian government’s implementation of changes in policies or regulations that affect such implementation may contribute to economic instability in Brazil and increase the volatility of securities issued abroad by Brazilian companies, including our securities.

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”),or 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 isFederal Police ins 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,“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,Federal Revenue Authority, which were under appeal in the CARF. Such investigations involve several companies and individuals, including representatives of various companies, politicians and third parties. Certain of these individuals are being investigated by the Brazilian Federal Police and others were formally charged and are facing criminal proceedings and/or have already been convicted by the Brazilian Federal Courts.

 

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. 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”)or “GDP,” contracted by 3.5% in 2015 and 3.5%3.3% in 2016 but increased by 1.0%1.3% in 2017)2017 and 2018 and 1.1% in 2019). In addition, although we have reduced our exposure to companies involved in the “Lava Jato”Lava Jato and other government investigations, we cannot assure you that new investigations will not be launched or that additional persons will not become subject to investigation. 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”Lava Jato investigations, we may also be materially adversely affected.

 

As a result of the allegations under the “Lava Jato”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 Investor Service, or “Moody’s,” in February 2016, and downgraded again by Fitch in May 2016. In addition, Brazil was further downgraded by S&P to BB- with a stable outlook in January 2018 as a result of the failure of the currentprior Brazilian government to approve certain pension reforms. Brazil’s sovereign rating is currently rated by the three major risk-rating agencies as follows: BB- by S&P and Fitch and Ba2 by Moody’s. 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,investments. In addition, the “Lava Jato” Lava Jatoinvestigations 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.instability, which may include further deteriorations in Brazil’s economic conditions.

 

GovernmentInflation, 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 thePlano 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 and 2017 consumer price inflation decreased to 6.3% and 2.9%, respectively. The Brazilian government’s measures to fight inflation, principally through the Brazilian Central Bank, that have had and may in the future have significant effects on the Brazilian economy and our business.business, and can continue to do so. 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.

 

15

Table of Contents

In March 2015, the SELIC rate was increased to 12.75%, due to continuing inflation pressures and was further increased to 13.25% in April 2015, to 13.75% in June 2015, and to 14.25% in July 2015. In December 2016, the SELIC rate (the basic interest rate in Brazil) was lowered to 13.75%, and in January 2017, the SELIC rate was further lowered to 13.0%, and to 12.25% in February 2017. In May 2017, the Monetary Policy Committee (Comitê(Comitê de Política Monetária)ria) of the Brazilian Central Bank, or COPOM,“COPOM”, decided to lower the SELIC rate to 10.25%, then lowering it to 9.25% in July 2017, and to 7.50% in October 2017 and to 7.0% in December 2017. In February 2018, the COPOM lowered the SELIC rate to 6.75% and then to 6.50% in March 2018 and kept throughout the year 2018. In 2019, the

21 

Table of Contents

COPOM continued this trend for the first half of the year until August 2019, when the rate was lowered to 6.00%, and then successively lowered further to 5.50% in September 2019, 5.00% in October 2019 and 4.50% in December 2019. In February 2020, the COPOM cut the SELIC rate to 4.25%.

 

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 2017,2019, a 1.0% increase or decrease in the basebasic interest rate would have resulted in a decrease or increase, respectively, in our net interest income of R$378334 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.

 

Inflation adversely affects our personnel and other administrative expenses that are directly or indirectly tied to inflation indexes, generally the consumer price index (Í(Índice de Preços ao Consumidor – Amplo)Amplo), or “IPCA,” and the general index of market prices (Í(Índice Geral de Preços-Mercado)os-Mercado), or “IGPM.” For example, considering the amounts in 2017,2019, each additional percentage point change in inflation would impact our personnel and other administrative expenses by approximately R$8493 million and R$6576 million, respectively.

 

Despite the Brazilian Central Bank’s repeated cuts of the SELIC rate, inflationInflation has continued to decline until recently,increased during 2019, reaching 2.95%4.31% for the twelve-month12-month period ending December 31, 2017, and decreasing2019 (compared to 2.84% for3.75% in 2018), as a result of the period ending February 28, 2018.current market conditions.

 

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 increases or decreases, intervention in the foreign exchange market, and actions to adjust or fix the value of thereal, may trigger increases in inflation and adversely affect the performance of the Brazilian economy as a whole. Any of the aforementioned developmentsthese actions 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 federal government sovereign bonds. As of December 31, 2017,2019, approximately 19.0%17.8% of our total assets, and 82.1%78.4% of our securities portfolio, was comprisedconsisted of debt securities issued by the Brazilian federal government. Any failure by the Brazilian governmentGovernment 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 carehealthcare 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.plans. For further information, seerefer to note 2322 to our consolidated financial statements.

 

1622 

Table of Contents

Changes in the present value of our obligations under our legacy defined benefit pension plans could causerequire 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, 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.

 

As of December 31, 2019, we had provisions for pensions and other obligations in the amount of R$16 million. See more information in note 23 to our audited consolidated financial statements included in this annual report.

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. The Brazilian government has implemented various economic plans and used various exchange rate policies, including sudden devaluations, periodic mini-devaluations (during which the frequency of adjustments has ranged from daily to monthly), exchange controls, dual exchange rate markets and a floating exchange rate system.

Although long-term depreciation of thereal is generally linked to the rate of inflation in Brazil, depreciation of therealoccurring over shorter periods of time has resulted in significant variations in the exchange rate among thereal, the U.S. dollar and other currencies. From 2013 to 2014, thereal continued to depreciatedepreciated against the U.S. dollar due to a decrease in commodities prices, and a recovery of the U.S. economy, reaching 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.

During 2015, due to the poor economic conditions in Brazil, including as a result of political instability, thereal devalued at a much higher rate than in previous years. On September 24, 2015, thereal felldepreciated to the lowest level since the introduction of the currency, at R$4.20 per U.S.$1.00. Overall, in 2015, thereal depreciated 47%, against the U.S. dollar, reaching R$3.91 per U.S.$1.00 on December 31, 2015. In 2016, thereal 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. In 2017, therealremained relatively stable against the U.S. dollar, with an exchange rate of R$3.31 per U.S.$1.00 as of December 31, 2017. In 2018, thereal continued to depreciate against the U.S. dollar with the exchange rate reaching R$3.88 per U.S.$1.00 as of December 31, 2018. In 2019, thereal continued to depreciate against the U.S. dollar, with the exchange rate reaching R$4.03 per U.S.$1.00 as of December 31, 2019. On March 28, 2018,5, 2020, the exchange rate was R$3.324.50 per U.S.$1.00. There can be no assurance that thereal will not substantially depreciate or appreciate further against the U.S. dollar.

 

In the year ended December 31, 2017,2019, a variation of 1.0% in the exchange rate ofreais 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$21,264 million.

 

23 

Table of Contents

Depreciation of thereal relative to the U.S. dollar has created additional inflationary pressures in Brazil, which havehas led to increases in interest rates and limited Brazilian companies’ access to foreign financial markets, and prompted the adoption of recessionary policies by the Brazilian government. Depreciation of thereal 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 thereal could make our foreign currency-linkedforeign-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 thereal relative to the U.S. dollar and other foreign currencies could lead to a deterioration of the Brazilian foreign exchange currency accounts,balance of payments, as well as dampen export-driven growth. Depending on the circumstances, either depreciation or appreciation of thereal could materially and adversely affect the growth of the Brazilian economy and our business, financial condition and results of operations.

 

Infrastructure, and workforce deficiency and other factors 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 GDPgross domestic product, or “GDP” growth has fluctuated over the past few years, with contractionsa contraction of 3.5% and 3.5% in 2015 and 2016 and growth of 1.0% and 1.1% in 2017.2017 and 2018, respectively, and a growth of 1.0% in 2019. 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, resulting in these areas, which limit productivitypotential energy shortages and efficiency.deficient transportation, declining logistics and telecommunication sectors, and a lack of a qualified labor force. In addition, the growth and performance of the Brazilian economy may be impacted by other factors such as nationwide strikes, natural disasters or other disruptive events. 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

17

Table of Contents

Europe and in the United States may differ significantly from economic conditions in Brazil;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 2015, 20162019, 2018 and 2017, 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 and the increasing risk aversion to emerging market countries, and the uncertainties regarding Brazilian macroeconomic and political conditions.countries. These uncertainties adversely affected us and the market value of our securities.

 

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.

 

Disruption24 

Table of Contents

A global economic downturn could have a material adverse effect on us.

The global macroeconomic environment is facing challenges, including the economic slowdown in China and the Eurozone, the end of funding by the U.S. Federal Reserve, the uncertain impact of Brexit and potential adoption of U.S. tariffs on steel imported from Brazil and Argentina. There is considerable uncertainty over the long-term effects of the expansionary monetary and fiscal policies adopted by the central banks and financial authorities of some of the world’s leading economies, including the United States. There have been concerns over conflicts, unrest and terrorist threats in the Middle East, Europe and Africa, which have resulted in volatility in oil and other markets. The United States and China have recently been involved in controversy over trade barriers in China that threatened a trade war between the countries and have implemented or volatilityproposed to implement tariffs on certain imported products. Sustained tension between the United States and China over trade policies could significantly undermine the stability of the global economy. It is unclear whether these challenges and uncertainties will be contained or resolved, and what effects they may have on the global political and economic conditions in the long term.

Any slowdown or instability in the global economy could impact income, purchasing power and consumption levels in Brazil, among other things, which could limit growth, increase delinquency rates and ultimately have a material adverse effect on us while also creating a more volatile economy, limiting potential access to capital and liquidity. In addition, any global economic slowdown or uncertainty may result in volatile conditions in the global financial markets, which could further increase negative effectshave a material adverse effect on us, including on our ability to access capital and liquidity on financial terms acceptable to us, if at all. Any such adverse effect on capital markets funding availability or costs or in deposit rates could have a material adverse effect on our interest margins and liquidity.

Disruption or volatility in global financial and credit markets could adversely affect the financial and economic environment in Brazil, which could have a material adverse effect on us.

 

Volatility and uncertainty in global financial and credit markets have generally led to a decrease in liquidity and an increase in the cost of funding for Brazilian and international issuers and borrowers. Such conditions may adversely affect our ability to access capital and liquidity on financial terms acceptable to us, if at all.

Part of our funding originates from repurchase agreements which are generally short-term and volatile in terms of volume, as they are directly impacted by market liquidity. As these transactions are typically guaranteed by Brazilian government securities, the value and/or perception of value of the securities may significantly impact the availability of funds, as the cost of funding will increase if the quality of the Brazilian government securities used as collateral is adversely affected as a result of conditions in financial and credit markets, making this source of funding inefficient for us.

If the size and/or liquidity of the Brazilian government bond and/or repurchase agreement markets decrease, or if there is increased collateral credit risk and we are unable to access capital and liquidity on financial terms acceptable to us or at all, our financial condition and the results of our operations may be adversely affected.

The exit of the United Kingdom (the “UK”) from the European Union (the “EU”) and the definition of its future relationship with the EU could adversely impact global economic or market conditions, as well as our operations, financial condition and prospects.

On 31 January 2020 the UK ceased to be a member of the EU on withdrawal terms which establish a transition period until 31 December 2020 during which the UK will be treated as if it were still a member of the European Union. Although the withdrawal agreement foresees the possibility to extend the transition period for one or two more years after the 31 January 2020, this is not automatic and the UK has enshrined the 31 December 2020 date in domestic legislation passing the withdrawal agreement as the end of the transition period, signaling a current desire not to extend it. Uncertainly remains around the terms of the UK's relationship with the EU at the end of the transition period. If the transition period were to end without a comprehensive trade agreement, the UK’s and Europe’s

25 

Table of Contents

economic growth may be negatively impacted. The uncertainty regarding and terms of the UK’s future relationship with the EU, as well as any adverse effect which it may have on the UK, the EU and the wider global economy could adversely affect global economic or market conditions and investor confidence. This could, in turn, have a material adverse effect on our operations, financial condition and prospects and/or the market value of our securities.

Our operations and results may be negatively impacted by the coronavirus outbreak.

Global or national health concerns, including the outbreak of pandemic or contagious disease, such as the recent coronavirus, may adversely affect us.

Since December 2019, a novel strain of coronavirus has spread in China and other countries. Such events could cause disruption of regional or global economic activity, which could affect our operations and financial results. The extent to which the coronavirus impacts our results will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the coronavirus and the actions to contain the coronavirus or treat its impact, among others.

Risks Relating to the Brazilian Financial Services Industry and Our BusinessBusiness.

 

Climate change can create transition risks, physical risks and other risks that could adversely affect us.

Climate change may imply three primary drivers of financial risk that could adversely affect us:

• Transition risks associated with the move to a low-carbon economy, both at idiosyncratic and systemic levels, such as through policy, regulatory and technological changes.

• Physical risks related to extreme weather impacts and longer-term trends, which could result in financial losses that could impair asset values and the creditworthiness of our customers.

• Liability risks derived from parties who may suffer losses from the effects of climate change and may seek compensation from those they hold responsible such as state entities, regulators, investors and lenders.

These primary drivers could materialize, among others, in the following financial risks:

• Credit risks: Physical climate change could lead to increased credit exposure, and companies with business models not aligned with the transition to a low-carbon economy may face a higher risk of reduced corporate earnings and business disruption due to new regulations or market shifts.

• Market risks: Market changes in the most carbon-intensive sectors could affect energy and commodity prices, corporate bonds, equities and certain derivatives contracts. Increasing frequency of severe weather events could affect macroeconomic conditions, weakening fundamental factors such as economic growth, employment and inflation.

• Operational risks: Severe weather events could directly impact business continuity and operations both of customers and ours.

• Reputational risk could also arise from shifting sentiment among customers and increasing attention and scrutiny from other stakeholders (investors, regulators, etc.) on our response to climate change.

Any of the conditions described above could have a material adverse effect on our business, financial condition and results of operations.

26 

Table of Contents

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.competitive, with this competition increasing in recent years. 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.institutions including through portability of loans.

 

Non-traditional providers of banking services, such as Internet basedInternet-based e-commerce providers, mobile telephone companies and Internet search engines, as well as the increase in the availability of payment services using cryptocurrencies and/orfor blockchain technologies 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. For more information, see “Item 4. Information on the Company—B. Business Overview—Regulation and Supervision—Other Applicable Laws and Regulations—Regulation of New Financial Institutions That Operate in Online Lending.”

 

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.our competitive position and business. Furthermore, the widespread adoption of new technologies, including cryptocurrencies and payment systems, could require substantial expenditures to modify or adapt our existing products and services as we continue to grow our internet and mobile banking capabilities. Our customers may choose to conduct business or offer products in areas that may be considered speculative or risky. Such new technologies 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 Internettoward internet and mobile banking may requirenecessitate changes to our retail distribution strategy. Our failure to swiftly and effectively implement such changes to our distribution strategy could have an adverse effect on our competitive position, particularly if our traditional competitors adapt more quickly than we to these shifts in demand.position.

 

18

Table of Contents

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, limitingprofitability, as well as limit 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 substantialextensive regulation and regulatory and governmental oversight, which could adversely affect us.our business, operations and financial condition.

 

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 the 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;

 

27 

Table of Contents

·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 interest rates and 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 onlimit 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 that 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 thatthose, which may be deemed to be systemically important. In addition, the volume, granularity, frequency and scale of regulatory and other reporting requirements require 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.

 

19

Table of Contents

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. In Spain and in other countries in which Santander Spain’s subsidiaries operate (including Brazil), there is continuing political, competitive and regulatory scrutiny of the banking industry. Political involvement in the regulatory process, in the behavior and governance of the banking sector and in the major financial institutions in which the local governments have a direct financial interest, and in their products and services, and the prices and other terms they apply to them, is likely to continue. 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

28 

Table of Contents

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 othersother measures, implemented as a result of the unification of the European banking system under a European Banking Union. In the United States, many changes have occurred as a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) and its implementing regulations, most of which are now in place. More recently, the President ofIn May 2018, the United States issued an executive order in 2017 that sets forth principles forCongress passed, and President Donald Trump signed into law, the Economic Growth, Regulatory Relief, and Consumer Protection Act, or “EGRRCPA,” the first major piece of legislation rebalancing the financial regulatory and legislative reform, andlandscape since the Republican majority in Congress has also suggested an agenda forpassage of the Dodd-Frank Act. The U.S. financial legislative reform. Theregulatory agencies have begun to propose regulations implementing EGRRCPA, but the ultimate impact of these reforms on our operations is currently uncertain. SeeFor more information, 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 reformreforms in the European Banking Union, the United States or elsewhereother jurisdictions, 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.

 

We are subject to potential intervention by any of our regulators or supervisors.

 

Our business and operations are subject to increasingly significant rules and regulations set by the Brazilian Central Bank, the CVM, and the CMN, that are required to conduct banking and financial services business. These apply to business operations, affect financial returns, and include reserve and reporting requirements, and conduct of businessconduct-of-business regulations.

 

In their supervisory roles, the Brazilian Central Bank, the CVM, and the CMN seek to maintain the safety and soundness of financial institutions with the aim of strengthening the protection of customers and the financial system. Their continuing supervision of financial institutions is conducted through a variety of regulatory tools, including the collection of information by way of prudential returns, reports obtained from skilled persons, visits to firms and regular meetings with management to discuss issues such as performance, risk management and strategy. As a result, we face increased supervisory scrutiny (resulting in increasing internal compliance costs and supervision fees), and in the event of a breach of our regulatory obligations we are likely to face more stringent regulatory fines.

 

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 Bankprograms, with these changes continuing to be a potential area of risk as they 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, which as a result could 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.

 

20

Table of Contents

In recent years, 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

29 

Table of Contents

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. In 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. We have been categorized by the Brazilian Central Bank in segment 1, the highest level for application of regulation for banks in Brazil.

 

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”),or “AML,” anti-terrorism, anti-bribery and 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-exposedpolitically exposed person screening) and keep our customer, account and transaction information up to date. We have implemented 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-bribery, and corruptionanti-corruption and sanctions laws and regulations are increasingly complex and detailed. The Basel Committee is now introducing guidelines to strengthen the interaction and cooperation between prudential and AML/CFT supervisors. Compliance with these laws and regulations requires automated systems, sophisticated monitoring and skilled compliance personnel.

 

We have developedmaintain updated policies and procedures aimed at detecting and preventing the use of our banking network for money laundering and other financial crime related activities. However, emerging technologies, such as cryptocurrencies and blockchain, could limit our ability to track the movement of funds.funds and therefore, present a risk to our Company. Our ability to comply with the legal requirements depends on our ability to improve detection and reporting capabilities and reduce variation in control processes and oversight accountability. These require implementation and embedding within our business effective controls and monitoring, which in turn requires ongoing 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 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 of third parties to whom we outsource certain tasks and processes, 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

30 

Table of Contents

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.

 

21

Table of Contents

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-bribery, and corruptionanti-corruption or sanctions requirements. Our reputation could also suffer if we are unable to protect our customers’ data and bank products and services from being accessed or used for illegal or improper purposes.

 

The Brazilian Federal Public Prosecutor’s Office, or “MPF,” has charged one of our officers in connection with the alleged bribery of a Brazilian tax auditor to secure favorable decisions in tax cases resulting in a claimed R$83 million (approximately U.S.$25 million) benefit to us. On October 23, 2018, the officer was formally indicted and asked to present his defense. On November 5, 2018 the officer in question presented his defense. The proceedings is currently in course. We are not a party to these proceedings. We have voluntarily provided information to the Brazilian authorities and have relinquished the benefit of certain tax credits to which the allegations relate in order to show good faith.

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 a large degree to maintain and properlyappropriately 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 breachedbeing associated with, breaches of 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 subject to increasing scrutiny and regulation from data protection laws, including penalties in the event of noncompliance with the terms and conditions of certain new European and Brazilian regulations.

As data privacy risks for banking organizations and the broader financial system have significantly increased in recent years, data privacy issues have become the subject of increasing legislative and regulatory focus.

On May 25, 2018, the Regulation (EU) 2016/279 of the European Parliament and of the Council of April 27, 2016 on the protection of natural persons with regard to the processing of personal data and on the free movement of such data (the “General Data Protection Regulation” or “GDPR”) became directly applicable in all member states of the European Union. In addition to the GDPR, we will soon face new regulations from Brazilian authorities. The Brazilian General Data Protection Act (Law no. 13,709/2018), or “LGPD,” was approved in the Federal Official Gazette on August 14, 2018 and, as amended by the Law no. 13,853/2019, will take effect in August 2020. Law no. 13,853/2019 also set up the National Data Protection Authority for purposes of monitoring, implementing and supervising compliance with the LGPD in Brazil. The LGPD also brings about deep changes in the conditions for personal data processing, with a set of rules to be observed in activities such as collection, processing, storage, use, transfer, sharing and erasure of information concerning identified or identifiable natural persons in Brazil.

Although a number of basic existing principles have remained the same, the GDPR has introduced extensive new obligations on data controllers and rights for data subjects. The LGPD applies to

31 

Table of Contents

individuals, as well as private and public entities, regardless of the country where they are headquartered or where data is hosted, as long as (i) data processing takes place in Brazil; (ii) the data processing activity is intended to offer or supply goods or services or to process data of individuals located in Brazil; or (iii) the data subjects are located in Brazil at the time their personal data is collected. The application of the LGPD will apply irrespective of industry or business when dealing with personal data and is not restricted to data processing activities performed through digital media and/or on the Internet.

The GDPR has also introduced new fines and penalties for a breach of requirements, including fines for systematic breaches of up to the higher of 4% of annual worldwide turnover or €20 million, and fines of up to the higher of 2% of annual worldwide turnover or €10 million (whichever is highest) for other specific infringements. The LGPD similarly sets out several penalties, which include warnings, blocking and erasure of data, public disclosure of the offense, and fines of up to two percent (2%) of the economic group’s turnover in Brazil in the preceding year, capped at R$50 million per offense.

The implementation of the GDPR and of the LGPD has required substantial amendments to our procedures and policies. The changes have impacted, and could further adversely impact, our business by increasing our operational and compliance costs. Further, there is a risk that the measures may not be implemented correctly or that there may be partial non-compliance with the new procedures. If there are breaches of the GDPR and or the LGPD obligations, as the case may be, we could face significant administrative and monetary sanctions, as well as reputational damage, which could have a material adverse effect on our operations, financial condition and prospects. Furthermore, following any such breach, we may be ordered to change our business practices, policies or systems in a manner that adversely impacts our operating results.

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 certainregulatory investigations and civil and tax 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 investigation or discovery, and we cannot state with confidenceaccurately 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 ofto 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 particularhighly uncertain matter may bebecome material to our operating results. As of December 31, 2019, we had provisions for taxes, other legal contingencies and other provisions for R$11,366 million. See more information in note 23 to our audited consolidated financial statements included in this annual report.

Disclosure controls and procedures over financial reporting may not prevent or detect all errors or acts of fraud.

Disclosure controls and procedures, including internal controls over financial reporting, are designed to provide reasonable assurance that information required to be disclosed by the company in reports filed or submitted under the U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”) is accumulated and communicated to management, and recorded, processed, summarized and reported within the time periods specified in the U.S. Securities and Exchange Commission’s rules and

32 

Table of Contents

forms.

These disclosure controls and procedures have inherent limitations, which include the possibility that judgments in decision-making can be faulty and result in errors or mistakes. Additionally, controls can be circumvented by any unauthorized override of the controls. Consequently, our business is exposed to risk from potential noncompliance with policies, employee misconduct, or negligence and fraud, which could result in regulatory sanctions, civil claims, and serious reputational or financial harm. In recent years, a number of multinational financial institutions have suffered material losses due to the actions of “rogue traders” or other employees. It is not always possible to deter employee misconduct, and the precautions we take to prevent and detect this activity may not always be effective. Accordingly, because of the inherent limitations in the control system, misstatements due to error or fraud may occur and not be detected.

 

We are subject to review by taxingtax 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. The interpretations of Brazilian 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 tax rates 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.

 

22

Table of Contents

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 the rate 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.

33 

Table of Contents

 

Our loan and investment portfolios are subject to risk of prepayment, which could have a material adverse effect on us.

 

Our fixed ratefixed-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 livesterms 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.

 

The credit quality of our loan portfolio may deteriorate and our loan lossesloss 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 into a wide range of our businesses. Non-performing or low credit quality loans have in the pastcan negatively impacted our results of operations and could do so in the future. In particular,as 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 (the credit quality of which may turn out to be worse than we had 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 andas well as 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. BecauseAs many of these factors are beyond our control and there is no preciseinfallible 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 incurredexpected 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.

 

23

Table of Contents

Economic uncertainty may lead to a contraction in our loan portfolio.

 

The recent slow growth rate of the Brazilian economy experienced in 2019, 2018 and 2017 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 increasea decrease of the SELIC rate in 2015 and 2016since 2017 have adversely affected the rate of growth of our loan portfolio in recent years. Ongoing economic uncertainty could adversely affect the 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 of 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

34 

Table of Contents

factors, including over-reliance on a particular source of funding, changes in credit ratings or market-wide phenomena such as market dislocation. Continued constraintsConstraints in the supply of liquidity, including in inter-bankinterbank lending, has affected and maycan materially and adversely affect the cost of funding our business, and extreme liquidity constraints may affect our current operations, our growth potential and our ability to fulfill regulatory liquidity requirements, as well as limit growth possibilities.requirements.

 

Our cost of obtaining funds is directly related to prevailing interest rates and to our credit spreads. Increasesspreads, with increases in interest rates and our credit spreads can significantly increasethese factors increasing the cost of our funding. Changes in our credit spreadsCredit spread variations are market-driven and 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 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 commercialretail deposits as our main source of funding. As of December 31, 2017, 78%2019, 80.6% of our customer deposits had remaining maturities of one year or less, or were payable on demand, while 22%31.6% of our assets have maturities of one year or more, 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 outsidebeyond our control, such asincluding: general economic conditions, and the confidence of commercialretail depositors in the economy and in the financial services industry, and the availability and extent of deposit guarantees, as well as competition for deposits between banks or with other products, such as mutual funds, for deposits.products. Any of these factors could significantly increase the amount of commercialretail deposit withdrawals in a short period of time, thereby reducing our ability to access commercialretail 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.

 

Central banks have taken extraordinary measures to increase liquidity in the financial markets as a response to the financial crisis. 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. Finally, the implementation of internationally accepted liquidity ratios might require changes in business practices that affect our profitability. The liquidity coverage ratio, or “LCR,” is a liquidity standard that measures if banks have sufficient high-quality liquid assets to cover expected net cash outflows over a 30-day liquidity stress period. The observations in this disclosure (exercise with daily balances for October, November and December 2019) the institution had a LCR of 126.7%, above the 100% minimum requirement. The Net Stable Funding Ratio, or “NSFR,” provides a sustainable maturity structure of assets and liabilities such that banks maintain a stable funding profile in relation to their activities. The NSFR, which must remain at a minimum of 100% beginning from October 1, 2018 according to CMN rules, stands at over 112.3% for us as of December 31, 2019.

 

24

Table of Contents

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.both variables. Any downgrade in (i) the rating of Brazil’s, (ii) our controlling shareholder’s,shareholders, or (iii) our credit rating would likely increase our cost of funding, requiring us to post additional collateral under some of our derivative and other contracts and adversely affect our interest margins and results of operations.operations results.

 

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 iswere downgraded, our credit rating would also likely be downgraded similarly.to a similar degree.

 

35 

Table of Contents

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 certainsome 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. In addition, under the terms of certain of our derivative contracts and other financial commitments, we may be required to maintain a minimum credit rating or terminaterisk termination of such contracts or require the posting of collateral. Any of these results of a ratings downgrade could reduce our liquidity and have an adverse effect on us, including 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-relatedinterrelated factors and assumptions, including market conditions at the time of any downgrade, whether anythe downgrade of our long-term credit rating precipitatesindirectly 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 whichincluding: the credit rating agency downgrades our credit rating,issuing the downgrade, 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 testingstress-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.

 

On October 2, 2015, S&P upgraded Spain’s sovereign rating to BBB+ from BBB with a stable outlook. In February 2016, Moody’s revised Spain’s sovereign outlook to stable from positive with rating at Baa2. Santander Spain’s long-term debt is currently rated investment grade by the major rating agencies, such credit ratings currently being: A3agencies: A2 stable outlook by Moody’s, A with a stable outlook by Moody’sStandard & Poor’s Ratings Services, or “S&P,” and A- with a stable outlook by Fitch Ratings Ltd., or “Fitch”. In February 2017, S&P revised the outlook from stable to positive, reflecting the revised funding plans announced by Santander Spain, which give S&P comfort that Santander Spain will build a substantial additional loss-absorbing capacity buffer over the next two years. In June 2017, S&P revised the outlook from positive to stable as a result of the risks associated with the acquisition of Banco Popular Español, S.A. by Santander Spain. Following the upgrade of the Spanish sovereign rating, in April 2018 S&P and S&P.Moody’s upgraded their ratings of Santander Spain from A- to A and from A3 to A2, respectively, and in July 2018 Fitch confirmed its rating and outlook.

 

Santander Brasil’s long-term debt in foreign currency is currently rated BB- with a stable outlook by S&P and Ba3 with a stable outlook by Moody’s.

S&P lowered Brazil’s credit rating in September 2015 from BBB- to BB+ (a non-investment gradenon-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. In addition,January 2018, Brazil was further downgraded by S&P to BB- with a stable outlook in January 2018 as a result of the failure of the currentprior Brazilian government to approve certain pension reforms. 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. In February 2018, Fitch further downgraded Brazil to BB-. Moody’s lowered Brazil’s credit rating from Baa2 to Baa3 (the lowest investment grade rating) in August 2015, and then to Ba2 (a non-investment gradenon-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- (stable) by S&P and Fitch, Ratings and Ba2 (stable) by Moody’s. 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: on2016. On August 12, 2015, Moody’s lowered our credit rating from Baa2 to Baa3, lowering it again on February 25, 2016 to Ba3, and onin March and

36 

Table of Contents

May 2017 it affirmed the rating at Ba3. On September 10, 2015, S&P lowered our credit rating from BBB- to BB+ (a non-investment gradenon-investment-grade rating), lowering it again on February 17, 2016 to BB and maintaining the rating at BB in August 2017 while changing the

25

Table of Contents

outlook to negative. In January 2018, Santander Brasil was downgraded by S&P to BB- with a stable outlook from BB with a negative outlook. In February 2019, Santander Brasil was upgraded by S&P to BB- with a stable outlook from BB- with a negative outlook. We are currently rated as follows: BB-Ba1 by S&P and Ba3 by Moody’s, both with a stable outlook. 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’ creditworthiness, 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.

Our hedging strategy may not be able to prevent losses.

We use a range of strategies and instruments, including entering into derivative and other transactions, to hedge our exposure to market, credit and operational risks. Nevertheless, we may not be able to hedge all risks to which we are exposed, whether partially or in full. Furthermore, the hedging strategies and instruments on which we rely may not achieve their intended purpose. Any failure in our hedging strategy or in the hedging instruments on which we rely could result in losses to us and have a material adverse effect on our business, financial condition and results of operations.

Inadequate pricing methodologies for insurance, pension plan and premium bond products may adversely affect us.

We establish prices and make calculations in relation to our insurance and pension products based on actuarial or statistical estimates. The pricing of our insurance and pension plan products is based on models that include a number of assumptions and projections that may prove to be incorrect, since these assumptions and projections involve the exercise of judgment with respect to the levels and timing of receipt or payment of premiums, contributions, provisions, benefits, claims, expenses, interest, investment results, retirement, mortality, morbidity, and persistence. We could suffer losses due to events that are contrary to our expectations as a result of, among others, incorrect biometric and economic assumptions or the use of incorrect actuarial bases in the calculation of contributions and provisions.

Although the pricing of our insurance and pension plan products and the adequacy of the associated reserves are reassessed on a yearly basis, we cannot accurately determine whether our assets supporting our policy liabilities, together with future premiums and contributions, will be sufficient for the payment of benefits, claims and expenses. Accordingly, the occurrence of significant deviations from our pricing assumptions could have an adverse effect on the profitability of our insurance and pension products. In

37 

Table of Contents

addition, if we conclude that our reserves and future premiums are insufficient to cover future policy benefits and claims, we will be required to increase our reserves and record these effects in our financial statements, which may have a material adverse effect on us.

 

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 customers 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 asforce 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 may face significant challenges in possessing and realizing value from collateral with respect to loans in default.

If all resources applied to recover of secured loans in default through extrajudicial measures are not sufficient, we may enforce the collateral through the courts or extrajudicial measures. However, we may face delays on the realization of value from the collateral due to juridical measures foreseen by Brazilian law such as challenge in the courts, ranking of preferred creditors. As a result, our financial results may be potentially affect by the inability to realize the value of the collateral, in full or at all or, by delay in realizing such collateral

 

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 23.3%86.7% of our total assets as of December 31, 2017.2019. 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 thereal or in interest

26

Table of Contents

rates and thereal 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

38 

Table of Contents

financial condition. In addition, any decrease in the value of these securities and derivatives portfolios may result in a decrease in our capital ratios, which could impair our ability to engage in lending activity at the levels we currently anticipate.

 

The execution and performance of these transactions depend on our ability to maintain adequate control and administration systems. Our ability to adequately monitor, analyze and report derivative transactions continues to depend, largely, on our information technology systems. These factors further increase the risks associated with these transactions and could have a material adverse effect on us.

 

We may not effectively manage risks associated with the replacement of benchmark indices.

Interest rate, equity, foreign exchange rate and other types of indices, which are deemed to be “benchmarks” are the subject of increased regulatory scrutiny. For example, regarding the interest rate benchmarks, in 2017, the UK’s Financial Conduct Authority, or the “FCA,” announced that it will no longer persuade or compel banks to submit rates for the calculation of the London interbank offered rate, or “LIBOR,” benchmark after 2021. This announcement indicates that the continuation of LIBOR on the current basis cannot and will not be guaranteed after 2021. Therefore, after 2021 LIBOR may cease to be produced. The Bank of England and the FCA are working with market participants to catalyze a transition to using Sonia. In addition, the European Money Market Institute (“EMMI”) announced the discontinuation of the Euro OverNight Index Average, or “EONIA,” after January 3, 2022 and that from October 2, 2019 until its total discontinuation it will be replaced by the euro short-term rate, or “€STR,”) plus a spread of 8.5 basis points. These and other reforms may cause benchmarks to perform differently than in the past, or to disappear entirely, or have other consequences, which cannot be fully anticipated, which introduces a number of risks for us. These risks include (i) legal risks arising from potential changes required to documentation for new and existing transactions; (ii) risk management, financial and accounting risks arising from market risk models and from valuation, hedging, discontinuation and recognition of financial instruments linked to benchmark rates; (iii) business risk that the revenues of products linked to LIBOR (in particular those indices that will be replaced) decrease; (iv) pricing risks arising from how changes to benchmark indices could impact pricing mechanisms on some instruments; (v) operational risks arising from the potential requirement to adapt IT systems, trade reporting infrastructure and operational processes; and (vi) conduct risks arising from the potential impact of communication with customers and engagement during the transition period. The replacement benchmarks and their transition path have been defined, but the mechanisms for implementation are under development. Accordingly, it is not currently possible to determine whether, or to what extent, any such changes would affect us. However, the implementation of alternative benchmark rates may have a material adverse effect on our business, results of operations, financial condition and prospects.

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.systems, among others. 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 may 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

39 

Table of Contents

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 management to, actions by management, based on models that are poorly developed, implemented or used, or as a result of the modeled outcome, being misunderstoodmisunderstand or the use ofmisuse such information for purposes for which it was not designed. In addition, if existing or potential customers or counterparties believe our risk management is inadequate, they could take their business elsewhere or seek to limit their transactions with us. ThisAny of these factors 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 commercialretail 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.

 

Some of the models and other analytical and judgment-based estimations we use in managing risks are subject to review by, and require the approval of, our regulators. If models do not comply with all their expectations, our regulators may require us to make changes to such models, may approve them with additional capital requirements, or we may be precluded from using them. Any of these potential situations could limit our ability to expand our businesses or have a material impact on our financial results.

Failure to effectively implement, consistently monitor 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.

 

27

Table of Contents

Failure to adequately protect ourselves against risks relating to cyber-securitycybersecurity could materially and adversely affect us. We are also subject to increasing scrutiny and regulation governing cybersecurity risks.

 

We face various cyber-securitycybersecurity 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

If we fall victim to evolvesuccessful cyber-attacks or experience cybersecurity incidents in scope and sophistication,the future, we

40 

Table of Contents

may incur significantsubstantial costs inand suffer other negative consequences, such as remediation costs (liabilities for stolen assets or information, or repairs of system damage, among others), increased cybersecurity protection costs, lost revenues arising from the unauthorized use of proprietary information or the failure to retain or attract customers following an attack, as already mentioned, litigation and legal risks, increased insurance premiums, reputational damage affecting 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-attackscustomers’ and investors’ confidence, as well as damages to our customers.competitiveness, stock price and long-term shareholder value.

 

We are also subject to increasing scrutiny and regulation governing cybersecurity risks thatrisks. Such regulation is fragmented and constantly evolving. Although currently thereSee “Item 4B—Business Overview—Regulation and Supervision—Regulations on Cybersecurity”. We could be adversely affected if new legislation or regulations are no specific rules in effect regulating cybersecurity policies and requirements for data processing, storage and cloud computing services contracted by financial institutions and other entities. In late 2017 the Brazilian Central Bank submitted a draft of the regulation on cybersecurity for financial institutionsadopted or if existing legislation or regulations are modified such that we are required to public consultation, and a final rule is expectedalter our systems or require changes to be issued during 2018.our business practices or policies. A failure to implement all or some of these new global and local regulations, that in some cases have severe sanctions regimes, could also have a material adverse effect on us. If we fail to effectively manage our cyber securitycybersecurity risk, for example, 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. Furthermore, upon a failure to comply with applicable law and regulation, we may be ordered to change our business practices, policies or systems in a manner that adversely impacts our operating results.

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—TechnologyOverview.”

It is important to highlight that even when a failure of or interruption in our systems or facilities is resolved timely or an attempted cyber incident or other security breach is successfully avoided or thwarted, normally substantial resources are expended in doing so, and Commercial Transformation.we may be required to take actions that could adversely affect customer satisfaction or behavior, as well as represent a threat to our reputation.

For additional information, see also “—We are subject to increasing scrutiny and regulation from data protection laws, including penalties in the event of noncompliance with the terms and conditions of certain new European and Brazilian regulations” and “—Failure to protect personal information could adversely affect us.”

 

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 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 customers. 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, 1.2%0.9% of our loan portfolio is allocated to our largest debtor and 7.6%6.9% to our next 10 largest debtors.

41 

Table of Contents

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.

 

28We face risks related to market concentration.

Table

Concentration risk is an essential factor in the management of Contentscredit risk and is therefore monitored continuously. Aspects such as the economic sector, concentration of risk in certain groups of customers and products, are assessed monthly as part of the Risk Appetite exercise. This risk arises from the imperfect diversification of credit portfolios, which may derive from “name concentration” (incomplete diversification of the borrower's idiosyncratic risk) and “concentration sector ”(existence of multiple systematic risk factors, generally related to sectors of the economy, but also has other sources as origin, such as geographic location or factors macroeconomic conditions).

We acknowledge that any excessive concentration of risk could have a material adverse effect on us if the relevant risk materializes and generates a substantial financial loss.

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 into 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’sarm’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 lengtharm’s-length basis. Future conflicts of interests may arise 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 accounting standard setters 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 financial statements are based in part on assumptions and estimates which, if inaccurate, could cause material misstatement of the results of our operations and financial position.

 

The preparation of financial statements requires management to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, income and expenses. Due to the inherent uncertainty in making estimates, actual results reported in future periods may be based upon amounts which differ from those estimates. Estimates, judgments and assumptions are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Revisions to accounting estimates

42 

Table of Contents

are recognized in the period in which the estimate is revised and in any future periods affected. The accounting policies deemed critical to our results and financial position, based upon materiality and significant judgments and estimates, include impairment of loans and advances, goodwill impairment, valuation of financial instruments, impairment of available-for-sale financial assets, deferred tax assets provision, and pension obligation for liabilities.

 

If the judgment, estimates and assumptions we use in preparing our consolidated financial statements are subsequently found to be incorrect, there could be a material effect on our results of operations and a corresponding effect on our funding requirements and capital ratios.

 

Our business is highly dependent on the proper functioning of information technology systems.

 

Our business is highly dependent on the ability of our information technology systems to accurately process a large number of transactions across numerous and diverse markets and products in a timely manner, and on our ability to rely on our digital technologies, computer and email services, software, and networks, as well as on the secure processing, storage and transmission of confidential data and other information in our computer systems and networks. The proper functioning of our financial control, risk management, accounting, customer service and other data processing systems is critical to our business and our ability to compete effectively.

 

29

Table of Contents

We do not operate all of our redundant systems on a real-time basis and cannot assure you that our business activities would not be materially disrupted if there were a partial or complete failure of any of these primary information technology systems or communication networks. Such failures could be caused by, among other things, major natural catastrophes, software bugs, computer virus attacks or conversion errors due to system upgrading. Such failures could be caused by, among other things, major natural catastrophes, software bugs, computer virus attacks, conversion errors due to system upgrading, security breaches caused by unauthorized access to information or systems, or intentional malfunctions or loss or corruption of data, software, hardware or other computer equipment. Any such failures could disrupt our business and impair our ability to provide our services and products effectively to our customers, which could adversely affect our reputation as well as 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 effectivecost-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 managereceive, maintain and holdstore confidential personal information of our customers and counterparties, including, sensitivebut not limited to, personally identifiable information and personal data,financial information in the ordinary course of our banking operations. The sharing, use, disclosure and protection of this information are governed by various Brazilian and foreign laws.

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. We also face the risk that the design of our controls and procedures prove to be inadequate or are circumvented such that the data we hold is incomplete, not recoverable or not securely stored. 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

43 

Table of Contents

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 customers with delays or errors, which could reduce demand for our services and products and could materially and adversely affect us. In addition, if we cannot maintain an effective and secure electronic data and information management system or we fail to maintain complete physical and electronic records, this could result in regulatory sanctions and serious reputational and financial harm to us.

 

For additional information, see also “—We are subject to increasing scrutiny and regulation from data protection laws, including penalties in the event of noncompliance with the terms and conditions of certain new European and Brazilian regulations” and “—Failure to adequately protect ourselves against risks relating to cybersecurity could materially and adversely affect us. We are also subject to increasing scrutiny and regulation governing cybersecurity risks.”

Damage to our reputation could cause harm to us.

 

Maintaining a positive reputation is critical to protect our attractingbrand, attract and maintainingretain customers, investors and employees.employees and conduct business transactions with counterparties. 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,enforcement, failure to deliver minimum standards of service and quality, dealings with sectors that are not well perceived by the public, ratings downgrades, significant fluctuations in our share price, dealing with customers in sanctions lists, rating downgrades, significant variations in the price of our ADRs throughout the year, compliance failures, unethical behavior, failures of our information technology systems and the activities of customers and counterparties.counterparties, including activities that negatively affect the environment. Further, negative publicity regarding us whether or not true, may result in harm to us.our prospects.

 

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 customersclients 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.

 

30

TableWe may be the subject of Contentsmisinformation and misrepresentations deliberately propagated to harm our reputation or for other deceitful purposes, or by profiteering short sellers seeking to gain an illegal market advantage by spreading false information about us. There can be no assurance that we will effectively neutralize and contain false information that may be propagated regarding us, which could have an adverse effect on our operating results, financial condition and prospects.

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 believecan offer additional value to our shareholders and are consistent with our business strategy. However, we may not be able to identify suitable acquisition or partnership candidates, and our ability to benefit from any such acquisitions and partnerships will depend in part on our successful integration of those businesses. Any such integration entails significant risks such as unforeseen difficulties in integrating operations and systems and unexpected liabilities or contingencies relating to the acquired businesses, including legal claims. We cannot provide assurance that we will, in all cases, be able to manage our growth effectively or deliver our strategic growth objectives. Challenges that may result from our strategic growth decisions include our ability to:

44 

Table of Contents

 

·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.

 

Goodwill impairments may be required in relation to acquired businesses.

We have made business acquisitions in the past and may make further acquisitions in the future. It is possible that the goodwill which has been attributed, or may be attributed, to these businesses may have to be written down if our valuation assumptions are required to be reassessed as a result of any deterioration in their underlying profitability, asset quality and other relevant matters. Impairment testing in respect of goodwill is performed annually, or more frequently if there are impairment indicators present, and comprises a comparison of the carrying amount of the cash-generating unit with its recoverable amount. Goodwill impairment does not, however, affect our regulatory capital. There can be no assurances that we will not have to write down the value attributed to goodwill in the future, which would adversely affect our results and net assets.

We rely on recruiting, retaining and developing appropriate senior management and skilled personnel.

Our continued success depends in part on the continued service of key members of our senior executive team and other key employees. The ability to continue to attract, train, motivate and retain highly qualified and talented professionals is a key element of our strategy. The successful implementation of our strategy and culture depends on the availability of skilled and appropriate management, both at our head office and in each of our business units. If we or one of our business units or other functions fails to staff its operations appropriately, or loses one or more of its key senior executives or other key employees and fails to replace them in a satisfactory and timely manner, our business, financial condition and results of operations, including control and operational risks, may be adversely affected.

In addition, the financial industry has and may continue to experience more stringent regulation of employee compensation, which could have an adverse effect on our ability to hire or retain the most qualified employees. If we fail or are unable to attract and appropriately train, motivate and retain qualified professionals, our business may also be adversely affected.

45 

Table of Contents

We rely on third parties and affiliates for important products and services.

Third-party vendors and certain affiliated companies provide key components of our business infrastructure such as loan and deposit servicing systems, back office and business process support, information technology production and support, internet connections, and network access. Relying on these third parties and affiliated companies can be a source of operational and regulatory risk to us, including with respect to security breaches affecting such parties. We are also subject to risk with respect to security breaches affecting the vendors and other parties that interact with these service providers. As our interconnectivity with these third parties and affiliated companies increases, we face the risk of operational failure with respect to their systems. We may be required to take steps to protect the integrity of our operational systems, thereby increasing our operational costs. In addition, certain problems caused by these third parties or affiliated companies could affect our ability to deliver products and services to customers. Replacing these third-party vendors could also entail delays and expense. Further, the operational and regulatory risk we face as a result of these arrangements may be increased to the extent that we restructure such arrangements. Restructurings could involve significant expense to us and entail significant delivery and execution risk, which could have a material adverse effect on our business, operations and financial condition.

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 89.5% 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,bylaws, transactions with related parties, corporate reorganizations, acquisitions and dispositions of assets, and dividends.

 

31

Table of Contents

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 the 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 ourlimitations. Our corporate governance practices, including our policies for related party transactions and for disclosure of material acts and facts. See “Item 16G. Corporate Governance.”

On July 27,model was further amended in 2015 as a result of theto reflect certain new requirements ofimposed on our parent company, Santander Spain, by 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.jurisdictions. See “Item 16G. Corporate Governance.”

 

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

46 

Table of Contents

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”)or “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,requirements; therefore, we currently use these exemptions and intend to continue using them. Accordingly, you will not have the same protections affordedprovided 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 cancelationcancellation 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 B3 is significantly less liquid than the NYSE or other major exchanges in the world. As of December 31, 2017,2019, the aggregate market capitalization of the B3 was equivalent to approximately R$3.2 4.8 trillion (U.S.$955.6 billion)1.2 trillion), and the top ten stocks in terms of trading volume accounted for approximately 44%36% of all shares traded on B3 in the year ended December 31, 2017.2019. In contrast, as of December 31, 2017,2019, the aggregate market capitalization of the NYSE was approximately U.S.$19.6 24.1 trillion. Although any of the outstanding shares of a listed company may trade on the B3, in most cases fewer than half of the listed shares are actually available for trading by the public, the

32

Table of Contents

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.

 

If securities analysts do not publish research or reports about our business or if they downgrade our ADRs or shares orsecurities issued by other companies in our sector, the price and trading volume 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

47 

Table of Contents

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 usstops providing reports 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 totalityall 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 B3 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, (“adjustedor “adjusted net income”),income,” which may differ significantly from our net income as determined under IFRS. This adjusted net income may be used to increase capital usedor 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$6.210.8 billion, R$5.36.6 billion and R$6.3 billion (R$1.65,2.90, R$1.401.77 and R$1.68 per unit, respectively) as dividends and interest on stockholders’ equity (considering gross value) in 2015, 20162019, 2018 and 2017, respectively, in accordance with our dividend policy, but there can be no assurance that dividends and interest on stockholders’ equity will be paid in the 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

33

Table of Contents

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 depositorydepositary to do so. To

48 

Table of Contents

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 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-residentnonresident to either a Brazilian resident or a non-residentnonresident 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-residentnonresident of Brazil to another non-residentnonresident 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-residentnonresident of Brazil to another non-residentnonresident 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. See “Item 10. Additional Information—E. Taxation—Material U.S. Federal Income Tax Considerations for U.S. Holders.”

 

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 Securities Exchange Act, of 1934, as amended (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 the assets of our directors and officers 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

49 

Table of Contents

of process in the United States or to the jurisdiction of any United StatesU.S. court. As a result, it may be difficult for investors to effect service of process within the United States on such persons.

 

34

Table of Contents

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 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 thanreais. Under Brazilian exchange control limitations and according to Brazilian laws, an obligation in Brazil to pay amounts denominated in a currency other thanreais 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 prevailingthen-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 the shares for which those rights are exercisable 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.

 

50 

Table of Contents

ITEM 4. INFORMATION ON THE COMPANY

 

4A. History and Development of the Company

4A.History and Development of the Company

 

General

 

We are a publicly held corporation (sociedade(sociedade anônima)nima) of indefinite term, incorporated under Brazilian law on August 9, 1985. 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 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. Documentation55-11-3553-3300 and the website is https://www.santander.com.br/ri. In addition, the SEC maintains a website at www.sec.gov that contains information filed by us electronically. The information contained on our website, any website mentioned in this annual report or any website directly or indirectly linked to these websites, is not part of, our incorporationand 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.not incorporated by reference in, this annual report and you should not rely on such information.

 

Our agent for service is Mercedes Pacheco, Managing Director – Senior Legal Counsel, Banco Santander, S.A., New York Branch, 45 E. 53rd Street New York, New York 10022.

 

History

We are currently the third-largest privately owned bank in Brazil and the only international bank with scale in the country. With high value added offers, we operate in both retail and wholesale segments, which allows us to meet the needs of individuals, small and medium enterprises, and large corporate customers.

We are part of Santander Group, a Spanish bank founded in 1857 that has expanded globally through numerous acquisitions. We believe that this give us an advantage over our competitors. Although, under the Santander Group’s business model each major unit is autonomous and required to be self-sufficient in terms of capital and liquidity, our relationship allows us to:

·access the Santander Group’s global operations, providing operational synergies with the Santander Group and enhancing our ability to provide global products and services to our customers while reducing technology development costs;

·provide our customers with the benefits of a strong presence in certain markets, predominantly in Latin America and Western Europe;

·take advantage of best practices, with regards to products, services, internal controls and risk management, already implemented in other countries; and

·develop our employees’ skills through local and international training and development, as well as by allow them to gain international experience in other offices of the Santander Group.

Our history in the Brazilian banking industry goes back to the 1970’s as summarized in the following figure:

3551 

Table of Contents

 

 

History

The following figure summarizes the key milestones of our history in Brazil.

The Santander Group was founded in Spain in 1857 and has expanded globally through a number of acquisitions and the integration of acquired businesses.Brasil Timeline

 

In 1957, the Santander Group first entered the Brazilian market for the first time 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. In 1970, the Santander Group opened a representative office in Brazil, followed by its first branch in 1982. We have continuedThe foundation of Santander Brasil was in 1985 through an acquisition of a local bank.

In the 1990s, the Santander Group has sought to pursue this strategy throughestablish its presence in Latin America, particularly in Brazil, by capitalizing on organic growth, as well as acquisitions, among whichpursuing an acquisition strategy, including the following most notable are the following:acquisitions:

 

·In November 2000, the Santander Group acquired Banespa, a bank owned by the State of São Paulo, andwhich became one of Brazil’s largest financial groups.

 

·On July 24, 2008, Santander Spain took an indirect share control of Banco Real, which it then absorbed into the Santander Group in order to further consolidate its investments in Brazil. On August 29, 2008, the acquisition by Santander Brasil of Banco Real’s share capital by Santander Brasil was approved through a share exchange transaction, (incorporação de ações), and Banco Real became a wholly-owned subsidiary of Santander Brasil, before beingBrasil. Subsequently, it was merged into Santander Brasil on April 30, 2009.

 

Since October 7, 2009, our Units,units, and common and preferred shares have been listed and traded on B3 under the B3tickers “SANB11”, “SANB3” and “SANB4”, respectively, while our ADRs representing American Depositary Shares (“ADSs”(or “ADSs”) have been registered with the SEC under the Securities Act have beenand are listed and traded on the NYSE.NYSE under the ticker “BSBR”. For further information, see “Item 9. The Offer and Listing—A. Offering and Listing Details.”

 

In recent years, we have acquired companies complementary to our business, such as: (i) Getnet Adquirência e Serviços para Meios de Pagamento S.A. (“GetNet”), a technology company specialized in electronic payment solutions; (ii) we formed a joint-venture in the payroll loan and payroll credit card loan segments known as Banco Olé Bonsucesso Consignado; (iii) we entered into a partnership with Banque PSA Finance (associated with the Peugeot, Citroën and DS automotive brands) as well as a joint venture with Hyundai Capital Services, Inc.; (iv) we launched “ContaSuper,” a pre-paid card system which allows users to manage their daily financial activities entirely online; and (v) we also entered into an agreement with American Airlines Inc. for the marketing and issuance of co-branded credit cards, with the purpose of offering AAdvantage® miles to their respective customers as a result of their daily purchases.

36

Table of Contents

In 2017, we acquired a 70% equity interest in Ipanema Empreendimentos e Participações S.A. (“Ipanema Credit Management”), a company that actively manages overdue loan portfolios and which we believe will further expand our expertise in credit recovery. During the course of 2017, we also announced a joint venture with HDI Seguros S.A. (“HDI Seguros”) in the field of car insurance. We have also continued to expand our customer offering during 2017. For example, we launched Superdigital, an evolution of ContaSuper, which enables customers to manage their finances in a different and dynamic way through a prepaid account.

Important Events

 

SaleWe have set forth below important recent events in the development of Santander Securities Services Brasil DTVM S.A.our business. For further information, please refer to Note 3 Basis of consolidation of IFRS Financial Statements to our consolidated financial statements included in “Item 18. Financial Statements” of this annual report.

 

On June 19, 2014, we executed preliminary documents containing the main terms and conditions relating to the sale

Sale of our qualified custody business operations, and of all of the shares issued by Santander Securities Services Brasil DTVM S.A. (“SSS DTVM”), one of our subsidiaries that was engaged in the rendering of third-party fund administration services. 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”), and Banco Bonsucesso S.A. (“Banco Bonsucesso”) agreed to form a joint venture in the payroll credit card loan and payroll loan segments, currently known as Banco Olé Bonsucesso Consignado S.A., or “Banco Olé Bonsucesso Consignado.”

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 also continue to originate payroll loan transactions through our own independent channels.

Investmentequity stake in Super Pagamentos e Administração de Meios Eletrônicos S.A.

 

On December 12, 2014,February 28, 2020, we through Aymoré CFI, acquired shares issuedsold to Superdigital Holding Company, S.L., a company indirectly controlled by Santander Spain, our entire equity interest in Super Pagamentos e Administração de Meios Eletrônicos S.A. (“Super”Superdigital”) representing 50%. We received consideration of Super’s total and voting capital. Super isR$270 million for our interest in Superdigital. As a Brazilian digital service provider that offers online payment accounts, prepaid cards and access to simplified financial services.result, we are no longer a shareholder of Superdigital.

Put option of the remaining equity interest in Banco Olé Consignado S.A. against Aymoré Crédito, Financiamento e Investimento S.A.

 

On January 4, 2016,March 14, 2019, the minority shareholder of Banco Olé formalized its interest in exercising the put option right provided in the Investment Agreement executed with Aymoré CFI, informed the sellerson July 30, 2014, to sell its 40% equity interest in Banco Olé to Aymoré CFI, a controlled entity 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.

Buyback Program

On November 1, 2017, our board of directors approved, in continuation of the buyback program that expired on November 3, 2017, 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 38,717,204 units or ADRs, representing 38,717,204 common shares and 38,717,204 preferred shares, corresponding to approximately 1.03% of our share capital. The term of the buyback program is up to 12 months starting from November 6, 2017.Santander Brasil.

 

3752 

Table of Contents

Financial CooperationOn January31, 2020, Santander Brasil and Joint Venture with Banque PSA Finance

On July 24, 2015, and in furtherancethe shareholders of Bosan Participações S.A. (holding company whose single asset are the shares representing 40% of the partnership in Europe between Banque PSA Finance (“Banque PSA”corporate capital of Banco Olé) have entered into the definitive agreements and performed the closing acts related to the purchase and sale of all shares issued by Bosan, upon transferring Bosan’s shares to Santander Consumer Finance forBrasil and the joint operationpayment to the sellers of the vehicle financing business related to PSA Peugeot Citroën (“PSA”) brands (which include Peugeot, Citroën and DS), we entered into binding agreements fortotal price of R$1,608,772,783,47. As 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 byresult, Santander Brasil became, directly and indirectly, the holder of 100% of PSA Finance Arrendamento Mercantil S.A. and 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.all shares issued by Banco Olé.

 

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, Gestora de Inteligência de Crédito S.A. (“CIB”), or “CIB”. The CIB will bewas 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 beis to develop a database that, in conformity with applicable laws, will collect, reconcile and handle the credit information of registered individuals and legal entities that register with the CIB andwho 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.

On April 14, 2017, the definitive documents were signed by the shareholders. The necessary regulatory authorizations, including by the Brazilian Central Bank and the Brazilian Anti-Trust Authority (Conselho Administrativo de Defesa Econômica), or “CADE,”CADE, have already been granted. We estimate that theThe CIB will becomebecame fully operational in 2019.

 

Joint Venture with Hyundai Capital Services, Inc.

 

On April 28, 2016, our wholly-owned subsidiary Aymoré CFI entered into a joint venture with Hyundai Capital Services, Inc. (“Hyundai, or “Hyundai Capital”), for the incorporationpurposes of incorporating (i) Banco Hyundai Capital Brasil S.A. and (ii) an insurance brokerage company, in ordercompany. These entities were incorporated to provide, respectively, auto finance and insurance brokerage services and products to consumers andthrough the Hyundai dealerships in Brazil.

 

Aymoré CFI will ownholds a 50% equity stake in the joint venture entitiesBanco Hyundai Capital Brasil S.A., while Hyundai Capital will have anholds the remaining 50% equity stake of 50% in the joint venture entities.interest.

 

The incorporation ofOn February 21, 2019, the Brazilian Central Bank granted Banco Hyundai Capital Brasil S.A. and of the insurance brokerage company is 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. The Presidential Decree required under Brazilian law has been obtained. We are currently working onBanco Hyundai Capital Brasil S.A. began operating in the developmentfirst half of the administrative, operational and organizational structures for the joint venture in compliance with applicable legislation.

38

Table of Contents

Partnership with American Airlines Inc.2019.

 

On December 9, 2016, Santander Brasil and American Airlines Inc. entered into a 10-year commercial participation agreement for the marketing and issuance of co-branded credit cards, with the purpose of offering AAdvantage® miles to their respective customers as a result of their daily purchases.

Opening of the branch in Luxembourg

On June 9, 2017, we received authorization fromApril 30, 2019, the Brazilian Central Bank to establish a branchauthorized the formation of the insurance brokerage company. The insurance brokerage company was incorporated on July 2, 2019 and began operating in Luxembourg, with a capital in an amount equivalent to U.S.$1 billion. The purpose of this branch is to offer international financial services to corporate clients with overseas operations. The branch was authorized by the Minister of Finance of Luxembourg on March 5, 2018.November 2019.

 

Acquisition of equity stake ofin Ipanema Empreendimentos e Participações S.A., currently named Return Capital Serviços de Recuperação de Créditos S.A. (“Return Credit Management”), and Gestora de Investimentos Ipanema S.A., currently named Return Gestão de Recursos S.A. (“Return Asset” and, together with Return Credit Management, the “Return Entities”)

 

On October 16, 2017, Santander Brasil, through its wholly-owned subsidiary2019, Atual Companhia Securitizadora de Créditos Financeiros, acquiredor “Atual,” informed the remaining shareholders of the Return Entities´ of its decision to exercise its call option for shares representing the remaining 30% of the Return Entities’ total voting capital owned for a direct equity interest in Ipanema Empreendimentos e Participações S.A. (“Ipanema Credit Management”)value of approximately R$17 million. The transaction was completed on November 1, 2019. As a result of this transaction, Atual currently owns 100% of the Return Entities’ issued and an indirect equity interest in Gestora de Investimentos Ipanema S.A. (“Ipanema Asset” jointly with Ipanema Credit Management, the “Ipanema Entities”), corresponding to 70% of Ipanema Entities’outstanding share capital.

The IpanemaReturn Entities are active in the credit recovery intelligence sector, providing services such as credit portfolio evaluation and pricing, collection, management and recovery of non-performing loans. Ipanema Credit Management focuses on portfolio pricing, collection and credit recovery management while Ipanema Asset, as an authorized asset manager duly licensed by the CVM, is responsible for the management of credit funds in which the portfolios of the Ipanema Entities’ customers are concentrated.

We intend to increase our recovery indicators with regards to non-performing loans by using the know-how of the Ipanema Entities. We also intend for the Ipanema Entities to continue to provide non-performing loan recovery and credit management services to third parties.

 

Joint Venture with HDI Seguros S.A.

 

On December 20, 2017, we entered into binding agreements with HDI Seguros S.A. (“HDI Seguros”) for the formation

53 

Table of Contents

of a partnership through the creation of a new insurance company called Santander Auto S.A. (“Santander, or “Santander Auto”). Sancap Investimentos e Participações S.A., a company controlled by Santander Brasil, will hold 50% of the issued share capital of Santander Auto with the remaining 50% being held by HDI Seguros. Santander Auto will focus on offering motor insurance policies through a 100%fully digital platform. The closingtransaction closed on October 9, 2018 when the documentation to form Santander Auto S.A. was executed. On January 11, 2019, Santander Auto was granted regulatory authorization to begin operations by SUSEP.

Creation of PI Distribuidora de Títulos e Valores Mobiliários S.A.

On May 3, 2018, our indirectly controlled subsidiary Santander Finance Arrendamento Mercantil S.A. was converted into a securities brokerage company and had its corporate name changed to SI Distribuidora de Títulos e Valores Mobiliários S.A. The conversion was approved by the Brazilian Central Bank on November 21, 2018.

On December 17, 2018, SI Distribuidora de Títulos e Valores Mobiliários S.A. changed its name to PI DTVM. The corporate name change was approved by the Brazilian Central Bank on January 22, 2019.

PI DTVM is a securities brokerage company, with an open digital platform, which will broaden the portfolio of financial products we are able to offer to our clients.

Formation of BEN Beneficios

On June 11, 2018, we incorporated BEN Beneficios, an entity fully held by Santander Brasil, whose purpose is to create, supply and administer various types of vouchers and tickets used to provide employee benefits (such as for meals, transportation and cultural events) in the form of printed electronic and magnetic cards. BEN Beneficios began operating in the second quarter of 2019.

Acquisition of residual equity stake in Getnet

On December 19, 2018, the minority shareholders of Getnet exercised their right to sell all of their shares to Santander Brasil, or the “Put Option”, pursuant to the Shares’ Purchase and Sale Agreement and Other Covenants executed between the parties on April 4, 2014, or “SPA”. On the exercise date of the transaction is subjectPut Option, we entered into a binding amendment to the fulfillmentSPA, to acquire all of certain customary contractual conditions, including obtaining the applicable regulatory approvals.Getnet shares owned by minority shareholders, corresponding to 11.5% of the entity’s equity interest, in the amount of R$1.431 billion. The CADEacquisition transaction was approved by the Brazilian Central Bank on February 18, 2019 and the transaction closed on March 2, 2018.February 25, 2019. As a result Santander Brasil currently owns 100% of Getnet’s issued and outstanding share capital.

 

Sale of BW Guirapá I S.A.equity stake in CIBRASEC – Companhia Brasileira de Securitização

 

On December 22, 2017, our wholly-owned subsidiary Santander Corretora de Seguros, Investimentos e Serviços S.A. (“Santander Investimentos”), Cia. de Ferro Ligas da Bahia – FERBASA S.A. (“FERBASA”) and Brazil Wind S.A. (“Brazil Wind”) entered into an agreement forJuly 24, 2019, we completed the sale of 100% of the shares issued by BW Guirapá Ito ISEC Securitizadora S.A. (“BW I”ISEC”) of our entire equity interest in CIBRASEC – Companhia Brasileira de Securitização (“Cibrasec”), corresponding to 4,000 common shares and owned50 Class A preferred shares, representing in the aggregate approximately 9.72% of Cibrasec’s total capital stock. The transaction was effected pursuant to the Shares Purchase and Other Covenants Agreement executed on the same date by Santander InvestimentosBrasil, the other shareholders of Cibrasec, ISEC and Brazil Wind to FERBASA. The transaction also encompasses the seven wind farms organizedCibrasec, as special purpose companies held by BW I. The base purchase priceintervening party. We received consideration of R$ 9.8 million for the total shares owned by Santander Investimentos will be up to R$414 million, provided that an additional paymentour interest in Cibrasec. As a result, we are no longer a shareholder of up to R$35 million may be due if certain future operational milestones set forth in the agreement are achieved. The CADE approved the transaction on January 17, 2018, and the transaction was completed on April 2, 2018.Cibrasec.

 

Acquisition of Technology CompaniesProjections Disclosure

 

On February 19, 2018October 8, 2019, we informed the market that we have decided to disclose projections (guidance) with respect to certain of our indicators for the year of 2022. While we believe that the projections, which we intend to disclose, are based on reasonable assumptions made by our management, such projections are nevertheless subject to significant uncertainties and February 28, 2018, Santander Brasil concludedmatters outside of our control, including: the acquisitionfuture average growth of the totality of shares of, respectively, Isban Brasil S.A. and Produban Serviços de Informática S.A.our loan portfolio, return on equity (ROE), or the Technology Companies, for a price of approximately R$61 million and R$43 million, respectively. The Technology Companies were indirectly controlled by Santander Spain.cost

 

3954 

Table of Contents

The Technology Companies areto income (end of term), the main providersfuture average growth in the number of technical supportour active customers and maintenance services related to software and hardware of Santander Brasil. The transaction will permit Santander Brasil to directly control local technology services and therefore increase the proximity thereof to its business, adopt time-to-market solutions, flexibility, and improve quality and efficiency.ourProspera (microcredit) customers.

 

Buyback Program

On November 1, 2019, our board of directors approved, in continuation of the buyback program set to expire on November 5, 2019, a 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 37,256,072 units or ADRs, representing a combination of 37,256,072 common and 37,256,072 preferred shares, corresponding to approximately 1% of our share capital. The term of the buyback program is up to 12 months beginning November 5, 2019, and expiring on November 4, 2020.

Issuance of Notes

On November 5, 2018, our board of directors approved the issuance, through our Cayman Islands branch, of debt instruments to form part of our Tier 1 and Tier 2 regulatory capital in the aggregate amount of U.S.$2.5 billion, pursuant to an offering made to non-U.S. Persons under Regulation S of the U.S. Securities Act of 1993, as amended, or the “Notes Offer”.

Our board of directors also approved the redemption of instruments issued to form part of our Tier 1 and Tier 2 regulatory capital, in accordance with the board resolution of January 14, 2014. The redemption were carried out with funds raised through the Notes Offer.

On December 18, 2018, the Brazilian Central Bank authorized the transactions contemplated in the Notes Offer and the redemption, which were completed on January 29, 2019.

Capital Expenditures and Divestitures

 

Our main capital expenditures include investments in our Information Technology (“IT”) platform. Our IT platform focuses on our customers and supports our business model. In 2017, 20162019, 2018 and 2015,2017, total investments in IT were R$1,1321,858 million, R$8951,276 million and R$8581,132 million, respectively.

 

In 2017, 2016 and 2015,2019, we continually improved our technology platform by means of investmentsrealized meaningful transformations in our core systemsoperations and technologic infrastructure, renewal. Inthrough the past 18 months, we have implemented over 80implementation of various and modern solutions in the areas of Artificial Intelligence (Machine Learning, AIOPs), Micro Services, BPM, Block Chain, Cybernetic Insurance, Facial Recognition, MultiCloud, among others. The application of these new technologies and processes in several areas, including new cybersecurity techniques, new platforms for customer relationship management, big data transformation, increased automationallowed the renovation of our development and release cycles, artificial intelligence platformsdigital channels for continually improve the experience of interaction between clients and the usebank, searching for offer services more and more practical and intuitive, besides makes possible the launch of cloud-based solutions.products all digital and innovative in the areas of Credit, Consortium, Payments, Agribusiness, Investments, in a way to serve the demands and expectations of the modern client.

 

We have recently startedIn the physical service’s scope (Branch, PABs and PAEs), applying new functionalities, including: biometry for clients PJ in transactions with card, purchase and payment of exchange by digital treasure, administration of single line for a migration towards cloud-based computingmore efficient organization of the service and recognition of preferential clients in order to provide improved IT services management, flexibility and cost optimization. In 2017, we made the Microsoft Office 365 platform available in cloud formattotem of branches, searching for more than 14,000 users, allowing greater collaboration between teams, increased productivity, simplified internal processessecurity, agility and improved mobility.service’s personalization. For further discussion regardingmore details about our technology infrastructure see “—of Technology, consult the item “ B. Business Overview—Overview - Technology and Infrastructure”

Our ongoing capital expenditures consist primarily of investments in IT. We expect to fund our ongoing capital expenditures principally from our cash flow from operations..

 

Our major divestituresdivestiture in the past three fiscal years and until the date of this annual report werewas the sale of BW I in 2017 and 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,2017.

For more information, 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”Operations and “—Important Events—Sale of BW Guirapá I S.A.”).

4B. Business Overview

Our Profile

We are the only international commercial bank with a significant presence in Brazil, where we are currently the third-largest privately owned bank. We have established a competitive presence in both the retail and wholesale banking sectors in Brazil, enabling us to meet the needs of individuals, small and medium enterprises, and large corporate clients.

Our Units, common shares and preferred shares are traded on B3 under the tickers “SANB11,” “SANB3” and “SANB4,” respectively. Our ADRs have been listed and traded on the NYSE since October 7, 2009 under the ticker “BSBR.”

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 major unit is autonomous and is required to be self-sufficient in terms of capital and liquidity, our relationship allows us to:

·access the Santander Group’s global operations, providing operational synergies with the Santander Group and enhancing our ability to provide global products and services to our customers while reducing technology development costs;

·provide our customers with the benefits of a strong presence in certain markets, predominantly in Latin America and Western Europe;

 

4055 

Table of Contents

·take advantage of best practice already implemented in other countries, including with regards to products, services, internal controls and risk management; and

·4B.develop our employees’ skills through local and international training and development, as well as by allowing them to gain international experience in other offices of the Santander Group.Business Overview

  

Our Strategy

 

Our goalstrategy is to be the leading financial group in Brazil, by providing the best experience in retail and wholesale banking services to our customers and employees.

We believe that the best wayendeavor to grow in a profitable, recurring and sustainable manner is by providing services with excellence and to consistently strive to enhance customer satisfaction levels, attract additional customersexpand our customer base and increase the loyalty of our customers. We seek to establish close and long-lasting relationships with customers, suppliers and shareholders.

To accomplish thatthis goal, our purpose is to help people and businesses prosper by being a Simple, Personal and Fair bank. Our strategy iswe have been deeply focused on understanding how the following objectives:Brazilian market works to address its demands effectively. As a consequence of our initiatives, Santander Brasil has made substantial progress in all key business areas, highlighted by a remarkable ROE evolution in the last five years. We believe we have been able to redirect our efforts toward a customer-centric business model with efficiency and risk model accuracy.

 

·Increase customer preference and loyalty by offering targeted, simple, digital and innovative products and services through a multichannel platform. Our active customer base totaled 21.7 million customers as of December 31, 2017, an 8% increase over our customer base as of December 31, 2016. As of December 31, 2017, we had 4.2 million loyal customers, an increase of 16% as compared to December 31, 2016. We define loyal customers as (1) active account holders who use at least three other products or services offered by Santander Brasil on a regular basis, and (2) have processed at least five transactions through Santander Brasil in the preceding 60 days. The minimum number of products or services which a customer must use in order to be classified as a loyal customer depends upon the customer’s segment (i.e., Private Banking, Santander Select, Santander Van Gogh or Santander Especial) and the type of product or service consumed. We believe this increase is a result of our focus on constantly improving our customers’ experience and satisfaction levels through our service-focused culture and the technological transformation of our channels, such as the new Internet banking and mobile banking for individuals and companies, 100% digital account opening portal and the Santander Way card app, among others. For more details on the channels, refer to “—Our Business—Service Channels.”

We have sought to identify our different types of customers and their specific consumption needs. Based on that, we have adopted a strategy which relies on serving our customers wherever and whenever they want, through multi-channel (digital and/or physical) solutions that deliver a customized and innovative portfolio of services and products.

 

·Improve the profitability, recurrence and sustainability of our results by growing and increasing our revenue diversification, with the objective of striking a balance between loans, funding and services, while maintaining a preemptive risk management approach and rigorous cost control. In 2017, 2016 and 2015, our net interest income and net fee income amounted to an aggregate R$47.7 billion (net interest income of R$34.9 billion and net fee income of R$12.7 billion), R$41.6 billion (net interest income of R$30.6 billion and net fee income of R$11.0 billion) and R$40.8 billion (net interest income of R$31.3 billion and net fee income of R$9.5 billion), respectively, driven, in each case, by customer revenues (loan and funding) and service revenues, as a result of our stronger portfolio of products and services and greater transactional activity by our customers. Our preemptive risk management led to an improvement in the default rate, from 7.04% for the fiscal year ended December 31, 2016 to 6.65% for the fiscal year ended December 31,December 2017, despite the slowdown in economic activity in the period.

We endeavor to seize all the opportunities presented to us by our ecosystem in order to cross-sell and upsell our products and services. For example, our automotive-related ecosystem consisting of Santander Financiamentos, Webmotors and Olé Consignado, has been instrumental in attracting new customers to Santander Brasil. Moreover, we have invested in initiatives that we believe have growth potential, such BEN, Sim, emDia, Santander Auto and PI. We believe that continuing to cross-sell and upsell across our business and investing in initiatives, which we believe to be promising, are key pillars for us to attract new customers and retain existing ones.

 

·Be disciplined with capital and liquidity to preserve our solvency, face regulatory changes and seize growth opportunities.Our Basel capital adequacy ratio, calculated in accordance with the regulations and guidance of the Brazilian Central Bank, totaled 15.8% at the end of 2017, higher than the sum of the minimum regulatory capital and capital conservation requirements.

Further evidence that we are on the right track is the fact that in 2019 we were recognized by Euromoney Awards for Excellence as the Best Bank in Brazil and the Best Bank in Latin America.

 

·Boost productivity through an intense agenda of commercial improvements that enable us to offer a complete portfolio of services. Our focus on operational excellence, with the adoption of simpler and more agile processes which provide us with full visibility of the customers’ relationship with us and enable us to interact effectively with customers, underscores our commitment to continuously improving customer satisfaction. For more information on products and services, refer to “Item 4. Company Information B. Business Overview—Our Business—Products and Services Provided to Our Customers.”

Below we outline the main initiatives we have taken during these last years:

•       Net promoter score or NPS. We introduced the NPS as our main customer satisfaction metric in 2017 and in 2018, we were pioneers in disclosing this index to the market. After each interaction with Santander Brasil, our customers are asked randomly to rate their experience following the NPS methodology. Nowadays, we take into account our NPS with respect to our compensation (profit sharing) metrics, affecting virtually every department and position level at the organization, including the administrative and commercial departments. Additionally, and reinforcing our commitment to service excellence, we invited our senior management to become personally involved in enhancing customer satisfaction, by getting in touch with at least three detractors (unsatisfied customers) in order to understand and solve their problems and turn them into promoters (satisfied customers). We ended 2019 with an NPS of 56 points and we believe that this high level in satisfaction translates into an expansion of our loyal customer base.

•       Operational excellence.With the goal of fine-tuning the customer journey and boosting efficiency, we have transformed several aspects of our operational model. First, we switched to an industrial approach, which means that we now have an end-to-end view of the customer experience, reducing manual activities and dispersion, as well as enhancing cost transparency. Additionally, this year we launched a new service model in large part of our low-income portfolio, where we have transformed five types of careers into a single business and service manager career, further optimizing our customer service at our branches, generating more business and delivering greater efficiency. With these changes, we have already obtained notable results, such as a decrease in the time needed for customers to finalize the purchase of certain products and an increase in the number of agreements issued.

•       Digital strategy.We are in constant digital transformation to better serve our customers. We have implemented a collaborative work system in our organization based on the “Agile” methodology, commonly used in IT. This new approach consists of multidisciplinary teams, with employees from

 

4156 

Table of Contents

In addition,business and technology areas, who are given autonomy to make decisions rapidly. Thanks to that, we also seekhave been able to supportoffer products and services, as well as add system updates through all our available channels quickly. These tools include: (i) providing a wide range of services across all channels according to customers' choices and/or needs; (ii) giving customers the success of our business by: (i) having a diversified business model, (ii) focusing on recurring revenue generation,ability to meet all their needs through digital channels; and (iii) maintaining prudent risk management, (iv) implementing strict cost control and (v) executing efficient capital allocation. We also striveintegrating all service channels to ensure that customers have a homogeneous experience, regardless of the channel chosen.

•       Optimization of commercial tools.We have simplified day-to-day operations of branch staff, so that they can spend more time meeting customer needs. As part of this initiative, we provided our banking activities contributeemployees with new features in our customer relationship tool (CRM) that centralizes all the information they need for their daily commercial and financial activities. We have also implemented time-saving tools, which reduce the amount of information and steps required to perform operational tasks.

•       Greater empowerment and incentives for branch staff.We have sought to decentralize the management of branch resources. Branch managers are now responsible for managing the expenses of their branches, and each branch has its own results report. This gives branch employees and managers a higher sense of autonomy and responsibility, as well as the feeling of being part of their own branch's success. Additionally, we have made some adjustments to the socialcompensation structure of branch employees and economic progressmanagers to ensure that the variable components of their compensation depend on the performance of the communities in which we are present, in a responsible and sustainable manner and with a special commitment to higher education.branch where they work.

 

Recent Business Developments

In recent years, our commercial banking segment has accounted for an increasingly large portion of our net interest income and our net fee and commissions income, as demonstrated in the following table.

  For the year ended December 31,
  2017 2016 2015 2017 2016 2015
  Net interest income Net fee and commissions income
   (%)
Commercial Banking  92.7   89.5   86.3   88.5   87.3   86.9 
Global Wholesale Banking  7.3   10.5   13.7   11.5   12.7   13.1 

•       Culture strengthening. We believe that committed employees make the increasebusiness sustainable. With that in mind, we have established clear and horizontal communication of senior management with employees, promoting meritocracy and diversity. In line with this practice, Santander Academy encourages our staff to assume a proactive role in their technical training and has been attended by 75% of total employees, who act as internal multipliers. As a result, in 2019, we were recognized for the fourth consecutive year as one of the Best Companies to Work for in Brazil, according to the GPTW (Great Place to Work) survey.

Finally, aligned with the Santander Group’s responsible growth strategy, Santander Brasil has made several public commitments to society, including: (i) having 30% of our leadership positions held by women by 2024 (today women account for 26% of leading roles at Santander Brasil); (ii) having 100% of our operations powered by renewable energy by 2025; and (iii) eradicating single-use plastic consumption at our facilities by 2020. Another equally important component in fulfilling our responsibilities to society is the “Prospera” microcredit program, through which we help Brazilians in low-income communities to prosper by giving them access to credit and financial products, and which contributed to placing us in the portion of our net interest income and our net fee and commissions income derived from commercial banking istop spot among banks on Fortune magazine’s 2019 “Change the resultWorld” list. Finally, we were named Company of the execution of a wide-scale transformation agenda basedYear on a customer-centric visionExame Magazine’s diversity ranking, in addition to being recognized as a result of which we were able to change the way we operate, introduce a culture of servicefinancial institution with the best inclusion and steadily increase our customer base. The following are some ofdiversity practices in the steps we took to achieve this:country.

 

·Streamlined processes. We have simplified the day-to-day operations of our customer-facing employees with a view to enabling our branch employees to devote a greater amount of time to meeting customers’ needs. As part of this, we made available to our employees a new customer relationship tool which centralizes all necessary information for their daily commercial and financial activities. We have implemented time-saving tools such asClique Único (“single click”) to reduce the volume of information and steps needed on operational tasks.

·Improved accountability and incentives for branch employees. In line with the new commercial dynamic implemented in the commercial banking segment and guided by the strategy established by the senior management, we have sought to decentralize the management of our branches’ resources. Branch managers are now responsible for managing the expenses of their own branch and each branch has its own profit and loss account. This gives branch managers and employees a greater sense of autonomy and responsibility, and gives them a stake in success of their branch. In addition, we have made certain changes to the compensation structure of branch managers and employees in order to ensure that any variable components of their remuneration are dependent upon the performance of the branch at which they work.

·Digital strategy. We have implemented a new collaborative working method within our organization based on the “Agile” methodology commonly used in IT. Our new working method involves putting together multidisciplinary teams from our business and technology functions and giving them the necessary autonomy to adapt to changing circumstances and requirements. This new working method has enabled us to put in place several digital tools aimed at enabling customers to access our services through a variety of digital and other channels, including by: (i) providing customers with a full range of services across all channels according to their choices and/or needs; (ii) giving customers autonomy to meet all their needs through digital channels; and (iii) integrating all service channels in order to ensure a seamless customer experience, regardless of the channel selected.

·Performance and compensation.We have set clear key performance indicators for our employees. In addition, we have increased the significance of variable compensation for branch employees in order to align their incentives with those of Santander Brasil.

·Net promoter score, or NPS. In 2017 we introduced the NPS as the leading metric of customer satisfaction. Following each interaction with Santander Brasil (e.g., purchasing a product, a service or communicating with us through one of our customer service channels), our customers are asked to rank this interaction on a scale from zero (which would mean that the customer would not recommend the applicable product or service to others) or ten (which would mean that the customer would recommend the product or service to others). This tool enables us to monitor customer satisfaction. We believe that greater customer satisfaction leads to increased customer loyalty, which we believe is key to growing our results consistently and sustainably.

42

Table of Contents

Our Business

 

Overview

We operate along two segments through which we offerprovide our 21.726.3 million active individual, SME and corporate customers aas of December 31, 2019 with our complete portfolio of products and services:services through the following business divisions:

 

·Commercial Banking Segment.In the Commercial Banking segment, we focus on building long-term relationships with our account holder and non-account holder customers. Customers in our Commercial Banking segment include individuals and companies (except for global corporate customers, which are dealt with within our Global Wholesale Banking segment). Revenue from this segment is generated by the provision of banking and financial products and services to our account holder and non-account holder customers, including essential checking and savings account services, priority services (such as withdrawals, debit cards, deposits and transfers), credit cards, foreign exchange services, investments and loans and financing.

·Global Wholesale Banking Segment.Our Global Wholesale Banking segment offers financial services and structured solutions for our global corporate customers, principally local and multinational corporations, and carries out proprietary trading activities. Our Global Wholesale Banking segment offers a wide range of national and international services specifically tailored to the needs of each customer.

•       Commercial Banking:This includes individuals and companies (except for global corporate customers, managed by our Global Wholesale Banking). Revenue from this segment is rendering of banking and financial products and services to our account holder and non-account holder customers.

 

The following chart sets forth

•       Global Wholesale Banking:We offer a wide range of national and international tailored financial services and structured solutions for our operating segmentsglobal corporate customers, principally local and their main focus.multinational corporations, and it also carries out proprietary trading activities.

 

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

Our Commercial Banking and Global Wholesale Banking segments are strongly integrated, which enables us to capitalize on each segment’s strengths to

57 

Table of Contents

We outline below the benefit of the other. We are able to offer joint solutions to customers inoperating divisions under each of our segments such as for example, offering integrated solutions to (i) large retailers and their respective points of sale and (ii) large companies and their employees.

The following table presentswell as the breakdown of our net interest income and profit before tax by operating segment:

 

  For the year ended December 31,
  2017 2016 2015 2017 2016 2015
  Net interest income Operating profit before tax
  (R$ millions)
Commercial Banking (1)  32,392   27,366   27,041   11,220   12,652   (5,565)
Global Wholesale Banking  2,554   3,221   4,297   3,293   3,732   2,349 
Total  34,946   30,586   31,337   14,514   16,384   (3,216)

(1)Profit before tax reported under commercial banking includes the effects of the hedge for investments held abroad (offset in the same amount in the “Income Tax” line). The effect of the hedge for investments held abroad in 2017, 2016 and 2015 amounted to expenses of R$810 million, gains of R$6,140 million and expenses of R$10,919million, respectively.

43

Table of Contents

As of December 31, 2017, our net interest income grew 14.3% and reached R$34,946 million compared to R$30,586 million as of December 31, 2016.This increase is primarily due to an increase in the volume of loans extended to customers and of the margins we charge on these loans, both of which were primarily concentrated in our commercial banking segment. As of December 31, 2017, our operating profit before tax decreased 11.4% and reached R$14,514 million compared to R$16,384 million as of December 31, 2016. Excluding the effects of the hedge for investment held abroad operating profit before tax amounted to R$15,324 million for the year ended December 31, 2017, a 49.6% increase from R$10,244 million compared to the year ended December 31, 2016. Operating profit before tax and operating before tax excluding the effects of the hedge investment abroad are non-GAAP measures. For further information, see “Item 3. Key Information—A. Selected Financial Data—Reconciliation of Non-GAAP Measures and Ratios to Their Most Directly Comparable IFRS Financial Measures.”

The following table shows a managerial breakdown of our loans and advances to customers by client category at the dates indicated:

  As of December 31, Change between 2016 Change between 2015
  2017 2016 2015 and 2017 and 2016
   (R$ million)
Individuals  107,610   91,195   84,578   18.0%  7.8%
Consumer Finance  33,170   26,608   25,850   24.7%  2.9%
SMEs  46,879   42,440   43,524   10.5%  (2.5)%
Corporate(1)  100,171   108,195   113,315   (7.4)%  (4.5)%
Total Credit Portfolio  287,829   268,438   267,266   7.2%  0.4%

(1)For purposes of loan portfolio presentation, “corporate” includes companies with annual gross revenues exceeding R$200 million, including our Global Corporate Banking customers.

As of December 31, 2017, our loans and advances to customers grew 7.2% and reached R$287,829 million compared to R$268,438 million as of December 31, 2016. This increase is primarily due to an increase in loans to individuals and in our consumer finance portfolio. For further information, see “Item 5. Operating and Financial Review and Prospects—A. Operating Results—Results of Operations.”

Commercial Banking

Individuals

The services we provide to individuals are currently as follows:

·Private Banking Business serves a select group of customers with at least R$5.0 million in assets available for investment. Our goal is to offer our customers a complete and tailor-made portfolio of onshore and offshore financial products and services, investment advice, loans and asset management through a dedicated manager for investments and banking services.

·Santander Select serves customers with a monthly income above R$20,000, or a monthly income above R$10,000 and R$30,000 in investments, or without monthly income but with over R$300,000 in investments. Our goal is to offer a value proposition with differentiated products and services, exclusive service spaces, relationship managers that serve a small number of customers and asset management advisory services.

·Santander Van Gogh serves customers with a monthly income from R$4,000 to R$10,000, or with at least R$40,000 in investments. Our objective is to understand the needs of our customers at each stage of their life and provide them with financial advice through a multichannel relationship, including financial products and services as well as financial advice.

·Santander Especial 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.

44

Table of Contents

We offer our retail lending products to customers through our extensive branch network and on-site service units. See “—Service Channels.” 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, 2017 vs. December 31, 2016
  2017 2016 2015 R$ million %
  (R$ millions)
Leasing/Auto Loans(1)  1,895   1,869   2,470   26   1.4 
Credit cards  24,278   20,524   19,013   3,754   18.3 
Payroll loans(2)  25,547   18,918   14,836   6,629   35.0 
Mortgages  28,232   27,313   26,134   919   3.4 
Agricultural Loans  5,232   3,416   3,438   1,816   53.2 
Personal loans/Other  22,426   19,155   18,687   3,271   17.1 
Total  107,610   91,195   84,578   16,415   18.0 

(1)Including loans to individuals in the consumer finance segment, the auto loan portfolio totaled R$33.1 billion as of December 31, 2017, R$26.7 billion as of December 31, 2016 and R$26.1 billion as of December 31, 2015.

(2)Includes Banco Olé Bonsucesso Consignado’s portfolio payroll loans from the agreement between Santander Brasil and Banco Bonsucesso.

Small and Medium Enterprises

We serve SMEs through the Santander Negócios e Empresas brand. Our current classification model for SMEs is as follows:

·Companies (Empresas) 3. Companies with annual revenues between R$30 million and R$200 million. Our service model is based on dedicated relationship managers, a team of experts for more complex demands and loan managers specializing in risk management for the segment. We also provide specialized services to multinationals and other major corporates in order to meet their specific needs.

·Companies (Empresas) 2. Companies with annual revenue between R$3 million and R$30 million. We offer these customers a comprehensive range of products and services in a user-friendly fashion principally through a relationship manager based at the customer’s branch. We also have committees specific to these customers in order to provide our customers with credit products.

·Companies (Empresas) 1. Companies with annual revenue of up to R$3 million. We offer these customers a simple banking solution through an integrated account (Santander Conta Integrada) that combines a corporate account with a payment terminal to provide benefits for the user, who must simply concentrate MasterCard and Visa credit card sales in the Getnet terminal and receipts in a Santander Brasil current account. We believe that this results in greater commercial efficiency as customers receive our products and services through a single point of access with access to standardized and automatically priced products delivered with the assistance of preapproved risk models and automated decision-making system.

·Companies (Empresas)1 (Digital). Companies with annual revenue of up to R$300,000. We serve these customers principally through a relationship manager available through online channels. We believe that this improves service availability and simplicity for our customers, including through extended service hours (8:00 a.m. to 8:00 p.m., Monday through Friday). We also offer these customers a full range of other online banking services.

In recent years, we have developed products specifically for SMEs, including industry-specific offers specially designed to meet the needs of bars and restaurants, gas stations, medical offices and clinics, franchises and supermarkets. 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 help connect our customers to international trade through the Santander Trade portal.

45

Table of Contents

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, 2017 vs. December 31, 2016
  2017 2016 2015 R$ million %
  (R$ millions)
Agricultural lending  506   322   243   184   57.1 
Working capital loans  12,359   12,695   14,736   (366)  (2.6)
Buyer financing  32   21   27   11   52.4 
Vendor financing  16   10   9   6   60.0 
Discounted receivables  1,667   1,491   1,228   176   11.8 
Comex  1,723   1,259   1,954   464   36.9 
Overdraft facility  2,773   2,837   3,072   (64)  (2.3)
Refinancing  4,169   4,365   3,691   (196)  (4.5)
Resolution 2,770  16   35   78   (19)  (54.3)
Account overdraft loans  1,820   1,734   1,983   86   5.0 
CDC/leasing(1)  1,724   1,506   1,521   218   14.5 
Other(2)  20,074   16,165   14,982   3,909   24.2 
Total(3)  46,879   42,440   43,524   4,439   10.5

    

(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.

Consumer Finance

Santander Financiamentos (the commercial brand used by our subsidiary Aymoré CFI) is our main consumer finance channel, with expertise in providing consumer credit (for the financing of purchases of motor vehicles, as well as other goods and services) directly to borrowers or through intermediate agencies.

We have a total portfolio of R$33.2 billion which is primarily composed of auto loans for individuals. We are the market leader in auto loans, with a market share of 23.1% as of December 31, 2017, according to the Brazilian Central Bank.

We have introduced “+negócios,” which we believe to be a leading online lending platform. +negócios is an innovative digital commercial platform designed to be simple and intuitive and which allows for faster loan simulations, credit approval and proposal formalization in addition to providing portfolio management reports. In May 2017, we introduced + Vezes, which enables retailers to offer installment payment options on purchases of goods and services. These platforms supported the expansion of our business, with over one million unique simulations being conducted on these platforms in December 2017.

We have also strengthened our positioning by offering integrated financing solutions together with Webmotors S.A., an online portal active in the Brazilian market through which consumers can advertise their cars for sale, and Santander AutoCompara, a tool which allows customers to compare car insurance prices for insurance coverage across several insurance companies.

We have joint ventures with RCI (Renault and Nissan) and PSA (Peugeot, Citroën and DS), and white-label partnerships with Hyundai, Subaru, Volvo and Chery. In addition, we also provide consumer credit through intermediate customers (i.e., stores), or industrial or partner brands, including businesses in the furniture, tourism, health, technology, accessibility equipment, renewable energy and cleaner processes sectors, among others.

46

Table of Contents

The following table sets forth certain key financial and operating data regarding our consumer finance business for the periods indicated.

  As of December 31, Change between 2016 and Change between 2015 and
  2017 2016 2015 2017 2016
Consumer finance loan portfolio market share (1) (%)  23.1%  20. 3%   18. 1%   2. 8 p.p.   2.2 p.p. 
Consumer finance portfolio (R$ billion)  33.1   26.6   25.8   24.7%  2.9%
Share of auto loan in the consumer finance portfolio (%)  85.6%  83.0%  86.3%  2.6 p.p.   (3.3) p.p. 

(1)Source: Brazilian Central Bank.

Corporate

Our corporate customer segment comprises large companies that have annual gross revenues greater than R$200 million (other than global corporate customers). We focus on fostering a close relationship with our corporate customers by providing them with customer-tailored services. In 2017, our team comprised approximately 120 bankers across Brazil dedicated exclusively to our corporate sector.

Global Wholesale Banking

1.     Retail Banking1.         Santander Corporate & Investment Banking (“SCIB”)Individuals2.         Proprietary TradingSMEs2.     Consumer Finance3.     Corporate

  For the Year Ended December 31,
  2019 2018 2017 2019 2018 2017
  Net interest income Operating profit before tax
  (R$ millions)
Commercial Banking (1)  42,044   39,391   32,392   18,657   12,397   11,220 
Global Wholesale Banking  2,277   2,531   2,554   3,616   3,512   3,293 
Total  44,321   41,922   34,946   22,273   15,909   14,513 

(1)Profit before tax reported under commercial banking includes the effects of the hedge for investments held abroad (offset in the same amount in the “Income Tax” line). The effect of the hedge for investments held abroad in 2019, 2018 and 2017 amounted to gains of R$1,264 million, gains of R$5,867 million and expenses of R$810 million, respectively.

The following table shows a managerial breakdown of our loans and advances by customer type at the dates indicated:

  As of December 31, Change between 2018 Change between 2017
  2019 2018 2017 and 2019 and 2018
  (R$ millions)
Individuals  156,177   133,603   107,610   16.9%  24.2%
Consumer Finance  48,421   40,964   33,170   18.2%  23.5%
SMEs  53,119   49,624   46,879   7.0%  5.9%
Corporate(1)  89,539   97,742   100,171   -8.4%  -2.4%
Total Credit Portfolio  347,257   321,933   287,829   7.9%  11.8%

(1)For purposes of loan portfolio presentation, “corporate” includes companies with annual gross revenues exceeding R$200 million, including our Global Corporate Banking customers.

Commercial Banking

1.        Retail

Individuals

We have structured this customer segment as follows:

Private Banking– is responsible for select group of customers with at least R$5.0 million in assets available for investment. In this segment, we offer a complete and tailored portfolio of onshore and offshore financial products and services, investment advice, loans and asset management through a dedicated manager for investments and banking services.

•    Santander Select– is responsible for customers with a monthly income above R$20,000, or a monthly income above R$10,000 and R$30,000 in investments, or more than R$ 300,000 in

58 

Table of Contents

investments. The offer here consists of a value proposition with differentiated products and services, exclusive service spaces, relationship managers who serve a small number of customers and provide asset management advisory services.

•    Santander Van Gogh– is responsible for customers with a monthly income from R$4,000 to R$10,000, or with investments above R$40,000. Our goal is to understand the needs of our customers at each stage of their life and provide them with financial advice through a multi-channel solution, including financial products and services as well as financial advice.

•    Santander Especial- is responsible for customers who earn up to 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.

It is worth noting that we also support our Select and Van Gogh customers through our Santander Direct channel. Santander Direct is suited to customers who want more flexible service hours, from 8:00 a.m. to 10:00 p.m., and who prefer using a remote method, such as telephone, e-mail or chat, as well as access to digital channels. This service complements our offering and broadens our capillarity by also catering to regions where we do not have a physical presence.

Small and Medium Enterprises (SMEs)

We serve SMEs under the Santander Negócios e Empresas brand, under the following segmentation:

•Empresas Núcleos (Core Companies)– is responsible for companies with annual revenues between R$30 million and R$200 million. Our service model is based on dedicated relationship managers, a team of experts for more complex demands and loan managers specializing in risk management. We also provide specialized services to multinational companies and other major corporations in order to meet their specific needs.

•Empresas Polo (Hub Companies)- is responsible for companies with annual revenues of between R$3 million and R$30 million. We offer these customers a comprehensive range of products and services in a user-friendly interface.

•Negócios Agência (Branches Business)- is responsible for companies with annual sales of up to R$3 million. We offer these customers a simple banking solution through an integrated account that combines a corporate account with a point of sale (POS) terminal. This arrangement provides our customers with benefits while they use the Getnet terminal in their credit card sales and receipts in a Santander Brasil current account.

•Empresas MEI (Individual Microentrepreneur)- is responsible for companies with annual revenues up to R$81,000. We offer these customers a simplified and cost-effective option (Santander Conta MEI).

It is worth noting that we also offer an attendance channel, the Negócios Direct (Direct Business), which is responsible for companies with annual revenues of up to R$1 million. We support these clients through a relationship manager who is available during extended service hours and via remote channels, such as telephone, e-mail or chat, as well as access to digital channels that facilitate a customer’s daily life.

2. Consumer Finance

We provide consumer credit to finance motor vehicles, goods and services directly or through intermediate agencies. Santander Financiamentos is our main service channel but we also operate under multiple brands.

The following table sets forth certain key financial and operating data regarding our credit finance for motor vehicles to individuals for the periods indicated:

59 

Table of Contents

  As of December 31, Change between 2018 and Change between 2017 and
  2019 2018 2017 2019 2018
Consumer finance loan portfolio market share (1) (%)  25.0%  25.4%  24.0%  (0.4) p.p   1.4 p.p 

(1)Source: Brazilian Central Bank.

1.Corporate

Our corporate customer segment caters to large companies that have annual gross revenues greater than R$200 million (except for our Santander Corporate & Investment Banking customers). We focus on fostering a close relationship with our corporate customers through managers and specialists geographically distributed across Brazil, providing customer-tailored services with a complete portfolio of local and global products (including products from Commercial Banking and SCIB as defined below).

Global Wholesale Banking

 

Global
1.Santander Corporate Banking

Global Corporate& Investment Banking (“GCB”) is the global business unit that covers those customers 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(SCIB)

SCIB is the global business unit that covers those customers, which, 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 customer portfolio consists of a range of industries, including telecommunications, retail, aviation, real estate and logistics, power, construction and infrastructure, natural resources, food, agribusiness and financial institutions.

Our customers in the SCIB 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.

 

Our product and service portfolio ranges from basic to tailor-made and highly complex solutions in the following areas:

·Global Transaction Banking, which includes the development and management of local and global transactional banking products, including local loans, commercial finance, BNDES on-lending, trade finance, local and international guarantees, structured loans, cash management, funding from international banks and specialized sales.
2.Proprietary Trading

 

·Global Debt Financing, which includes funding and financial advisory services, origination and distribution of fixed-income securities in the capital markets, financing of acquisitions and syndicated loans, other structured financings, tax equities, subordinated debt and energy efficiency transactions.

Our proprietary trading division is responsible for managing our proprietary books and liquidity positions.

Our Portfolio of Products and Services

Payments

1.Credit and Debit Cards

 

·Investment Banking, which includes advisory services relating to mergers and acquisitions and equity capital markets.

We operate in the credit and debit card market by issuing these products to our customers (including both account and non-account holders), with the majority of customers being individuals. Our strategy is to offer credit and debit cards compatible with the income level and lifestyle of each of our customers.

We are the exclusive distributors of the AAdvantage® card in Brazil, which is linked to the American Airlines loyalty program, one of the most recognized programs in the market.

We highlight the Crediário, launched in March 2019, which allows our customers to simulate and pay for their purchases in installments directly on a POS device. Merchants receive payments two days after they are effective.

The following table sets forth certain key financial and operating data regarding our credit card business for the periods indicated.

60 

Table of Contents

  As of and For the Year Ended December 31, Change between 2018 and Change between 2017 and
  2019 2018 2017 2019 2018
Credit card portfolio market share(1)  12.9%  13.3%  12.8%  (0.37) p.p   1.2 p.p 
Credit card portfolio (R$ billion) (2)  36.1   30.9   25.1   16.8%  23.1%
Total card turnover (R$ billion)  (2)  236.4   201.6   168.3   17.3%  19.8%
Credit card turnover (R$ billion) (2)  161.0   137.1   111.9   17.4%  22.5%
Total card transactions (in millions) (2)  2,725.4   2,338.2   1,987.6   16.6%  17.6%
Credit card transactions (in millions) (2)  1,450.9   1,206.1   992.9   20.3%  21.5%
Participation of credit card in the household consumption – Market overview (2) (%)  24.5%  23.1%  21.6%  2.94 p.p   1.4 p.p 

(1)Source: Brazilian Central Bank, as of December, 2018. The data relating to the year ended December 31, 2017 has been revised as a consequence of the restatement of the way to measure the market share data issued by ABECS.

(2)Source ABECS – “Monitor bandeiras”. In 2018 the methodology began to include all acquirings and for better comparison the 2017 and 2016 values were restated. The data relating to the years ended December 31, 2018 and 2017 has been revised as a consequence of the restatement of the methodology of monitoring issued by ABECS.

 

·Equities, which includes stock brokerage and advisory services, cash equities services for individuals, corporate and financial institutional investors and equity research.

2.Santander Way

 

·Client Treasury, which includes structuring foreign exchange transactions, offering various foreign exchange products, over-the-counter derivatives and investments and other financial and structured products for customer or different segments including institutional investors, corporate and retail customers and equity derivatives.

SantanderWay an app that allows customers to manage all their Santander Brasil cards through a digital channel and has also become a payment platform, with new features that allow instant transfers peer-to-peer through contact list or QR Code, account sharing between users and payments via QR Code in POS Getnet.

3.Merchant Acquiring Market | Getnet

 

·Market Making, which is responsible for the pricing of customer deals originated by our sales force from corporate, institutional, private banking and retail segments.

Getnet is a technology company that offers physical and digital solutions, to people and businesses. The acquisition of Getnet, which was completed in 2019, gave us more flexibility, and enabled us to create more complete and tailored solutions for our customers, integrating its services with Santander Brasil.

Through Getnet, we are able to offer a wide array of payment solutions to individuals and companies, including: (i) mobile and Wi-Fi point of sale or POS devices; (ii) SuperGet, a mobile POS device that self-employed professionals and small companies can buy or rent from us; (iii) TEF, a solution for establishments with a significant number of transactions, operating in synergy with the establishment’s systems and which offers sales reconciliation through our bank-integrated customer benefits; (iv) Getnet App, which allows its users to track sales details in real time, and anticipate amounts, while also providing business analytics information, such as the best time to make a sale, thus helping business owners better manage their activities based on a richer set of data; (v) Digital POS, a complete solution that can be customized and, when connected to the internet, allows app downloads and the use of integrated management functions; and (vi) Getnet Digital Platform, a tool for all e-commerce environments, with integrated services such as safe boxes, recurrence and anti-fraud systems, which is modeled after the “one-stop shop” concept and provides financial intermediation between a marketplace and its storeowners, as well as several other financial services, such bill generation, and sales conciliation; (vii) Getnet Digital, which is geared towards Small and Medium-sized Enterprises (SME) and allows its users to set up their stores online, in addition to offering a number of services, such as payment platform, alongside visual and fully integrated management.

Getnet also enables us to provide SME customers with a fully integrated offer, including card payment solutions. One of them is “Conta Integrada,” a bundle that combines a current account with an integrated card payment solution, which rewards customers who concentrate their sales on POS devices.

The following table sets forth certain key financial and operating data regarding our merchant acquiring business for the periods indicated.

61 

Table of Contents

  As of and For the Year Ended December 31, Change between 2018 and Change between 2017 and
  2019 2018 2017 2019 2018
  (R$ millions, except as otherwise indicated)
Market share of total turnover(1)  11.3%  12.3%  11.0%  (1.0) p.p.   1.3 p.p. 
Debit turnover  80.9   73.4   51.2   10.2%  43.4%
Credit turnover  126.6   114.1   90.9   11.0%  25.5%
Number of debit transactions (thousand)  1,415,089   1,245,269   840,171   13.6%  48.2%
Number of credit transactions (thousand)  1,070,717   893,519   743,263   19.8%  20.2%

(1)Source: Data for 2019 is based on ABECS Monitor Bandeiras - Acquirers data for the nine-month period ended September 30, 2019. Data for the year ended December 31, 2019 was not available as of the date of this annual report. For comparison purposes, the difference between September 30, 2019 and September 30, 2018 would be: (0.9) p.p

 

47

Table of Contents

The GCB team is dedicated to customer 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 awards we have received, the principal among which are listed in the table below.

Area 

Acknowledgments 

Global
Transaction
Banking

1stplace in BNDES Disbursements to Large Companies and 4th place in BNDES Disbursements to Small and Medium Enterprises in the first half of 2017, according to the BNDES

Best Trade Bank in Latin America by Trade and Forfaiting Review in 2017

Best Trade Bank in Latin America, according to Euromoney in 2016
Investment
Banking		Leadership in M&A: from 5thplace in 2015 to 1st place in 2016, according to Thomson
Equities

Ranked as 4th place among Brazilian banks and 6th place in Latin America. Ranked as 1st place in the Energy & Sanitation and Transportation (Latin America), Education (Brazil) and Strategy (Brazil and Latin America) sectors and several leading positions in Brazil’s Research rankings by U.S. magazineInstitutional Investor in 2017

Santander Corretora was authorized to use B3’s Agro Broker seal. It now has all B3 qualification seals

Client
Treasury

1st place in the Foreign Exchange Rankings by the Brazilian Central Bank since 2014

Best Treasury in Brazil in 2017, according to Euromoney

Financial
Solutions
and
Advisory

Project Finance with Seaborn Networks won the Greenfield Deal of the Year 2016 award byWorld Finance magazine

Project Finance with Seaborn Networks won the Perfect 10 ECA Finance Deal of the Year 2016 award by Trade & Export Finance

1st place Financial Advisor for Project Finance in Brazil and Americas 2017, according to Dealogic

Leader in Fixed Income, according to ANBIMA
Leader in Project Finance Advisory for the 8th time since 2008, according to ANBIMA
Best Commodity Finance Bank in Latin America, according to Euromoney

Proprietary Trading

Our proprietary trading division is responsible for the management of our proprietary books and liquidity positions.

Principal Products and Services Provided to Our Customers

Credit and debit Cards

We operate in the credit and debit card market issuing credit and debit cards to our customers (including both account and non-account holders). We endeavor to offer credit and debit cards compatible with the income level and lifestyle of each of our customers. Most of our credit and debit card customers are individuals. Our revenues from credit and debit cards include administration fees, interest on unpaid balances, annuity fees and withdrawal fees.

Holders of credit cards issued by Santander Brasil have access to the Esfera rewards program, which offers exclusive deals and discounts with more than 300 partners such as Cinépolis, FastShop and Casas Bahia, among others. In addition, holders of credit cards also have access to Bonus Esfera, which enables customers to exchange their Esfera reward points for certain products, services and travel benefits.

48

Table of Contents

Our credit card holders also have access to our Santander Way mobile application, which is an online credit card tool allowing customers, among other things, to track their credit card use online. With more than 4.2 million unique users, Santander Way is a highly ranked payment app, with 4.8 stars on the App Store and 4.6 stars on Google Play. In 2017, we launched Santander Pass, a credit card using near-field communication technology which allows for contactless payments. We offer two devices (a bracelet and a sticker) linked to our customers’ cards to simplify our customers’ user experience.

We exclusively distribute the AAdvantage® card in Brazil, which is linked to the American Airlines loyalty program, one of the most recognized programs in the market. We also have partnerships and associations with brands such as Dufry, Shell, Vivo and Smiles (which was launched recently) to offer exclusive benefits to our customers.

We have also launched two -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; and
4.Superdigital

 

·“1|2|3,” which is aimed at customers with higher incomes (R$1,500 per month and above) 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).

Superdigital is a digital pre-paid solution that allows customers to manage their daily financial activities entirely online through a pre-paid account with a user-friendly interface. As mentioned above, on February 28, 2020, we sold to Superdigital Holding Company, S.L., a company indirectly controlled by Santander Spain, our entire equity interest in Superdigital.

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. In order to comply with the resolution, we offer customers a solution that automatically converts the balance of any revolving credit outstanding after the relevant bill into an installment loan. See “Item 4. Information on the Company—B. Business Overview—Regulation and Supervision—Other Applicable Laws and Regulations—Credit Cards.”).

 

The following table sets forth certain key financial and operating data regarding our credit card business for the periods indicated.

  As of and For the Year Ended December 31, Change between 2016 and Change between 2015 and
  2017 2016 2015 2017 2016
Credit card turnover market share(1)  14.6%  13.1%  12.2%  1.5 p.p.   0.9 p.p. 
Credit card portfolio (R$ billion)  25.1   21.1   19.4   19.0%  8.7%
Total card turnover (R$ billion)  167.9   140.2   122.9   19.7%  14.1%
Credit card turnover (R$ billion)  111.5   92.2   82.2   20.9%  12.2%
Total card transactions (in millions)  1,969.0   1,651.5   1,424.0   19.2%  16.0%
Credit card transactions (in millions)  974.2   810.7   704.0   20.2%  15.2%
Participation of credit card in the household consumption – Market overview (1) (%)  17.6%  17.5%  17.7%  0.1 p.p.   (0.2) p.p. 

(1)Source: Data for 2017 is based on ABECS data for the nine months period ended September 30, 2017 as data for the year ended December 31, 2017 was not available as of the date of this annual report.For comparison purposes, the differencebetweenSeptember 30, 2017andSeptember 30, 2016 would be: 1.7 p.p. for “Credit card turnover market share” and 0.4 p.p. for “Participation of credit card in the household consumption – Market Overview.”
5.Esfera

 

Esfera is our loyalty program, which can be accessed through a dedicated website and mobile app. Our loyalty program enables holders of credit cards issued by Santander Brasil to exchange their reward points for many products, services and travel benefits, with exclusive deals and discounts with partners such as Cinépolis, FastShop and Casas Bahia, among others.

6.BEN Benefícios

BEN is a benefits company that brings greater freedom, purchasing power and quality of life to the people who use them, in addition to delivering an integrated digital experience, as mentioned above in the “Item 4.A—History and development of the Company—Important Events.”

Payroll Loans

 

A payroll loan is a retail product with a differentiated methodPayroll loans support account holders and non-account holders in the execution of payment.projects and financial organization. Monthly installments are deducted directly from customers’ payrollborrowers’ paychecks by their employerown employers, and are then credited to Santander Brasil, significantly reducing our credit risk. Our customersAs a result, payroll loan rates are typically retirees benefitting from a state pension, private sector employees and employees from the public sector.lower than other credit options. We make payroll loans available directly to our account holders, as well as indirectly to non-account holders through Olé Consignado.

 

49

Table of Contents

We offer payrollPayroll loans are offered through our mobile banking platform and through our branches. Our customers have the possibility of refinancing their payroll loans, as well as through our branches. Since July 2017, customers can apply for and receive a payroll loan entirely online. We seekchoosing from other options to advise our customers as to which type of loan they should enter into (personal or payroll) based onhelp them manage their financial needs.debts.

 

The following table sets forth certain key financial and operating data regarding our payroll loans business foras of the periodsdates indicated.

 

  As of December 31, Change between 2016 and Change between 2015 and
  2017 2016 2015 2017 2016
Market share in origination (1)  12.1%  9.8%  6.5%  2.3 p.p.   +3.3 p.p. 
Payroll loan portfolio (R$ billion)  25.5   18.9   14.8   35.0%  27.5%

62 

Table of Contents

  As of December 31, Change between 2018 and Change between 2017 and
  2019 2018 2017 2019 2018
Market share in origination (1)  13.2%  12.2%  12.1%  1.01 p.p   0.1 p.p 

Payroll loan portfolio (R$ billion)43.0 33.825.527.1%32.5%

(1)Source: Brazilian Central Bank, as of December 31, 20172019, December 31, 2018 and December 31, 2016,2017, as applicable.

 

Mortgages

 

We offer long-term loansfinancing to our customers for the purchase of real estate, secured by deeds of trust, or for customers who wish to obtain a loan using real estate as collateral. We consider mortgages to be a strategic product due to their lower risk (since the acquired property serves as collateral) and ability to increase customer loyalty with the Bank (especially given that we offer customers more attractive rates if they choose to bank with us). OurIn this market, our customers in this marketand those of our competitors are primarily individuals.

 

We do not offer mortgage loans that do not meet prime lending regulatory standards, which means that (i) we do not make any loansfinancing for more than 80%90% 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 notother indebtedness added to the financing cannot exceed 35% of borrowers’ monthly gross income.

To improve practicality for our customers, we have launched our real estate portal, a digital channel that enable customers to obtain mortgages in a 100% digital fashion. We believe we are first bank in Brazil to offer customers the opportunity to obtain a mortgage while only need to be physically present to sign the contract and then return it duly registered. We have established a partnership with the largest real estate portal in Brazil in order to improve our sales network and strengthen our digital presence. In addition, we launched a high-impact marketing campaign, in conjunction with a major retailer in which we offered customers market-leading terms to obtain mortgage financing or transfer their existing mortgage financing to us, while also giving customers the chance to win a refrigerator.

 

The following table sets forth certain key financial and operating data regarding our mortgage business for the periods indicated.

 

 As of December 31, Change between 2016 and 2017 Change between 2015 and 2016 As of December 31, Change between Change between
 2017 2016 2015     2019 2018 2017 2018 and 2019 2017 and 2018
  (in R$ billions, except percentages) (in R$ billions, except percentages)
Mortgage loan portfolio  34.8   36.6   36.8   (5.0)%  (0.5)% 39.3 36.3 34.8 8.3% 4.3%
Individual sector mortgage loans  28.2   27.3   26.1   3.4%  4.5% 37.2 31.4 28.2 18.4% 11.3%
Loan to value(1) – Production (% quarterly average)  58.6%  55.9%  59.2%  2.7 p.p.   (3.3) p.p.  62.9% 60.6% 58.6% 2.31 p.p 2 p.p 
Loan to value(2) – Portfolio (%)  46.4%  48.1%  49.3%  (1.7) p.p.   (1.2) p.p.  49.4% 48.7% 46.4% 0.73 p.p 2.3 p.p 

 

(1)Ratio between loans and the value of the collateral, excluding home equity.

 

(2)As of 2017, the LTV guarantee is calculated at market value. In the previous years it was calculated based on the value of the collateral registered in the contract. For better comparison, the 2016 and 2015 values were2017 value was restated.

 

Superdigital

Superdigital is our digital payment solution that allows customers to manage their daily financial activities entirely online in a user-friendly interface through a pre-paid account. Superdigital is an evolution of ContaSuper, which we acquired in 2016.Tailored Products and Services

 

Superdigital customers can easilyWe have a complete offering of services and rapidly (i) make withdrawalsproducts worldwide. In this way, we have a portfolio that ranges from basic to tailor-made and highly complex solutions in the “Banco24Horas” ATM network; (ii) sendfollowing areas:

·Global Transaction Banking -which includes the sale and receive moneymanagement of local and global transactional banking products, which includes local loans, commercial finance (confirming), transfers of BNDES onlending, trade finance, guarantees, structured loans, cash management solutions and funding from any bank; (iii) recharge mobile phones; and (iv) carry out foreign exchange transactions in up to 10 currencies. In addition to all these features, customers also receive an international MasterCard credit card to make purchases in physical and online stores and have access to the Santander Esfera and MasterCard Surpreenda programs, which offer a series of benefits and promotions.banks.

 

5063 

Table of Contents

The following table sets forth certain key·Global Transactional Services - which is responsible for sales and management of global transactional banking, trade finance, guarantees, structured loans, and funding from international banks;

·Global Debt Financing - which includes funding and financial advisory services related to projects, origination and operating data regarding our Superdigital businessdistribution of fixed-income securities in the debt capital markets, financing of acquisitions and syndicated loans, other structured financing arrangements, subordinated debt and energy efficiency transactions.

·Investment Banking - which includes advisory services in mergers and acquisitions and equity capital markets transactions, including initial public offering and follow-on offerings.

·Equities - which includes stock brokerage and advisory services, equity services for individuals, corporate and financial institutional investors in stocks, derivatives, as well as equity research.

·Treasury Customers - which is responsible for structuring and offering foreign exchange, derivative and investment products for customers from several segments of Santander Brasil, including institutional investors, corporate and retail customers.

·Market Making - which is responsible for the periods indicated.pricing of customer deals originated by our sales force from corporate, institutional, private banking and retail segments.

 

  For the Year Ended December 31, Change between 2016 and 2017 Change between 2015 and 2016
  2017 2016 2015    
Total customers (thousands)  1,287.2   810.7   391.3   58.8%  107.2%

We are one of the leading banks in capital markets and financial advisory services in the Brazilian and international markets as evidenced by the awards we have received, the principal among which are listed in the table below.

AreaAcknowledgments

Global

Transaction

Banking

1st place in BNDES Disbursements to Large Companies and 4th place in BNDES Disbursements to Small and Medium Enterprises in the first half of 2017, according to the BNDES
Best Trade Bank in Latin America and Deal of the Year Latin America: Seaborn Networks by Global Trade Review in 2016 and 2017
1stplace in Trade Finance Bank, according to Febraban

64 

Table of Contents

EquitiesRanked as 4th place among Brazilian banks and 6th place among banks in Latin America. Ranked as 1st place in the Energy & Sanitation and Transportation (Latin America), Education (Brazil) and Strategy (Brazil and Latin America) sectors, and several leading positions in Brazil’s Research rankings by U.S. magazine Institutional Investor in 2017

Santander Corretora was authorized to use B3’s Agro Broker certificates. It now has all B3 qualification certificates

Santander Corretora has ranked 1st place in stock picking since 2012, according to Valor Econômico

Clients Treasury1stplace in the Foreign Exchange Rankings by the Brazilian Central Bank since 2014
Best Treasury in Brazil in 2017, according to Euromoney
Global Debt Financing (GDF)

Financial advisory: 1st place in Latam and Brazil ranking in 3Q19 by Dealogic

LatinFinance 2017 Awards

Best Infrastructure Financing: Brazil

Ventos do Araripe III

2nd place in DCM International – Brazilian Bonds by BondRadar

ü1st place as Financial Advisor and Structurer (number of projects)

ü1st place as Financial Advisor for Auctions

(financial volume)

2018:

ü1st place - Financial Advisor by Volume

ü1st place - Auction Financial Advisor by Volume

ü1st place - Arranger by Volume

Customer Solutions

 

Agribusiness

 

OurAgribusiness remains one of our key areas of expansion, and we believe that expanding our agribusiness customer unit offersnetwork further also helps broadening our reach within the Brazilian countryside to areas in which are not present yet. We provide a completefull range of products and services targetingfocused on the agribusiness sectorsector. Our approach to rural producers differs from the approach we take with our other customers as we offer rural producers a specialized relationship, which we believe to be more agile and efficient through a network that includes 14 specializedof physical stores located in key agricultural regions, a team with expertise in the agribusiness (including agronomists) sector and a team with the expertise necessary to offer certain segment-specific products, in addition to our mainstream banking and finance products, to farmers, cooperatives and agribusinesses.digital solutions.

 

The following table sets forth certain key financial and operating data regarding our agribusiness for the periods indicated.

 

As of and For the Year Ended December 31,

Change between 2016 and 2017

Change between 2015 and 2016

 As of and For the Year Ended December 31, Change between Change between

2017

2016

2015

 2019 2018 2017 2018 and 2019 2017 and 2018
           
Number of agribusiness-focused stores14—14—  34   21   14   13   7 
Agribusiness loan portfolio (R$ billion)11.58.96.029.1%47.9%  10.9   11.8   11.5   -7.9%  2.6%

 

Merchant Acquiring Market | GetnetMicrofinance

 

GetnetProspera Santander Microfinance is a technology company that offers merchant acquiring solutions, both physicallythe largest productive and through digital means. The acquisition of Getnet, which was completedmicrocredit-oriented operation among privately owned banks in 2014, has given us more flexibility, allowing us to create more complete and tailor-made solutions to our customers. According to a Nilson report for 2017, Getnet is currently the fourth largest merchant acquiring company in Latin America and the second largest e-commerce acquiring company in Latin America, in each caseBrazil, based on number of transactions.

We offer payment solutions for individualsmarket share and companies, including: (i) mobileportfolio value. It is geared toward supporting formal and Wi-Fi point of sale, or POS, devices; (ii)Vermelhinha, a mobile POS device which self-employed professionals and small companies may buy or rent from us; (iii) TEF, a solution for establishments with a significant number of transactions, integratedinformal microentrepreneurs in society with the establishment’s systemspurpose of generating work and which offers reconciliation of sales through our “Santander Mais Gestão” program; (iv) the Getnet App, which helps merchants manage their business; (v) POS Digital, which merges payment and apps; and (vi) eGetnet,income. With a digital platform of e-commerce with100% digitalized service process, in addition to products intended to improve business management skills, we have clients who hire us for services previously not available to them, because they do otherwise have access to financial services, such as safe box, recurrenceproperty finance, consortium and anti-fraud systems.investment services.

Getnet also 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 which rewards customers who concentrate their sales on POS devices.

In order to ensure the high quality of our products and services, we have received these relevant certifications:

·Tier III – international seal of availability, reliability and security in data centers;

·PCI – the highest recognition of data security for the payment card industry;

·PIN Visa 2.0 – to enhance validation methods and improve consistency with compliance assessments;

·ISO 27.001 – attests to the excellence of processes and security in confidentiality, integrity and availability of information;

·ISO 10.002 – excellence in the treatment of complaints in electronic means of payment; and

·Reclame Aqui’s RA1000 Seal, which is given to companies with excellent levels of service and commitment to after-sales.

 

5165 

Table of Contents

The following table sets forth certain key financial

Webmotors

Webmotors is the first and operating data regarding our merchant acquiring businessbiggest Brazilian technology company focused on automotive purchase and sale solutions for dealers, original equipment manufacturers and private sellers, holding the biggest online automotive classified in Brazil.

Webmotors received over 30 million visits each month and had an average over 450,000 cars listed. Through the Cockpit, a pioneering and disruptive platform for car dealers, which combines solutions for the periods indicated.entire chain described above, we offer the following solutions: business management/performance, buyer profile (CRM), data intelligence, predictive pricing models and market data (AutoGuru). This hub generated positive results, such as a 25% increase in the volume of contracts by sellers and a 15% decrease in the time of these contracts with end-customers. With that, we experienced a 30% growth in the number of dealerships with a high level of engagement with us.

 

  As of and For the Year Ended December 31, Change between 2016 Change between 2015
  2017 2016 2015 and 2017 and 2016
  (R$ millions, except as otherwise indicated)
Market share of total turnover(1)  11.5%  9.5%  7.7%  2.1 p.p.   1.7 p.p. 
Debit turnover  51.2   37.6   29.3   36.0%  28.3%
Credit turnover  90.9   70.6   53.7   28.7%  31.4%
Number of debit transactions (thousand)  840,171   592,937   436,396   41.7%  35.9%
Number of credit transactions (thousand)  743,263   654,090   381,937   13.6%  71.3%

We have also launched “+Fidelidade,” a loyalty program aimed at providing our intermediate customers with a full value offer through a model of incentives to store owners based on their loyalty and relationship level with Grupo Santander Brasil and Webmotors. We have sought to improve customers’ after-sales experience through several functionalities made available on an online portal.

(1)Source: ABECS

+ Negócios and + Vezes

In 2017 we launched + Negócios, an innovative digital trading platform designed to be simple and intuitive, which enables faster execution of loan simulations, receipt of credit approval and proposal formalization for vehicle, in addition to providing portfolio management reports. In the same year we introduced “+Vezes”, a digital trading platform which allows retailers to offer installment payment options when they sell goods and services.

 

Cash Management

 

We offer cash management solutions to corporate customers and SMEs online through our Internet banking and mobile banking services. Our revenues from cash management include fees from the following products which we offer: (i) collections, in which we assist customers in carrying out commercial transactions using printed or online payment slips; (ii) payments, consisting of simple and automatic management of our customers’ accounts payable activities through individual transactions or via electronic file transfer; (iii) payroll, which is intended to facilitate the management of salary and benefits payments to our customers’ employees via an online tool; (iv) collection of values, which consists of the payment of cash values and checks at the customer’s points of sale; and (v) custody, by which we perform the custody, control and deposit of predated checks up to the date of clearing. In addition, other products generate revenue and are structured and tailored to the customer’s operation.

 

Customer Funding

 

Since we are primarily a commercial bank, ourOur main sources of liquidity are customer funding through deposits and other bank funding instruments. These deposits, combined with equity and other instruments, enable us to meet most of our liquidity and legal reserve requirements. As of December 31, 2017, customer deposits amounted to R$276.0 billion, representing 63.5% of total funding, which amounted to R$434.6 billion.

 

For morefurther information, refer tosee “Item 5. Review and Operating and Financial Outlook—B. Liquidity and Capital Resources—Liquidity and Funding.”

 

Investments

 

Our investment products are created through a qualified advisory process thatfor retail customers seeks to understand our customers’provide qualified guidance and help them to achieve their financial objectives based on four major pillars:

·Client investment profile -We appraise the situation of our costumer to understand their level

66 

Table of Contents

of financial culture, investment profile.horizons, liquidity needs and the levels of risk they are willing to assume, among other factors. This analysis allows usis reviewed periodically, according to map out solutions for our customers’ short-, medium-customer’s needs and long-term objectives.local regulations.

 

Our recommendations are always based on a “recommended portfolio” solution, which seeks better returns for our customers through the combination of diversified products and services that meet the specific needs of each customer, as well as our own objectives.

·Investment strategy - Our investment philosophy aims to provide long-term returns through a structured asset allocation process and mitigate market risks from diversification among different asset classes.

 

Our portfolio is composed of a wide range of products, which are distributed and offered at our branches and digital channels, including investment funds, which are managed by Santander Asset Management, time deposits, real estate credit notes, agricultural credit notes, financial letters and structured notes certificates, which are treasury-managed, and other products such as equities, derivatives, exchange traded funds, real estate funds and public securities, which are intermediated by Santander Corretora.

·We define strategic portfolios for each customer profile and build our “Model Portfolio” on monthly basis according to market conditions and trends. This tactical view arises from the Asset Allocation Committee, which consists of economists from ours economics department, Santander Asset Management, our Private Banking unit and our brokerage house (Santander Corretora).

 

Additionally, our
·Execution and implementation - To assure a successful execution of investment strategy we provide a complete array of financial products, ranging from banking instruments, bonds, stocks, structured notes, investment funds, with an open architecture with selected investment providers, real Estate funds and exchange traded funds, among other capital markets instruments. Our partnership with Zurich Santander completes this offering with Zurich Santander allows us to offer a wide range of private pension plans.

·Follow-up- Our advisory team performs, along with the client, a thorough and frequent revision of their profile, objectives and results, seeking to keep the investments within the established parameters and Model Portfolio’s guidance.

In order to identify possible deviations in the positions from the investment profile, we also rely on automated monitoring systems. These controls warns the costumers of any operations that compromise the suitability of their portfolio and are in line to our commitment to protect our costumer’s interests.

Furthermore, each customer has direct access to its positions through a private access site on the Internet and Mobile App, enabling them to view the evolution of their investment strategies.

Programa Avançar

We also have a non-financial solution aimed at entrepreneurial customers, which we make available a web platform through which SMEs can access content and solutions related to management and innovation, internationalization, team building, and other topics that we believe are relevant to businesses. We see this program as a key component of our offering to Brazilian entrepreneurs.

 

Service Channels

 

We offer our financial services and products to our customers through our multichannel distribution network, composed of: (i) physical channels, such as branches, mini-branches or PABs, and ATMs; (ii) call centers; and (iii) digital channels, such as Internet banking and mobile banking.

52

Table of Contents

The main focus of our service channels is to provide our customers a full range of services across all channels, according to their choices and/or needs. The availability of digital service channels gives our customers the necessary autonomy to meet most of their needs through digital channels. This enables our branch employees to focus on customer service and the provision of advice rather than operational tasks. Our investment in digital channels has been important in developing this strategy.

 

Physical 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) and ATMs.customers. The following table presents our physical distribution network as of the dates indicated.

 

 As of December 31, As of December 31,
 2017 2016 2015 2019 2018 2017
Branches  2,255   2,254   2,262   2,328   2,283   2,255 
PABs  1,211   1,167   1,175 
Mini-branches  1,512   1,267   1,211 
Own ATMs  13,522   13,806   14,221   13,296   13,641   13,522 
Shared ATMs  21,195   19,868   18,550   23,780   23,049   21,195 

 

67 

Table of Contents

Branch Network

 

Our branch network offers our customers our entire portfolio of products and services with personal and customized customer service. As of December 31, 2017, we had a network of 2,255 full service branches throughout Brazil, 85% of which were concentrated in the Southeast and South regions.

The table below shows the geographic distribution of our branch network as of the dates indicated.

 

 As of December 31, As of December 31,
 2017 2016 2015 2019 2018 2017
Northeast  8%  8%  8%  9%  8%  8%
North and Midwest  6%  6%  6%  7%  7%  6%
Southeast  72%  72%  72%  70%  71%  72%
South  13%  13%  13%  13%  13%  13%

 

PABs (Mini-branches)

 

We offer daily banking services to our SME and corporate customers and their employees through our PABs -(the acronym stands for Postos de Atendimento Bancário in Portuguese) located on their sites, as well as in hospitals and universities. Our PABs are generally exclusive sale points at customers’ sites. We believe that theThe 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.

 

ATMs

 

We operate an extensive network of 13,52213,296 ATMs, including those located in our branches and PABs.Mini-branches. In addition, our customers have access to the “Banco24Horas” network, which operates 21,19523,780 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.

 

Call Centers

 

Our call centers provide ouractive Santander Brasil customers (account and single product holders) with the opportunity to make inquiries, execute paymentconsultation, financial transactions and apply for products and services, such as personal loans.product hiring services. This important distribution channel has a variety of customer self-service facilities. Our call centers are also an important distribution channel that offers our clients additional products and services to our customers.

As of December 31, 2017 our call centers served approximately 8.9received over 150 million customers and employed approximately 5,200 people.

53

Table of Contents

contacts in 2019.

 

Digital Channels

 

Our digital channels include Internet banking, mobile banking and other digital platformssolutions intended to provide our customers a convenient manner in which to access the products and services whichthat we offer. We have recently made improvements to our digital channels, including:highlight the following key features:

 

·Internet Banking. We have revised our Internet bankingOnePay – This service with a viewis available through the Santander App and enables customers to simplifying it. The home screen now features the most important services, such as checking account, credit card, investments and personal loans, as well as the optiontransfer funds to choose favorite features. We have also added a search engine, which helps customers find features that are not frequently used, such as income reports.foreign countries in various currencies.

 

·Mobile Banking.We have modernized our apps, which can be downloaded on mobile devices and smartphones from the Apple Store and Google Play store. As a new feature for investments, our apps now provides a graphical and consolidated view of the investment portfolio, in addition to allowing customers to make investments in mutual funds, fixed income products and others (as well as withdraw funds from the same). We also provide corporate and SME customers the possibility of making transfers and payments, checking their ContaMax account, simulating, contracting and canceling working capital loans, accessing the automatic prepayment of card receivables, using certain chat functions and unlocking and registering a new access password.

• Santander On “Financial control” – This service is also available through Santander App and enables our customers view all of their commitments to us, as well as pending issues with the Brazilian tax authorities (Receita Federal do Brasil), Serasa (a Brazilian credit bureau) and the Brazilian Central Bank and transparency in the credit relationship with Santander Brasil. Its service shows, with easy interface and simple language, credit quality and the use of debt with Santander, allowing income to be updated without the necessity of showing any voucher, as well as relocation of available limits.

 

The following table provides certain key operating information with regards to our digital channels as of the dates indicated.

 

  For the year ended
December 31,
  2017 2016 2015
  (in millions)
Number of digital customers(1)  8.6   6.4   4.8 
Number of digital channel transactions(2)  3,699   3,151   2,460 
Number of customers with biometric registration  7.7   6.6   0.12 

68 

Table of Contents

  For the Year Ended
  December 31,
  2019 2018 2017
  (in millions)
             

Number of digital customers(1)  13.4   11.4   8.6 
Number of digital channel transactions(2)  4,311   4,073   3,699 

(1)We define digital customers as customers who have used at least one of the digital channels made available by Santander Brasil (i.e., mobile banking and internet banking) in the preceding 30 days.days of year end.

 

(2)Refers to transactions carried out through Internetinternet banking, mobile banking and other digital platforms. The data relating to the year ended December 31, 2018 has been revised as a consequence of a change in the criteria applicable to digital transactions accounting.

 

Internet banking and mobile banking transactions accounted for around 73.9% of all transactions in 2017, compared to 69.4% in 2016 and 65.9% in 2015. The following table provides an overview of the weight of each key non-physical distribution channel in our overall distribution system.

 

 For the Year Ended
 For the year ended
December 31,		 December 31,
 2017 2016 2015 2019 2018 2017
  (%)          (%)
Internet banking  54.0   54.3   56.2   39.7   46.1   54.0 
ATMs  14.4   16.7   16.7   8.9   10.4   14.4 
Mobile(1)  19.9   15.1   9.7   39.0   34.5   19.9 
Branch  5.4   6.8   9.2   4.1   5.2   5.4 
IVR(2)  2.7   3.8   5.5 
Interactive Voice Response (IVR) (2)  7.4   2.3   2.7 
Call Center  3.5   3.3   2.7   0.9   1.4   3.5 

(1)Includes tablet transactions. Data refers to total transactions (account holder and unique product-holder).

 

(2)Interactive voice response is an automated telephony system in which a computer interacts with callers (who can use their voice and tones input via a keypad to communicate with the computer), gathers information and routes calls to the appropriate recipient.

 

54

Table of Contents

In addition to Internet banking and mobile banking, we have digital platformssolutions that play an important role in providing a better digital experience for our customers and potential customers, including:

 

·Digital account opening. - We have made it possible to open an account with Santander Brasil entirely online.

 

·Santander Corretora App. - We provide a digital trading platform for our brokerage customers.

 

·Superdigital. Our digital payment platform is available online and through our mobile app.

·Santander Financiamentos. We have made it possible for customers to simulate and enter into auto loans via our website as well as through our online app.

·Autocompara. Autocompara- It allows customers to obtain insurance quotes from six different insurance companies and purchase the best offer through Autocompara’s website.

 

·EsferaPi. Our reward and discount program can be accessed– This is a solution that acts as a digital broker, empowering clients to invest through a dedicated websitesimple and mobile app.intuitive digital platform. It also provides market information and financial education tools. Pi was launched in 2019.

 

·SantanderWaySim. SantanderWay– This is an app that allows customers to manage all their Santander Brasil cards through a digital channel.credit solution for non-account holders, with competitive conditions and a better experience and usability. It is a complete credit marketplace, which we believe to be transparent and through which we offer financial guidance. Sim was launched in 2019.

 

·ID emDia – This debt renegotiation solution is an evolution of the traditional collection model. It provides a self-service debt management portal to indebted customers and was launched in 2019.

Technology and Infrastructure

Throughout 2019, we accelerated our investments in technology. Our goal was to deliver an innovative and agile bank, being able to face pertinent challenges to our digital transformation with competitiveness and service quality. Through technology, we aimed to boost our efficiency to grow faster.

In 2019, we launched a program to simplify and digitize our sales network and customer support

69 

Table of Contents

processes by 2022. We have also improved our development and system implementation chain by adopting a more automated, robust and scalable architecture based on micro services and cloud computing as well as by refining our DevSecTestOps practices for application development and infrastructure operations. We have listed below a few initiatives we have delivered this year:

• Corporate Platform:We have redesigned our mobile channel, in order to deliver a simple and safer navigation. We have deployed the QR Code authentication on ATMs, a new chat services platform, registration of favorite contacts for future transactions and digital access to Getnet sales receipt, online access to consolidated receipts within Corporate Internet Banking and payment of municipal, state and federal taxes through bar code, ensuring a more transparent and digital experience to our corporate customers.

•Santander Way Transformation:.We improved our payment platform by launching version 2.0 of the Santander Way App. We believe that the improved layout emphasizes important functionalities, such as ID Santander, isNFC (Near Field Communication) and OPC (“Online Purchase Card”), besides many upgrades to ensure an app designedeven better customer experience. Additionally, new features were incorporated to increase transaction security across our corporate Internet bankingthe application, allowing customers to receive, send and Santander Empresas apps.charge cash: P2P transfers through contact list or QR Code, purchase split with contacts within mobile’s contact list and payments through QR Code scanning on Getnet POS.

 

·•Getnet app.Investments Platform Evolution – The Getnet app enables customers to manage credit and debit card sales on Getnet terminals, among other services.

·Santander One Investimentos. Our Santander One Investimentos program features videos with informationWe simplified the customer registration experience on the best investments forbrokerage platform in order to make it faster and intuitive. We have also increased the number of investment products offered in our customers and is available on our website and our YouTube channel.investment platform.

 

Technology• Multicloud:We have executed our Cloud First global strategy, which focuses on providing an Infrastructure as a Service (IaaS and Infrastructure

We believe that proper managementPaaS), supported by a secure integration architecture between Santander’s Datacenter in Brazil and various local public cloud service providers. This infrastructure allows applications to be balanced between internal environment and the public cloud, ensuring greater flexibility and agility for an accelerated implementation of new business structures with the development of modern, digital and continually monitored applications. This transformation adds more robustness and scalability to our technology is key forsolutions, increasing the efficiencyoffer and availability of our business. Santander Brasil is continuously investing in new technologies and renewal of equipment and infrastructure, aiming to provide better solutionsservices provided to our customers and then leveraging the growth of our business while keeping high quality and performance standards.

• Business Process Digitization:In order to improve profitabilityefficiency and growproductivity, we digitized over seventeen major processes from our business.asset, transactional services, manufacture and treasury/cards departments, by developing new business rules in our business process management tool. This reduced the total analysis time for each process, paper printing and increased our overall control over the processes.

• Payroll loans:we have made improvements to the product’s digital journeys, in order to make the customer’s interaction more intuitive and decrease the amount of complaints reported to local regulatory agencies. We operatehave launched new preventive credit products in order to support our customer’s doubts clarification and increase the institution’s capital allocation efficiency. Furthermore, we have improved the point of sales designation, making the post sales experience more transparent to our customers and increasing the accuracy of the point of sales goals control.

• Interactive Voice Response (IVR) Transformation:we have deployed a newly humanized interactive voice response, or IVR for contact center and corporate customers support, with conversation mechanisms and a language closer to human language. The IVR can also predict customer’s actions, enabling a better self-service experience and minimizing the need for intervention from human assistants. Additionally, new features were incorporated into the IVR for individual customers, such as identification of defaulting customers and call transfer to the debt collection department so that customers can renegotiate credit products debts.

• Chatbots:we have implemented a modern technologychatbot platform interconnectedto develop and evolve new communication solutions with thatour customers. These solutions take advantage of the Santander Group, which allows usartificial intelligence and Natural Language Processing (NLU), to serve our customers on an international scale. We believe that being interconnected with the technological platform of the Santander Group gives us an advantage as we are the only international bank with significant operations in Brazil. See also “Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions—Information Technology Platform.”

One of our key goals is to be able to serve our customers through a number of channels, including both physical channels (such as branches) and digital channels (such as Internet and mobile banking). We endeavor to be customer-centric and be able to meet customers’ needs conveniently and effectively by enablingallow our customers to interactsolve their needs with us through the channels which they prefer from time to time.

In order to achieve this goal,support of chats and virtual assistants, in 2017, we released a new app called “Santander Way” developed for the credit cardpractical and payments market which, among other functionalities, allows our customers to shop using a virtual card (secure online shopping), enable or disable the use of customers own credit cards outside of Brazil and manage their expenditure and limits in an user-friendly manner.

Below are a few of the other initiatives which we have undertaken in order to be able to provide our customers with an enhanced digital experience:way.

·Continuous improvements to our mobile banking systems.We have made continuous incremental improvements to our mobile banking systems and interface, including making loan renegotiations via chat possible, providing “touchID” sign in, enabling customers to recharge their prepaid mobile phones, introducing ID Santander (an app designed to increase transaction security across our corporate Internet banking) as well as other steps to make it easier for our customers to perform transactions online.

 

5570 

Table of Contents

·•Santander Pass.In 2017, we launched Santander Pass, a credit card using near-field communication technology which allows for contactless payments. We offer two devices (a bracelet and a sticker) linked to our customers’ cards to simplify our customers’ user experience.

·Digital document management system.Brazilian General Data Protection Act (Law no. 13,709/2018), or “LGPD”):We have put in place abegun taking steps to make our systems comply with the LGPD’s requirements through technical alignment with digital documents management platformand human channels responsible for meeting holder’s rights, carrying out an assessment to improveidentify the day to day worksystems that store and use personal identifiable information, adaptation of our branchestechnical and back office. The system was put in place in November,2016structural components processes, policies and already contains approximately five million documents.

·Biometric identification.As of December 31, 2017, we had enrolled over 10 million customers in our biometric identification platform, which allows our customers to access ATMs without using their debit or credit cards.

·Digital client onboarding.We have put in place a digital client onboarding solution which enables customers to open an account with us entirely online.

·Superdigital.We have made improvements to our Superdigital app, which enables customers to manage their finances in a different and dynamic way through a prepaid account. Services available include money transfers, payment sharing and other similar services available via chat.

·New HR tools. We have a 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 that enables employees to clock in and out by geolocation, and review their pay slips and working hours.

·Academia Santander. We have 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.

·Ongoing development.We are pursuing analyzing the possibility of introducing certain additional technologies to our operations, including: (i) research on speech analytics with regards to contact center calls, (ii) research of natural language processing to review legal agreements and (iii) launch of a new projects to deliver an improved chat-automated chat platform to support our employees.procedures review.

 

A key factor in making us a more digital organization has been the evolution• Technology lifecycle management and applications portfolio optimization:In 2019, we updated and renewed over nearly 18% of our software applications, avoiding risks of upcoming obsolescence events, which could lead to high unavailability incidents, security, and data breaches as well as long time to recover on service outages. Additionally, we have strongly optimized our software applications portfolio: almost 8% of our software applications were decommissioned in the way we develop new solutions internally. means of functional consolidation toward fewer software components holding same business products and services.

Secure Bank (Cyber Security and Antifraud)

•Cyber Security:In 2016, we introduced a software development method known as “Scaled Agile” development. This involves putting together multidisciplinary teams fromorder to protect our business and technology functionsour customers against potential sensitive data leaks or confidential data, we have strengthened our infrastructure and giving themcapabilities to detect and prevent cyber attacks in 2019. We integrated our cyber security systems and processes at a global level, expanded the necessary autonomyuse of artificial intelligence to adapt to changing circumstancesproactively identify behaviors of potential threats, evolved our security operational centers (SOCs) and requirements. We believe that these multidisciplinary, issue-focused teams are able to delivery projects in an efficientexpanded our data protection and more responsive manner. As of December 31, 2017, we had over 1,000 professionals spread through 100 “agile” teams covering approximately 70% of all our ongoing software development projects. We have also taken steps to increase the automation of development and release cycles through a software life cycle best practice known as “DevOps” which seeks to promote greater contact between IT developers and IT operations teams.access control levels.

 

•Antifraud:On the field of fraud prevention, we have enhanced our biometric platform through the deployment of facial recognition solutions to authenticate online inquiries and payments on checking account or Santander Way applications. On the corporate platform, we have developed a new module to monitor malwares installed in computers that access our Internet Banking, preventing our customers to be redirected to fake websites.

Communications and Marketing

 

In 2017, we used communicationWe operate under multiple brands. A key aspect of our brand positioning strategy is to endeavor to fulfill our role as a responsible bank, i.e. one that does not just offer products and marketing toolsservices, but also encourages its customers to deliver more streamlineduse these responsibly by offering financial education and appropriate solutions against a demanding economic scenario. Our communications and marketing initiativesby seeking to be transparent in 2017 included:all of our actions.

 

·Campaigns focused on debt renegotiation. We used the “Credit with Attitude” campaign, for example, to promote the proper use of credit.

We use and monitor several communication tools in order to achieve our multiple customer portfolio with a unique approach and visual identity. This include not only the traditional media, such as television, but also internet and mobile advertising.

 

·Black Week Santander. We launched “Black Week Santander” in the last quarter of 2017 during which we placed more than 30 products and services on sale.

·Reduced Response Times in Our Interactions with Customers.We launched the “Mesa Ágil Santander Brasil” pilot project at the end of 2017 pursuant to which we began providing our customer service on a 24/7 basis in order to significantly reduce our response time.

56

TableWe had over 7.8 million users connected to us across social media (Facebook, Instagram, Twitter, LinkedIn and Youtube) as of ContentsDecember 31, 2019, which enables us to reach significant audiences. We also carried out important television campaigns, which we believe demonstrated our constant search for democratization in access to information and financial services, in addition to maintaining transparency about all of our actions.

·Social Media. In 2017, we accumulated around 3.3 million followers on Facebook, 183,900 on Twitter, 84,400 on LinkedIn, 57,000 on Instagram and 121,300 registered followers on YouTube.

·Farol Santander. We launched the latest entrepreneurism, culture and leisure facility in the city of São Paulo, Farol Santander. The building, a landmark in the city of São Paulo, was initially inaugurated in 1947 and was acquired by Santander Brasil in 2000. Reopened on January 25, 2018, the Farol building was designed to connect citizens, their capacity, cultural identity and social relationships, thereby contributing to the redevelopment of the city’s old quarter.

 

Sustainability

 

Our sustainability strategy is basedBased 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. Our solidity is based ona responsible internal management, a consistent risk culture, ethical values as a basis and technology at the responsible managementservice of our activities. Through our practices,people and business we seek to act assupport the Brazilian society in its transformation into the Brazil of the 21st century by fostering the economic growth in a transformational agent, contributing to the prosperity of our clientsresilient and society.

Social and Financial Inclusion

Our microcredit unit, Prospera Santander Microcrédito, is the largest productive and oriented microcredit operation - which is aimed at formal and informal micro entrepreneurs and focused on generating work and income - among privately owned banks in Brazil based on market share and portfolio value. In 2017, we launched products and services designed to increase access to banking services such as checking account, credit card, POS machines, personal accident insurance and savings accounts. As a result, in the year ended December 31, 2017, our microcredit unit disbursed a total of approximately R$800 million (a 32.9% increase compared to our disbursements in the year ended December 31, 2016), by generating more than 200,000 operations, from active customers, and opened approximately 36,000 new checking accounts. We maintained a high payment compliance rate (95.6%), as a result of our business model, educational actions, such as financial education lectures, and the capacity-building programParceiros em Ação, which is a private social investment program that supportsinclusive manner, stimulating the development of microenterprises in low-income regions where Prospera Santander Microcrédito is present. In the year ended December 31, 2017, 1,066 entrepreneurs were trained in 17 Brazilian cities.

ThePrograma Amigo de Valor, for instance, allows Santander Brasil, as well as our employeeshuman potential and customers, to transfer partpromoting an efficient and strategic use of their owed income tax directly to the Child and Adolescent’s Rights Funds. In the year ended December 31, 2017, this program raised funds totaling R$12 million (a 14.5% increase compared to the year ended December 31, 2016), which were directed to 38 projects in Brazil. We expect that these projects will benefit approximately 10,000 children, adolescents and their families.natural resources.

 

In addition, thePrograma Escola Brasil, a corporate volunteering program focusing on public schools, promoted over 400 actions with the effort of 1,174 employee volunteers, in 198 public schools.

Education

OurSantander Universidades Brasil programBrazil, sustainability governance is committed to social and economic inclusion through investment in higher education programs, promoting the insertion of students in the labor market and supporting entrepreneurship and innovation initiatives with incentives and awards. In 2017,Santander Universidades Brasil, granted 3,437 scholarships to students.

Another important initiative to support education is Universia, the leading university network in Ibero-America. Universia has been sponsored by the Santander Group since its founding. In Brazil, there are 404 universities participating, 120 employment websites with over 800,000 job positions. In 2017, Universia Brazil recruited 2,800 students for internship positions, had over 17.3 million unique users in its website.

Social and Environmental Businesses

In 2015, we published and implemented our Socio-Environmental Responsibility Policy, or PRSA, based on global guidelines, locally identified commitments and demands, and our local business strategy. Decision-making goes through the Board of Directors, the Sustainability Committee (responsible for clarifications and recommendations to the Board of Directors regarding the development of guidelines set forth in CMN Resolution 4,327/14, further incorporating sustainability into the organization’s analytic and decision-making processes. As part ofrelated to sustainability), our socio-environmental governance improvement process we launched the Senior Executive Committee of the PRSA, which is composed of the vice presidents of risk, human resources, communications, marketing, institutional relations and sustainabilityexecutive committee and the compliance officer. This committee will be involved in strategic decisions regarding the PRSA and will act as a bridge with the board of executive officers.Sustainability Executive Superintendence

 

5771 

Table of Contents

We offer products, servicesResilient and programs which promoteInclusive Economy

Our broad commercial activity allows us to advise and support both from large clients and projects as well as informal entrepreneurs. Thus, our role is to be a facilitator and contribute to the generation of jobs, income, improvement of logistics and infrastructure, in order to contribute to the development of Brazil.

Through this pillar, for example, we seek to financially empower people who are unbanked, underbanked or who may be financially vulnerable by offering access to banking services, products and non-financial initiatives. Regarding financial education, in 2019, we trained approximately 28,000 people. This also included providing in-person training at our customers’ businesses in more sustainable ways. For example, in 2017,branches over the weekend, where volunteers taught over 1,961 people.

In addition, we participated in an issuancehave specific offers supporting microentrepreneurs and small and medium enterprises such as above mentioned Santander ON and Prospera SantanderMicrofinanças.

Development of green bondsPotentials

Our commitment to the development of potential begins with our employees. We have been ranked as one of the best companies to work for in the Great Place to Work survey since 2016. Guided by our corporate culture and internal policies, we offer opportunities supporting the development and professional growth, in order to build a culture of delivering results, respect, innovation, inclusion and diversity.

We also contribute to the promotion of the rights of children and adolescents. Through Amigo de Valor Program, Santander Brasil, employees and clients directly donate a part of the due income tax to the Funds for the Rights of Children and Adolescents (Fundo dos Direitos da Criança e do Adolescente). In 2019, this program raised funds R$19 million.

Through the Santander Universities Program, we offer initiatives focused on granting national and international scholarships, programs for the development of entrepreneurs and internship and employment programs. On December 31, 2019, about 6,000 scholarships and entrepreneurships were granted with a total investment of about R$27 million.

Efficient and strategic use of the Natural Resource

In 2019, the total amount of U.S.$500 million for projects involving energy efficiency, wasteenvironmental financing with Santander Brasil facilitated across Santander Financiamentos, Responsible Agribusiness, Corporate, Retail (Individual and Corporate clients), Project Finance and Santander Corporate and Investment Banking, including Green Bonds, totaled approximately R$13 billion.

In relation to internal environmental management, in 2019, we announced our decision to eliminate the single-use plastic consumption at Santander Brasil, by launching the #Desplastifique program. The implementation plan started with the administrative buildings, in 2019, and sustainable water management and two issuances forwill be present in all branches by the constructionend of wind farms, in the amount of R$22 million. We have also set up an initiative to promote low-carbon financing. In 2017, we launched theCDC Socioambiental product for individual customers and thePlano Empresário Sustentável product for the construction sector. In the year ended December 31, 2017 we disbursed more than R$1.7 billion to socio-environmental financing.2020.

 

We also intend to have continued to progress with “Fit to Grow,” which was implemented in 2016 to promote rational expenditure management. At the end100% of our operations powered by renewal energy by 2025. In December 2019, approximately 24% of the first year of implementation,electricity we had a reduction in consumption involving electricity (approximately of 6%), paper prints (of 4.5%) and air travel (of 19.5%).consumed was derived from renewable sources.

 

RecognitionsSocio-Environmental Responsibility Policy

 

Our sustainability strategySocio-Environmental Responsibility Policy or PRSA meets the requirements of CMN Resolution n° 4.327/14 and SARB Regulation 14 of FEBRABAN. It defines guidelines and consolidates specific policies for socio-environmental practices have been recognized byin business and relationships with certain parties. These practices include socio-environmental opportunities, impacts and risk management related to subjects,

72 

Table of Contents

such as suitability in granting and using credits, management of suppliers and socio-environmental risk analysis. There is a Senior Group of our PRSA, which consists of our vice-presidents of Risks, Corporate, Human Resources, Finance, and Communication, Marketing, Institutional Relationships and Sustainability, as well as the inclusionAgribusiness and the Compliance Officers. This Senior Group is involved in the decision-making related to the PRSA and operates as a connection with our Executive Committee.

Competition and Industry Transformation

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 73.3% of the eighth consecutive year,credit and 68.8% of the deposits available in the portfoliocountry in September 2019, according to the Brazilian Central Bank and the financial statements of theÍndice de Sustentabilidade Empresarial – “ISE” (Business Sustainability Index) of the B3. 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. aforementioned banks.

 

Other recognitionsThe following table shows the total loans and deposits of the five leading financial institutions in 2017 included:Brazil at the dates indicated:

 

·We were recognized by the Exame Sustainability Guide promoted by “Revista Exame.”
  Santander Brasil Bradesco Itaú Unibanco Banco do Brasil Caixa Economica Federal Financial System
  December 2019 (R$ billions)
Total loans(1)  352.0   454.0   429.4   621.3   693.7   3,478.5 
Total deposits(1)  268.5   367.8   402.1   330.7   433.6   2,621.8 

 

·We achieved third place in the category Leading Company in Corporate Governance 2017 in the Sustainable Leaders Agenda 2020 of ALAS20 Latinoamérica.

 

·Spanish Chamber of Commerce in Brazil Award of Sustainability: Universia Brazil’s activities were one of the highlights in the “large companies” category.

 

·With Fit to Grow case, we were recognized in the category of Sustainability in Products and Services, by the “Prêmio ECO,” organized by the American Chamber of Commerce.

(1)       According to the Brazilian Central Bank, reported and presented in accordance with Brazilian GAAP (December 2019).

·We received the “Efficiency Practices Leader” awarded by the “Federación Latinoamericana de Bancos” (FELABAN) and the International Finance Corporation (IFC).

·We were recognized by the Carbon Disclosure Project as one of the largest Brazilian leaders in climate change, having reached the highest score among companies in the financial sector.

·Our head office received the “Guia de Rodas Seal,” a certification related to accessibility for people with disabilities.

·In 2017, we contributed to the Santander Group’s inclusion in the Dow Jones Sustainability Index for an additional year (ranked tenth among banks included in the index, which includes a total of 319 companies).

 

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 risks. Such coverage establishes reimbursement for the asset replacement value.

 

In addition, we also maintain the following insurance policies:

 

·policies against material and/or bodily damage caused to third parties for which we are held responsible;

 

·policies against financial losses due to fraud or employee misconduct, among others;

 

58

Table of Contents

·directorsdirectors’ and officersofficers’ 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; and

 

·policies against hacker attacks and cyber-crimes.

 

Dependence on Patents, Licenses, Contracts and Processes

 

In Brazil, ownershipThe major trademarks we use, including, among others, the “Santander” brand, are owned by Santander Investment Bank. Santander Brasil has a license to use this brand. All trademarks of trademarks can be acquired only through a validly approved registrationour business are registered with the National Institute of Intellectual Property (Instituto(Instituto Nacional de Propriedade Industrial,, or “INPI”), the agency responsible for registering trademarks, patents and designs and software in Brazil.Brazil, or have been submitted to INPI by us or by the Santander Group. After registration,

73 

Table of Contents

the owner has exclusive rights of use of the trademark throughout Brazil for a 10-yearten-year period that can be successively renewed for equal periods.

 

As of the date of this annual report, we own 545567 trademarks in Brazil, 365 of which are owned byamong them, Santander Brasil owns over 100 trademark registrations in Brazil with the remaining 180 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. In addition, 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 of 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 2017, there were 135 universal banks, 20 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 reduce 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. In 2017 the Brazilian economy began recovering with GDP growing by 1% during the year.

59

Table of Contents

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 76.0% of the credit and 84.1% of the deposits available in the country in September 2017, according to the Brazilian Central Bank and the financial statements of the aforementioned banks.

Industry Transformation

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 roles as credit providers (with a 54.1% market share) and deposit takers (with a 43.0% market share, according to the Brazilian Central Bank. 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
   (%)             
Total assets(1)  8.4%  13.2%  17.3%  17.1%
Total loans(2)  7.9%  12.3%  14.6%  18.7%
Total deposits(2)  9.2%  12.0%  20.0%  20.4%

(1)According to the IF report of the Brazilian Central Bank in December 2017.

(2)According to the Brazilian Central Bank, reported and presented in accordance with BR GAAP (December 2017).

Brazilian Credit Market

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.

60

Table of Contents

By the end of December 2017, 51.3% of the R$3,086 billion of total credit outstanding in Brazil was market-based credit, of which 53.7% were loans to individuals and 46.3% were corporate and SME loans:

  2017 2016 2015
   (R$ billion)
Total outstanding loans  3,086   3,105   3,219 
Earmarked credit  1,503   1,549   1,582 
Market-based credit  1,583   1,556   1,637 
Corporate and SME  732   747   832 
Individuals  851   809   805 

Source: Brazilian Central Bank.

Credit to Individuals

According to the Brazilian Central Bank, the total outstanding market-based credit for individuals increased at an average annual compounded rate (“CAGR”) of 4.3% between December 2012 and December 2017, reaching R$850.5 billion, or 27.6% of total loans in Brazil.

The following table shows the evolution of the main retail credit products offered to individuals:

  2017 2016 2015 CAGR between December 2015 and December 2017
   (R$ billion, except for percentages)
Overdraft accounts  21.8   23.3   24.7   (6.1)%
Payroll loans  310.5   287.6   272.5   6.7%
Personal loans  101.9   101.7   107.5   (2.7)%
Credit card  201.1   184.9   173.4   7.7%
Auto loans  150.8   144.8   163.0   (3.8)%
Mortgage loans (individuals only)  565.1   534.4   499.6   6.3%
Agricultural loans (individuals only)  176.2   162.5   153.7   7.0%
Others  121.6   121.3   117.6   1.7%
Total  1,649.0   1,560.7   1,512.2   4.4%

Source: Brazilian Central Bank.

Despite the economic recession in 2015 and 2016, 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 9.5% in December 2017. Government financing for housing and real estate accounts for approximately 28.6% of the retail credit market in Brazil, according to the Brazilian Central Bank. As of December 31, 2017, our market share was 5.5%.

Historically, the costs of market-based loans in Brazil have always been high due to the lack of competition and high default rates. Payroll loans are a safer and more attractive type of market-based loan for individuals. 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 10.6% ​​between December 2012 and December 2017. As of December 31, 2017, payroll loans accounted for approximately 18.8% of the retail credit market in Brazil. As of December 31, 2017, we had an 8.3% market share in payroll loans, according to the Brazilian Central Bank.

The auto loan 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 loan portfolio decreased by 11.1% in 2016 but increasing by 4.1% in 2017 as a result of the improving condition of the Brazilian economy. As of December 31, 2017, we ranked first in the auto loan market, with a market share of 23.2%, according to the Brazilian Central Bank.

61

Table of Contents

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 with a view to decreasing the risks associated with electronic transactions and reducing related costs. As of December 31, 2017, we had a 14.2% the market share in credit cards in terms of revenue, according to the Brazilian Central Bank.

Corporate and SME Credit

According to the Brazilian Central Bank data, the amount of loans granted to companies has increased at a CAGR of 2.1% between December 2012 and December 2017, reaching R$1.4 trillion, or 46.6% of the total lending in Brazil. The main corporate products are BNDES loans and working capital loans, which account for 15.8% and 9.5%, respectively, of total loans in the country according to the Brazilian Central Bank.

Asset Management

According to ANBIMA, the asset management industry in Brazil increased at a CAGR of 11.9% between December 2011 and December 2017, reaching R$3.8 trillion of total assets. Retail funds represent 25.7% of this total. The largest players in the market are the large financial conglomerates and their main customers are institutional investors, including pension funds, insurance companies and private banking customers. As of December 31, 2017, we had a 7.8% 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, (theor 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 board of the CMN is composed of the president of the Brazilian Central Bank, the Minister of Planning and the Minister of Finance, and is chaired bywho also chairs the Minister of Finance.Board. 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.information. The Brazilian Central Bank has committees to address specific issues, noteworthy among which is the Monetary Policy Committee (“Copom”), whichissues. COPOM, one of these, has the purpose of adopting measures to fulfill the inflation targets defined by the CMN and establishing monetary policy guidelines. The activity of the CopomCOPOM 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.

62

Table of Contents

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).

 

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 B3.

 

74 

Table of Contents

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 December 2017, the CMN enacted a new rule establishing that all such requests submitted to the Brazilian Central Bank must be approved within 12 months (subject to suspension of the term in some instances). 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 registered as permanent assets without prior approval of the Brazilian Central Bank. In addition, theThe corporate purpose of thesuch 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 tosuch as 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. In December 2017, the CMN enacted a new rule establishing allThe requests offor change of control submitted to the Brazilian Central Bank must be approved within 12 months and all requests for changes to organizational documents mentioned above must be approved within three months (in both cases subject to suspension of the term in some instances);

 

·Brazilian financial institutions must fulfill minimum capital and compulsory deposit requirements and must observecomply with 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 belonging to the S1 segment, as is the case of Santander Brasil, cannot lend more than 25% of its Tier 1 Regulatory Capital (Patrimôpatrimônio de Referêreferência) to a single person or group;group and the maximum exposure to concentrated individual clients or group of connected clients of such Segment 1 financial institution is 600% of its Tier 1 Regulatory Capital (a concentrated individual client would mean, for the purpose of the proposed rule, as any one client to which exposure is equal to or higher than 10% of its Tier 1 Regulatory Capital);

 

63

Table of Contents

·AAccording to the Banking Reform Law, a Brazilian financial institution cannot carry out credit transactions with (i) its controlling shareholders, directors and members of other statutory bodies (fiscal, advisory and other) and their respective spouses and relatives up to second degree, (ii) with the individuals or legal entities that hold a qualified interest (15% of the capital stock) in their capital, (iii) with the legal entities in which they have qualified interest (direct or indirect), (iv) with the legal entities in which they have effective operational control or preponderance in the deliberations, regardless of the equity interest, and (v) with the legal entities with common directors or members of the board of directors. Such prohibition shalldoes not be applied,apply, subject to limits and conditions still to be issued,established by the CMN through the enactment ofResolution No. 4,693 in October 2018, to: (i) transactions carried out under market-compatible conditions, without additional benefits or different benefits when compared to the operations deferred to the institution other customers with the same profile, (ii) credit operationsa counterparty that have as counterparty a financial institution that is part of the institution prudential conglomerate, provided that they contain contractual clauses of subordination, except in the case of overnight and loan transactions with other financial institutions specified by the law, (iii) the interbank deposits, according to the law, (iv) the obligations assumed by related parties under the compensation and settlement services authorized by the Brazilian Central Bank or by the CVM and their respective counterparties, and (v) other cases authorized by the CMN; the management of third-party assets must be segregated from other activities and must follow the regulations issued by the CVM;has an officer

75 

Table of Contents

or director in common with the financial institution providing credit, provided that the officer or director is considered an independent member in both entities; (ii) transactions carried out under market-compatible conditions, without additional benefits or different benefits when compared to the operations deferred to the institution to other customers with the same profile, (iii) credit operations that have as counterparty a financial institution that is part of the institution prudential conglomerate, provided that they contain contractual clauses of subordination, except in the case of overnight and loan transactions with other financial institutions specified by the law, (iv) the interbank deposits, according to the law, (v) the obligations assumed by related parties under the compensation and settlement services authorized by the Brazilian Central Bank or by the CVM and their respective counterparties, and (vi) other cases authorized by the CMN; the management of third-party assets must be segregated from other activities and must follow the regulations issued by the CVM.

 

·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; andpolicies;

 

·The Banking Reform Law 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.certain situations. 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 the 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, (“Baselor “Basel Committee”) guidelines and other applicable regulations, including the Basel II Accord, (“Baselor “Basel II”), which was recently implemented in Brazil, and the Basel III Accord, (“Baselor “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.

 

64

Table of Contents

Brazilian financial institutions are subject to capital measurement and standards based on a risk weighted risk-assetasset 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-weightedrisk 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

76 

Table of Contents

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 bufferscountercyclical buffer 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 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.time frame.

 

Regulatory capitalCapital 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 capitalRegulatory 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 risk weighted risk-assetasset ratio.

 

On December 29, 2014, the Brazilian Central Bank established that the amount of the Premium Principal Capital shallwas to start at 0.625% of the risk weighted risk-assetasset ratio as of January 1, 2016, and shall increaseincreasing 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 determinedetermined 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

 

6577 

Table of Contents

institutions authorized to operate by the Brazilian Central Bank (except for those expressly waived from complying with regulatory capitalRegulatory 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 increaseincreased from the currentformer 11% to a maximum of 13%. as from 2019. 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 guidelines of the document “Basel III: The Liquidity Coverage Ratio and liquidity risk monitoring tools” issued by the Bank for International Settlements onin January 2013. 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.

 

As mentioned above, the 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, 2017, Santander Brasil had a surplus (difference between net assets and net cash outflows) of R$14.6 billion, which resulted in an LCR of 123%, above the regulatory requirement of 80%.

 

In November 2017, the CMN established a minimum limit for the Net Stable Funding Ratio (Índice de Liquidez de Longo Prazo, or “NSFR”) and the Leverage Ratio (Razão de Alavancagem, or “RA”) with which Brazilian financial institutions are required to comply. The NSFR corresponds to the ratio between the Available Stable Funds (Recursos Estáveis Disponíveis, or “ASF”) and the Required Stable Funds (Recursos Estáveis Requeridos, or “RSF”) of the financial institution. The financial institutions classified as “segment 1” for purposes of the application of prudential rules, as we are, and must maintain, as from October 1, 2018, a minimum NSFR of 1.00. The RA consists onof the ratio between the sum of the principal capital and the supplementary capital divided by the total liabilities of the financial institution as determined pursuant to applicable regulation. The financial institutions classified as “segment 1,” as we are, or “segment 2” for purposes of the application of prudential rules are required to maintain a minimum RA of 3% starting onas from January 1, 2018.

 

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 2014 2015 2016 2017 2018 2019 As from 2020
Common equity  4.5%  4.5%  4.5%  4.5%  4.5%  4.5%  4.5%  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%  5.5%  6.0%  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%
Regulatory Capital  11.0%  11.0%  9.9%  9.3%  8.6%  8.0%  8.0%
Capital conservation buffer  —   —   —   0.6%  1.3%  1.9%  2.5%  0.0%  0.0%  0.6%  1.3%  1.9%  2.5%  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% 
Countercyclical bufferup to 0.6%up to 1.3%up to 1.9%up to 2.5%up to 2.5%up to 2.5%up to 2.5%

 

78 

Table of Contents

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.

 

66

Table of Contents

Systemically Important Financial Institutions

 

The assessment of the global systemic importance of financial institutions, (“IAISG”)or “IAISG” comprises the index of systemic importance, (“ISG”)or “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)

 

Financial institutions must submit to the Brazilian Central Bank, monthly and semi-annually,semiannually, 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 capitalRegulatory 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 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.

On January 29, 2020, the CMN published Resolution No. 4,776, which requires financial institutions categorized as S1, S2 and S3 to publish IFRS financial statements. The requirement is already in force for publicly held financial institutions and financial institutions which are leaders of a prudential conglomerate, and will come into effect for all remaining financial institutions on January 1, 2022.

 

Segmentation for the Proportional Application of 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 the purposes of proportional application of the prudential regulation. The segmentation is based on the size, international activity and risk profile of members of each segment. Pursuant to the resolution, the segments are as follows:

 

(i)       Segment 1 comprises multiservice banks, commercial banks, investment banks, foreign exchange banks and savings bankbanks with (a) an asset base equivalent or superior to 10% of Brazil’s GDP;

79 

Table of Contents

or (b) which perform relevant international activities, irrespective of the size of the institution;

 

(ii)       Segment 2 comprises multiservice banks, commercial banks, investment banks, foreign exchange banks and savings banks with (a) an asset base lower than 10% of Brazil’s GDP; and (b) other institutions with an asset base equivalent to or greater than 1% of Brazil’s GDP;

 

(iii)       Segment 3 comprises institutions with an asset base lower than 1% and equivalent to or greater than 0.1% of Brazil’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, foreign exchange banks and savings bank; and (b) institutions not subject to the verification of reference equity.bank.

 

We have been categorized by the Brazilian Central Bank in segment 1, the highest level for application of regulation for banks in Brazil.

 

67

Table of Contents

Regulation of Risk and Capital Management Structure

 

In February 2017,The rules enacted by 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 providesBank provide 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 theThe rules and requirements on risk management governance and the competence and duties of the risk management officer.

The rule setsset 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.profiles. This means that a financial institution of limited 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.protocols.

 

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%31% 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$33.6 billion for financial institutions with consolidated Tier 1 capital under R$3 billion; (ii) R$22.4 billion for financial institutions with consolidated Tier 1 capital between R$3 billion and R$10 billion; (iii) R$11.2 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 highera Regulatory Capital greater than R$15 billion.

 

Additionally, since Brazilian Central Bank Circular No. 3,943 of May 23, 2019 was enacted, interbank deposits made by leasing companies are excluded from the assessment base of the compulsory reserve requirement for time deposits of financial institutions of the same conglomerate.

·Demand Deposits. As a general rule, the Brazilian Central Bank imposes a reserve requirement of 25%21% in relation to demand deposits.

 

·Savings DepositsDeposit.s. The Brazilian Central Bank imposes a reserve requirement of 20% in relation to general savings deposits and to rural savings deposits.

 

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.

68

Table of Contents

Asset Composition Requirements

 

Permanent assets (defined as property and equipment other than commercial leasing operations,

80 

Table of Contents

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, as a general rule, may not have more than 25.0%25% of their Regulatory Capital– Tier 1 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%25% 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 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—instruments — including government securities—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 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.

 

In this respect, on February 9,On June 31, 2018, the Brazilian Central Bank submitted to public consultationCMN enacted a draft regulation which, if it comes into force, would providerule providing that financial institutions categorized as “Segment 1” as per the Brazilian Central Bank’s classification system established in 2017 (which is our case) (1) may not have more than 25.0% of their Regulatory Capital allocated to a single legal or natural person, and (2) that the total exposure of such financial institutions to one individual customerscustomer may not exceed 600% of their Regulatory Capital allocated to focused exposure, that is 10% of their Regulatory Capital – Tier 1. All exposures subject to capital requirements would be considered for purposes of this proposed rule. The proposed rule also intends to establish the criteria for measurement of the exposures, definition of related parties, the acknowledgment of credit risk mitigators and a requirement to report compliance with the applicable limitations. The proposed rule would subjectsubjects financial institutions categorized as segment 2, segment 3 or segment 4 to less restrictive rules.

 

Centralized Registration and Deposit of Financial Assets and Securities

 

In August 2017, the Brazilian Congress converted Provisional Measure No. 775, issued by the President of Brazil in April 2017, into Law No. 13,476. The new law13,476/17 consolidates the provisions on creation of liens over financial assets and securities. OnCMN Rule No. 4,593/2017, as amended, regulates the same day, the CMN issued a new rule to regulate the provisions set by Law 13,476registration and consolidate the regulation on centralized deposit and registry of financial assetsinstruments and securities issued or owned by financial institutions as well as the provision of custody services by such institutions.

Resolution 4,734/19 sets out the guidelines applicable to the establishment of liens and otherencumbrances on credit and debit payment instruments due to credit operations with financial institutions authorizedandregulatescredit operations guaranteed by receivables from payment arrangements. The amount of receivables perfected into guarantees for a certain credit transaction be reduced, whenever applicable, so that they are limited to operate by the Brazilian Central Bank. Law No. 13,476 became effective on March 1, 2018. On February 1, 2018outstanding balance of the Brazilian Central Bank submittedtransaction or to public consultation a draftthe maximum limit extended, in the case of an extension of a new rule to establishnon-dischargeable credit facility by a financial institution on an absolute and unilateral basis.

Circular 3,952/19, deals in particular with the termsprocedures for the creationregistration of liens over financial assets registered with regulated entities.receivables, and

 

6981 

Table of Contents

requires a convention between market infrastructures to guarantee the uniqueness of the receivables as financial assets that can be registered, interoperability, exchange of information between registration systems and participants in the structure.

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 CompensaçãoBrasileiroor 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”)or “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 interbankBrazilian Central Bank also plans to implement an instant payment ecosystem by November 2020, and is taking steps to launch the ecosystem before the scheduled implementation date, such as studying and testing available technologies, establishing parameters and participants of the system. The settlement of the system will be centralized at the Brazilian Central Bank. In addition to increasing the speed at which payments or transfers are made and received, available 24 hours a day, seven days a week in all days of funds are not only settled by STR but alsothe year, the ecosystem has the potential to increase market competitiveness and efficiency; lower costs; and enhance customer experience.

On February 18, 2020, the Brazilian Central Bank published Circular No. 3,985, which sets out implementation procedures and participation criteria for the Brazilian Instant Payments System (Sistema de Pagamentos Instantâneos or “SPI”) and the Brazilian Central Bank’s instant payments arrangement. The rule determines that all financial and payment institutions with a license to operate granted by the Funds Transfer System (Sitraf),Central Bank and which have more than 500,000 active client accounts (including checking, savings and payment accounts) will mandatorily participate in the Deferred Settlement System for Interbank Credit Orders (Siloc)SPI and in the Centralizer Clearance for Checks (Compe), which are also part of SPB.Central Banks instant payments arrangement. Circular No. 3,985 will enter into effect on March 2, 2020.

 

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 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

82 

Table of Contents

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 RegistrationRegulation of the Transfer of Customer Data by Financial Institutions to Database Managers

 

Brazilian law regulates the formation and consultation of databases containingwith information regarding performance, individuals or legal entities, for the formation of credit performance informationhistory. Resolution No. 4,737 determines that the history of individualsthe following operations should be provided: (i) credit operations; (ii) leasing operations; (iii) self-financing operations executed upon consortium groups; and (iv) other operations with characteristics of credit granting; and defines the criteria for the registration of database managers, such as the identification of the natural and legal entities. Dissemination of information from these databases is subject to the express request or authorizationpersons that are part of the institution’s corresponding customers. Databases managed by acontrol 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) may receive credit performance information.database manager.

 

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, bankBank services to individuals are divided into the following four groups: (i) essential services; (ii) priority services;

70

Table of Contents

(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 accountholdersaccount holders 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 customers agree to access and use their accounts by electronic means only. In the case of these exclusively electronic deposit and savings accounts, banks areonly (being authorized to charge fees for supplying essential services only when the customer voluntarily elects to obtain personal service at the banks’ branches or customer service locations.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 customers a “standardized package” of priority services, whose content is defined, as well as the customers’ 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-lendingonlending 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

83 

Table of Contents

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 funds; (iii) rental of safe deposit boxes; (iv) courier services; (v) custody and brokerage services, (vi) endorsement of customers debts (aval, or guarantee); and (vii) foreign currency exchange.

 

It is worth pointing out: (i) the prohibition against charging fees in cases of adhesion contractscontract amendments, except in the cases of asset replacement in leasing transactions, early liquidation or amortization, cancelationcancellation 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

 

The default payment fees charged by financial institutions, consumer credit companies (financeiras), and leasing companies are expressly limited to compensatory interest per day on the amount that is overdue, interest on arrears and fines on arrears.

 

71

Table of Contents

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 customers. 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.

 

Revolving credit for financings of credit card bills may only be extended to customers until the due date of the following credit card bill. After this term, financial institutions must offer customers another type of financingproduct with conditions more favorable than the ones typically found in the credit card market. Banks are prohibited from offering this type of credit to customers who have already contracted one revolving credit for financing of credit card bills which waswere not repaid in a timely manner.

 

Payment Agents and Payment Arrangements

 

Since 2014, the CMN and the Brazilian Central Bank have powers to regulate payment mechanisms, players and transactions. The regulation issued by the Brazilian Central Bank, 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 as 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-paidpostpaid 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.

 

In March 2018, the CMN enacted a set84 

Table of new rules establishing, among others, the regulatory cost reduction by decreasing the maximum limit for the interchange fee in purchase domestic payment arrangements and checking accounts, in order to improve the competition.Contents

Portability of Credit Transactions

 

Financial institutions’ customers can transfer their credit transactions from one institution to another. Such transfers must comply with the specific rules established by the Brazilian Central Bank, 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

 

Financial institutions and other institutions authorized to operate by the Brazilian Central Bank may keep on their records digital documents instead of physical documents, provided that certain requirements to ensure the documentsdocuments’ 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.met.

 

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 participationto participate in a group, association or office while being aware that its principal or secondary activities are directed towardstoward the practice of such acts.

 

The Brazilian Anti-Money Laundering Law also created the Financial Intelligence Unit (ConselhoUnidade de Controle de Atividades FinanceirasInteligência Financeira (the Council of Control of Financial Activities, or “COAF”“UIF”), which operates under the jurisdiction of the Ministry of Finance. The purpose of the COAFUIF 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 COAFUIF 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) the 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.

 

72

Table of Contents

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.

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.

73

Table of Contents

Financial institutions must maintain specific records of (i) 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 (a) an amount equal to or greater than R$100,000100,000.00 or (b) 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 issuancevaluables; and (ii) the issuances of cashier’s checks, TED (Electronic Available Transfer)funds electronic transfers (TED) or of any other instrument of transfer of funds upon payment in cash, for an amount equal to or greater than R$100,000.100,000.00.

 

Financial institutions must maintain records of all operations, products and services contracted, including withdrawals, deposits, contributions, payments, receipts and transfers of funds. Additionally, the institutions must also maintainkeep specific records of (i) transactions in cash (deposit,with an individual value greater than R$2,000.00; (ii) deposit or cash transactions of an individual value equal to or greater than R$50,000.00; and (iii) withdrawal withdrawaltransactions, including those carried out by means of a prepaid card, request of provision for withdrawalcheck or TED) bymoney order, with an individual value equal to or greater than R$50,000.00.

The regulations also impose an obligation on financial institutions ofto request that both clients and non-clients a providing a withdrawal request at least three working days in advance for withdrawals (including those carried out by check or money order) in an amount equal to or greater than R$50,000.50,000.00.

On January 23, 2020, the Brazilian Central Bank published Circular No. 3,978, which improves

85 

Table of Contents

the regulation applicable to financial institutions, by expanding the adoption of a risk-based approach and will enter into effect on July 1, 2020. Regulated institutions must carry out specific internal risk assessments in order to identify and measure the risk of using their products and services in the practice of money laundering and terrorist funding.

In connection with the aforementioned change, the Know-Your-Client procedures were also improved and includes the identification, qualification and classification of the customer, compatible with the risk profile, the nature of the relationship with the AML policy and the institution's internal risk assessment, which must be permanently reassessed, according to the evolution of the business relationship and the risk profile of the client. The regulationsprocedures must also provideinclude the verification of the client's (their representatives, family members or close collaborators) condition as a Politically Exposed Individual, as well consider them in the monitoring, selection and analysis of operations and situations with indications of suspected money laundering or terrorist funding.

On December 5, 2019, the CVM issued CVM Instruction No. 617, which establishes a new framework for a minimumthe prevention of three business days prior communication for withdrawalsmoney laundering and cash paymentsthe financing of an amount equalterrorism in the Brazilian securities market. CVM Instruction No. 617 is in line with the practices currently implemented in the principal global securities markets, including with regard to or greater than R$50,000.the recommendations of the Financial Action Group against Money Laundering and the Financing of Terrorism (GAFI/FATF), as well as with the duties arising from Brazilian anti-money laundering laws.

 

Brazilian Anti-Corruption Law

 

Law No. 12,84612,846/13 of August 1, 2013, Brazil’s new anti-corruption law (“Brazilianor the “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, thisThe 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.

 

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 on the financial transactions of customers who are deemed to be politically exposed individuals.individuals (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). 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;

 

86 

Table of Contents

·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.

 

74

Table of Contents

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, (“2007or “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.

Data Protection Requirements

The GDPA was published in the Federal Official Gazette on August 15, 2018 and was amended by Law No. 13,853, issued on July 8, 2019 or “Law 13,853/2019”. The GDPA will take effect in August 2020.

Before the GDPA, Brazil lacked regulations specific to data privacy and a data protection authority. Despite this, privacy has been generally protected through the Federal Constitution, the Civil Code (Law No. 10,406 of January 10, 2002), the Consumer Protection Code (Law No. 8,078 of September 11, 1990) and the Civil Rights Framework for the Internet (Law No. 12,965 of April 23, 2014 and the Decree 8,771 of May 11, 2016, also known as the Internet Law).

The GDPA brings about profound changes in the rules and regulations applicable to the processing of personal data processing, with a set of rules to be complied with in activities such as the collection, processing, storage, use, transfer, sharing and erasure of information concerning identified or identifiable natural persons.

The GDPA has a wide range of applications and extends to individuals as well as private and public entities, regardless of the country where they are headquartered or where data are hosted, as long as (i) the data processing takes place in Brazil; (ii) the data processing activity is intended to offer or supply goods or services to, or to process data of individuals located in Brazil; or (iii) the subjects of the data are located in Brazil at the time their personal data are collected. The GDPA will apply irrespective of the industry or business when dealing with personal data and is not restricted to data processing activities performed through digital media and/or on the internet.

The GDPA sets out several rules related to data processing such as principles, requirements and duties imposed to data controllers and data processors; rights of data subjects; requirements in connection with cross-border transfers of data; obligation to appoint a data protection officer; data security and data breach notification; corporate governance practices; and the regime for civil liabilities and penalties in case of a breach of the provisions of the GDPA. Penalties include warnings, blocking and erasure of data, public disclosure of the offense and fines of up to 2% of the economic group’s turnover in Brazil in the preceding year, capped at R$50 million per offense.

Moreover, Law 13,853/2019 created the Brazilian National Data Protection Authority, or “ANPD”, which will have powers and responsibilities analogous to the European data protection authorities, exercising a triple role of (i) investigation, comprising the power to issue norms and procedures, deliberate on the interpretation of the GDPA and request information of controllers and

87 

Table of Contents

processors; (ii) enforcement, in cases of noncompliance with the law, through an administrative process; and (iii) education, with the responsibility to disseminate information about and foster knowledge of the GDPA and security measures, fostering standards for services and products that facilitate control of data, and elaborating studies on national and international practices for the protection of personal data and privacy, among others.

The ANPD has been assured technical independence, although it is subordinated to the Presidency of the Republic. It will be composed of five commissioners, to be appointed by the President of Brazil, and advised by a National Council for the Protection of Personal Data and Privacy, composed of 23 unpaid members.

Regulations on Cybersecurity

Financial institutions must follow certain cyber risk management and cloud outsourcing requirements which apply to the design and adaptation of internal controls. Policies and action plans to prevent and respond to cybersecurity incidents must be in place before May 2019, and fully compliant by December 2021. Data location and processing may occur inside or outside Brazil, but access to data stored abroad must be granted at all times to the Brazilian Central Bank for inspection purposes. The contracting of relevant processing services must be communicated to the Brazilian Central Bank within 10 days from the execution of the agreement.

 

Auditing Requirements

 

The legislation and regulations issued by the CMN, CVM and B3 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 onwith the standards of the Public Company Accounting Oversight Board with regard to IFRS as issued by the IASB, as required by the SEC. 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. 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) an internal control system quality and adequacy evaluation report, including regarding electronic data processing and risk management systems, evidencing any identified deficiencies; (iii) a legal and regulatory provisions non-compliancenoncompliance report, regarding those which have, or may have, material impacts on the financial statements or on the audited financial institution’s operations; (iv) a limited assurance report, analyzing Santander Brasil’s Annual and Sustainability Report pursuant to the guidelines and requirements of the Global Reporting Initiative, (“GRI”)or “GRI”; and (v) any other reports required by the Brazilian Central Bank, CVM and B3. The reports issued by independent auditors must be available for consultation upon request by the overseeing authorities.

 

Independent auditors and the fiscal council,audit committee, 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-compliancenoncompliance with legal rules and regulations which placesthat place 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.

 

88 

Table of Contents

The executive office of the financial institution must inform the independent auditor and the fiscal council,audit committee, when established, if any of the above situations occur.

 

CMN regulation also requires financial institutions and certain other entities holding regulatory capitalRegulatory Capital equal to or greater than R$1 billion to create a corporate body designated as the “audit committee.”

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.”

 

New regulation on internal auditingInternal Auditing of financial institutionsFinancial Institutions

 

On June 29, 2017, the CMN enacted a new regulation establishing new guidelines for the implementation of internal audit controls for financial institutions. According to this new ruling, that will be effective as of December 31, 2017, financialFinancial institutions are required to establish and maintain internal audit activities compatible with their operational specifications, so that such internal bodies are able to perform an independent, autonomous and impartial audit of the quality and effectiveness of the institutions’institution’s internal systems. The new regulation also requires that these activities toSuch unit shall be performed by a unit directly controlled by the institution’s board of directors. In addition, Provisional Measure No. 784 has established new responsibilities to internalInternal and external independent auditors who may now be heldare also liable for failures of the financial institution’s internal control mechanisms.

 

75

Table of Contents

Socio-Environmental Responsibility Policy

 

Financial institutions are required to have a Responsibility Policy,responsibility policy, which must guide the social and environmental actions in conducting their businesses, their relationship with their customers and other users of their products and services. The Responsibility Policyresponsibility 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 Policyresponsibility 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).

 

Policy for Succession of Financial Institutions Managers

 

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. 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.

 

Corporate governanceGovernance of financial institutionsFinancial Institutions

 

In April 2017, the CMN issued a new resolution with the purpose of incorporating in the Brazilian regulatory framework principles and criteria on corporate governance of financialFinancial institutions established by the Basel Committee on Banking Supervision, through the “Core Principles for Effective Banking Supervision.” This measure is an additional step towards aligning the Brazilian regulatory framework applicable to financial institutions with international recommendations.

The rule establishes the terms for the remittancemust (i) remit to the Brazilian Central Bank of information on the financial institution’s management, controlling group and relevant shareholders, including the obligation to communicate to the regulator any information that may affect the reputation of any such persons. Financial institutions mustpersons; (ii) make available a communication channel allowing employees, contributors, customers, users, associates, or services providers to report anonymously situations indicating illegalities of any nature related to the institution. Financial institutions must alsoinstitution; and (iii) have an internal body responsible for receiving the information and complying with the reporting obligations.

 

Compliance Policy

 

In August 2017, the CMN enacted a new rule providing that Brazilian financialFinancial institutions and other institutions authorized to operate by the Brazilian Central Bank must implement and maintain a compliance policy compatible with the nature, size, complexity, structure, risk profile and business model of the institution. The compliance policyinstitution, which is intended to ensure an effective compliance risk management by the institution and may be established at the consolidated enterprise level (conglomerado prudencial). Among others, theThe compliance policy must establish the scope and purpose of the compliance function in the institution, set forth the organizational structure of the compliance function, specify which personnel is allocated to the compliance function, and establish a segregation of roles among personnel in order to avoid conflicts of interest.

 

The compliance policy must be approved by the board of directors and the regulation also assigns to the board the responsibility to ensure the following: adequate management of the compliance policy

89 

Table of Contents

throughout the institution, its effectiveness and continued application, its communication to all employees and services providers, as well as the dissemination of the integrity and ethical standards as part of the institutionsinstitution’s culture. The board of directors is also responsible for ensuring the application of measures in case of non-compliance,noncompliance, and for providing the necessary means for the activities related to the compliance functions to be adequately conducted.

 

The entities subject to the new rule are required adopt and implement a compliance policy in accordance with such requirements by December 31, 2017.

76

Table of Contents

Consumer Protection

 

Relationships between consumers and financial institutions are governed by Law 8,078, dated September 11, 1990, (“Brazilianor “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’sconsumers’ 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 customer’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;service to allow customers and users free choice and decision-making;

 

·to timely provide, to the customer or user, agreements, receipts, statements, advicesadvice 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-paidpostpaid payment account;

 

·to forward a payment instrument to the customer’scustomers’ or user’susers’ 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.

 

Financial institutions operating exclusively via digital means are excluded from the scope of certain aspects of the regulation.

 

Policy for Relationship with Customers and Users of Financial Products and Services

 

Financial institutions and other institutions authorized to operate by the Brazilian Central Bank must have a policy governing the relationship with customers and users of financial products and services. In addition, 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.

 

Ombudsman

 

Financial institutions and other entities whichthat are authorized to operate by the Brazilian Central Bank must have an ombudsman office. In 2015, the regulatory framework that regulates the ombudsman office of the entities authorized to operate by the Brazilian Central Bank was updated. 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 attributionsattributes according the current 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)customer service attendance channel-SAC);

 

90 

Table of Contents

·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.

 

Financial institutions have been required to fully implement the above since 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.

77

Table of Contents

Certain amendments to the regulations governing the role of the ombudsman will come into force in July 2018, including the requirements to implement a system for customers to be able to assess and report on the performance of the ombudsman office and a requirement for financial institutions to disclose the existence of the ombudsman through their channels of communication.

 

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.

 

BrokerAs of August 29, 2019, securities brokers and dealer firmsdealers may not execute operations that may be qualified as the granting of loansloan their own securities to their customers, includingclients as long as they use the assignmentfunds as collateral for operations in which the institution itself intermediates. The loan transaction consists of rightsthe transfer of assets from the institution: (i) to the customer, in conjunction with limited exceptions; collect commissions from their customers relatedthe transfer of that asset to transactionsthe clearinghouse or clearing and settlement service provider; or (ii) to the clearinghouse or clearing and settlement service provider on behalf of the customer through powers established in a formal written power of attorney. In either case, the assets or set of assets in question shall return to the positions originally held at the end of the period stipulated in the contract. To offer this new service, securities during the primary distribution; acquire real estate which is not for their own use; or obtain loans from financial institutions, except for (i) loansbrokers and dealers must appoint a director responsible 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.loan operations under consideration.

 

78

Table of Contents

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.

 

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 capitalRegulatory 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).

91 

Table of Contents

On October 7, 2019, the Brazilian Central Bank, sent to the President of Brazil a draft bill to change the way in which the Brazilian foreign exchange market (“New Foreign Exchange Bill”). The draft also contains provisions regarding Brazilian capital abroad and foreign capital within Brazil. The initiative aims to modernize, simplify and reduce legal doubts associated with current Brazilian foreign exchange legislation.

The main aspects of the New Foreign Exchange Bill are: (i) ratification, at the legal level, that foreign exchange transactions may be carried out freely (provided such transactions are carried out by entities authorized to operate in this market and subject to applicable rules); (ii) granting of broad powers to the CMN and the Brazilian Central Bank to regulate the foreign exchange market and foreign exchange operations; (iii) expansion of international correspondence activities by Brazilian banks; (iv) possibility of Brazilian financial institutions investing and lending abroad funds that have been raised in Brazil or abroad; (v) the exclusion from its scope of foreign currency purchase and sale operations of up to US$1,000 carried out between individuals on an occasional and non-professional basis; and (vi) the granting of powers to the monetary authorities to establish situations in which the prohibition of the private offset of credits between residents and nonresidents, as well as payments in foreign currency in Brazil, would not apply. As of this date, the Brazilian Congress is still reviewing the proposal and it is not possible to estimate if and when it will be approved, or what changes will be proposed.

 

Foreign Investment in Brazilian Financial Institutions

 

According to the Brazilian federal 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 Presidentialpresidential decree. A Presidentialpresidential 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-votingnonvoting shares of Brazilian financial institutions traded on a stock exchange or securities depositary receipts offered abroad representing shares without specific authorization.

 

In addition,Following the Brazilian constitution prohibits foreign financial institutions from establishing new branches or subsidiaries in Brazil except when duly authorized by the Presidentenactment of Brazil and byDecree No. 10,029, the Brazilian Central Bank. Bank published, on January 22, 2020, Circular No.3,977 recognizing as an interest of the Brazilian government the foreign holding of equity or increase in equity interest of financial institutions headquartered in Brazil (which is still subject to the same requirements and procedures applicable to the any acquisition of equity in Brazilian financial institution), as well as the opening of local branches of foreign financial institutions. However, since Santander Brasil had already been granted a specific presidential decree authorizing the foreign interest in its share capital, prior to Decree 10,029/19 being issued it does not affect its operations in Brazil.

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.

 

BankingBank Correspondents

 

Financial institutions are allowed to provide specific services to customers, 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.

 

92 

Table of Contents

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.

 

79

Table of Contents

Cayman Islands Banking Regulation

 

We have a branch in the Cayman Islands with its own staff and representative officers. Banco Santander (Brasil) S.A. – Grand Cayman Branch is licensed under The Banks and Trust Companies Law (2013 Revision) of the Cayman Islands, or the “Banks and Trust Companies Law,” as a Category “B” Bank and it is duly registered as a Foreign Company with the Registrar of Companies in the 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 Grand Cayman 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 customers and extends credit to Brazilian and non-Brazilian customers, mainly to support trade transactions with Brazil. The results of the operations of the Grand Cayman 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, irrespective 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, 2017,2019, CI$1 was equivalent to R$4.0341,4.88, according to the Brazilian Central Bank.

 

Luxembourg Banking Regulation

 

Branches of credit institutions from outside the European Union (“non-EU credit institutions”) must be licensed by the Luxembourg Minister of Finance under the law of 5 April 1993 on the financial sector, as amended, in order to operate in Luxembourg.

 

We have a branch in Luxembourg with its own staff and representative officers. Our Luxembourg branch is licensed as a Luxembourg branch of a non-EU credit institution and is duly registered with the Luxembourg Trade and Companies’ Registry. The branch, therefore, is duly authorized to carry on banking business in Luxembourg. Its registered offices are at 35F, avenue J.F. Kennedy, 2nd floor, L-1855L-

93 

Table of Contents

1855 Luxembourg, Grand Duchy of Luxembourg.

 

Our Luxembourg 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 customers and extends credit to Brazilian and non-Brazilian customers, mainly to support trade transactions involving Brazil. The results of the operations of the Luxembourg branch are consolidated in our consolidated financial statements.

 

Luxembourg law requires the Luxembourg branch to have a minimum endowment capital of EUR 8,700,000€8,700,000 and the solvency, and liquidity requirements deriving, among others, from EU Regulation No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms apply to it.

 

80

Table of Contents

Foreign Subsidiary

 

We established an independent subsidiary in Spain, Santander EFC, in order to complement our foreign trade strategy for corporate customers, 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 SpanishMinisterio 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

 

Financial Regulatory Reform

 

Banking statutes and regulations are continually under review by the United States Congress. In addition to laws and regulations, the U.S. bank regulatory agencies may issue policy statements, interpretive letters and similar written guidance. Many changes have occurred as a result of the 2010 Dodd-Frank Act and its implementing regulations, most of which are now in place. More recently, the President of the United States issued an executive order in 2017 that sets forth principles for financial regulatory and legislative reform, and the Republican majority in Congress has also suggested an agenda for financial legislative reform. In addition,May 2018 the five regulatoryUnited States Congress passed, and President Trump signed into law the Economic Growth, Regulatory Relief, and Consumer Protection Act (“EGRRCPA”) which, among other things, revised the thresholds for total consolidated assets at which certain enhanced prudential standards apply to bank holding companies. EGRRCPA made clear that the Board of Governors of the Federal Reserve System (the "Federal Reserve Board") retains the right to apply enhanced prudential standards to FBOs with greater than $100 billion in global total consolidated assets, such as Santander Spain.

In October 2019, the federal banking agencies charged with implementingissued final rules (the "Tailoring Rules") that, pursuant to EGRRCPA, adjust the thresholds at which certain enhanced prudential standards and capital and liquidity requirements apply to certain banking organizations, including large FBOs such as Santander Spain. As a result, Santander Spain is now generally subject to less restrictive enhanced prudential standards and capital and liquidity requirements than under previously applicable regulations.

Volcker Rule

Section 13 of the U.S. Bank Holding Company Act of 1956, as amended, and its implementing rules (collectively, the “Volcker“Volker Rule”) are considering changes to the Volcker Rule regulations to make them less burdensome. It is too early to assess whether there will be any major changes in the regulatory environment or merely a rebalancing of the post-financial crisis framework, but we will monitor these developments and assess their impact on our operations.

Volcker Rule

The “Volcker Rule prohibits “banking entities” from engaging in certain forms of

94 

Table of Contents

proprietary trading or from sponsoring or investing in “covered funds,” in each case subject to certain exceptions. The Volcker Rule also 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. Banking entities such as Santander Brasil and Santander Spain were required to 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. Santander Spain has assessed how the Volcker Rule affects its businesses and subsidiaries, including Santander Brasil, and has brought its activities into compliance. 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. The Volcker Rule 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. Santander Spain’s non-U.S. banking organizations,organization subsidiaries, 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. Those exemptions generally apply toexempt proprietary trading, and sponsoring or investing in covered funds if, among other restrictions, the essential actions take place outside the United States and any transactions are not with U.S. persons.

 

On July 21, 2017, the five regulatory agencies charged with implementing the Volcker Rule announced the coordination of reviews of the treatment of certain foreign funds that are investment funds organized and offered outside of the United States and that are excluded from the definition of covered fund under the agencies’ implementing regulations. Also in July 2017, the Federal Reserve issued guidelines for banking entities seeking an extension to conform certain “seeding” investments in covered funds to the requirements of the Volcker Rule.

As of October 2019, the five regulatory agencies charged with implementing the Volcker Rule finalized amendments to the Volcker Rule. These amendments tailor the Volcker Rule’s compliance requirements to the amount of a firm’s trading activity, revise the definition of trading account, clarify certain key provisions in the Volcker Rule, and modify the information companies are required to provide the federal agencies. Santander Brasil will still largely rely on the “solely outside the U.S. exemption” to conduct its trading activities.

In early 2020, the five federal agencies proposed additional amendments to the Volcker Rule related to the restrictions on ownership interests in and relationships with covered funds. Santander Spain will continue to monitor these Volcker Rule-related developments and assess their impact on its operations, including those of Santander Brasil, as necessary.

 

81

Table of Contents

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, (theor 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 ACTPatriot 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.

 

U.S. Sanctions

95 

Table of Contents

The Office of Foreign Assets Control (“OFAC”) is responsible for administering economic sanctions imposed against designated foreign countries, governments, individuals and entities pursuant to various Executive Orders, statutes and regulations. OFAC-administered sanctions take many different forms. For example, sanctions may include: (1) restrictions on U.S. persons’ trade with or investment in a sanctioned country, including prohibitions against direct or indirect imports from and exports to a sanctioned country and prohibitions on U.S. persons engaging in financial transactions relating to, making investments in, or providing investment-related advice or assistance to, a sanctioned country; and (2) blocking of assets of targeted governments or “specially designated nationals,” by prohibiting transfers of property subject to U.S. jurisdiction, including property in the possession or control of U.S. persons. Blocked assets, such as property and bank deposits, cannot be paid out, withdrawn, set off or transferred in any manner without a license from OFAC. In addition, non-U.S. persons can be liable for “causing” a sanctions violation by a U.S. person or can violate U.S. sanctions by exporting services from the United States to a sanctions target, for example by engaging in transactions with targets of U.S. sanctions denominated in U.S. dollars that clear through U.S. financial institutions (including through U.S. branches or subsidiaries of non-U.S. banks).

Failure to comply with applicable U.S. sanctions could have serious legal and reputational consequences, including significant civil monetary penalties and, in the most severe cases, criminal penalties.

In addition, the U.S. government has implemented various sanctions that target non-U.S. persons, including non-U.S. financial institutions, that engage in certain activities undertaken outside the United States and without the involvement of any U.S. persons (“secondary sanctions”) that involve Iran, North Korea, Russia, or Hezbollah or other persons designated by the U.S. under the specially Designated Global Terrorist (SDGT) sanctions program. If a non-U.S. financial institution were determined to have engaged in activities targeted by certain secondary U.S. sanctions, it could lose its ability to open or maintain correspondent or payable-through accounts with U.S. financial institutions, among other potential consequences.

Antitrust Regulation

 

According to the Brazilian antitrust law, actions whichthat 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 thousand60,000 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 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.

 

In December 2018, the Brazilian Central Bank and CADE approved a joint normative act establishing procedures with the purpose of increasing efficiency for their respective actions regarding antitrust matters. Pursuant to the joint normative act, the authorities are authorized to share information for the purposes of their respective activities and carry out meetings with each other to discuss matters requiring the regulatory cooperation between both authorities.

Insolvency Laws Concerning Financial Institutions

 

Financial institutions are subject to the proceedings established by Law 6,024 of March 13, 1974, (“Lawor “Law 6024”), which establishes the applicable provisions in the event of intervention or extra-judicial extrajudicial

96 

Table of Contents

liquidation by the Brazilian Central Bank, as well as to bankruptcy proceedings.

 

Intervention and extra-judicialextrajudicial 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

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-judicialextrajudicial liquidation or bankruptcy of the entity is ordered.

 

Intervention may also be ordered upon the request of a financial institution’s management.

 

82

Table of Contents

Extra-judicialExtrajudicial Liquidation

 

Extra-judicialExtrajudicial 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 liquidateplace a financial institution in extrajudicial liquidation 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 ninety90 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.

 

97 

Table of Contents

The decree of extra-judicialextrajudicial 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-judicialExtrajudicial 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-federalnonfederal public financial institutions thatwhich allows institutions to continue to operate normally. The RAET may be ordered in the case of an institution which:that:

 

·continually enters into recurrent operations whichthat are against economic or financial policies set forth in federal law;

 

·faces a shortage of assets;

 

·fails to comply with the compulsory reserves rules;

 

83

Table of Contents

·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,spinoff, amalgamation or transfer of the controlling interest of the financial institution, (iii) decision by the Brazilian Central Bank, or (iv) declaration of extra-judicialextrajudicial liquidation of the financial institution.

 

Bankruptcy Law

 

Law No. 11,101, of February 9, 2005, as amended, (theor the “Bankruptcy Law”), regulates judicial reorganizations, out-of-court reorganizations and the bankruptcy of individuals and corporations that

98 

Table of Contents

have occurred since 2005 and applies to financial institutions only with respect to the matters not specifically regulated by the intervention and extra-judicialextrajudicial liquidation regimes described above.

 

Repayment of Creditors in a Liquidation or Bankruptcy

 

In the event of extra-judicialextrajudicial liquidation or bankruptcy of a financial institution, creditors are paid pursuant to their priorities and privileges. Pre-petitionPrepetition 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

 

Systemically important Brazilian financial institutions must implement a recovery plan (plano de recuperação), with the aim of reestablishing adequate levels of capital and liquidity and to preserve the viability of such institutions. The recovery plans must 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.

 

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.

 

84

Table of Contents

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 objectwhose objects 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. In December 2017, the CMN enacted a new rule amending certain provisions of the FGC regulation among which includes the establishment of a limit of R$1 million per 4-yearfour-year period for the coverage of the credits of a certain creditor against the group of associated financial institutions.

 

Bill of Law amendingAmendments to the administrative proceedingsAdministrative Proceedings in the Brazilian national financial system,National Financial System, the Brazilian Payment System and capital markets

On October 20, 2017, Provisional Measure No. 784, issued on June 8, 2017, ceased to be effective. The modifications proposed by the Brazilian National Congress with regards to administrative measures applicable to the Brazilian national financial system, the Brazilian payment system and capital markets were then reissued under Law No. 13,506, of November 13, 2017, or “Law 13,506.”Capital Markets

 

Law 13,506 applies to entities authorized or supervised by the Brazilian Central Bank or by the CVM, as well as to market participants. Some of the key aspects of Law 13,506 are:are that: (i) it increases

99 

Table of Contents

the maximum fine applicable by the Brazilian Central Bank from R$250 thousand250,000 to R$2 billion or 0.5% of the revenues of the company arising from services and financial products in the year prior to the violation; (ii) it increases the maximum fine applicable by the CVM from R$500 thousand500,000 to R$50 million; (iii) it makes additional types of violations subject to penalties; (iv) it provides that the penalty of “public admonition” may be cumulative to other penalties applicable by the Brazilian Central Bank; (v) it provides that Brazilian Central Bank may enter into cease-and-desist commitments; and (vi) it provides that the Brazilian Central Bank and the CVM may enter into administrative agreements similar to leniency agreements.

 

Opening, Maintenance and Closing of Deposit Accounts

CMN Resolution No. 4,753 provides criteria for the opening, maintenance and closing of deposit accounts. The regulation determines that financial institutions must adopt procedures and controls that allow the verification and validation of the identity and qualification of the account holders and, if applicable, their representatives, as well as the authenticity of the information provided by the client. This information must be kept updated by the financial institution.

The rule also requires financial institutions to ensure, through the procedures and technology used for the opening, maintaining and closing of deposit accounts, the integrity authenticity and confidentiality, as well as the protection against unauthorized access, use, alteration, reproduction and destruction, of the information and the electronic documents used by them during the process.

Issuance of Credit Instruments Electronically

Provisional Measure No. 897 (“MP 897/2019”) among other provisions, (i) created a new credit instrument, the Rural Real Estate Note (Cédula Imobiliária Rural or “CIR”), with the purpose of advancing rural real estate financing by the creation of an instrument specifically designed to that end; (ii) changed the rules governing Bank Deposit Certificates (Certificado de Depósito Bancário or “CDB”), especially regarding their issuance and the transfer of their ownership, by providing among other changes that CDB issued in book-entry form should be transferred by electronic endorsement, exclusively by means of a specific notation in the issuing institution's own electronic system or, when deposited in central depositary, by means of specific notation in the corresponding electronic system; and (iii) authorized that customary credit instruments such as the Agricultural Certificate of Deposit (Certificado de Depósito do Agronegócio - CDA), the Agricultural Warrant (Warrant Agropecuário - WA), the Real Estate Credit Certificate (Certificado de Crédito Imobiliário- CCI), the Bank Credit Note (Cédula de Crédito Bancário - CCB), the Rural Credit Note (Cédula de Crédito Rural - CCR) , the Rural Promissory Note (Nota Promissória Rural - NPR), the Rural Trade Bill (Duplicata Rural - DR), may be issued in book-entry form through the electronic bookkeeping system held at a financial institution or other entity authorized by the Central Bank to perform electronic bookkeeping activity.

Guidelines for Implementation of Open Banking in Brazil

The Brazilian Central Bank announced the initial guidelines for open banking regulation in Brazil through Notice No. 33,455 on April 25, 2019. Open Banking consists in the sharing of data and payment solutions by financial institutions and other authorized entities, upon customer’s authorization and via integration of information systems. Brazilian Central Bank has looked at open banking as an important tool for innovation in the financial market, making the banking industry more efficient and competitive.

The Brazilian open banking model will comprise financial institutions, payment institutions and other Brazilian Central Bank-licensed entities by making it possible to share, in a phased-in approach, (i) data on products and services, (ii) customer record data, and (iii) customer transaction data. Open banking will eventually cover the provision of payment services. The criteria and specifications of each phase will be specified by the Brazilian Central Bank on specific regulation and self-regulation yet to be issued. Within this context, Brazilian Central Bank-licensed entities opting to join the open banking ecosystem must share the information listed above with other participating institutions. At its inception the open banking model will only be compulsory for financial institutions belonging to prudential conglomerates in segments S1 and S2. With regard to customer data, customer authorization will always

100 

Table of Contents

be required.

On November 28, 2019, the Brazilian Central Bank launched Public Consultation No. 73/2019, which ended on January 21, 2020, which disclosed the draft resolution to implement Open Banking in Brazil to the public, so as to collect comments and suggestions on the proposed resolution. Among other topics, the draft resolution deals with the duties and responsibilities of participants and the minimum requirements for the operationalization of the system. According to the draft, financial institutions and prudential conglomerates belonging to the S1 and S2 segments, as is the case of Santander Brasil, are required to participate in Open Banking.

Regulatory Sandbox

On November 28, 2019, the Brazilian Central Bank published Public Consultation No. 72/2019, which ended on January 31, 2020, regarding the Controlled Testing Environment for Financial Innovations (“Sandbox”) which is intended to enable institutions test innovative financial and payment projects for a specified period. The draft resolution released by the Brazilian Central Bank establishes the applicable conditions for the implementation of the Sandbox, among which are the specific rules for the first cycle of tests, such as duration and number of participants, required documentation, criteria for the classification of institutions and the schedule for registration, selection and authorization processes of such entities. The Public Consultation is set to end on January 31, 2019, and as of this date, the Brazilian Central Bank is yet to receive contributions from various market agents, which will result in alterations on the proposed draft.

Limitations on overdraft-secured checks

On November 27, 2019, the CMN issued Resolution No. 4,765 or “Resolution No. 4,765/2019”, providing for new rules on the overdraft granted by financial institutions in checking accounts held by individuals and individual micro entrepreneurs. The new rule limits the charging of fees on overdraft-secured checks to: (i) 0% for the opening credit facilities of up to R$ 500.00; and (ii) 0.25% for the opening of credit facilities larger than R$500.00, calculated with the amount of the facility that exceeds R$500.00. It also limits interest rates over the overdraft-secured check to up to 8% per month, to which must be added a discount of the overdraft fees already charged monthly by the financial institution. If the interest is less than or equal to the overdraft fees, such interest rates must be equal to zero. In addition, Resolution No. 4,765/2019 establishes that the overdraft-secured check must be compatible with the customer’s risk profile.

Resolution No. 4,765/2019 has come into force on January 6, 2020, for agreements executed after the referred date, will come into force on June 1, 2020, for agreements executed prior to such date. Regarding the 8% limitation above, the rule applies to all contracts from January 6, 2020, regardless of the date the applicable contract was entered into.

On February 6, 2020, the Brazilian Central Bank issued Circular No. 3,981, which deals with the new information regarding overdraft facilities that must be highlighted in the statement of the checking accounts held by natural persons or MEIs. Circular No. 3,981 will enter into effect on June 1, 2020.

Automatic debit of banking accounts

On December 19, 2018, CMN issued Resolution No. 4,771, which sets forth new rules for the automatic debit payments from checking account and accounts designated for the payment of an individual’s wages. The new rule sets forth that financial institutions should only process automatic debit payments upon prior and express authorization of the client, and provides for the procedures for the authorization and cancellation of automatic debit payments. The new rule will come into force on May 1st, 2020.

101 

Table of Contents

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%15.0% for financial institutions (until February, 2020) and 9.0% for companies, after adjustments determined by the tax legislation.

 

Constitutional amendment No. 103/2019 increased the CSLL tax rate for financial institutions from 15.0% to 20.0% from March 1, 2020.

Deferred tax assets and liabilities are computedmeasured 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.

 

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.

85

Table of Contents

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 usthe company, to the municipality where we have branches or administrative centers.the service renderer is located. The rates vary from 2.0% to 5.0% and depend on the nature of the service.

 

On December 30, 2016, SupplementaryComplementary Law No.n° 157/2016 was enacted. This new legislation establishes a minimum rate of 2.0% for these types of taxes, (without anyno reductions or deductions being permitted).permitted. This Law No. 157/2016 provides that the ISS owed by credit card managing companies (administradoras de cartões de créditos) should be paid to the municipality in which the service taker is located and where the corresponding POS has been registered. In addition, it also determined that the following services are subject to ISS in the municipality in which the service taker is located: (i) card management;management, including POS services, that may be paid to the municipality where the corresponding POS device has been registered; (ii) leasing; (iii) fund management; and (iv) syndicate activities. consortium.

Before the aforementioned Law was enacted, the ISS was due in the municipality in which the service provider was located (irrespective of where the service taker was located). With this new legislation, ISS rates may vary depending on where the service taker is located.

 

There are several complications that may arise from this new legislation, including (i) as service takers are generally located in several municipalities, it is logistically difficult to comply and collect the taxes; and (ii) there are situations where the municipality of the service taker is not easily identifiable by the credit card company (as is the case for online transactions, for example).

 

Since the ISS is a municipal tax, the rule must be regulated by each municipality in order to be enforceable. This new rule is only applicable to triggering events occurring from 2018 onwards, when the municipal regulations to the SupplementaryComplementary Law No.n° 157 comescome into force.

On March 23, 2018, the Brazilian Supreme Court suspended the application of the SupplementaryComplementary Law No.n° 157. It is still suspended. Although, the Congress is discussing a Complementary law proposition to centralize ISS tax collection, in order to tackle Complementary Law n° 157 suspension while making tax collection easier.

 

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 somefinancial revenues and commissions, net of some expenses)financial expenses, which are payable by financial institutionsinstitutions. The rate is 0.65% for PIS and similar entities, as defined by law, are due at the rate of 0.65% and 4%, respectively. for COFINS. 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.an accrual basis, and collected monthly.

 

102 

Table of Contents

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.

As mentioned above, on December 30, 2016, Supplementary Law No. 157/2016 was enacted by the Brazilian federal government. This new legislation establishes a minimum rate of 2.0% for this tax and changes the place where the collection and payment of the ISS should be made by certain service providers.

86

Table of Contents

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:

 

Transaction(1)

Maximum Legal Rate

Current Rate

Credit extended by financial institutions and non-financial entities1.5% 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 day0.5% 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 / receivables  (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 derivatives25.0%0% onAlthough 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 contractsmaximum rate is 25%, it has been reduced 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.zero at this moment.
Insurance transactions entered into by insurance companies25%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

103 

Table of Contents

Transaction(1)

Maximum Legal Rate

Current Rate

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.

87

Table of Contents

  0% for outflow of funds related to the payment of principal and interest in connection with foreign loans and financings.
  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.Brazilian Depositary Receipts.
  0% for simultaneous exchange transactions, for the inflow of funds by

104 

Table of Contents

Transaction(1)

Maximum Legal Rate

Current Rate

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, as from May 2, 2016.
  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).

1.10%The applicable to remittances to rate for credit on a

foreign bank account owned by Brazilian residents,belonging to a

resident in Brazil is 1.10%, as from

March 3, 2018.

 

(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.

 

88

Table of Contents

FATCA

 

The Foreign Account Tax Compliance Act, (“FATCA”)or “FATCA,” became law in the United States on March 18, 2010. The legislation requires foreign financial institutions, (“FFIs”)or “FFIs,” (such as Santander Brasil) to enter into an FFI agreement under which they agree to identify and provide the U.S. Internal Revenue Service, (“IRS”)or “IRS,” with information on accounts held by U.S. persons and certain U.S.-owned foreign entities, or otherwise face a 30% withholding tax on certain U.S. source 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 accounts to the IRS.

 

On September 23, 2014, Brazil and the United States announced that they entered into an intergovernmental agreement, (“IGA”)or “IGA”, which became effective in Brazil by virtue of Decree No. 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(Receita Federal do Brasil)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.1,680n° 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 Organisation for Economic Co-operation and Development’s Base Erosion and Profit Shifting project, which is aimed at reducing tax avoidance. Normative Ruling No.n° 1,680 applies to legal entities required to present thee-Financeira pursuant to Normative Ruling No.n° 1,571, dated July 2, 2016.

 

105 

Table of Contents

On the same date, the Normative Ruling No.n° 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”)or “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). Law No. 157/2016 provides that the ISS owed by credit card managing companies (administradoras de cartões de créditos) should be paid to the municipality in which the service taker is located and where the corresponding POS has been registered. In addition, also determined that the following services are subject to ISS in the municipality in which the service taker is located: (i) card management; (ii) leasing; (iii) fund management; and (iv) syndicate activities. Before the aforementioned Law was enacted, the ISS was due in the municipality in which the service provider was located (irrespective of where the service taker was located). With this new legislation, ISS rates may vary depending on where the service taker is located. On March 23, 2018, the Brazilian Supreme Court suspended the application of the Supplementary Law No. 157.

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 calledRegime Especial de Regularização Cambial e Tributária, or “RERCT”) until December 31, 2014. Law No. 13,428/2017 extended that deadline to June 30, 2016 (and also provided that heirs may take advantage of RERCT, if the inheritance process prior to the RERCT application date.

89

Table of Contents

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.

On April 3, 2017, the Federal Revenue Office published Normative Ruling No. 1,704/2017 regulating the new round of the RERCT, under which taxpayers that have not yet disclosed their assets held abroad may do so until July 31, 2017.

The new program provides that income tax shall be assessed at a 15% rate, in addition to a penalty of 135% of the tax due (i.e., thus leading to a 20.25% penalty), thus resulting in a total tax burden of 35.25%. For purposes of the assessment of the income tax and penalty, the value of the assets as of June 30, 2016 should be reported to the tax authorities. Moreover, the amount related to these assets must be converted into Brazilianreaisaccording to the exchange rate provided for the Brazilian Central Bank on that same date, that is, June 30, 2016.

Special Regularization Tax Program

Provisional Measure No. 783 of 2017 was published on May 31, 2017, creating the Special Tax Regularization Program (Programa Especial de Regularização Tributária,or “PERT”) before the Brazilian Federal Revenue Office and the National Treasury Public Attorney’s Office. The Provisional Measure was converted into Law No. 13,496, of October 24, 2017 (“Law 13,496/17”). Taxpayers had until November 14, 2017 to apply for enrollment in the PERT tax relief program.

PERT encompasses tax and non-tax debts past due on or before April 30, 2017, including those covered by past tax relief programs (whether ongoing or terminated), under judicial or administrative dispute, or otherwise arising from tax assessments issued after publication of Law 13,496/17.

Taxpayers may use tax losses and the CSL negative tax base ascertained by December 31, 2015 and reported by July 29, 2016, whether relating to the taxpayer itself or to a party responsible for the tax or co-obligor for the debt, as well as those relating to direct or indirect controlled and controlling companies, or companies under direct or indirect common control as of December 31, 2015 (provided that such companies are domiciled in Brazil and that such status remains unchanged until the option date).

 

Income Tax Levied on Capital Gains

 

Law 13,259, of March 16, 2016 (“Law 13,259/16”) 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 portion of the gains up to R$5 million, (ii) 17.5% for the portion of the gain that exceeds R$5 million but does not exceed R$10 million, (iii) 20% for the portion of the gain that exceeds R$10 million but does not exceed R$30 million, and (iv) 22.5% for the portion 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.

 

90New Income Tax Bylaw (RIR/18)

Table of Contents

Decree 9,580/18, published in November, 2018, revoked and replaced RIR/99 (Decree 3,000/99).

The new RIR/18 consolidates rules regarding Income Tax published until December 31st, 2016.

It includes several rule changes which occurred over time, such as transfer pricing and thin capitalization rules, financial products’ taxation and corporate income tax changes brought by Law 12973/2014, listed below:

·Tax effects connected to IFRS;

·Transitional Tax Regime (RTT) revocation, which was implemented in order to neutralize temporarily the effects related to IFRS until Law 12,973 was enacted;

·Equity-method company valuation, including new provision to tax treatment on goodwill or the discount paid on these entities investments;

·Tax regimen applicable to profits, dividends and interests on equity by Brazilian companies;

·Creation of new tax regimen regarding foreign controlled companies (CFC rules) e its effects on taxation arising from the profits earned abroad by these companies; and

·A new PIS/COFINS calculation basis for financial institutions, including income from essential activity.

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.

 

On September 6, 2017, Santander Brasil received a payment order in an amount106 

Table of €1,603.00 in favor of a Brazilian recipient from an entity based in Turkey. Upon receipt of the supporting documentation, Santander Brasil became aware of the fact that the ultimate payer was actually Iran Water and Electrical Equipments Engineering Co., an entity based in Iran and controlled by the Iranian government. Santander Brasil therefore declined to process the transaction. The intended recipient of the funds obtained an order from the Court of Justice of the State of São Paulo (Tribunal de Justiça Estado de São Paulo) requiring Santander Brasil to process the payment. Santander Brasil complied with the court order and processed the payment accordingly. Revenues and profits generated by Santander Brasil on this transaction in the year ended December 31, 2017 were negligible.Contents

As we are part of the Santander Group, we must also 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 the Santander Group and its affiliates. During the period covered by this annual report:

 

(a)Santander UK plc (“Santander UK”) holds two savings accounts and one current account for two customers resident in the UK who are currently designated by the US under the Specially Designated Global Terrorist (“SDGT”) sanctions program. Revenues and profits generated by Santander UK on these accounts in the year ended December 31, 2017 were negligible relative to the overall profits of Santander Spain.

(a)       Santander UK holds accounts for two customers, with the first customer holding one GBP Savings Account and one GBP Current Account, and the second customer holding one GBP Savings Account. Both customers, who are resident in the UK, are currently designated by the US under the SDGT sanctions program. Revenues and profits generated by Santander UK on these accounts in the year ended December 31, 2019 were negligible relative to the overall profits of Banco Santander S.A.

(b)Santander UK holds two frozen current accounts for two UK nationals who are designated by the US under the SDGT sanctions program. The accounts held by each customer have been frozen since their designation and have remained frozen through 2017. The accounts are in arrears (£1,844.73 in debit combined) and are currently being managed by Santander UK Collections & Recoveries department. No revenues or profits were generated by Santander UK on these accounts in the year ended December 31, 2017.

 

(b)       During the period covered by this annual report, Santander UK held one savings account with a balance of £1.24, and one current account with a balance of £1,884.53 for another customer resident in the UK who is currently designated by the US under the SDGT sanctions program. The customer relationship pre-dates the designations of the customer under these sanctions. The United Nations and European Union removed this customer from their equivalent sanctions lists in 2008. Santander UK determined to put a block on these accounts and the accounts were subsequently closed on 14 January 2019. Revenues and profits generated by Santander UK on these accounts in the year ended 31 December 2019 were negligible relative to the overall profits of Banco Santander S.A.

(c)       Santander UK holds two frozen current accounts for two UK nationals who are designated by the US under the SDGT sanctions program. The accounts held by each customer have been frozen since their designation and have remained frozen through 2019. The accounts are in arrears (£1,844.73 in debit combined) and are currently being managed by Santander UK Collections & Recoveries department. No revenues or profits were generated by Santander UK on these accounts in the year ended December 31, 2019.

(d)       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.

 

(e)       During the period covered by this annual report, Santander Brasil held one current account with a balance of R$100.0 for a customer resident in Brazil who is currently designated by the U.S. under the SDGT sanctions program. The customer relationship pre-dates the designation of the customer under these sanctions. Santander Brasil determined to terminate the account even prior to the customer being formally designated under the SDGT sanctions program on September 10, 2019, and the account was subsequently closed on October 9, 2019. Revenues and profits generated by Santander Brasil on this account in the year ended December 31, 2019 were negligible relative to the overall profits of Banco Santander S.A.

In the aggregate, all of the transactions described above resulted in gross revenues and net profits in the year ended December 31, 2017,2019, which were negligible relative to the overall revenues and profits of theBanco Santander, Group.S.A. 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.

 

91

Table of Contents

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.”

 

107 

Table of Contents

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, 2019, 2018, 2017, 2016 2015, 2014 and 20132015 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.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 – 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, For the Year Ended December 31,
 2017 2016 2015 2019 2018 2017
 Average Balance Interest Average Rate Average Balance Interest Average Rate Average Balance Interest Average Rate Average Balance Interest Average Rate Average Balance Interest Average Rate Average Balance Interest Average Rate
 (in millions of R$, except percentages) (in millions of R$, except percentages)
Assets and Interest
Income		                                    
Assets and InterestAssets and Interest                
IncomeIncome                
Cash and balances with the Brazilian Central Bank  105,301   5,954   5.7%  99,374   7,316   7.4%  67,261   4,625   6.9%  48,670   3,828   7.9%  81,018   5,096   6.3%  105,301   5,954   5.7%
Loans and amounts due from credit institutions  23,460   5,107   21.8%  33,982   7,473   22.0%  41,622   5,076   12.2%  101,981   3,844   3.8%  56,093   2,978   5.3%  23,460   5,107   21.8%
Loans and advances to customers  277,797   44,507   16.0%  239,762   43,978   18.3%  245,749   41,845   17.0%  323,180   50,406   15.6%  304,633   46,471   15.3%  277,797   44,507   16.0%
Debt instruments  146,822   13,457   9.2%  128,105   14,783   11.5%  122,137   14,872   12.2%  178,811   13,528   7.6%  164,111   13,629   8.3%  146,822   13,457   9.2%
Other interest – earning assets  —   2,393   0.0%  —   3,597   —   —   3,451   —   -     1,235   -     -     2,304   -     -     2,393   -   
Total interest – earning assets  553,380   71,418   12.9%  501,222   77,146   15.4%  476,769   69,870   14.7%  652,642   72,841   11.2%  605,855   70,478   11.6%  553,380   71,418   12.9%
Equity instruments  1,871   83   4.4%  2,195   259   11.8%  2,729   143   5.2%  1,464   19   1.3%  1,213   33   2.7%  1,871   83   4.4%
Investments in associates  987   —   —   878   —   —   903   —   —   1,060   -     -     963   -     -     987   -     -   
Total earning assets  556,238   71,501   12.9%  504,296   77,405   15.3%  480,401   70,013   14.6%  655,166   72,860   11.1%  608,031   70,511   11.6%  556,238   71,501   12.9%
Cash and balances with the Brazilian Central Bank  4,569   —   —   2,995   —   —   3,056   —   —   4,538   -     -     4,351   -     -     4,569   -     -   
Loans and amounts due from credit institutions  2,455   —   —   1,737   —   —   1,463   —   —   2,258   -     -     1,676   -     -     2,455   -     -   
Impairment losses  (18,169)  —   —   (15,539)  —   —   (14,212)  —   —   (22,528)  -     -     (21,056)  -     -     (18,169)  -     -   
Other assets  55,648   —   —   75,540   —   —   64,048   —   —   56,912   -     -     56,276   -     -     55,648   -     -   
Tangible assets  6,484   —   —   6,786   —   —   6,881   —   —   9,091   -     -     6,414   -     -     6,484   -     -   
Intangible assets  30,286   —   —   29,832   —   —   30,222   —   —   30,070   -     -     29,839   -     -     30,286   -     -   
Total average assets  637,511   71,501   11.2%  605,646   77,405   12.8%  571,860   70,013   12.2%  735,507   72,860   9.9%  685,531   70,511   10.3%  637,511   71,501   11.2%
Liabilities and Interest Expense                                    
Deposits from the Brazilian Central Bank and
Deposits from credit institutions		  100,473   4,866   4.8%  95,217   5,367   5.6%  81,797   3,783   4.6%

 

92108 

Table of Contents

Liabilities and Interest Expense                  
Deposits from the Brazilian Central Bank and Deposits from credit institutions  81,797   3,783   4.6%  68,761   3,370   4.9%  67,375   4,584   6.8%
Customer deposits  244,364   19,491   8.0%  229,645   25,693   11.2%  217,653   20,666   9.5%  303,741   14,966   4.9%  285,694   13,577   4.8%  244,364   19,491   8.0%
Marketable debt securities  82,055   7,901   9.6%  95,760   12,213   12.8%  84,118   10,048   11.9%  76,194   5,138   6.7%  71,525   4,607   6.4%  82,055   7,901   9.6%
Subordinated debts  8,599   548   6.4%  13,901   1,233   8.9%  16,070   1,523   9.5%  10,779   660   6.1%  10,952   630   5.8%  8,599   548   6.4%
Other interest-bearing liabilities  —   4.456   —   —   3,759   —   —   1,308   —   -     2,890   -     -     4,376   -     -     4,749   -   
Total interest-bearing liabilities  416,816   36,179   8.7%  408,067   46,268   11.3%  385,215   38,129   9.9%  491,187   28,520   5.8%  463,388   28,557   6.2%  416,815   36,472   8.8%
Noninterest bearing demand deposits  64   —   —   15,393   —   —   14,792   —   —   14,612   -     -     11,127   -     -     16,394   -     -   
Other liabilities  117,161   —   —   97,283   —   —   89,820   —   —   133,255   -     -     121,198   -     -     115,689   -     -   
Non-controlling interests  745   —   —   638   —   —   557   —   —   617   -     -     555   -     -     745   -     -   
Stockholders’ Equity  87,868   —   —   84,283   —   —   81,475   —   —   95,836   -     -     89,263   -     -     87,868   -     -   
Total average liabilities and equity  638,983   36,179   5.7%  605,664   46,268   7.6%  571,860   38,129   6.7%  735,507   28,520   3.9%  685,531   28,557   4.2%  637,511   36,472   5.7%

 

 

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, 2017,2019, compared to the year ended December 31, 2016,2018, and for the year ended December 31, 20162018 compared to the year ended December 31, 2015.2017. 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 2017/2016 For the years ended 2016/2015
  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  427   (1,789)  (1,362)  2,344   346   2,690 
Loans and amounts due from credit institutions  (1,482)  (884)  (2,365)  (1,071)  3,468   2,397 
Loans and advances to customers  6,103   (5,574)  529   (1,038)  3,172   2,134 
Debt instruments  1,975   (3,302)  (1,326)  708   (798)  (90)
Other interest-earning assets  (1,200)  —   (1,200)  142   —   142 
Total interest-earning assets  5,823   (11,548)  (5,724)  1,085   6,188   7,273 
Equity Instruments  (34)  (141)  (175)  (33)  148   115 
Total earning assets  5,790   (11,690)  (5,900)  1,052   6,336   7,388 
Interest Expense and Similar Charges                        
Interest-bearing liabilities                        
Deposits from the Brazilian Central Bank and Deposits from credit institutions  611   (198)  413   93   (1,307)  (1,214)
Customer deposits  1,561   (7,763)  (6,202)  1,187   3,840   5,027 
Marketable debt securities  (1,590)  (2,722)  (4,312)  1,454   711   2,165 
Subordinated liabilities  (394)  (291)  (685)  (197)  (93)  (290)
Other interest-bearing liabilities  697   —   697   2,451   —   2,451 
Total interest-bearing liabilities  (885)  (10,974)  (10,089)  4,988   3,151   8,139 

  For the Years Ended 2019/2018 For the Years Ended 2018/2017
  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  (2,348)  1,080   (1,268)  (1,477)  619   (858)
Loans and amounts due from credit institutions  1,915   (1,049)  866   3,624   (5,753)  (2,129)
Loans and advances to customers  2,876   1,059   3,935   4,162   (2,198)  1,964 
Debt instruments  1,166   (1,267)  (101)  1,502   (1,330)  172 
Other interest-earning assets  (1,069)  -     (1,069)  (89)  -     (89)
Total interest-earning assets  2,540   (177)  2,363   7,722   (8,662)  (940)
Equity Instruments  6   (20)  (14)  (24)  (26)  (50)
Total earning assets  2,546   (197)  2,349   7,698   (8,688)  (990)
Interest Expense and Similar Charges
Interest-bearing liabilities                        
Deposits from the Brazilian Central Bank and Deposits from credit institutions  285   (786)  (501)  679   905   1,584 
Customer deposits  878   511   1,389   2,903   (8,817)  (5,914)
Marketable debt securities  309   222   531   (920)  (2,374)  (3,294)
Subordinated liabilities  (10)  40   30   139   (57)  82 
Other interest-bearing liabilities  (1,486)  -     (1,486)  (80)  -     (80)

93109 

Table of Contents

Total interest-bearing liabilities(24)(13)(37)2,721(10,343)(7,622)

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,
  2017 2016 2015
  (in millions of R$, except percentages)
Average earning assets  553,380   504,296   480,401 
Interest and dividends on equity securities(1)  71,501   77,405   70,013 
Net interest income  35,322   31,137   31,884 
Gross yield(2)  12.9%  15.3%  14.6%
Net yield(3)  6.4%  6.2%  6.6%
Yield spread(4)  4.0%  4.0%  4.7%

  For the Year Ended December 31,
  2019 2018 2017
  (in millions of R$, except percentages)
Average total interest – earning assets  652,642   605,855   553,380 
Interest and dividends on equity securities(1)  72,860   70,511   71,501 
Net interest income  44,340   41,954   35,029 
Gross yield(2)  11.2%  11.6%  12.9%
Net yield(3)  6.8%  6.9%  6.3%
Yield spread(4)  5.3%  5.4%  4.0%

 

(*)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, For the Year Ended December 31,
  2017   2016(3)  2015  2019 2018 2017
ROA: Return on average total assets  1.4%  1.2%  1.7%  2.3%  1.9%  1.4%
ROE: Return on average stockholders’ equity  10.4%  8.9%  12.1%  17.4%  14.3%  10.4%
ROE (adjusted) (1)  15.4%  13.3%  18.5%  24.6%  21.0%  15.4%
Average stockholders’ equity as a percentage of average total assets  13.8%  13.9%  14.2%  13.0%  13.0%  13.8%
Payout(2)  70.7%  71.6%  63.4%  65.8%  52.5%  70.7%

 

(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.”

110 

Table of Contents

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).

 

(3)Our results for 2015 were affected by the R$4.8 billion reversal of tax provision regarding COFINS in that year which did not occur in 2017 or 2016.

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, For the Year Ended December 31,
 2017 2016 2015 2019 2018 2017
Cash and balances with the Brazilian Central Bank  19%  19.8%  14.1%  7.5%  13.4%  19.0%
Loans and amounts due from credit institutions  4.2%  6.8%  8.7%  15.6%  9.3%  4.2%
Loans and advances to customers  50.2%  47.8%  51.5%  49.5%  50.3%  50.2%
Debt instruments  26.5%  25.6%  25.6%  27.4%  27.0%  26.5%
Total interest-earning assets  100%  100.0%  100.0%  100%  100%  100%

94

Table of Contents

Loans and Amounts Due from Credit Institutions

 

The following table showsFor further information about Loans and Amounts Due from Credit Institutions, see note “5 – Loans and amounts due from credit institutions” to our short-term funds deposited with other banks at eachconsolidated financial statements included in “Item 18. Financial Statements” of the dates indicated.this annual report.

 

  For the year ended December 31,
  2017 2016 2015
  (in millions of R$)
Time deposits  4,237   2,070   3,627 
Reverse repurchase agreements  271   848   153 
Escrow deposits  10,136   9,836   9,493 
Cash and foreign currency investments  15,981   13,195   24,058 
Other accounts  1,744   2,014   5,271 
Total  32,369   27,964   42,601 

Investment Securities

 

As of December 31, 20172019 and 2016,2018, the book value of investment securities was R$151176 billion and R$146177 billion, respectively (representing 23.0%23% of our total assets as of such dates). Brazilian government securities totaled R$122136 billion, or 81.2%77.3% and R$123117 billion, or 84.2%66.0% of our investment securities as of December 31, 20172019 and 2016,2018, respectively. For a discussion of how our investment securities are valued, see notes 7 and 8 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, As of December 31,
 2017 2016 2015 2019 2018 2017
 (in millions of R$) (in millions of R$)
Debt securities                  
Government securities—Brazil  122,362   122,972   93,440   135,848   116,531   122,362 
Debentures and promissory notes  12,097   12,923   11,967   13,875   10,556   12,097 
Other debt securities  14,626   7,931   10,307   23,609   48,346   14,626 
Total domestic/debt securities  149,086   143,825   115,714   173,332   175,433   149,086 
                        
Equity securities                        
Shares of Brazilian companies  389   1,186   1,168   665   783   389 
Shares of foreign companies  5   4   11   -     2   5 
Investment fund units and shares  1,235   1,237   961   1,693   320   1,235 
Total equity securities  1,629   2,427   2,141   2,358   1,106   1,629 
Total investment securities  150,715   146,252   117,855   175,690   176,539   150,715 

 

As of December 31, 20172019 and 2016,2018, we held no securities of single issuers or related groups of companies whose aggregate book or market value exceed 6%1% of our stockholders’ equity, other than the Brazilian government securities, which represented 140% and 144%127%, respectively of our stockholders’ equity. As of December 31, 20172019 and 2016,2018, the total value of our debt securities was

111 

Table of Contents

approximately 172%179% and 171%191%, respectively, of stockholders’ equity.

 

95

Table of Contents

The following table analyzes the maturities and weighted average yields of our debt investment securities (before impairment allowance) as of December 31, 2017.2019. 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 Maturing within 1 year Maturing between 1 and 5 years Maturing between 5 and 10 years Maturing after 10 years Total
 (in R$ millions) (in R$ millions)
Debt securities                              
Government securities—Brazil  24,474   51,049   20,068   26,771   122,362   20,263   90,716   20,476   8,775   135,848 
Other debt securities  4,930   13,000   8,129   665   26,724   -     25,031   8,071   -     37,484 
Total debt investment securities  29,404   64,049   28,197   27,436   149,086   20,263   115,747   28,547   8,775   173,332 

 

The average rate for debt investment securities is 9.3%7.6%.

 

Domestic and Foreign Currency

 

The following table shows our assets and liabilities by domestic and foreign currency, on December 31, 2017, 2016, and 2015:as of the dates indicated.

 

 As of December 31, As of December 31,
 2017 2016 2015 2019 2018 2017
 Domestic Currency Foreign Currency Domestic Currency Foreign Currency Domestic Currency Foreign Currency Domestic Currency Foreign Currency Domestic Currency Foreign Currency Domestic Currency Foreign Currency
 (in millions of R$) (in millions of R$)
Assets                        
Cash and balances with the Brazilian Central Bank(1)  100,740   126   110,430   175   88,909   234   4,878   15,250   16,651   15,065   18,144   15,981 
Debt instruments  137,420   11,666   134,038   9,788   109,837   5,877   164,447   8,885   166,743   8,690   137,420   11,666 
Loans and amounts due from credit institutions, gross(1)  17,005   15,364   25,421   2,542   18,631   23,970   107,694   1,553   79,166   454   65,279   -   
Loans and advances to customers, gross  269,126   18,703   257,170   11,267   264,491   2,775   326,421   20,835   304,031   17,902   269,126   18,703 
Equity Instruments  1,624   6   2,426   —   2,141   —   2,358   -     1,106   -     1,624   6 
Total assets  525,915   45,865   529,485   23,772   484,009   32,857   605,798   46,523   567,697   42,111   491,593   46,356 
Liabilities                                                
Financial Liabilities at Amortized cost                        
Financial Liabilities at Amortized cost:                        
Deposits from the Brazilian Central Bank and Deposits from credit institutions  56,563   22,812   51,340   27,294   33,056   36,395   58,283   40,988   74,160   24,863   56,563   22,812 
Customer deposits  276,042   —   247,445   —   232,344   10,669   336,515   -     304,198   -     276,042   -   
Marketable debt securities  68,335   1,912   92,132   7,711   82,507   12,151   64,987   8,715   70,109   4,517   68,335   1,912 
Subordinated debts  519   —   466   —   8,097   —   -     -     9,886   -     519   -   
Debt instruments eligible to compose capital  8,435   —   8,312   —   9,959   —   -     10,176   -     9,780   8,435   -   
Other financial liabilities  44,261   —   36,879   —   32,073   —   60,885   -     51,729   -     44,261   -   
Total liabilities  454,155   24,724   436,574   35,005   398,036   59,245   520,670   59,879   510,082   39,160   454,155   24,724 

(1)In the fiscal year ended December 31, 2019, the balances related to compulsory deposits were reclassified from cash and reserves at the Brazilian Central Bank to the item Loans and other amounts with credit institutions for better presentation and, consequently, the respective comparative balances also have been reclassified.

 

Loan Portfolio

 

As of December 31, 2017,2019, our total loans and advances to customers were R$287.8347 billion (44.6%(45.6% of our total assets). Net impairment losses, loans and advances to customers were R$272.4327 billion as ofDecember 31, 2017 (42.1%2019 (42.9% of our total assets). In addition to loans, we had outstanding as of December

112 

Table of Contents

31, 2019, 2018, 2017, 2016 and 2015, 2014 and 2013,R$125.9 billion, R$122.7 billion, R$106.9 billion, R$91.2 billion R$91.9 billion, R$98.6 billion and R$100.591.9 billion respectively, of loan commitments drawable by third parties.

 

96

Table of Contents

Types of Loans by Type of Customer

 

Substantially all of our loans are to borrowers domiciled in Brazil and are denominated inreais. 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 10.0%10% of our total loansloans. Furthermore, currently, 1.2%1.01% of our loan portfolio is allocated to our largest debtor and 7.7%6.79% to our next 10 largest debtors.

 

  As of December 31,
  2017 2016 2015 2014 2013
  (in millions of R$)
Commercial and industrial(1)  140,619   140,993   150,881   133,087   113,571 
Real estate – (2)  34,809   36,650   36,852   31,864   25,555 
Installment loans to individuals(3)  110,513   88,702   77,407   81,893   84,312 
Lease financing(4)  1,888   2,093   2,126   2,266   2,768 
Loans and advances to customers, gross(5)  287,829   268,438   267,266   249,111   226,206 
Impairment losses  (15,409)  (16,435)  (15,233)  (13,421)  (13,472)
Loans and advances to customers, net  272,420   252,003   252,033   235,690   212,734 

(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. 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.For further information about Loans breakdown and Maturity see note “9 – 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.

97

Table of Contents

Maturity

The following table sets forth an analysis by maturity of our loans and advances to customersclients” sections “a - Breakdown” and “b – Detail” in “Item 18. Financial Statements,” which contains our audited consolidated financial statements prepared in accordance with IFRS as issued by type of loans on December 31, 2017.the IASB.

  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  103,378   59.3   31,262   37.9   5,979   19.2   140,619   48.9 
Real estate  7,792   4.5   10,970   13.3   16,047   51.7   34,809   12.1 
Installment loans to individuals  62,078   35.6   39,394   47.7   9,041   29.1   110,513   38.4 
Lease financing  1,000   0.6   887   1.1   1   0.0   1,888   0.7 
Loans and advances to customers, gross  174,248   100.0   82,513   100.0   31,068   100.0   287,829   100.0 

 

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, 2017.2019.

 

 Fixed and variable rate loans with maturity Fixed and variable rate loans with maturity
 Less than one year One to five years Over five years Total Less than one year One to five years Over five years Total
 Balance % of Total Balance % of Total Balance % of Total Balance % of Total Balance % of Total Balance % of Total Balance % of Total Balance % of Total
 (in millions of R$, except percentages) (in millions of R$, except percentages)
Fixed rate  137,109   78.7   54,621   66.2   10,862   35.0   202,592   70.4   155,506   84   91,283   77   11,972   28   258,761   75 
Variable rate  37,139   21.3   27,892   33.8   20,206   65.0   85,237   29.6   30,691   16   26,558   23   31,247   72   88,496   25 
Total  174,248   100.0   82,513   100.0   31,068   100.0   287,829   100.0   186,197   100   117,841   100   43,218   100   347,256   100 

 

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,
  2017 2016 2015
  Balance % of Total Assets Balance % of Total Assets Balance % of Total Assets
  (in millions of R$, except percentages)
OECD countries(1)            
Spain  1,217   0.2   1,495   0.2   240   — 
United States  3,304   0.5   1,692   0.3   2,686   0.4 
Netherlands  3,853   0.6   6,595   1.0   5,474   0.9 
United Kingdom(3)  6,508   1.0   190   0.0   10   0.0 
Other OECD countries(2)  1,072   0.1   1,020   0.2   364   0.1 
Total OECD  15,954   2.5   10,992   1.7   8,774   1.4 
Non-OECD countries                        
Latin American countries(2)  314   0.0   55   0.0   522   0.1 
Cayman Islands  (8,304)  (1.3)  1,301   0.2   4,372   0.7 
Other(2)  100   0.0   463   0.1   574   0.1 
Total non-OECD  (7,890)  (1.2)  1,819   0.3   5,468   0.9 
Total  8,064   1.2   12,811   2.0   14,242   2.4 
      As of December 31,    
  2019   2018   2017  
  Balance % of Total Assets Balance % of Total Assets Balance % of Total Assets
  (in millions of R$, except percentages)          
OECD countries(1)            
Spain  2,589   0.3   1,984   0.3   1,217   0.2 
United States  9,081   1.2   3,721   0.5   3,304   0.5 
Netherlands  2,355   0,3   1,531   0.2   3,853   0.6 
United Kingdom()  158   0.0   1,003   0.1   6,508   1.0 

113 

Table of Contents

Other OECD countries(2)  218   0.0   16,264   2.4   1,072   0.1 
Total OECD  14,401   1.9   24,503   3.6   15,954   2.5 
Non-OECD countries                        
Latin American countries(2)  189   0.0   1,382   0.2   314   -   
Cayman Islands  467   0.1   3,528   0.5   (8,304)  (1.3)
Other(2)  483   0.1   2,397   0.3   100   -   
Total non-OECD  1,139   0.1   7,307   1.1   (7,890)  (1.3)
Total  15,540   2.0   31,810   4.6   8,064   1.2 

 

(1)The OrganisationOrganization for Economic Cooperation and Development.

 

(2)Aggregate outstandings in any single country in this category do not exceed 0.75%1.2% of our total assets.

 

(3)In 2017, the outstandings with the United Kingdom exceeded 0.75% of our total assets. For comparison purposes, the 2016 and 2015 outstanding for the country were reclassified from the “Other OECD” line to a specific line at the table above.

98

Table of Contents

The following table presents the amounts of our cross-border outstandings as of December 31, 2017, 20162019, 2018 and 20152017 by type of borrower where outstandings in the borrower’s country exceeded 0.75%1.2% of total assets.

 

 Government Banks and Other Financial Institutions Commercial and Industrial Other Loans Total Government Banks and Other Financial Institutions Commercial and Industrial Other Loans Total
 (in millions of R$) (in millions of R$)
2015          
United States  —   2,621   59   —   2,680 
Netherlands  —   —   5,474   —   5,474 
United Kingdom      9   —   1   10 
Cayman Islands  —   2,265   —   —   2,265 
Total  —   4,895   5,533   1   10,429 
2016                    
2017          
United States  —   2,621   23   43   1,692   -     3,168   20   115   3,303 
Netherlands  —   —   6,595   —   6,595   -     -     3,853   -     3,853 
Austria  —   168   —   —   168   -     -     280   (5)  275 
United Kingdom  —   52   —   138   190   -     5   247   6,256   6,508 
Cayman Islands  —   778   —   —   778   5,656   -     1,485   (15,445)  (8,304)
Total  —   3,619   6,618   181   9,423   5,656   3,172   5,885   (9,079)  5,634 
2017                    
2018                    
United States  —   3,168   20   115   3,303   -     3,569   23   130   3,722 
Netherlands  —   —   3,853   —   3,853   -     -     1,531   -     1,531 
Austria  —   —   280   (5)  275   -     -     197   (4)  193 
United Kingdom(1)  —   5   247   6,256   6,508 
United Kingdom  -     1   38   964   1,003 
Cayman Islands  5,656   —   1,485   (15,445)  (8,304)  3,541   1,987   3,685   (5,685)  3,528 
Total  5,656   3,172   5,885   (9,079)  5,635   3,541   5,557   5,474   (4,595)  9,977 
2019                    
United States  -     8,710   55   316   9,081 
Netherlands  -     -     2,355   -     2,355 
Austria  -     -     127   (2)  125 
United Kingdom  -     -     7   151   158 
Cayman Islands  469   263   488   (752)  467 
Total  469   8,973   3,030   (287)  12.185 

 

Non-current assets held for sale

For further information, see note “10 - Non-current assets held for sale” in “Item 18. Financial Statements,” which contains our audited consolidated financial statements prepared in accordance with IFRS as issued by the IASB.

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.

For further information, see note “16 – Deposits from the Brazilian Central Bank and Deposits from Credit Institutions” and “17 – Client deposits” in “Financial Statements” in “Item 18. Financial

114 

Table of Contents

Statements,” which contains our audited consolidated financial statements prepared in accordance with IFRS as issued by the IASB.

The following table shows the maturity of time deposits (excluding inter-bank deposits) in denominations of U.S.$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, 2019
DomesticInternational
(in millions of R$)
Under 3 months216,896-  
3 to 6 months62,672-  
6 to 12 months62,671-  
Over 12 months93,547-  
Total435,786-  

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,
  2019 2018 2017
  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  123,941   5.00%  99,379   7.34%  97,421   8.33%
Average during the period (1)  100,473   4.84%  102,051   9.67%  98,567   10.63%
Maximum month-end balance  123,941       113,691       119,007     
Total short-term borrowings at year end  123,941       99,379       97,421     

(1)In 2017,The average annual balance sheet data has been calculated based upon the outstandings withaverage of the United Kingdom exceeded 0.75%monthly balances at 13 dates: at December 31 of our total assets. For comparison purposes, the 2016prior year and 2015 outstanding for each of the country were reclassified frommonth-end balances of the “Other OECD” line to a specific line at the table above.12 subsequent months.

 

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 Years Ended December 31, 2017, 20162019, 2018 and 2015—2017—Results of Operations—Impairment Losses on Financial Assets (Net).”

 

 As of December 31, As of December 31,
 2017 2016 2015 2014 2013 2019 2018 2017 2016 2015
 (in millions of R$) (in millions of R$)
Balance at beginning of year  18,191   15,412   13,563   13,641   14,042   22,969   18,262   18,191   15,412   13,563 
Initial adoption of IFRS 9  -     2,461   -     -     -   
Balance adjusted  22,969   20,723   18,191   15,412   13,563 
Impairment losses charged to income for the year  13,493   14,383   13,723   12,049   14,356   14,361   13,540   13,493   14,383   13,723 
Write-off of impaired balances against recorded impairment allowance  (13,422)  (11,605)  (11,874)  (12,126)  (14,757)  (14,705)  (11,294)  (13,422)  (11,605)  (11,874)
Balance at end of year  18,262   18,191   15,412   13,563   13,641   22,625   22,969   18,262   18,191   15,412 
Of which:                                        
Loans and advances to customers  15,409   16,435   15,233   13,421   13,472   20,557   20,242   15,409   16,435   15,233 
Loans and amounts due from credit institutions  69   201   179   142   168   14   14   69   201   179 
Debt Instruments  2,784   1,555   144   —   — 
Recoveries of loans previously written off(1)  1,154   994   757   855   456 

115 

Table of Contents

Provision for Debt Instruments  2,055   2,714   2,784   1,555   144 
Recoveries of loans previously charged off(1)  991   827   1,154   994   757 

 

(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.

 

99

Table of Contents

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, For the Year Ended December 31,
 2017 2016 2015 2014 2013 2019 2018 2017 2016 2015
 (in millions of R$) (in millions of R$)
Recoveries of loans previously written off(1)  1,154   994   757   855   456 
Recoveries of loans previously charged off(1)  991   827   1,154   994   757 
Commercial and industrial  413   563   294   185   123   481   345   413   563   294 
Real estate  210   103   86   81   78 
Real estate – construction  47   103   210   103   86 
Installment loans to individuals  521   314   348   560   215   456   370   521   314   348 
Lease finance  10   14   29   29   41   8   9   10   14   29 
Impairment losses charged to income for the year(1)  13,492   14,383   13,723   12,048   14,356   14,361   13,540   13,492   14,383   13,723 
Commercial and industrial  5,499   6,523   6,634   4,875   5,186   2,377   3,620   5,499   6,523   6,634 
Real estate – mortgage  471   369   91   38   126 
Real estate – construction  95   193   471   369   91 
Installment loans to individuals  7,461   7,617   6,766   6,867   8,803   11,866   9,708   7,461   7,617   6,766 
Lease finance  61   (125)  232   268   241   23   19   61   (125)  232 
Write-off of impaired balances against recorded impairment allowance  (13,422)  (11,605)  (11,874)  (12,126)  (14,757)  (14,705)  (11,294)  (13,422)  (11,605)  (11,874)
Commercial and industrial  (5,716)  (4,553)  (4,953)  (4,494)  (3,195)  (4,101)  (3,981)  (5,716)  (4,553)  (4,953)
Real estate  (342)  (190)  (77)  (97)  (177)
Real estate – construction  (93)  (191)  (342)  (190)  (77)
Installment loans to individuals  (7,312)  (6,811)  (6,622)  (7,337)  (11,093)  (10,462)  (7,100)  (7,312)  (6,811)  (6,622)
Lease finance  (52)  (51)  (222)  (199)  (292)  (49)  (22)  (52)  (51)  (222)

 

(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.

 

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, As of December 31,
 2017 % of Total Loans 2016 % of Total Loans 2015 % of Total Loans 2019 % of Total Loans 2018 % of Total Loans 2017 % of Total Loans
 (in millions of R$, except percentages) (in millions of R$, except percentages)
Borrowers                        
Commercial and industrial  10,339   56,6   10,555   58.0   8,586   55.7   7,836   35   10,792   47   10,338   56.6 
Real estate  493   2,7   364   2.0   184   1.2 
Real estate – construction  355   2   358   2   493   2.7 
Installment loans to individuals  7,374   40,4   7,226   39.7   6,420   41.7   14,409   64   11,768   51   7,374   40.4 
Lease financing  56   0,3   46   0.3   222   1.4   25   0   51   0   56   0.3 
Total  18,262   100,0   18,191   100   15,412   100.0%  22,625   100   22,969   100.0   18,261   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,
  2017 2016 2015
  (in millions of R$)
Internal Risk Rating (1)            
Low  226,098   207,890   211,645 
Medium-low  33,635   32,104   29,501 
Medium  10,423   10,941   8,639 
Medium-high  8,215   6,977   8,552 
High  9,457   10,526   8,929 
Loans and advances to customers, gross  287,829   268,438   267,266 

100116 

Table of Contents

  As of
  December 31,
  2019 2018 2017
  (in millions of R$)
Internal Risk Rating      
             

Low  257,133   240,440   226,098 
Medium-low  56,549   50,486   33,635 
Medium  11,755   11,967   10,423 
Medium-high  8,513   7,722   8,215 
High  13,307   11,318   9,457 
Loans and advances to customers, gross  347,257   321,933   287,829 

For further information on our internal risk rating levels and their corresponding probability of default, see “Item 11. Quantitative and Qualitative Disclosures about Market Risk—Credit Risk—Credit Monitoring.”

 

Renegotiation Portfolio

 

The renegotiation portfolio for the year ended on December 31, 20172019 amounted to R$12.215 billion, compared to R$1214 billion for the same period in 2016,2018, an increase of R$2131,966 million or 1.8%14.5%. 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 54.0%48.5% as of December 31, 20172019 and 51.9%53.9% as of December 31, 2016.2018. 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:

 

 2017 2016 2015 2019 2018 2017
 (in millions of R$, except percentages) (in millions of R$, except percentages)
Renegotiation Portfolio by type of customer            
Commercial and industrial  6,086   5,763   5,158   5,141   5,949   6,086 
Real Estate  1   —   —   -     -     1 
Installment loans to individuals  6,047   6,130   6,173   10,102   7,492   6,047 
Financial leasing  79   99   64   239   75   79 
Total  12,213   11,992   11,395   15,482   13,516   12,213 
Allowances for impairment losses  6,596   6,226   5,740   7,501   7,279   6,596 
Coverage ratio  54.0%  51.92%  50.4%  48.45%  53.85%  54.0%

 

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 latelater 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.

 

101

Table of Contents

Impaired Assets

 

The following table shows our impaired assets, excluding country risk.assets. 

 

  As of December 31,
  2017 2016 2015 2014 2013
  (in millions of R$, except percentages)
Impaired assets                    
Past due and other impaired assets(1)  19,145   18,887   18,599   14,011   14,022 
Impaired assets as a percentage of total loans  6.7%  7.0%  7.0%  5.6%  6.2%
Net loan charge-offs as a percentage of total loans  4.7%  4.3%  4.4%  4.9%  6.5%
Net loan charge-offs as a percentage of average total loans  4.8%  4.5%  4.5%  5.3%  6.8%

117 

Table of Contents

  As of December 31,
  2019 2018 2017 2016 2015
  (in millions of R$, except percentages)
Impaired assets          
                     

Past due and other impaired assets(1)  23,426   22,426   19,145   18,887   18,599 
Impaired assets as a percentage of total loans  6.7%  7.0%  6.7%  7.0%  7.0%
Net loan charge-offs as a percentage of total loans  4.3%  3.5%  4.7%  4.3%  4.4%
Net loan charge-offs as a percentage of average total loans  5.3%  3.8%  4.8%  4.5%  4.5%

 

(1)Includes as of December 31, 2017,2019, R$5,4392,788 million of doubtful loans (R$3,754 million in 2018, R$5,439 million in 2017, R$5,576 million in 2016 and R$5,549 million in 2015, R$3,959 million in 2014 and R$1,744 million in 2013)2015) that were not past-due.

 

Evolution of Impaired Assets

 

Our impaired assets increased by 1.4 %,4.5%, or R$2581,000 million, to R$19,14523,426 million as of December 31, 2017,2019, compared to R$18,88722,426 million as of December 31, 2016.2018. Provisions for impairment losses, including total recoveries of loans previously charged off, increased 0.4%decreased 1.5%, or R$71344 million, to R$18,26222,626 million as of December 31, 2017,2019, compared to R$18,19122,969 million as of December 31, 2016.2018. Offsetting these effects were recoveries of R$1,154991 million on loans previously written off as of December 31, 20172019 and R$994 827 million as of December 31, 2016.

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, 2017.2018.

 

The following table shows the changes in our impaired assets at the dates indicated:

 

 As of December 31, As of December 31,
 2017 2016 2015 2014 2013 2019 2018 2017 2016 2015
 (in millions of R$) (in millions of R$)
Balance at beginning of year  18,887   18,599   14,011   14,022   16,057   22,426   19,145   18,887   18,599   14,011 
Initial Adoption of IFRS9(1)  -     703   -     -     -   
Adjusted Balance  22,426   19,848   18,887   18,599   14,011 
Net additions  13, 680   11,893   16,462   12,114   12,722   16,001   13,872   13,679   11,893   16,462 
Write-offs  (13,422)  (11,605)  (11,874)  (12,127)  (14,757)  (15,001)  (11,294)  (13,422)  (11,605)  (11,874)
Balance at end of year  19,145   18,887   18,599   14,011   14,022   23,426   22,426   19,145   18,887   18,599 

(1)Further information, see Financial Statements notes 1 and 9.

 

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. In 2017,2019, better options to restructure debts decreasedcollaborated to maintain the “net additions” to impaired assets, keepingrelatively at the amount relatively stable.same level.

 

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, As of December 31,
 2017 2016 2019 2018
 (in millions of R$) (in millions of R$)
Commercial and industrial  11,994   11,629   10,073   11,832 
Real estate  782   719 
Real estate – construction  827   1,036 
Installment loans to individuals  6,304   6,488   12,497   9,499 
Lease financing  65   52   29   59 
Total  19,145   18,887   23,426   22,426 

102

Table of Contents

Commercial and Industrial

 

Impaired assets in the portfolio of commercial and industrial loans amounted to R$11,99410,073 million as of December 31, 2017, an increase2019, a decrease of R$3651,759 million, or 3.1%15%, compared to R$11,62911,832 million as of December 31, 2016.2018. The increasedecrease in impaired assets in this portfolio was mainly primarily due to defaults by certain borrowers as a result of the weak macroeconomic conditions in Brazil. We havemeasures that Santander Brasil put in place various measures to manage impaired assets, including collection practices with respect to our borrowers whereby we offered certain customers the chance to negotiate a restructuring of their debts.debts or asset disposal.

 

118 

Table of Contents

Real Estate

 

Impaired assets in the real estate lending portfolio totaled R$782827 million on December 31, 2017, an increase2019, a decrease of R$63209 million, or 8.8%20.2%, compared to R$7191,036 million as of December 31, 2016.2018. The increasedecrease was primarily due to defaults by certain specific large borrowers as a result ofchange on macroeconomic conditions lead to reduction on the weak macroeconomic conditionsinterest rates on real estate portfolio in Brazil.

 

Installment Loans to Individuals

 

Impaired assets in the installment loans to individuals lending portfolio totaled R$6,30412,497 million as of December 31, 2017,2019, with a decreasean increase of R$1842,998 million, or 2.8%31.6%, compared to 2016.2018. This decreaseincrease was a resultconsequence of renegotiation practices for customers during restructuring programs along the year which reflectsrecurrent growth the measures adopted by Santander Brasil since late 2012portfolio and the weak macroeconomic conditions related to manage default ratesthe portfolio in this portfolio, which included the adaptationBrazil, such as unemployment rate and degree 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.income commitment.

 

Lease Financing

 

Impaired assets in the lease financing lending portfolio totaled R$6529 million on December 31, 2017, an increase2019, a decrease of R$1330 million compared to December 31, 2016. The increase in impaired assets was mainly due to defaults by certain borrowers as a result of weak macroeconomic conditions in Brazil.2018.

 

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 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. 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 expected 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 lossmeasurement is calculated using statistical models that considermade through the following factors:

 

·Exposure at default or “EAD”Default (EAD): is the amount of a transaction exposed to credit risk including the ratio of current outstanding balance exposure that could be provided at default. Developed models incorporate hypotheses considering possible modifications to 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.payment schedule.

 

103

Table of Contents

·Probability of defaultDefault (PD): is defined as the probability that the counterparty can meet its obligations to pay the principal and / or “PD”interest. For the purposes of IFRS 9, both will be considered: PD - 12 months (Stage 1), which is the probability that the financial instrument will default during the next 12 months as well as PD - life time (Stage 2 and 3), which considers the probability that the transaction between in default between the balance sheet date and the residual maturity date of the borrower failing to meet its principal and/or interest payment obligations. PD is measured using a time horizon of one year;transaction. The standard requires that is, it quantifies the probability of the borrower defaulting in the coming year. A loan is in default if either the value of principal or interest is past due by ninety days or more or the loan is current but there are doubts asfuture information relevant to the solvencyestimation of the counterparty (subjective doubtful assets).these parameters should be considered.

 

·Loss given default, or “LGD,”Given Default (LGD): is the loss arisingproduced in the event of default. In addition to examiningother words, this reflects the PD, we manage our portfolio looking for loanspercentage of exposure that could not be recovered 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 baseda default. It depends mainly on the net charge-offs on defaulted loans, taking into account the guarantees/collateral, which is considered as credit risk mitigants associated with the loans, the income and expenses associated with the recovery process and the timing of delinquency.each financial asset,

119 

Table of Contents

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.

 

·Loss identification period, or “LIP,”Discount rate: the rate applied to the future cash flows estimated during the expected life of the asset, and which is equal to the time period betweennet present value of 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.financial instrument at its carrying value.

 

Moreover, priorIn order to charging off past due loans without recovery (which is only done after we have completed all recovery efforts), we record provisions toestimate the remaining balance ofabove parameters, the loan so our allowanceBank has applied its experience in developing internal models for impairment losses fully covers our losses. Thus, we understand that our allowanceparameters calculation both for impairment losses methodology has been developed to fit its risk metricsregulatory and capture loans that could potentially become impaired.management purposes.

 

Loans Past Due for Less Than 90 Days Butbut 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, As of December 31,
 2017 % of total 2016 % of total 2019 % of total 2018 % of total
 (in millions of R$, except percentages) (in millions of R$, except percentages)
Commercial and industrial  3,559   19.9   4,141   23.8   3,517   15.4   4,424   19.8 
Mortgage loans  4,880   27.3   5,202   29.9   5,782   25.3   4,527   20.2 
Installment loans to individuals  9,266   51.8   7,957   45.7   13,489   59.1   13,256   59.2 
Lease financing  177   1.0   109   0.6   24   0.1   168   0.8 
Total (*)  17,882   100.0   17,409   100.0   22,812   100.0   22,375   100.0 

 

(*)Refers only to loans past due between 1 and 90 days.

 

Impaired Asset Ratios

 

Our Credit risk exposure portfolio increased by R$28.827.4 billion to R$330.5391.6 billion as of December 31, 20172019, compared to R$301.7364.2 billion as of December 31, 2016.2018. Our impaired assets increased by approximately R$258 million1 billion in the same period, from R$18.922.4 billion to R$19.123.4 billion. The default rate decreased by 4720 basis points in 20172019 in comparison to 2016. The decrease2018, explained in part by the growth of the portfolio and measures that Santander Brasil put in place to manage impaired asset ratios was mainly caused by 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.assets.

 

104

Table of Contents

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, As of December 31,
 2017 2016 2015 2014 2013 2019 2018 2017 2016 2015
 (in millions of R$ except percentages) (in millions of R$ except percentages)
Loans and advances to customers, gross  287,829   268,438   267,266   249,111   226,206   347,257   321,933   287,829   268,438   267,266 
Impaired assets  19,145   18,887   18,599   14,011   14,022   23,426   22,426   19,145   18,887   18,599 
Provisions for impairment losses  18,262   18,191   15,412   13,563   13,641   22,626   22,969   18,262   18,191   15,412 
Credit risk exposure Non-GAAP – customers (1)  330,474   301,703   310,877   288,445   257,420   391,569   364,194   330,474   301,703   310,877 
Ratios                                        
Impaired assets to credit risk exposure  5,8%  6.3%  6.0%  4.9%  5.4%  6.0%  6.2%  5.8%  6.3%  6.0%
Coverage ratio(2)  95,4%  96.3%  82.9%  96.8%  97.3%
Coverage ratio(2)  96.6%  102.4%  95.4%  96.3%  82.9%
Impairment losses  (12,338)  (13,390)  (12,966)  (11,193)  (13,900)  (13,370)  (12,713)  (12,338)  (13,389)  (12,966)
Losses on other financial instruments not measured at fair value(3)  —   88   (524)  (78)  (218)
Impairment losses on financial assets (net)(4)  (12,338)  (13,301)  (13,634)  (11,272)  (14,118)

Gains (losses) due to derecognition of financial assets measured at amortized cost(3)		  -     -     -  88   (524)
Impairment losses on financial assets (net) (4)  (13,370)  (12,713)  (12,338)  (13,301)  (13,490)

 

(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$287,829 million347 billion as of December 31, 20172019 and guarantees and documentary credits amounting to R$42,645 million44 billion as of December 31, 2017.2019. We include off-balance sheet information in this measure to better demonstrate our total managed credit risk.

120 

Table of Contents

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, 20172019 impairment losses on financial assets (net) included R$2.7842,055 million relating to debt instruments.

 

The following chart shows our impaired assets to credit risk ratio from 20132014 through 2017:2019:

 

 

105

Table of Contents

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,
  2017 2016 2015
  (in millions of R$, except percentages)
Balance at beginning of year  1,418   1,310   978 
Foreclosures loans and other assets transferred  524   835   293 
Capital increase in companies held for sale  —   10   355 
Change in the scope of consolidation (1)  —   (498)  — 
Sales  (435)  (239)  (317)
Final balance, gross  1,508   1,418   1,310 
Impairment losses  (352)  (80)  (73)
Impairment as a percentage of foreclosed assets  23.4%  5.7%  5.5%
Balance at end of year  1,155   1,338   1,237 

(1)4C.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.” On December 22, 2017, our wholly-owned subsidiary Santander Corretora de Seguros, Investimentos e Serviços S.A. (“Santander Investimentos”), Cia. de Ferro Ligas da Bahia – FERBASA S.A. (“FERBASA”) and Brazil Wind S.A. (“Brazil Wind”) entered into an agreement for the sale of 100% of the shares issued by BW Guirapá I S.A. (“BW I”) and owned by Santander Investimentos and Brazil Wind to FERBASA. For more information, see“Item 4. A—Important Events—Sale of BW Guirapá I S.A.”Organizational Structure

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.

The following tables analyze our deposits at the dates indicated.

  As of December 31,
  2017 2016 2015
  (in millions of R$)
Deposits from the Brazilian Central Bank
and Credit Institutions		            
Time deposits  52,739   49,549   55,795 
Demand deposits  306   314   145 
Repurchase agreements  26,329   28,771   13,511 
of which:            
Backed operations with Private Securities(1)  —   446   85 
Backed operations with Public Securities  26,329   28,324   13,427 
Total deposits of the Brazilian Central Bank
and Credit Institutions		  79,375   78,634   69,451 
Customer deposits            
Current accounts  17,560   15,868   15,580 
Savings accounts  40,572   36,051   35,985 
Time deposits  146,818   94,478   89,986 
Repurchase agreements  71,092   101,047   101,492 
of which:            
Backed operations with Private Securities(1)  33,903   59,460   61,174 
Backed operations with Public Securities(1)  37,189   41,586   40,318 
Total Customer deposits  276,042   247,445   243,043 
Total deposits  355,417   326,079   312,494 

(1)Refers primarily to repurchase agreements backed by debentures of own issue.

106

Table of Contents

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, 2017
  Domestic International
  (in millions of R$)
Under 3 months  20,299   2,815 
3 to 6 months  9,690   — 
6 to 12 months  11,270   — 
Over 12 months  38,200   3,396 
Total  79,459   6,211 

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,
  2017 2016 2015
  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  97,421   8.33%  131,016   13.60%  115,003   14.15%
Average during the period (1)  98,567   10.63%  124,705   14.11%  89,046   14.24%
Maximum month-end balance  119,007       131,016       103,105     
Total short-term borrowings at
year end		  97,421       131,016       115,003     

(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”), or “Sterrebeeck”, and Grupo Empresarial Santander, S.L. which are controlled subsidiaries of the Santander Group. As of December 31, 2017,2019, Santander Spain held, directly and indirectly, 89.5% of our voting stock (not including the shares held by Banco Madesant - Sociedade Unipessoal).

 

As of December 31, 2017,2019, Santander Spain was the largest bank in the euro zone by market capitalization, with a market capitalization of approximately €88,410€61,986 million. As of December 31, 2017,2019, Santander Spain’s attributable profit totaled €7,516€6,515 million, 13.5% higher17% lower than the previous year, and the total shareholder remuneration on account of the earnings for the 20172019 financial year is €0.463€0.23 per share.share (subject to the approval by the 2020 annual shareholders’ meeting). 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, 2017,2019, Santander Brasil contributed 26%28% 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:

 

Activity

Country of Incorporation

Ownership Interest

Direct

Total Direct and Indirect

Direct and Indirect subsidiaries of Banco Santander (Brasil) S.A.    
Banco Bandepe S.A.BankBrazil100.00%100.00%
Santander Leasing S.A. Arrendamento MercantilLeasingBrazil78.57%99.99%
Aymoré Crédito, Financiamento e Investimento S.A.FinancialBrazil100.00%100.00%
Santander Brasil Administradora de Consórcio Ltda.Buying clubBrazil100.00%100.00%
Atual Companhia Securitizadora de Créditos FinanceirosSecuritizationBrazil100.00%100.00%

107121 

Table of Contents

Santander Corretora de Câmbio e Valores Mobiliários S.A.BrokerBrazil99.99%100.00%
Santander Corretora de Seguros, Investimentos e Serviços S.A. (current name of Santander Participações S.A.)HoldingBrazil100.00%100.00%
Getnet Adquirência e Serviços para Meios de Pagamento S.A.(1)Payment InstitutionBrazil88.50%88.50%
Sancap Investimentos e Participações S.A.HoldingBrazil100.00%100.00%
Santander Brasil, EFCFinancialSpain100.00%100.00%
Santander Holding Imobiliária S.A. (current name of Webcasas S.A.)HoldingBrasil100%100.00%
Controlled by Sancap    
Santander Capitalização S.A.Savings and annuitiesBrazil—100.00%
Evidence Previdência S.A.Social SecuritiesBrazil—100.00%
Controlled by Getnet    
Auttar HUT Processamento de Dados Ltda.Other ActivitiesBrazil—100.00%
Integry Tecnologia e Serviços A.H.U Ltda.Other ActivitiesBrazil—100.00%
Toque Fale Serviços de Telemarketing Ltda.Other ActivitiesBrazil—100.00%
Controlled by Aymoré CFI    
Super Pagamentos e Administração de Meios Eletrônicos S.A.(2).Other ActivitiesBrazil—100.00%
Banco Olé Bonsucesso Consignado S.A. (current nameof Banco Bonsucesso Consignado S.A.)(3).BankBrazil—60.00%
Banco PSA Finance Brasil S.A. (6)BankBrazil—50.00%
Controlled by Banco Olé Bonsucesso Consignado    
BPV Promotora de Vendas e Cobrança Ltda.Other ActivitiesBrazil—100.00%
OléTecnologia Ltda.Other ActivitiesBrazil—100.00%
Controlled by Santander Leasing    
Santander Finance Arrendamento Mercantil S.A. (current name of PSA Finance Arrendamento Mercantil S.A.) (6).LeasingBrazil—100.00%
Controlled by Corretora de Seguros, Investimentos e Serviços    
Webmotors S.A.Other activitiesBrazil—70%
Tecban – Tecnologia Bancária S.A. (Tecban)Other activitiesBrazil—19.81%
PSA Corretora de Seguros e Serviços Ltda.Insurance brokerBrazil—50%
Santander FIC FI Contract I Referenciado DIInvestment FundBrazil—(a)
Santander Fundo de Investimento Unix Multimercado Crédito PrivadoInvestment FundBrazil—(a)
Santander Fundo de Investimento Diamantina Multimercado Crédito Privado de Investimento no ExteriorInvestment FundBrazil—(a)
Santander Fundo de Investimento Amazonas Multimercado Crédito Privado de Investimento no ExteriorInvestment FundBrazil—(a)
Santander Fundo de Investimento SBAC Referenciado DI Crédito PrivadoInvestment FundBrazil—(a)
Santander Fundo de Investimento Guarujá Multimercado Crédito Privado de Investimento no ExteriorInvestment FundBrazil—(a)
Santander Fundo de Investimento Financial Curto PrazoInvestment FundBrazil—(a)
Santander Fundo de Investimento Capitalization Renda FixaInvestment FundBrazil—(a)

ActivityCountry of IncorporationOwnership Interest

Direct and Indirect subsidiaries of Banco Santander (Brasil) S.A.
Banco Bandepe S.A.BankBrazil100.00%
Santander Leasing S.A. Arrendamento MercantilLeasingBrazil99.99%
Aymoré Crédito, Financiamento e Investimento S.A.FinancialBrazil100.00%
Santander Brasil Administradora de Consórcio Ltda.Buying clubBrazil100.00%
Atual Serviços de Recuperação de Créditos e Meios Digitais S.A. (current name of Atual Companhia Securitizadora de Créditos S.A.)Credit Recovery ServicesBrazil100.00%
Santander Corretora de Câmbio e Valores Mobiliários S.A.BrokerBrazil100.00%
Santander Corretora de Seguros, Investimentos e Serviços S.A.HoldingBrazil100.00%
Getnet Adquirência e Serviços para Meios de Pagamento S.A.(1)Payment InstitutionBrazil100.00%
Sancap Investimentos e Participações S.A. HoldingBrazil100.00%
Santander Brasil, EFCFinancialSpain100.00%
Santander Holding Imobiliária S.A. (current name of Webcasas S.A.)HoldingBrazil100.00%
Santander Brasil Tecnologia S.A.TechnologyBrazil100.00%
Rojo Entretenimento S.A.Other ActivitiesBrazil94.60%
BEN Benefícios e Serviços S.A.Other ActivitiesBrazil100.00%
Esfera Fidelidade S.A.Other ActivitiesBrazil100.00%
Super Pagamentos e Administração de Meios Eletrônicos S.A.(2).Other ActivitiesBrazil100.00%
Banco Olé Consignado S.A. (current name of Banco Bonsucesso Consignado S.A.)(3).BankBrazil60.00%
Controlled by Atual Serviços de Recuperação de Créditos e Meios Digitais S.A. (current name of Atual Companhia Securitizadora de Créditos S.A.)
Return Capital Serviços de Recuperação de Créditos S.A. (current name of Ipanema Empreendimentos e Participações S.A.)Credit Recovery ServicesBrazil100.00%
Controlled by Return Capital Serviços de Recuperação de Créditos S.A. (current name of Ipanema Empreendimentos e Participações S.A.)
Return Gestão de Recursos S.A. (current name of Gestora de Investimentos Ipanema S.A.)Asset ManagementBrazil100.00%
Controlled by Sancap Investimentos e Participações S.A.
Santander Capitalização S.A. Savings and annuitiesBrazil100.00%
Evidence Previdência S.A.Social SecuritiesBrazil100.00%
Controlled by Getnet Adquirência e Serviços para Meios de Pagamento S.A.
Auttar HUT Processamento de Dados Ltda.Other ActivitiesBrazil100.00%
Toque Fale Serviços de Telemarketing Ltda.Other ActivitiesBrazil100.00%
Controlled by Aymoré Crédito, Financiamento e Investimento S.A.
Banco PSA Finance Brasil S.A. (6) BankBrazil50.00%
Banco Hyundai Capital Brasil S.A. (current name of BHJV Assessoria e Consultoria Empresarial Ltda.)BankBrazil50.00%
Controlled by Banco Olé Consignado
Crediperto Promotora de Vendas e Cobrança Ltda.Other ActivitiesBrazil100.00%

108122 

Table of Contents

Olé Tecnologia Ltda.Other ActivitiesBrazil100.00%
Controlled by Santander Leasing S.A. Arrendamento Mercantil
Pi Distribuidora de Títulos e Valores Mobiliários S.A. (current name of Santander Finance Arrendamento Mercantil)LeasingBrazil100.00%
Consolidated Investment Funds
Santander FIC FI Contract I Referenciado DIInvestment FundBrazil(a)
Santander Fundo de Investimento Unix Multimercado Crédito PrivadoInvestment FundBrazil(a)
Santander Fundo de Investimento Diamantina Multimercado Crédito Privado de Investimento no ExteriorInvestment FundBrazil(a)
Santander Fundo de Investimento Amazonas Multimercado Crédito Privado de Investimento no ExteriorInvestment FundBrazil(a)
Santander Fundo de Investimento SBAC Referenciado DI Crédito PrivadoInvestment FundBrazil(a)
Santander Fundo de Investimento Guarujá Multimercado Crédito Privado de Investimento no ExteriorInvestment FundBrazil(a)
Santander Fundo de Investimento Financial Curto PrazoInvestment FundBrazil(a)
Santander Fundo de Investimento Capitalization Renda FixaInvestment FundBrazil(a)
Santander Paraty QIF PLC (5)Investment FundBrazil—(a)
Santander FI Hedge Strategies Fund (5)Investment FundBrazil—(a)
BRL V - Fundo de Investimento Imobiliário-FII (4)Real Estate Investment FundBrazil—(a)
Fundo de Investimento em Direitos Creditórios Multisegmentos NPL Ipanema VI - Não PadronizadoInvestment FundBrazil(a)
Fundo de Investimento em Direitos Creditórios Multisegmentos NPL Ipanema VI - Não PadronizadoInvestment FundBrazil(a)
Santander Hermes Multimercado Crédito Privado Infraestrutura Fundo de InvestimentosInvestment FundBrazil(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 quotas 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 sellersFebruary 28, 2020, we sold to Superdigital Holding Company, S.L., a company indirectly controlled by Santander Spain, our entire equity interest in Super Pagamentos e Administração de Meios Eletrônicos S.A. (“Superdigital”). We received consideration of its decision to exercise the call optionR$ 270 million for the shares representing the remaining 50%our interest in Superdigital. As a result, we are no longer a shareholder 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.Superdigital.

 

(3)At an extraordinary general meeting held on March 3, 2016On December 31, 2020, Santander Brasil and the change fromshareholders of Bosan Participações S.A. (holding company whose single asset are the nameshares representing 40% of the corporate capital of Banco Bonsucesso Consignado S.A.Olé) have entered into the definitive agreements and performed the closing acts related to the purchase and sale of all shares issued by Bosan, upon transferring Bosan’s shares to Santander Brasil and the payment to the sellers of the total price of R$1,608,772,783.47. As a result, Santander Brasil became, directly and indirectly, the holder of all shares issued by 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 capital increase was approved by the Brazilian Central Bank in November 22, 2016..

 

(4)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.

 

(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.

 

4D. Property, Plant and Equipment

4D.Property, Plant and Equipment

 

We operate four major administrative operational centers, all of which are owned properties. Additionally, we own 403405 properties for the activities of our banking network and rent 1,6352,130 properties

123 

Table of Contents

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 Block A, Vila Olímpia, São Paulo, State of São Paulo, Brazil.

 

ITEM 4A. UNRESOLVED STAFF COMMENTS

 

Not applicable.

 

ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

 

5A. Operating Results

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, 2017, 20162019, 2018 and 20152017 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, 2017, 20162019, 2018 and 2015,2017, 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.”

 

109

Table of Contents

Brazilian Macroeconomic Environment

In 2015, the economy deteriorated due to imbalances in the main macro fundamentals (inflation, external accounts and fiscal accounts). Monetary policy adjustments, contraction of federal government spending and tax increases, depreciation of the real against the dollar, and realignment of public tariff prices were needed. 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 3.5% 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 3.5%. 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.

During the course of 2017 the Brazilian government announced changes to certain labor laws and the creation of a new long term rate for BNDES loans. However, the reform of Brazil’s social security system has been postponed to 2019.

OtherPrincipal Factors Affecting Our Financial Condition and Results of Operations

Brazilian Macroeconomic Environment

 

As a Brazilian bank, we are significantly affected by the general economic environment in Brazil. The Brazilian economic environment has historically been characterized by significant variations in economic growth, inflation and currency exchange rates. Our results of operations and financial condition are influenced by these factors and the effect that these factors have on employment rates, the availability of credit and average wages in Brazil. The following table presents key data of the Brazilian economy for the periods indicated:

 

 For the year ended December 31, For the year ended December 31,
 2017 2016 2015 2019 2018 2017
GDP growth (1)  1.0%  (3.5)%  (3.5)%  1.2%  1.1%  1.0%
CDI rate (2)  9.9%  14.0%  13.2%  6.0%  6.4%  9.9%
TJLP (3)  7.00%  7.50%  7.00%  5.6%  7.0%  7.0%
SELIC rate (4)  7.00%  13.75%  14.25%  4.5%  6.5%  7.00%
Increase (decrease) in real rate against the U.S. dollar  1.5%  (16.5)%  47.0%  4.0%  17.1%  -16.5%
Selling exchange rate (at period end) R$ per U.S.$1.00  3.31   3.26   3.90   4.03   3.87   3.31 
Average exchange rate R$ per U.S.$1.00 (5)  3.19   3.49   3.33   3.94   3.65   3.19 
Inflation (IGP-M) (6)  (0.5)%  7.2%  10.5%  7.3%  7.6%  -0.5%
Inflation (IPCA) (7)  2.9%  6.3%  10.7%  4.3%  3.8%  2.9%

 

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 rate at the end of the applicable period.

 

(5)Average of the selling exchange rate for the business days during the period.

 

124 

Table of Contents

(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.

General economic stability in Brazil following the onset of the global financial crisis in 2009 allowed the Brazilian Central Bank to continue its policy of reducing interest rates. Due to inflation and other general macroeconomic concerns, the Brazilian Central Bank began increasing interest rates, with the SELIC, a benchmark interest rate, reaching 10.00% at the end of December 31, 2013, 11.75% at the end of December 31, 2014 and 14.25% at the end of December 31, 2015. The Central Bank has been reducing interest rates since then, with the SELIC reaching 13.75% as of December 31, 2016, 7.00% as of December 31, 2017, 6.50% as of December 31, 2018, and 4.50% as of December 31, 2019.

Presidential elections were held in Brazil in October 2018. The resolution of the political and economic crisis in Brazil depends on the approval of reforms that are expected to be promoted by the President of Brazil.The 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 could increase.

Any deterioration in Brazil’s rate of economic growth, changes in interest rates, the unemployment rate or price levels generally may adversely affect our business, financial conditions and results of operations.

 

Interest Rates

 

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 started a monetary easing cycle, reducing the SELIC rate to 13.75% on December 31, 2016, and further reducing the SELIC rate to 7.00% as of December 31, 2017. The Brazilian Central Bank reduced the SELIC rate by 0.25% on meetings held on February 7 and March 21, 2018, bringing the SELIC rate down to 6.50%. 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.

 

110

Table of Contents

The following table presents the low, high, average and period-end SELIC rate since 2013,2015, as reported by the Brazilian Central Bank:

 

 Low High(1) Average(2) Period-End Low High(1) Average(2) Period-End
Year                        
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   11.75   14.25   13.58   14.25 
2016  13.75   14.25   14.15   13.75   13.75   14.25   14.15   13.75 
2017  7.00   13.75   9.83   7.00   7.00   13.75   9.83   7.00 
2018 (through March 30, 2018)  6.50   7.00   6.75   6.50 
2018  6.50   7.00   6.75   6.50 
2019  4.50   6.50   6.13   4.50 
2020 (through March 5, 2020)  4.25   4.50   4.38   -   

 

(1)Highest month-end rate.

 

(2)Average of month-end rates during the period.

 

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, 2017,2019, a 100 basis point increase in the yield curve would have resulted in R$378334 million decline in the net interest income over a one-year period.

 

Credit Volume and Quality in Brazil

 

There was a slowdown in credit growth in 2015, with anOur annual growth of outstanding credit of 6.7%, a ratio of non-performingnonperforming 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-performingnonperforming loans to individuals reached 3.9%6.1%. Subsequently, in 2017, 2018 and 2019, the ratio of nonperforming loans to individuals reached 5.3%, 4.8% and 5.0%, respectively.

 

The total outstanding credit to GDP increased from 34.7% in December 2007 to 53.7%49.7% in December 2016, and fell to 47%47.1% in 2017. The ratio increased to 47.3% in 2018 and climbed to 47.8% in 2019.

 

  2017 2016 2015
  (in billions of R$)
Total Credit Outstanding (*)  3,064   3,107   3,217 
Earmarked credit  1,511   1,550   1,582 
Non-earmarked based credit  1,553   1,557   1,635 
of which:            
Corporate  705   747   832 
Individuals (retail)  847   809   805 

125 

Table of Contents

  2019 2018 2017
             

  (in billions of R$)
Total Credit Outstanding (*)  3,471   3,261   3,064 
Earmarked credit  1,465   1,500   1,511 
Non-earmarked based credit  2,006   1,761   1,553 
of which:            
Corporate  905   814   705 
Individuals (retail)  1,101   948   847 

 

(*)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 2017,2019, we recorded foreign exchange expenses of R$2,789 million, foreign exchange expenses of R$2,806 million in 2018 and foreign exchange revenues of R$605 million R$4,575 million in 2016 and foreign exchange losses of R$10,084 million in 2015.2017. These results are due to the variation of the U.S. dollar against thereal 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. During 2015, thereal depreciated significantly mainly as a result of deteriorating economic conditions in Brazil, including Brazil being downgraded to non-investment grade status by

111

Table of Contents

S&P and Fitch Ratings, and a decrease in global commodities prices, and on December 31, 2015, the exchange rate was R$3.90 per U.S.$1.00. During 2016, thereal 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. TheIn 2017 therealremained relatively stable against the U.S. dollar, throughout 2017, with a small depreciation of 1.5% to R$3.31 per U.S.$1.00 as of December 31, 2017. Therealdepreciated further against the U.S. dollar throughout 2018, with a depreciation of 17%. On December 31, 2017,2018, the exchange rate was R$3.313.87 per U.S.$1.00. In 2019 and through to the date of this annual report, the real has depreciated against the U.S. dollar. As of December 31, 2019, the exchange rate was R$4.03 per U.S.$1.00.

 

Depreciation of thereal relative to the U.S. dollar has created additional inflationary pressures in Brazil, which have led to increasesdecreases in interest rates, limited Brazilian companies’ access to foreign financial markets and prompted the adoption of recessionary policies by the Brazilian government. Depreciation of thereal may also, in the context of an economic slowdown, lead to decreased consumer spending, deflationaryinflationary 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 thereal 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 thereal 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 thereal could materially and adversely affect the growth of the Brazilian economy and our business, financial condition and results of operations.

 

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 atFrom 2005 to 2018, the targeted level was 4.5% since 2005, with a tolerance interval of 2% above and below this target. From 2017 onwards2.0 percentage points that prevailed until 2016 – since then the tolerance interval for 2017 inflation was reducedband has been narrowed to 1.5%.1.5 percentage point. In addition, the targettargeted set for inflation2019 by the CMN was set atlowered to 4.25% in 2019 and 4.00% in 2020.additional 0.25 percentage point decreases have already been defined for the targets until 2022 (4.00% for 2020, 3.75% for 2021 and 3.50% for 2022).

 

Between 2012 and 2014, inflation ranged from 5.8% to 6.4%,i.e., it was close to the top of the fluctuation range in the Brazilian Central Bank’s inflation targeting range. In 2015, as a result of the indexation of a significant portion of contracts for services to the inflation levels of the previous years,

126 

Table of Contents

the impact of adjustment of tariffs and the impact of the depreciation of thereal 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 2016,2017, 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-month2.95% (12-month accumulated rate). In 2017, inflation continued to decrease, with the twelve-month accumulated rate reaching 2.95%, below the lower limit of the Brazilian Central Bank’s target fluctuation range of 3% to 6%. As a result, the Brazilian Central Bank was required to send a letter to the CMN explaining the reasons for not meeting the target in which the Brazilian Central Bank explained that it expectsexpected that the monetary easing undertaken between 2016 and 2017 is expected toin 2018would make the actual inflation rate converge towardstoward the target. In 2018 the inflation increased to 3.75%, thus reinforcing the efficiency of the monetary policy in the country. In 2019 and through to the date of this annual report, inflation reached 3.3% in 12-month accumulated terms.

 

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 2017,2019, 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$378443 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.

 

Inflation adversely affects our personnel and other administrative expenses that are directly or indirectly tied to inflation indexes, generally the consumer price index (Í(Índice de Preços ao Consumidor – Amplo)Amplo), or “IPCA,” and the general index of market prices (Í(Índice Geral de Preços-Mercado)os-Mercado), or “IGPM.” For example, considering the amounts in 2017,2019, each additional percentage point change in inflation, would impact our personnel and other administrative expenses by approximately R$8493 million and R$6576 million, respectively.

 

112

Table of Contents

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, 2017

As of December 31, 2016

Form of Required Reserve

Yield

 As of December 31, 2019 As of December 31, 2018 Form of Required Reserve Yield
Demand deposits         
Rural credit loans (1)34.0%LoansCap rate: 9.5% p.a.  30.00%  30.00% Loans Cap rate: 7.0% p.a.
Microcredit loans (2)2.0%LoansCap rate: 2.0% p.m.  2.00%  2.00% Loans Cap rate: 2.0% p.m.
Reserve requirements (4)40.0%45.0%CashZero  21.00%  21.00% Cash Zero
Additional reserve requirements0.0%CashSELIC  0.00%  0.00% Cash SELIC
Free funding (3)24.0%19.0%    47.00%  47.00% 
         
Savings accounts            
Mortgage loans65.0%LoansCap of TR + 12.0% p.a.  65%  65% Loans TR + 12.0% p.a.
 TR + 6.17% p.a., or 
Reserve requirements (4)24.5%CashTR + 70.0% of the target SELIC  20.00%  20.00% Cash TR + 70.0% of the target SELIC
Additional reserve requirements0.0%5.5%CashSELIC  0.00%  0.00% Cash SELIC
Free funding (3)10.5%5.0%    15.00%  15.00% 
         
Time deposits            
Reserve requirements (4)34.0%25.0%    31%  33% Cash SELIC
In cash or other instruments0.0%15.0%Cash or other instrumentsSELIC for Cash
In cash0.0%10.0%CashSELIC
Additional reserve requirements0.0%11.0%CashSELIC
Free funding(3)66.0%64.0%  

127 

Table of Contents

In cash or other instruments  0.00%  0.00% Cash or other instruments SELIC for Cash
In cash  0.00%  0.00% Cash SELIC
Additional reserve requirements  0.00%  0.00% Cash SELIC
Free funding(3)  69.00%  67.00%    

 

(1)Rural credits are credits granted to farmers in the amount of R$11.612.9 billion and R$9.011.8 billion on December 31, 20172019 and December 31, 2016,2018, respectively.

 

(2)Micro-creditMicrocredit is a credit granted to very small businesses, with an open position of R$429.0 million1.2 billion and R$317.1642.0 million on December 31, 20172019 and December 31, 2016,2018, 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)According to Circular No. 3,823”3,823 of the CMN, the Brazilian Central Bank replaced the reserve requirement deduction of time deposits and demand deposits by a fixed amount, based on total deductions as of January 20, 2017. From 2020, no deductions will be allowed. No deductions are allowed to meet reserve requirements for saving accounts.

 

Taxes

 

See “Item 4. Information on the Company—B. Business Overview—Regulation and Supervision—Taxation.Other Applicable Laws and Regulation —Taxation.”

 

Hedging in Foreign Investments

 

We operate a branchtwo foreign branches, one in the Cayman Islands, and another one in Luxemburg, and have a subsidiary named Santander Brasil Establecimiento Financiero de Credito, EFC, or “Santander EFC” (an independent wholly-owned subsidiary in Spain) which are 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 thereal on foreign investments are non-taxable or non-deductible. 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 thereal, 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, 2017.2019.

 

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 2017, 20162019, 2018 and 2015,2017, 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

113

Table of Contents

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 for tax purposes generates a permanent difference and, as a result, no record of the deferred tax liability.

 

The following table shows the main assumptions for the basis of valuation as of the dates indicated.

 

2017

2016

2015

 2019 2018 2017
(Value in use: cash flows) (Value in use: cash flows)
Main Assumptions(*)         
Basis of valuation         
Period of the projections of cash flows(1)5 years5 years5 years  5 years   5 years   5 years 
Growth rate(2)8.3%8.0%7.5%  4.8%  5.1%  8.3%
Discount rate(3)14.6%15.2%15.2%  12.5%  13.6%  14.6%

128 

Table of Contents

 

(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 areal growth rate of 4.15%1% p.a. plus annual long-term inflation in 2017.2019.

 

(3)The discount rate is calculated based on the capital asset pricing model. The discount rate before tax is 17,78% in 2019, 19.33% in 2018 and 20.42% in 2017, 20.23% in 2016 and 20.11% in 2015.2017.

 

(*)The recoverability test was performed during the second half of 2017. 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 and perpetuity growth rate as the main assumption subject to reasonably possible change and we did not identify any impairment to goodwill.

 

Other Factors Affecting the Comparability of Our Results of Operations

 

Acquisition of residual equity stake in Getnet

On December 19, 2018, the minority shareholders of IpanemaGetnet Put Option, pursuant to the applicable Share Purchase Agreement, or SPA. On the exercise date of the Put Option, we entered into a binding amendment to the SPA, to acquire all of the Getnet shares owned by minority shareholders, corresponding to 11.5% Getnet’s share capital, for an amount of R$1.431 billion. The acquisition transaction was approved by the Brazilian Central Bank on February 18, 2019 and settled on February 25, 2019, and we became the holders of 100% of Getnet’s shares.

Formation of Esfera Fidelidade S.A.

Esfera Fidelidade was incorporated on August 14, 2018 as our wholly-owned subsidiary. Esfera Fidelidade was formed to develop and manage customer loyalty programs. The company started its operations in November 2018.

Investment in Loop Gestão de Pátios S.A.

In 2018, Webmotors S.A., a company in which we own an indirect 70% equity interest, entered into an agreement with Allpark Empreendimentos, Participações e Serviços S.A. and Celta L.A. Participações S.A. to acquire a 51% stake in Loop through a capital increase and issuance of new shares by Loop which were fully subscribed and paid-in by Webmotors. Loop conducts physical and virtual car auctions. This acquisition has enabled Webmotors to expand its service portfolio and strengthen its competitive position. The transaction was completed on September 25, 2018 for the amount of R$23.9 million.

Formation of BEN Benefícios e Serviços S.A.

On June 11, 2018, Santander Brasil incorporated BEN Beneficios. BEN Beneficios is engaged in create, supply and administer various types of vouchers and tickets used for the provision of employee benefits (such as for meals, transportation and cultural events) in the form of printed electronic and magnetic cards. The company began its operations in the second quarter of 2019.

Creation of PI Distribuidora de Títulos e Valores Mobiliários S.A.

On May 3, 2018, Santander Finance Arrendamento Mercantil S.A., one of our indirect subsidiaries, was converted into a securities brokerage and changed its corporate name to SI Distribuidora de Títulos e Valores Mobiliários S.A. The conversion process was approved by the Brazilian Central Bank on November 21, 2018. On December 17, 2018, SI Distribuidora de Títulos e Valores Mobiliários S.A. changed its corporate name to PI Distribuidora de Títulos e Valores Mobiliários S.A.. On January 22, 2019 it received approval for the aforementioned name change from the Brazilian Central Bank. The

129 

Table of Contents

company begun its operations in March 2019.

Acquisition of Isban Brasil S.A. and Produban Serviços de Informática S.A. Companies

On February 19 and 28, 2018, respectively, we purchased all shares issued by Isban Brasil from Ingenería de Software Bancário, S.L., and all shares issued by Produban Serviços de Informática from Produban Servicios Informáticos Generales, S.L., for R$61,078 thousand and R$42,731 thousand, respectively. While all parties to these transactions are ultimately controlled by Santander Spain, the transactions were conducted on an arm’s length basis. On February 28, 2018, Isban Brasil was merged into Produban Serviços de Informática S.A. and on the same date, Produban Serviços de Informática changed its corporate name to Santander Brasil Tecnologia S.A

Sale of equity interest in BW Guirapá I S.A.

On December 22, 2017, Santander Corretora de Seguros, Cia. de Ferro Ligas da Bahia – Ferbasa S.A. and Brazil Wind S.A. entered into an agreement for the sale of 100% of the shares issued by BW Guirapá I S.A. held by Santander Corretora de Seguros and Brazil Wind to Cia. de Ferro Ligas da Bahia – Ferbasa S.A. The transaction also encompassed the seven wind farms organized as special purpose companies held by BW I. The base consideration paid was R$414 million, and an additional amount of up to R$35 million may be paid if certain contractual targets are met. The transaction closed on April 2, 2018.

Formation of Santander Auto S.A.

On December 20, 2017, we entered into binding agreements with HDI Seguros for the formation of a partnership through the creation of a new insurance company called Santander Auto S.A., or “Santander Auto”. Sancap Investimentos e Participações S.A. and Gestora de Investimentos Ipanema, a company controlled by Santander Brasil, will hold 50% of the issued share capital of Santander Auto with the remaining 50% being held by HDI Seguros. Santander Auto will focus on offering motor insurance policies through a 100% digital platform. The transaction closed on October 9, 2018 for the amount of R$15 million when the documentation to form Santander Auto S.A. was executed. On January 9, 2019, SUSEP granted Santander Auto the regulatory authorization to operate. Santander Auto began its operation on August 2019.

Acquisition of equity stake in the Returns Entities

 

On October 16, 2017, Santander Brasil, through its wholly-owned subsidiary Atual Companhia Securitizadora de Créditos Financeiros or “Atual”, acquired a direct equity interest in the Ipanema EntitiesReturn Credit Management, and an indirect equity interest in Return Asset corresponding to 70% of IpanemaReturn Entities’ share capital.

 

The Ipanema Entities are active inOn October 16, 2019, Atual informed the credit recovery intelligence sector, providing services such as credit portfolio evaluation and pricing, collection, management and recoveryremaining shareholders of non-performing loans. Ipanema Credit Management focuses on portfolio pricing, collection and credit recovery management while Ipanema Asset, as an authorized asset manager duly licensed byits decision to exercise the CVM, is responsiblecall option for the managementshares representing the remaining 30% the Return Entities’s total voting capital owned by them, for a value of credit funds in which the portfoliosapproximately R$17 million. The transaction was completed on November 1, 2019. As a result of this transaction, Atual currently owns 100% of the IpanemaReturn Entities’ customers are concentrated.issued and outstanding share capital.

 

We intend to increase our recovery indicators with regards to non-performing loans by using the know-how of the Ipanema Entities. We also intend for the Ipanema Entities to continue to provide non-performing loan recovery and credit management services to third parties.

Accession toJoined Certain Tax Payment Plans

 

In August 2017, we joined the Special Tax Regularization Program (Programa Especial de Regularização Tributária), or PERT. The program allows for certain tax debts to be repaid in installments. In connection with our participation in this program, we are repaying in installments certain amounts due as a result of lawsuits and administrative proceedings relating to corporate income tax and social security contributions for the periods from 1999 to 2005 in a total amount of R$492 million in January 2018 (taking into account the reduction arising from our participation in the program). A payment of R$191.9 million was due in August 2017 and a further payment of R$299.7

130 

Table of Contents

million was due by January 2018, both of which we have made within the prescribed time limits. As a result of our participation, we recorded expenses in an amount of R$364 million (after tax) in the third quarter of 2017.

 

114

Table of Contents

In October 2017, we joined the Incentive Payment Programs and Installments (ProgramaProgramas de Parcelamento Incentivado) created by the cities Rio de Janeiro and São Paulo. The program allows for certain tax debts to be repaid in installments. In connection with our participation in this program,these programs, we are repaying in installments certain amounts due as a result of lawsuits and administrative proceedings relating to ISS for the periods from 2005 to 2016 in a total amount of R$293 million as of December 31, 2017. As we had made provisions for these losses, we registered income of R$435 million as a result of the reversal of certain provisions, net of tax effects, in an amount of R$96 million.

 

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, the CIB. The CIB will bewas 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 beis 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.

 

On April 14, 2017, the finaldefinitive documents were signed by the shareholders. At the extraordinary shareholders’ meeting held on October 5, 2017, a capital increase in an amount of R$285,205 thousand was approved as a result of which CIB’s capital stock increased from R$65,823 thousand to R$351,028 thousand. The necessary regulatory authorizations, including bycompany began its activities in 2019.

Formation of Banco Hyundai Capital Brasil S.A.

On April 28, 2016, our wholly-owned subsidiary Aymoré CFI entered into a joint venture with 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, as well as products to consumers and Hyundai dealerships in Brazil. Aymoré CFI holds a 50% equity stake in Banco Hyundai Capital Brasil S.A. while Hyundai Capital holds the remaining 50% equity interest. On February 21, 2019, the Brazilian Central Bank andgranted to Banco Hyundai Capital Brasil S.A. the CADE have already been granted. We estimate thatauthorization to operate as a banking entity. Banco Hyundai Capital Brasil S.A. began its operations in the CIB will become fully operational infirst half of 2019. On April 30, 2019, the Brazilian Central Bank granted the authorization to the formation of the insurance brokerage company, which was incorporated on July 2, 2019. The company began its operations on November 2019.

 

Sale of SSS DTVMSantander Securities Services Brasil Distribuidora de Títulos e Valores Mobiliários S.A., or “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

131 

Table of Contents

million before taxes recorded in the “Other non-financial gains/losses” line.

 

Equity DistributionIssuance of Notes

 

On November 5, 2018, our board of directors approved the issuance, through our Cayman Islands branch, of debt instruments to form part of our Tier 1 2013,and Tier 2 regulatory capital in the proposal for equity distributionaggregate amount of U.S.$2.5 billion, pursuant to shareholders was approved at a shareholders’ meeting. In January 2014, the conditions for usan offering made to be able to effect the equity distribution (i.e., endnon-U.S. Persons under Regulation S of the periodU.S. Securities Act of opposition from unsecured creditors, approval by1993, as amended, or the “Notes Offer”.

Our board of directors also approved the redemption of instruments issued to form part of our Tier 1 and Tier 2 regulatory capital, in accordance with the board resolution of January 14, 2014. The redemption were carried out with funds raised through the Notes Offer.

On December 18, 2018, the Brazilian Central Bank authorized the transactions contemplated in the Notes Offer and filing of the minutes of the meeting at the JUCESP)redemption, which were satisfied. The equity distribution to shareholders occurredcompleted on January 29, 2014, and our shares and Units have been traded ex-rights to the equity distribution since January 15, 2014.2019.

 

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 ofreais.

115

Table of Contents

Critical Accounting Policies

 

Our consolidated financial statements have been prepared in accordance with IFRS as issued by the IASB.

General

OurIASB and the principal accounting policies are described in noteNote 2 - Accounting policies and method of measurement to our audited consolidated financial statements. The following discussion describes those areas that require the most judgment or involve a higher degree of complexity 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.policies.

 

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 fairFor further information, see notes “5 - Loans and amounts due from credit institutions”; “6 - Debt instruments”; “7 - Equity instruments”; “8 - Derivative financial instruments and Short positions”; “9 - Loans and advances to clients”; “26 - Other Comprehensive Income”; and “30 - 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 assetfinancial assets 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.

116

Table of Contents

·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 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 usedliabilities” in these models and the sensitivity of the valuation of financial instruments to changes in the principal assumptions used.“Item 18. Financial Statements,”.

 

Impairment Losses on Financial Assets

Definition

 

A financial asset is considered impaired when there is objective evidence of any of the following:that events have occurred which:

 

·significant financial difficulties affectingin the issuer, borrower or other similar obligor;case of debt instruments (loans and debt securities), give rise to an adverse impact on the future cash flows that were estimated at the transaction date;

 

·it becoming probablein the case of equity instruments, mean that the issuer, borrower or other similar obligor will enter bankruptcy or other financial reorganization;their carrying amount may not be fully recovered;

 

·a breacharise from the violation 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.

117

Table of Contents

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;loans; and

 

·The circumstances in which collections will foreseeably be made.arise during the Bankruptcy process.

 

These cash flows are subsequently discounted using the instrument’s effective interest rate.

With regard to recoverable amount losses resultingFor further information, see notes “5 - Loans and amounts due 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 debtcredit institutions”; “6 - Debt instruments”; “7 - Equity instruments”; “8 - Derivative financial instruments and contingent liabilitiesShort positions”; and commitments, the identification of their recoverable amount“9 - Loans and the calculation of the amounts necessaryadvances to cover the related credit risk.

The procedures employedclients” 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, 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.

118

Table of Contents

·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)“Item 18. Financial Statements,”.

·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 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.

132 

Table of Contents

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 changesFor further information, see notes “13 - Intangible assets - Goodwill” and “24 - Tax assets and liabilities” 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 2017, 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.

119

Table of Contents

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 2017, 2016 and 2015 (see notes 14, 13 and 12, respectively, to our audited consolidated financial statements)“Item 18. Financial Statements”.

 

Post-employment Benefit Plan

 

The Post-employmentpost-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 planFor further information, see notes “22 - Provisions for which wepensions 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 renderedsimilar obligations” 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)“Item 18. Financial Statements”.

 

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.

New Accounting Pronouncements

 

The new accounting standards which will come into force after December 31, 20172019 are mentioned in our audited consolidated financial statements included in this annual report. For further information, see note 1.c.1“1 - Introduction, basis of presentation of the consolidated financial statements and other information” to our audited consolidated financial statements.

 

All accounting policies and measurement bases with a material effect on the consolidated financial statements for 2017were2019 were applied in the preparation of such financial statements.

 

133 

Table of Contents

Results of Operations for the Years Ended December 31, 2017, 20162019, 2018 and 2015

The following table presents an overview of the certain key aspects of our results of operations for the years ended December 31 2017 2016 and 2015:

 

Executive Summary 

– Santander Brasil Results at a glance

Results 

Total Income

Our total income amounted to R$48,72558,769 million forin 2019, an increase of 18.7% in comparison with the year ended December 31, 2017, a decrease of 0.2% as compared to R$48,837 million for2018, reflecting the year ended December 31, 2016. This decrease was primarily due to lower gains/losses on financial assets and liabilities (net) and exchange differences (net) of R$1,576 million in the year ended December 31, 2017 as compared to R$7,591 million in the year ended December 31, 2016, mainly as a consequencegood performance of our results of hedging on investments abroad in 2017. This decrease was offset by an increase in our net interest income of R$4,360 million, or 14.3% mainly due to an increase in our credit portfolio and margins charged on the loans we extend, and an increase in net fees and commissions of R$1,744 million, or 15.9% due to increase in the number loyal customers and an increase in the volume of transactions processed.business lines. Excluding the effects of the hedge for investment held abroad, our total income would have amounted to R$49,53560,033 million in the year, ended December 31, 2017, an increase of 17.6%8.4% compared to the year ended December 31, 2016. Total income excluding the effectssame period of the hedge investment abroad is a non-GAAP measure.previous year. For further information, see “Item 3. Key Information—A. Selected Financial Data—Reconciliation of Non-GAAPNon- GAAP Measures and Ratios to Their Most Directly Comparable IFRS Financial Measures.”Measures”.

 

Our total incomeConsolidated Profit for the year ended December 31, 2015 amounted to2019 totaled R$30,814 million, a decrease of 58.5% compared to the year ended December 31, 2016, mainly due to the impact of the non-recurring result regarding reversal of tax provisions and tax reimbursement in relation to COFINS.

Impairment losses on Financial Assets (Net)

Our impairment losses on financial assets (net) reached R$12,338 million for the year ended December 31, 2017, a decrease of R$963 million, or 7.2% compared to our impairment losses on financial assets (net) in the year ended December 31, 2016. This decrease was primarily due to certain risk management measures which we have undertaken in recent years. In the year ended December 31, 2016, our impairment losses on financial assets (net) decreased by R$333 million, or 2.4%, as compared to our impairment losses on financial assets (net) of R$13,63416.6 million, in the year ended December 31, 2015, primarily as a result of (1) an2019, 29.9% increase of 2.1%, or R$280 million, in impairment losses for loans and receivables from R$13,110 million as of December 31, 2015 to R$13,390 million on December 31, 2016, and (2) a decrease of R$612 million to revenues of R$88 million forover 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

121 

Table of Contents

Consolidated Profit for the Year

Our consolidated profit for the year ended December 31, 2017 was R$9,138 million, an increase of R$1,673 million, or 22.4%,2018, as a result of an increase in the volume of transactions primarily due to our expanded digital offeringnet interest income and an increasenet fees and commissions as well as lower losses in the number of loyal customers. 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 nonrecurring results before taxes of R$7.9 billion related to a reversal of tax provision regarding COFINSgains/losses on financial assets and R$765 million of tax reimbursements related to COFINS that did not occur in 2016.liabilities (net) and exchange differences (net).

Efficiency

Our efficiency ratio was 33.1% in December 2017, a 2.5 p.p. increase from 30.6% in December 2016. Our efficiency ratio was 30.6% in December 2016, a 16.6 p.p. decrease from 47.1% in December 2015. Disregarding the effect of the hedge for investment abroad on our revenues, our adjusted efficiency ratio reached 32.5%, 34.9% and 34.8% in December 2017, 2016 and 2015, respectively. The efficiency ratio excluding the effects of the hedge investment abroad is a non-GAAP measure. For further information, see “Item 3. Key Information—A. Selected Financial Data—Reconciliation of Non-GAAP Measures and Ratios to Their Most Directly Comparable IFRS Financial Measures.”

Loan Portfolio

Our total loan portfolio reached to customers amounted R$287.8347 billion as of December 31, 2017,2019, an increase of 7.2%7.9% compared to December 31, 2016,2018, mainly due to an increase in loans to individuals and consumer finance portfolio. Loans

Credit Qualityremains at reasonable levels and support our growth.Impaired assets to individuals totaled R$107.6 billion, an increasecredit risk ratio was 6.0% for the year ended December 31, 2019, a 0.1 p.p. decrease as compared the previous year.Coverage ratio was 96.6% in the year ended December 31, 2019, a 5.8 p.p. decrease to 102.4% the year ended December 31, 2018.Basel Capital adequacy ratio was 15.04% in the year ended December 31, 2019, a decrease of 18.0%, driven by credit cards, payroll loans and agricultural loans. Our consumer finance loan portfolio grew 24.7% in 2017, mainly due to an increase in vehicle financing greater than the market growth rate. In 2016, our total loan portfolio totaled R$268.4 billion, an increase of 0.4% as0.02% compared to the year ended December 31, 2015, driven by loans to individuals (specifically payroll loans and mortgages).

Credit Quality2018. 

 

Our impaired assets to credit risk ratio was 6.7% for the year ended December 31, 2017, a 0.3 p.p. decrease as compared to 7.0% in the years ended December 31, 2016. In 2015 impaired assets to credit risk ratio was 7.0%.

Our coverage ratio (provisions for impairment losses as a percentage of impaired assets) was 95.4% in the year ended December 31, 2017, a 0.9 p.p. decrease as compared to 96.3% December 31, 2016. This decrease was principally caused by a specific borrower in the final quarter of 2017. In 2015, this ratio was 82.9%, a 13.5p.p. increase as compared to 2016.

Our Basel Capital adequacy ratio, calculated in accordance with the regulations and guidance of the Brazilian Central Bank, was 15.8% for the year ended December 31, 2017, a decrease from 16.3%, as of December 31, 2016. For the year ended December 31, 2015 this ratio was 15.7%.

Deposits

Deposits from Brazilian Central Bank and deposits from credit institutions plus customer deposits increased by 9.0%8.1% to R$355.4 billion on December 31, 2017. For the year ended December 31, 2016, deposits from Brazilian Central Bank and deposits from credit institutions plus customer deposits amounted to R$326.1 billion, a 4.3% increase compared to R$312.5436 billion in the year ended December 31, 2015.2019.

122 

Table of Contents

Results of Operations

 

The following table presents our consolidated results of operations for the years ended December 31, 2017, 20162019, 2018 and 2015:2017:

 

  For the year ended December 31,
  2017 2016 2015 % Change
2017/2016		 %Change
2016/2015
  (in millions of R$, except percentages)
Net interest income  34,946   30,586   31,337   14.3   (2.4)
Income from equity instruments  83   259   143   (67.9)  81.0 
Income from companies accounted for by the equity method  72   48   116   50.0   (58.6)
Net fee and commission income  12,722   10,978   9,484   15.9   15.8 
Gains/losses on financial assets and liabilities (net) and exchange differences (net)  1,574   7,591   (9,918)  (79.3)  (176.5)
Other operating income (expenses)  (672)  (625)  (347)  7.6   79.9 
Total income  48,725   48,837   30,814   (0.2)  58.5 
Administrative expenses  (16,121)  (14,920)  (14,515)  8.0   2.8 
Depreciation and amortization  (1,662)  (1,483)  (1,490)  12.1   (0.5)
Provisions (net)  (3,309)  (2,725)  (4,001)  21.4   (31.9)
Impairment losses on financial assets (net)  (12,338)  (13,301)  (13,364)  (7.2)  (2.4)
Impairment losses on other assets (net)  (457)  (114)  (1,221)  300,9   (90.6)
Other nonfinancial gain (losses)  (324)  91   831   

n.d.

   (89.1)
Operating profit before tax  14,514   16,384   (3,216)  (11.4)  (609.5)
Income tax  (5,376)  (8,919)  13,050   (39.7)  (168.3)
Consolidated profit for the year  9,138   7,465   9,834   22.4   (24.1)

  For the Year Ended December 31,
        % Change % Change
  2019 2018 2017  
        2019/2018 2018/2017
  (in millions of R$, except percentages)
Net interest income  44,321   41,921   34,946   5.7   20.0 
Income from equity instruments  19   33   83   (42.0)  (60.8)
Income from companies accounted for by the equity method  149   66   72   126.6   (8.4)
Net fee and commission income  15,713   14,132   12,722   11.2   11.1 
Gains/losses on financial assets and liabilities (net) and exchange differences (net)  (326)  (5,589)  1,574   (94.2)  (455.1)
Other operating income (expenses)  (1,108)  (1,056)  (672)  4.9   57.1 
Total income  58,769   49,507   48,725   18.7   1.6 
Administrative expenses  (16,942)  (16,792)  (16,121)  0.9   4.2 
Depreciation and amortization  (2,392)  (1,740)  (1,662)  37.5   4.7 
Provisions (net)  (3,682)  (2,000)  (3,309)  84.1   (39.6)
Impairment losses on financial assets (net)  (13,370)  (12,713)  (12,338)  5.2   3.0 
Impairment losses on other assets (net)  (131)  (508)  (457)  (74.1)  11.3 
Other nonfinancial gain (losses)  20   156   (324)  (86.9)  (148.2)
Operating profit before tax  22,273   15,910   14,514   40.0   9.6 
Income tax  (5,642)  (3,110)  (5,376)  81.4   (42.2)
Consolidated profit for the year  16,631   12,800   9,138   29.9   40.1 

 

Consolidated Profit

134 

Table of Contents

Our consolidated profit for the Yearyear ended December 31, 2019 was R$16,631 million, an increase of R$3,832 million, or 29.9%, as compared to our consolidated profit of R$12,800 million for the year ended December 31, 2018 as a result of:

(i)an increase of R$2,400 million in net interest income mainly due to the growth in our loan portfolio driven by our commercial banking segment;

(ii)an increase of R$1,581 million in net fees and commission, primarily as a result of an increase of R$722 million in revenues from credit and debit cards, an increase of R$417 million in revenues from sale of insurance and premium bonds, an increase of R$295 million in revenues from capital markets and an increase of R$138 million in revenues from current account services. These increases were explained for the expansion of our customer base, greater loyalty and higher transactionality.

 

Our consolidated profit for the year ended December 31, 20172018 was R$9,13812,800 million, an increase of R$1,6733,662 million, or 22.4%40.1%, as compared to our consolidated profit of R$7,4659,138 million for the year ended December 31, 20162017 as a result of of:

(i)       an increase of R$4,3606,975 million in net interest income mostly driven by growth in our loan portfolio driven by our commercial banking segment;

(ii)       an increase of R$1,410 million in net fees and commissions, primarily as a result ofof: (a) an increase of R$571 million in the volumerevenues from credit and debit cards; (b) an increase of transactions primarilyR$370 million in revenues from current account services; and (c) an increase of R$354 million in revenues from insurance and premium bonds. These increases were in turn due to an 11.6% increase in our expanded digital offeringtotal active customer base and ana 24.8% increase in the number of loyal customers (ii) lower expenses of R$3,543 million tax expensescustomers; and

(iii) a decrease of R$6,0177,163 million in gains/losses on financial assets and liabilities (net) and exchange differences (net), both of which include the effects of the hedge for investment held abroad (i.e., R$6,950 million of gains in tax expenses line and losses in gains/losses on financial assets and liabilities (net) and exchange differences (net)).abroad.

 

·Our consolidated profit for the year ended December 31, 2016 was R$7,465 million, a 24.1% decrease as compared to the year ended December 31, 2015 for which our consolidated profit was R$9,834 million. This decrease in our consolidated profit 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 made to cover the legal 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.”

123 

Table of Contents

Net Interest Income

 

Net interest income for the year ended December 31, 20172019 was R$34,94644,321 million, a 14.3%5.7% or R$4,3602,400 million increase from R$30,58641,921 million for the year ended December 31, 2016.2018. This increase was mainly due toexplained by a 7.2%7.9% increase in the volume of loans extended to customersour credit portfolio, driven by individuals and an increase in the margin we charge on these loans, both of which were primarily concentrated in our commercial banking segment. In addition, our revenues from deposits increased as a result of our liability management plan, which included: (i) an increase in the average margins charged on deposit products which we offer, and (ii) an increase in the proportion of products which we offer on which we charge relatively higher margins.

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 nonrecurring 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.consumer finance.

 

Average total earning assets in 20172019 were R$556.2655.2 billion, a 10.3%7.8% or R$51.947.1 billion increase from R$504.3608.0 billion in 2016.2018. The principal drivers were an increase of R$38.045.9 billion, or 15.9%81.8%, in the average of loans and advancesamounts due from credit institutions, a R$18.5 billion increase in average of loans and advance to customers and a R$18.714.7 billion increase in average of debt instruments.debit instruments, which were partially offset by a R$32.3 billion decrease in average of cash on balances with the Brazilian Central Bank. Net yield (the net interest income divided by average earning assets) was 6.4%6.8% in 20172019 compared to 6.2%6.9% in 2016,2018, an increase of 0.2 p.p. Our 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 was 6.2% in 2016, compared to 6.6% in 2015, a decrease of 0.40.1 p.p.

 

Average total interestinterest-bearing liabilities in 20172019 were R$416.8491.2 billion, a 2.1%6.0% or R$8.727.8 billion increase from R$408.1463.4 billion in 2016.2018. The main drivers of this growth were an increase of R$14.718.0 billion in customer deposits, and an increase of R$13.05.3 billion in deposits from the Brazilian Central Bank and deposits from credit institutions which were partially offset by a decreaseand an increase of R$13.74.7 billion in marketable debt securities and a decrease of R$5.3 billion in subordinated debts. 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.securities.

 

Finally, the yield spread (the difference between gross yield on earning assets and the average cost of interest-bearing liabilities) was 4.0%5.3% in 2019 as compared to 5.4% in 2018, mainly due to a decrease in the cost of funding, associated with the overall reduction in Brazil’s interest rate from 6.50% in 2018 to 4.5% in 2019.

Net interest income for the year ended December 31, 2018 was R$41,921 million, a 20.0% or

135 

Table of Contents

R$6,975 million increase from R$34,946 million for the year ended December 31, 2017. This increase was mainly due to an 11.6% increase in the volume of our credit portfolio which was primarily concentrated in our commercial banking segment, and which was partially offset a decrease in our revenues from deposits as a result of the interest rate being lower in the fiscal year ended December 31, 2018 than the fiscal year ended December 31, 2017.

Average total earning assets in 2018 were R$608.0 billion, a 9.3% or R$51.8 billion increase from R$556.2 billion in 2017. The principal drivers were an increase of R$32.6 billion increase in the average of loans and amounts due to credit institutions, a R$26.8 billion, or 9.7%, in the average of loans and advances to customers, a R$17.3 billion increase in average of debt instruments , which were partially offset by a R$ 24.3 billion decrease in average of cash on balances with the Brazilian Central Bank. Net yield (the net interest income divided by average earning assets) was 6.9% in 2018 compared to 6.4% in 2017, and 2016 and 4.7% in 2015.an increase of 0.5 p.p.

 

Average total interest-bearing liabilities in 2018 were R$463.4 billion, an 11.2% or R$46.6 billion increase from R$416.8 billion in 2017. The main drivers of this growth were an increase of R$41.3 billion in customer deposits, an increase of R$13.4 billion in deposits from the Brazilian Central Bank and deposits from credit institutions and an increase of R$2.4 billion in subordinated debts, which were offset by a decrease of R$10.5 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) was 5.4% in 2018, as compared to 4.1% in 2017, mainly due our Commercial Banking segment accounting for a greater share of in our total results and a decrease in the cost of funding, associated with the overall reduction in Brazil’s interest rate.

Income from Equity Instruments

 

Income from equity instruments for the year ended December 31, 20172019 totaled R$8319 million, a R$17514 million decrease from R$25933 million for the year ended December 31, 2016. This decrease was2018, mainly due to a decreaselower dividends received from Santander Fundo de Investimento Guarujá Multimercado Crédito Privado Investimento no Exterior.

Income from equity instruments in dividends from investments registered in available for sale financial assets. In 2016,2018, totaled R$25933 million, a R$11650 million increasedecrease from R$14383 million for the year ended December 31, 2015.2017. This increasedecrease was mainlyprimarily due to an increasea receipt of dividends of Rio Alto Gestão de Creditos e Participações S.A. that did not occur in dividends from investments registered in available for sale financial assets.2018.

 

Income from Companies Accounted for by the Equity Method

 

Income from companies accounted for by the equity method for the year ended December 31, 20172019 was R$72149 million, aan R$2484 million increase from R$4866 million for the year ended 2016.2018, mainly due to an increase of R$59 million in the result of operations of Banco RCI Brasil S., a jointly-controlled company, an increase of R$19 million in the results of operations of Tecban (Tecnologia Bancária S.A.), a jointly-controlled company and an increase of R$12 million in the results of operations of Webmotors S.A., a jointly-controlled company. These improved results were partially offset by a decrease of R$5 million in the results of operations of Gestora de Inteligência de Crédito, a jointly-controlled company and a R$2 million reduction in the results of operations of Santander Auto S.A. a jointly-controlled company.

Income from companies accounted for by the equity method for the year ended December 31, 2018 was R$66 million, a R$6 million decrease from R$72 million for the year ended December 31, 2017. This increase was mainly due to the positive results of operations of Banco RCI Brasil S.A., a jointly-controlled company, which were partially offset by negative results of operations of Webmotors S.A., a jointly-controlled company. 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 with results of operations at Banco RCI Brasil S.A., a jointly-controlled company.

 

124136 

Table of Contents

Net Fee and Commission Income

 

Net fee and commission income for the year ended December 31, 20172019 reached R$12,72215,713 million, a 15.9%an increase of 11.2% or R$1,7441,581 million increase fromcompared to R$10,97814,132 million for the year ended December 31, 2016.2018. This increase was mainly due to an increase of R$670722 million in revenues from credit and debit cards, R$543417 million in revenues from current account services, R$337 million in revenues fromsale of insurance and capitalization products and an increase ofpremium bonds, R$283295 million in revenues from capital markets and R$138 million from revenues from current account services.

Net fees and commissions for the year ended December 31, 20162018 reached R$10,97814,132 million, a 15.8%11.1%, or R$1,4941,410 million, increase from R$9,48412,722 million for the year ended December 31, 2015.2017. This increase was mainly due to an increase of R$512571 million in revenues from credit and debit cards, R$430370 million in revenues from banking fees andcurrent account services, R$285354 million in revenues from insurance and capitalization products.premium bonds.

 

Net fees and commissions from credit and debit cards totaled R$3,6924,986 million for the year ended December 31, 2017,2019, an increase of 22.2%16.9% compared to the year ended December 31, 2016.2018. This increase was primarily due toas a result of a higher transaction volume (1,969.0 millionturnover (R$236.4 billion in the fiscal year ended December 31, 20172019 as compared to 1,651.5 millionR$201.6 billion the fiscal year ended December 31, 2016). 2018.

Net fees and commissions from credit and debit cards totaled R$3,0224,264 million for the year ended December 31, 2016,2018, an increase of 20.4%15.5% compared to the year ended December 31, 2015, mainly owing to higher interchange fees2017. This increase was primarily due to an increasea higher transaction volume (2,338.2 million in transaction volumes.

Net fees and commissions from current account services totaled R$3,544 million for the year ended December 31, 2017, an increase of 18.1%2018 as compared to the year ended 2016 primarily due to an increase in the volume of transactions of 20.2%. Net fees and commissions from current account totaled R$3,0011,987.6 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 the volume of transactions and a change in our product mix.2017).

 

Net fees and commissions from insurance and capitalization productspremium bonds totaled R$2,8153,586 million for the year ended December 31, 2017,2019, a 13.6%13.1% increase compared to the year ended December 31, 2016,2018, mainly due to credit life insurance associated to the expansiongood evolution of our product portfolio and the growth in credit related insurance products. portfolio.

Net fees and commissions from insurance and capitalization productspremium bonds totaled R$2,4783,169 million for the year ended December 31, 2016, a 13.0%2018, an increase of 12.6% compared to the year ended December 31, 2015. This increase was2017, mainly due to the marketing campaigns conducted in the branch network during the first half of 2016.credit life insurance associated with portfolio dynamics.

 

Revenues from fees and commissions charged in connection with capital markets totaled R$8731,211 million for the year ended December 31, 2017,2019, an increase of 47.9%32.2% compared to the year ended 2016,2018, mainly due to an increase of R$263 million in revenues from securities placements. For the year ended December 31, 2016, underwriting and placement and an increase of R$32 million in revenues from administration and custody.

Revenues from fees and commissions charged in connection with capital markets totaled R$590916 million afor the year ended December 31, 2018, an increase of 4.9% compared to the year ended 2017, mainly due to an increase in revenues from securities placements.

Net fees and commissions from current account services totaled R$894,051 million for the year ended December 31, 2019, an increase of 3.5% compared to the year ended 2018 driven by the expansion of our active current account holders due to greater customer loyalty.

Net fees and commissions from current account totaled R$3,913 million for the year ended December 31, 2018, an increase of 10.4% compared to the year ended December 31, 2015.2017 explained by the growth of digital transactions and the increase of active current account holders.

 

The following table reflects the breakdown of net fee and commission income for the year ended December 31, 2017, 20162019, 2018 and 2015:2017:

 

 For the year ended December 31 For the Year Ended December 31
 2017 2016 2015 % Change 2017/2016 Change% 2016/2015 2019 2018 2017 % Change 2019/2018 Change% 2018/2017
   (in millions of R$, except percentages)   (in millions of R$, except percentages)
Current account services  3,544   3,001   2,570   18.1   16.7   4,051   3,913   3,544   3.5   10.4 
Collection and payment services  1,152   957   816   20.4   17.3   1,313   1,291   1,152   1.7   12.1 
Insurance and capitalization  2,815   2,478   2,192   13.9   13.0   3,586   3,169   2,815   13.2   12.6 
Asset Management and pension funds  824   1,174   1,028   (29.8)  14.2   1,434   1,289   824   11.2   56.4 
Credit and debit cards  3,692   3,022   2,509   22.2   20.4   4,986   4,264   3,692   16.9   15.5 
Capital markets  873   590   501   47.9   17.8 
Trade finance  956   855   701   11.8   22.0 
Tax on services  (526)  (515)  (401)  2.2   28.3 
Others  (608)  (584)  (433)  4.1   35.0 
Total  12,722   10,978   9,484   15.9   15.8 

125137 

Table of Contents

Capital markets  1,211   916   873   32.2   4.9 
Trade finance  1,317   1,228   956   7.2   28.5 
Tax on services  (622)  (671)  (526)  (7.3)  27.6 
Others  (1,562)  (1,266)  (608)  23.4   108.2 
Total  15,713   14,133   12,722   11.2   11.1 

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, 20172019 were gainslosses of R$1,574326 million, a reduction of R$6,0175,263 million decreasein losses from gains of R$7,5915,589 million for the year ended December 31, 2016.2018. This variation is mainly due to a decreasegains of R$6,9505,156 million in derivatives transactions, as a consequencerelated to financial assets measure at fair value through profit or loss held and gains of our results of hedging on investments abroad, which was offset by the same amount in income taxes.R$ 17.9 million related to exchange differences (net). Excluding the results of hedging on investments abroad effect, gains/losses on financial assets and liabilities (net) and exchange differences (net) were gains of R$2,384938 million for the year ended December 31, 2017,2019, a 64.3%R$660 million increase from gains of R$1,451278 million compared to the year ended December 31, 2016, primarily2018 mainly due to the positive results in our derivative positions as a result of market volatility.positions. Gains/losses on financial assets and liabilities (net) and exchange differences (net) excluding the effects of the hedge investment abroad is a non-GAAP measure. For further information, see “Item 3. Key Information—A. Selected Financial Data—Reconciliation of Non-GAAP Measures and Ratios to Their Most Directly Comparable IFRS Financial Measures.”.

 

Gains/losses on financial assets and liabilities (net) and exchange differences (net) for the year ended December 31, 20162018 were losses of R$5,589 million, a decrease of R$7,163 million from gains of R$7,591 million, a R$17,509 million increase from losses of R$9,9181,574 million for the year ended December 31, 2015.2017. This variation is mainly explained by an increasedue to a decrease of R$17,0595,057 million fromin derivatives transactions as a consequence of our results of hedging on investmentsinvestment abroad, which was offset by losses in the same amount in income taxes. Excluding the results of hedging on investments abroad effect, gains/losses on financial assets and liabilities (net) and exchange differences (net) were R$278 million for the year ended December 31, 2018, a 88.3% decrease from R$2,384 million compared to the year ended December 31, 2017, primarily due to positive results in our derivative positions as a result of market volatility which occurred in the fiscal year ended December 31, 2017 did not occur in the fiscal year ended December 31, 2018. Gains/losses on financial assets and liabilities (net) and exchange differences (net) excluding the effects of the hedge investment abroad is a non-GAAP measure. For further information, see “—Other Factors Affecting Our“Item 3. Key Information—A. Selected Financial ConditionData—Reconciliation of Non-GAAP Measures and Results of Operations—Hedging in Foreign Investments.Ratios to Their Most Directly Comparable IFRS Financial Measures.”.

 

The following table presents our gains/losses on Financial Assets and Liabilities (net) and Exchange Differences (net) for the periods indicated.

 

 For the year ended December 31 For the Year Ended December 31
 2017 2016 2015 % Change 2017/2016 %Change 2016/2015 2019 2018 2017 % Change 2019/2018 Change% 2018/2017
 (in millions of R$, except percentages) (in millions of R$, except percentages)
Gains/losses on financial assets and liabilities (net) and exchange differences (net)  1,574   7,591   (9,918)  (79.3)  (176.5)  (326)  (5,589)  1,574   (94.2)  (455.1)
Effects of the hedge for investment held abroad  (810)  6,140   (10,919)  (113.2)  (156.2)  1,264   5,867   810   (78.5)  624.3 
Gains/losses on financial assets and liabilities (net) and exchange differences (net) excluding Hedge Impact(1)  2,384   1,451   1,001   64.3   45.0   938   278   2,384   237.7   (88.4)

(1)Gains/losses on financial assets and liabilities (net) and exchange differences (net) excluding the effects of the hedge investment abroad is a non-GAAP measure. For further information, see “Item 3. Key Information—A. Selected Financial Data—Reconciliation of Non-GAAP Measures and Ratios to Their Most Directly Comparable IFRS Financial Measures.”

 

138 

Table of Contents

Other Operating Income/Expenses

 

Other operating income/expenses for the year ended December 31, 20172019 were expenses of R$6721,108 million, an increase of R$4752 million compared to expenses of R$6251,056 million for the year ended December 31, 2016 primarily due to an increase in contributions to a deposit protection scheme known as the Credit Guarantee Fund (Fundo Garantidor de Crédito).2018. Other operating income/expenses for the year ended December 31, 2018, were expenses of R$6251,056 million, an increase of R$277384 million compared to expenses of R$347672 million for the year ended December 31, 2015, primarily2017, mainly 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.assets we received as guarantees from our customers.

 

Administrative Expenses

 

Administrative expenses for the year ended December 31, 20172019 were R$16,12116,942 million, a R$1,200149 million increase compared to expenses of R$14,92016,792 million for the year ended December 31, 2016.2018. For the year ended December 31, 2016,2018, our administrative expenses of R$14,92016,792 million reflected a R$405672 million increase compared to administrative expenses of R$14,51516,121 million for the year ended December 31, 2015.2017. The performance in both periods is primarily attributed to the increase in: (i) personnel expenses, which are in line, with our meritocratic culture and the performance of our business; and (ii) data processing expenses line in order to support the increase in the volume of our customer transactions.

 

126 

Table of Contents

Personnel expenses increased R$560122 million for the year ended December 31, 2017,2019, as a consequence of the increase in the benefits line and higher wages and salaries with a result of the renegotiation of our collective bargaining agreement. In the year ended December 31, 2018, our personnel expenses increased R$269 million compared to the same period in 2017. This performance can be attributed to the increase in wages and salaries and social security costs mainly due to higher profit sharing expenses related to the incentive plan expenses alignedand benefits, which are in line with the business performance. In the year ended December 31, 2016, our personnel expenses increased R$578 million compared to the same period in 2015, due principally to higher wage and salariesmeritocratic culture and the R$155 million lump-sum bonus in connection with the renegotiationperformance of our collective bargaining agreement in October 2016.business.

 

The following table sets forth our personnel expenses for each of the periods indicated:

 

 For the year ended December 31, For the Year Ended December 31,
 2017 2016 2015 % Change 2017/2016 %Change 2016/2015 2019 2018 2017 % Change 2019/2018 Change% 2018/2017
 (in millions of R$, except percentages) (in millions of R$, except percentages)
Wages and salaries  5,714   5,377   4,655   6.3   15.5   5,876   5,813   5,714   1.1   1.7 
Social security costs  1,381   1,273   1,316   8.5   (3.3)  1,277   1,405   1,381   (9.1)  1.7 
Benefits  1,309   1,278   1,184   2.4   7.9   1,492   1,387   1,309   7.5   6.0 
Training  58   63   93   (7.9)  (32.7)  66   63   58   4.8   8.6 
Other personnel expenses  475   386   550   23.1   (29.8)  617   538   475   14.7   13.3 
Total  8,937   8,377   7,799   6.7   7.4   9,328   9,206   8,937   1.3   3.0 

 

Other administrative expenses increased R$64028 million fromto R$6,5437,614 million for the year ended December 31, 20162019 from R$7,586 million for the year ended December 31, 2018, mainly due to a R$272 million increase in technology and systems, a R$91 million increase in advertising, R$83 million increase in specialized and technical service, both expenses derived from more intense commercial actions in our business, partially offset by a decrease of R$582 million with general maintenance expenses which as a result of the adoption of IFRS 16.

In the year ended December 31, 2018 other administrative expenses increased R$403 million to R$7,586 million for the year ended December 31, 2018 from R$7,183 million for the year ended December 31, 2017. This2017, mainly due to: (i) a R$422 million increase mostly reflects higher expensesin technology and systems associated with greater transactionality and expansion of our customer base, (ii) an R$189 million increase in specialized and technical services especially technology and systems, and advertising and communications as a consequence of our commercial actionsservices. This growth in line with business transformations. Other administrative expenses decreasedwas partially offset by R$173136 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 travelin communications-related expenses.

 

The following table sets forth our other administrative expenses for each of the periods indicated:

  For the year ended December 31,
  2017 2016 2015 % Change 2017/2016 %Change 2016/2015
  (in millions of R$, except percentages)
Specialized and technical services  1,901   1,745   1,821   9.0   (4.2)
Property, fixtures and supplies  1,284   1,279   1,268   0.5   0.8 
Technology and systems  1,365   1,247   1,193   9.5   4.6 
Advertising  618   487   523   26.9   (7.0)
Communications  593   489   481   21.4   1.6 
Per diems and travel expenses  107   133   160   (19.6)  (16.9)
Surveillance and cash courier services  630   622   615   1.3   1.3 
Other administrative expenses  685   542   655   26.3   (17.3)
Total  7,183   6,543   6,716   9.8   (2.6)

 

139 

Table of Contents

   For the Year Ended December 31,
   2019 2018 2017 % Change 2019/2018 Change% 2018/2017
                      

  (in millions of R$, except percentages)
Specialized and technical services  2,173   2,090   1,901   4.0   9.9 
General maintenance expenses  748   1,331   1,284   (43.8)  3.7 
Technology maintenance expenses  2,059   1,786   1,365   15.3   30.8 
Advertising  713   622   618   14.6   0.6 
Communications  473   457   593   3.5   (22.9)
Per diems and travel expenses  140   127   107   10.2   18.7 
Taxes other than income tax  112   89   123   25.9   (27.4)
Surveillance and cash courier services  631   617   630   2.3   (2.1)
Insurance premiums  35   29   27   20.7   7.4 
Other administrative expenses  (1)  531   535   595   21.5   (18.3)
Total  7,614   7,586   7,183   0.4   5.6 

(1) In December 31, 2019, includes mainly Data Processing Expenses in the balance of R$2.4 million (2018 – R$67.7 million and 2017 - R$73.7 million), Service Expenses in the balance of R$2.2 million (2018 - revenue of R$26.8 million and 2017 - R$87.2 million), Expenses with Benefit Guarantor Fund - FGB R$53.5 milion (2018 – R$35.0 million and 2017 - R$5.3 million), Interest on Own Capital R$0 (2018 – R$38.0 million and 2017 - R$20.8 million), and Recovery of Charges and Expenses R$97.4 million (2018 – R$92.4 million and 2017 – R$89.4 million).

The efficiency ratio, which we calculate as total administrative expenses divided by total income, increaseddecreased to 33.1%28.8% in the year ended December 31, 2017,2019, as compared to 30.6%33.9% for the year ended December 31, 2016.2018 For the year ended December 31, 20152017 it was 47.1%33.1%. Our adjusted efficiency ratio, which excludes the effect of the hedge for investment held abroad (see “—Hedging in Foreign Investments” and “Selected Financial Data—Selected Consolidated Ratios, Including Non-GAAP Ratios”), was 32.5%28.2%, 34.9%30.3% and 34.8%32.5% in 2017, 20162019, 2018 and 2015,2017, respectively.

 

Depreciation and Amortization

 

Depreciation and amortization for the year ended December 31, 20172019 was R$1,6622,392 million, a R$180652 million increase from R$1,4831,740 million for the year ended December 31, 2016. This was principally2018, primarily due to impairmentthe change in accounting practices resulting from the adoption of intangible assets related to softwareIFRS 16 following the principles of R$155 millionIAS 17. For further information, please see “Item 1 Introduction, basis of presentation of the consolidated financial statements and an increaseother information, c.1) Adoption of R$29 million incurrednew standards and interpretations of our consolidated financial statements included in connection with lease renewals.“item 18.Financial Statements of this annual report. For the year ended December 31, 2016,2018, depreciation and amortization amounted to R$1,4831,740 million, a R$778 million decreaseincrease from R$1,4901,662 million for the year ended December 31, 2015.2017, mainly due to higher depreciation expenses related to technology items and higher amortization expenses in relation to third party real estate and facilities.

 

127 

Table of Contents

Provisions (Net)

 

Provisions principally include provisions for tax, civil, and especially labor claims. Provisions (net) totaled R$3,682 million for the year ended December 31, 2019, an increase of R$1,682 million compared to R$2,000 million for the year ended December 31, 2018, mainly due to an increase of R$700 million related to the creation of an efficiency and productivity fund, an increase in civil and labor proceedings due to revision of the operational model and a constitution of provisions related to the legal proceeding brought by the association of retired employees of Banespa (Associação dos Funcionários Aposentados do Banco do Estado de São Paulo), or AFABESP, an association of former employees of Banespa in which the classification of the chance of loss was revised to probable in December 2019 (for further information see note 23 to our audited consolidated financial statements included in the ”Item 18. Financial Statements” of this annual report).

In the year ended December 31, 2018, provisions (net) totaled R$2,000 million, a increase of R$1,310 million compared to R$3,309 million for the year ended December 31, 2017, an increase of R$584 million compared to R$2,725 million for the year ended December 31, 2016. This increase was mainly due to an increase in provisionsa decrease of R$816 million related to civil and labor contingences and by our participationthe past service cost in the incentive installment payment program relatedcontribution established for a post-employment benefit plan named Cabesp due to ISS taxes and the participationchanges in the amnesty program for outstanding taxes and social security debts (in accordance with Provisional Measure No.783/2017). Forplan in the first half of 2018 (for further information, see note 24.c1 from22. to our audited consolidated financial statements included in “Item 18. Financial Statements” of in this annual report. In the year ended December 31, 2016, provisions (net) totaled R$2,725 million, 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 provisionsreport) and lower gains related to tax and civil contingencies.foreclosed assets.

140 

Table of Contents

 

Impairment Losses on Financial Assets (Net)

 

Impairment losses on financial assets (net) for the year ended December 31, 20172019 were R$12,33813,370 million, aan R$963657 million decreaseincrease compared to R$13,30112,713 million for the year ended December 31, 2016.2018. This decreaseincrease was principally due to:to Installment Loans to Individuals, due to the recurrent growth of the credit portfolio in this segment.

·A decrease of 7.9%, or R$1,052 million, in impairment loss for loans and receivables to R$12,338 million as of December 31, 2017, from R$13,390 million on December 31, 2016. We believe this decrease is primarily a result of our risk management strategy and 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.

·A decrease of R$89 million in other financial instruments not measured at fair value from a revenue of R$88 million in the year ended December 31, 2016 to a loss of R$1 million in the year ended December 31, 2017.

 

For the year ended December 31, 2016,2018, impairment losses on financial assets (net) were R$13,30112,713 million, aan R$333375 million decreaseincrease compared to R$13,63412,338 million for the year ended December 31, 20152017 principally due to:

 

·An increase of 2.1%, or R$280

An increase of 3%, or R$375 million, in impairment loss for loans and receivables to R$12,713 million in impairment losses for loans and receivables from R$13,110 million as of December 31, 2015 to R$13,390 million 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 kept 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. This change 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 to2018, from R$301.7 billion as of12,338 million on December 31, 2016. Our impaired assets increased by approximately R$289 million in2017. This increase was primarily a result of the same period from R$18.6 billion to R$18.9 billion (see “—Impaired Assets by Typeadoption of Loan”). The default rate on all loans and other financial assets increased by 30 basis points in 2016 in comparison to 2015.IFRS 9 criteria.

 

Our credit risk exposure portfolio increased by R$28.825.3 billion to R$330.5347.3 billion as of December 31, 20172019 compared to R$301.7321.9 billion as of December 31, 2016. Our credit risk exposure portfolio of2018. Furthermore, our impaired assets increased R$310.71 billion from R$23.4 billion as of December 31, 2016 was approximately R$9.174 billion lower than our credit risk exposure portfolio of R$310.9 billion as of December 31, 2015. Furthermore, our impaired assets increased R$257 million from R$18.9 billion as of December 31, 20162018 to R$19.122.4 billion for the year ended December 31, 2017. Our impaired assets increased by approximately R$289 million from R$18.6 billion as of December 31, 2015 to R$18.9 billion as of December 31, 2016 (see “—Impaired Assets by Type of Loan”).2019. The default rate decreased by 4720 base points in 20172019 in comparison with 2016, and increased by 30 basis points in 2016 in comparison with 2015.2018.

 

128 

Table of Contents

The following table shows the ratio of our impaired assets to total credit risk exposure and our coverage ratio as of December 31, 20172019 and December 31, 20162018 and 2015.2017.

  

 For the year ended December 31, As of December 31,
 2017 2016 2015 % Change 2017/2016 %Change 2016/2015 2019 2018 2017 % Change 2019/2018 % Change 2018/2017
 (in millions of R$, except percentages) (in millions of R$ except percentages)
Loans and advances to customers, gross  287,829   268,438   267,266   7.2   0.4   347,257   321,933   287,829   7.9   11.8 
Impaired assets  19,145   18,887   18,599   1.4   1.6   23,426   22,426   19,145   4.5   17.1 
Provisions for impairment losses  18,262   18,191   15,412   0.4   18.0   22,625   22,969   18,262   (1.5)  25.8 
Credit risk exposure – customers(1)  330,474   301,703   310,877   9.5   (3.0)
Credit risk exposure Non-GAAP – customers(1)  391,569   364,194   330,474   7.5   10.2 
Ratios                                        
Impaired assets to credit risk exposure  5.8%  6.3%  6.0%  (0.5) p.p.   0.3 p.p.   6.0%  6.2%  5.8%  (0.2)  0.4
Coverage ratio(2)  95.4%  96.3%  82.9%  (0.9) p.p.   13.4 p.p. 
Impairment losses on loans and receivables  (12,338)  (13,390)  (13,110)  (7.9)  2.1 
Impairment losses on other financial instruments not measured at fair value through profit for loss(3)  (0)  88   (524)  (100.2)  (116.9)
Total of Impairment losses on financial assets (net)(4)  (12,338)  (13,301)  (13,364)  (7.2)  (2.4)
Coverage ratio(2)  96.6%  102.4%  95.4%  (5.7)  7.3
Impairment losses  (13,370)  (12,713)  (12,338)  5.2  3.0
Gains (losses) due to derecognition of financial assets
measured at amortized cost(3)		  -     -     -    -   (100)
Impairment losses on financial assets (net) (4)  (13,370)  (12,713)  (12,338)  5.2  3.0

 

(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$287,829391.6 million and guarantees and documentary credits amounting to R$42,645 million.44 billion. We present the off-balance information 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, 2017, 20162019, 2018 and December 31, 2015,2017, our total of impairment losses on financial instruments included R$2,7842,055 million, R$1442,714 million and R$1,5552,784 million, respectively, relating to debt instruments.

 

The following chart shows our impaired assets to credit risk ratio (impairment losses divided by loans and advances to customers, gross) from 20132014 through 2017:

2019:

 

129141 

Table of Contents

Impaired Assets by Type of Loan

 

The following table shows our impaired assets by type of loan as of December 31, 2017, 20162019, 2018 and 2015.2017.

 

 For the year ended December 31, For the Year Ended December 31,
 2017 2016 2015 % Change 2017/2016 %Change 2016/2015 2019 2018 2017 % Change 2019/2018 Change% 2018/2017
 (in millions of R$, except percentages) (in millions of R$, except percentages)
Commercial and industrial  11,994   11,629   10,749   3.1   8.2   10,073   11,832   11,994   (14.9)  (1.3)
Real estate  782   719   829   8.8   (13.3)
Real estate – construction  827   1,035   782   (20.1)  32.4 
Installment loans to individuals  6,304   6,488   6,970   (2.8)  (6.9)  12,497   9,499   6,304   31.6   50.7 
Lease financing  65   52   52   25.0   

n.d.

   29   59   65   (50.8)  (9.3)
Total  19,145   18,888   18,599   1.4   1.5   23,426   22,426   19,145   4.5   17.1 

 

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.”

 

Commercial and Industrial

 

Impaired assets in the portfolio of commercial and industrial loans amounted to R$11,99410,073 million as of December 31, 2017, an increase2019, a decrease of R$3651,759 million, or 3.1%14.9%, compared to R$11,62911,832 million as of December 31, 2016.2018. The increasedecrease in impaired assets in this portfolio was mainly primarily due to defaults by certain borrowers as athe result of the weak macroeconomic conditions in Brazil. We havemeasures that Santander Brasil put in place various measures to manage impaired assets,it, including collection practices with respect to our borrowers whereby we offered certain customers the chance to negotiate a restructuring of their debts.debts or asset disposal.

 

Impaired assets in the portfolio of commercial and industrial loans amounted to R$11,62911,832 million as of December 31, 2016, an increase2018, a decrease of R$880162 million, or 8.2%1.3%, compared to R$10,74911,994 million as of December 31, 2015. The increase2017. This decrease in impaired assets in this portfolio was mainly caused by the slowdown in the Brazilian economy in the last three years,between 2014 and 2017, affecting our commercial and industrial

142 

Table of Contents

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$782827 million on December 31, 2017, an increase2019, a decrease of R$63209 million, or 8.8%20.2%, compared to R$7191,036 million as of December 31, 2016.2018. The increasedecrease was primarily due to defaults by certain specific large borrowers as a result ofchanges on monetary policy that lead to reduction on the weak macroeconomic conditionsinterest rates on real estate portfolio in Brazil.

 

Impaired assets in the real estate lending portfolio totaled R$7191,036 million on December 31, 2016, a decrease2018, an increase of R$111254 million compared to R$829782 million as of December 31, 2015. The decrease in impaired assets between December 31, 2016 and 2015 was primarily due to better management of this portfolio, with improved options for customers to restructure their debt. 2017.

For further information, please see “Item 4. Information on the Company—B. Business Overview—Selected Statistical Information—Assets—Impaired Assets—Methodology for Impairment Losses.”

 

130 

Table of Contents

Installment Loans to Individuals

 

Impaired assets in the installment loans to individuals lending portfolio totaled R$6,30412,497 million as of December 31, 2017,2019, with a decreasean increase of R$184 2,998 million, or 2.8%31.6%, compared to 2016.2018. This decreaseincrease was a resultconsequence of renegotiation practices for customers during restructuring programs along the year which reflectsrecurrent growth of the measures adopted by Santander Brasil since late 2012portfolio and the weak macroeconomic conditions related to manage default ratesthe portfolio in this portfolio, which included the adaptationBrazil, such as unemployment rate and degree 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.income commitment.

 

On December 31, 2016, our impairedImpaired assets in the installment loans to individuals lending portfolio totaled R$6,4889,499 million as of December 31, 2018, with a decreasean increase of R$4823,195 million, or 6.9%50.7%, compared to 2015. The decrease2017. This increase was a result of adoption of IFRS 9 criteria this year and the weak macroeconomic conditions in impaired assets reflects the measures adopted by us since late 2012 to manage default rates in this portfolio. Brazil.

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 lease financing lending portfolio totaled R$6529 million on December 31, 2017, an increase2019, a decrease of R$1330 million compared to December 31, 2016. The increase2018.

Impaired assets in the financial leasing lending portfolio amounted to R$59 million as of December 31, 2018, a decrease of R$6 million compared to December 31, 2017. This decrease in impaired assets was mainly due to defaults by certain borrowers as a result of weak macroeconomic conditions in Brazil.

 

Impaired assets in the financial leasing lending portfolio amounted to R$52 million as of December 31, 2016 and 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, 20172019 amounted to losses of R$457131 million, an increasea decrease of R$342377 million as compared to the year ended December 31, 2016. This increase was primarily2018, mainly due to impairment lossesloss of R$306 million related to systemassets in the acquisition and development of software that was recorded due to obsolescence function and disruption of these systems in 2018 that did not occur in 2016.2019. For the year ended December 31, 2016,2018, impairment losses on other assets (net) amounted to losses of R$114508 million, a decreasean increase of R$1,10652 million as compared to 2015,2017, mainly due to expenseshigher loss provision of R$675 million related to the impairment of software and expenses of R$534 million related to the impairment ofnon onlending payroll services related assets in 2015 that did not recur in 2016.loans.

 

143 

Table of Contents

Other Nonfinancial Gains/Losses

 

Other nonfinancial gains/losses were gains of R$20 million during the year ended December 31, 2019, a negative variation of R$136 million from losses of R$156 million during the year ended December 31, 2018, primarily due to (i) an increase of R$104 million relating to income from the reversal of the provision for impairment of properties and R$78 million which is related to the sale of assets received in the recovery of credits with customers that occurred in 2018 that did not occur in 2019.

During the year ended December 31, 2018, other nonfinancial gains/losses were losses of R$156 million, a negative variation of R$168 million from gains of R$324 million during the year ended December 31, 2017, a negative variationprimarily due to (i) an increase of R$415272 million from gains of R$91 million duringrelated to provisions for devaluations on real estate that occurred in the fiscal year ended December 31, 2016, mainly due to the disposal of property received2017 that did not occur in the collection process and the provision of the recoverable value of these assets. During thefiscal year ended December 31, 2016, other nonfinancial gains/losses were gains2018 and (ii) an increase of R$91182 million aof which R$740104 million decreaserelating to income from gainsthe reversal of the provision for impairment of properties and R$83178 million during the year ended December 31, 2015, mainly duewhich is related to a nonrecurring gain of R$751 million from the sale of SSS DTVMassets received in 2015.the recovery of credits with customers. For further information, see “Item 4. Information on the Company—A. Historynote 42 and Development of the Company—Important Events—Sale of Santander Securities Services Brasil DTVM S.A.”43 from our audited consolidated financial statements included in this annual report.

 

Operating Profit Before Tax

 

Operating profit before tax for the year ended December 31, 20172019 was R$14,51422,273 million, a decreasean increase of R$1,8706,363 million, or 11.4%40.0%, as compared to R$16,38415,910 million for the year ended December 31, 2016.2018. In the year ended December 31, 2015,2017, our operating profit before tax for the year end was negative R$3,21614,514 million.

 

Excluding the effects of the hedge for investment held abroad operating profit before tax amounted to R$15,32423,537 million for the year ended December 31, 2017, a 49.6%2019, an 8.1% increase from R$10,24421,777 million compared to the year ended December 31, 2016.2018. In the year ended December 31, 20152017 operating profit before tax was R$7,70314,514 million. Operating profit before tax excluding the effects of the hedge for investment held abroad is a non-GAAP measure. For further information, see “Item 3. Key Information—A. Selected Financial Data—Reconciliation of Non-GAAP Measures and Ratios to Their Most Directly Comparable IFRS Financial Measures.”

 

131 

Table of Contents

The table below presents our operating profit before tax and our operating profit before tax excluding the effects of the hedge for investment held abroad for the periods presented.

 

 For the year ended December 31, For the Year Ended December 31,
 2017 2016 2015 % Change 2017/2016 %Change 2016/2015 2019 2018 2017 % Change 2019/2018 Change% 2018/2017
 (in millions of R$, except percentages) (in millions of R$, except percentages)
Operating Profit Before Tax  14,514   16,384   (3,216)  (11.4)  (609.5)  22,273   15,910   14,514   40.0   9.6 
Effects of the hedge for investment held abroad  (810)  6,140   (10,919)  (113.2)  (156.2)  1,264  5,867  810   (78.5)  624.3 
Adjusted operating profit before tax(1)  15,324   10,244   7,703   49.6   33.0   23,537   21,777   15,324   8.1   42.1 

 

(1)Adjusted operating profit is a non-GAAP measure. For further information, see “Item 3. Key Information—A. Selected Financial Data—Reconciliation of Non-GAAP Measures and Ratios to Their Most Directly Comparable IFRS Financial Measures.”

 

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).COFINS. Income taxes amounted to expenses of R$5,3765,642 million for the year of 2017,ended December 31, 2019, a R$3,5432,532 million decreaseincrease from lossesexpenses of R$8,9193,110 million for the year 2016.ended December 31, 2018. This decrease isincrease was mainly attributable to the following events: (i) foreign exchange losses of R$1,512 million as a result of the effects of exchange rate variations on investments abroad and losses on

144 

Table of Contents

hedge instruments, affecting the line “Gains (losses) on financial assets and liabilities (net)” line; (ii) the increase in Operating Income before taxation arising from the result of the entities' operations, and (iii) the recognition of certain deferred tax credits in December 2019 as a result of the adjustment of CSLL tax credits derived from the tax rate increase to 20% for banks (Constitutional amendment nº103/2019). For further information, see note 24 from our audited consolidated financial statements included in this annual report.

For the year ended December 31, 2018, income taxes amounted to expenses of R$3,110 million for the year of 2018, a R$2,266 million decrease from expenses of R$5,376 million for the year ended December 31, 2017. This decrease was mainly attributable to the foreign exchange gains of R$6,9505,057 million as a consequence of the effects of foreign exchange rate variations on the investmentin investments abroad onfor our foreign branchbranches and subsidiary, and the associated hedging instruments, affecting the “Gains (losses) on financial assets and liabilities (net)” line and (ii) the recognition of certain deferred tax credits during 2017 as a result of the decrease of CSLL rate from 20% to 15% applicable from 2019 onwards.

For the year ended December 31, 2016, income taxes amounted to expenses of R$8,919 million, a R$21,969 million change from a R$13,050 million of tax benefit for the year 2015. This change is mainly attributable to the following events: (i) negative variation of R$17,059 million as a consequence of the effects of foreign exchange rate variations on investments held abroad, 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 deferred tax credits derived from the increase of the CSLL tax rate from 15% to 20% in August 2015.line.

 

The following table shows our income taxes and income taxes excluding the effects of the hedge for investment held abroad for the periods indicated.

 

 For the year ended December 31, For the Year Ended December 31,
 2017 2016 2015 % Change 2017/2016 

%Change 2016/2015

 2019 2018 2017 %Change 2019/2018 Change% 2018/2017
 (in millions of R$, except percentages) (in millions of R$, except percentages)
Income taxes  (5,376)  (8,919)  13,050   (39.7)  (168.3)  (5,642)  (3,110)  (5,376)  81.4   (42.1)
Effects of the hedge for investment held abroad  810   (6,140)  10,919   (113.2)  (156.2)  (1,264)  (5,867)  (810)  (78.5)  624.3 
Income taxes excluding effects of the hedge for investment held abroad  (6,186)  (2,779)  2,130   122.6   (230.5)  (6,906)  (8,977)  (6,186)  (23.1)  45.1 

 

(1)*Income taxes excluding effects of the hedge for investment held abroad is a non-GAAP measure. For further information, see “Item 3. Key Information—A. Selected Financial Data—Reconciliation of Non-GAAP Measures and Ratios to Their Most Directly Comparable IFRS Financial Measures.”

 

Results of Operations by Segment for the Years Ended December 31, 2017, 20162019, 2018 and 20152017

 

The following tables show our results of operations for the years ended December 31, 2017, 20162019, 2018 and 2015,2017, for each of our operating segments.

 

Commercial Banking

  For the Year Ended December 31,
  2019 2018 2017 % Change 2019/2018 

%

Change 2018/2017

  (in millions of R$, except percentages)
Net interest income  42,044   39,391   32,392   6.7   21.6 
Income from equity instruments  5   10   83   (51.0)  (88.0)
Income from companies accounted for by the equity method  150   66   72   126.5   (8.3)
Net fee and commission income  13,923   12,537   11,262   11.1   11.3 
Gains/losses on financial assets and liabilities (net) and exchange differences (net)  (1,541)  (6,752)  (26)  (77.2)  26,275.0 
Other operating income (expenses)  (1,069)  (966)  (641)  10.7   50.7 

132145 

Table of Contents

Commercial Banking

 

  

For the year ended December 31,

  

2017

 

2016

 

2015

 

% Change 2017/2016

 

%Change 2016/2015

  (in millions of R$, except percentages)
Net interest income  32,392   27,366   27,041   18.4   1.2 
Income from equity instruments  83   259   143   (67.9)  81.0 
Income from companies accounted for by the equity method  72   48   116   50.0   (58.6)
Net fee and commission income  11,262   9,580   8,241   17.6   16.3 
Gains/losses on financial assets and liabilities (net) and exchange differences (net)  (26)  5,619   (9,069)  (100.5)  (162.0)
Other operating income (expenses)  (641)  (611)  (335)  4.8   82.4 
Total income  43,143   42,261   26,136   2.1   61.7 
Personnel expenses  (8,167)  (7,638)  (7,123)  6.9   7.2 
Other administrative expenses  (7,012)  (6,273)  (6,450)  11.8   (2.7)
Administrative expenses  (15,179)  (13,911)  (13,573)  9.1   2.5 
Depreciation and amortization  (1,560)  (1,382)  (1,361)  12.9   1.5 
Provisions (net)  (3,190)  (2,685)  (4,013)  18.8   (33.1)
Impairment losses on financial assets (net)  (11,233)  (11,607)  (12,365)  (3.2)  (6.1)
Impairment losses on other assets (net)  (436)  (114)  (1,220)  281.9   (90.7)
Other nonfinancial gain (losses)  (324)  91   831   (456.9)  (89.1)
Operating profit before tax  11,220   12,652   (5,565)  (11.3)  (327.3)

  

For the year ended December 31,

  

2017

 

2016

 

2015

 

% Change 2017/2016

 

%Change 2016/2015

  (in millions of R$, except percentages)
Operating Profit Before Tax  11,220   12,652   (5,565)  (11.3)  (327.3)
Effects of the hedge for investment held abroad  (810)  6,140   (10,919)  (113.2)  (156.2)
Adjusted Operating Profit Before tax  12,030   6,512   5,354   84.7   21.6 
Total income  53,511   44,286   43,143   20.8   2.7 
Personnel expenses  (8,554)  (8,404)  (8,167)  1.8   2.9 
Other administrative expenses  (7,140)  (7,186)  (7,012)  (0.6)  2.5 
Depreciation and amortization  (2,297)  (1,637)  (1,560)  40.3   4.9 
Provisions (net)  (3,669)  (1,948)  (3,190)  88.3   (38.9)
Impairment losses on financial assets (net)  (13,423)  (12,420)  (11,233)  8.1   10.6 
Impairment losses on non-financial assets (net)  (73)  (450)  (436)  (83.7)  3.2 
Other nonfinancial gain (losses)  20   156   (324)  (86.9)  (148.1)
Operating profit before tax  18,375   12,397   11,220   48.2   10.5 

 

2017

  For the Year Ended December 31,
  2019  2018 2017 

%

Change 2019/2018

 

%

Change 2018/2017

  (in millions of R$, except percentages)
Operating Profit Before Tax  18,375   12,397   11,220   48.2   10.5 
Effects of the hedge for investment held abroad  1,264   5,867  810  (78.5)  624.3 
Adjusted Operating Profit Before tax  19,639   18,264   12,030   7.5   51.8 

2019 and 20162018

 

Operating profit before tax attributed to the Commercial Banking segment for the year ended December 31, 20172019 was R$11.218.4 billion, a 48.2% or R$1.46.0 billion decreaseincrease from R$12.612.4 billion for the year ended December 31, 2016.2018. This variation was mainly due to:

 

·An increase of R$5,026 million in net interest income for the year ended December 31, 2017, compared to the year ended December 31, 2016, as a result of an increase in volume of loans extended to customers, an increase in the margin we charge on these loans and an increase in revenues from deposits as a result of our liability management plan.

• an increase of R$2,653 million in net interest income for the year ended December 31, 2019, compared to the year ended December 31, 2018 mainly due to an 15.0% increase in the volume of our credit.

 

·An increase of R$1,682 million in net fee and commission income for the year ended December 31, 2017, compared to the year ended December 31, 2016, mainly due to (i) an increase in revenues from current accounts, (ii) an increase in revenues from credit and debit cards, and (iii) an increase in revenues from insurance and capitalization products.

• an increase of R$1,386 million in net fee and commission income for the year ended December 31, 2019, compared to the year ended December 31, 2018, mainly due to (i) an increase in revenues from credit and debit cards, (ii) an increase in revenues from sale of insurance and premium bonds, and (iii) an increase in revenues from current account service; and.

 

·A decrease of R$375 million in impairment losses on financial assets (net) for the year ended December 31, 2017, compared to the year ended December 31, 2016. This decrease reflects 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 obligation.

• a decrease of R$377 million in impairment losses on other assets (net) mainly due to impairment loss of assets in the acquisition and development of software that was recorded due to obsolescence function and disruption of these systems in 2018 that did not occur in 2019.

2018 and 2017

Operating profit before tax attributed to the Commercial Banking segment for the year ended December 31, 2018 was R$12.4 billion, a 10.5%, or R$1.2 billion increase from R$11.2 billion for the year ended December 31, 2017. This variation was mainly due to:

• an increase of R$6,998 million in net interest income for the year ended December 31, 2018, compared to the year ended December 31, 2017, as a result of an increase in volume of loans extended to customers, partially offset by revenues from deposits decreased as a result of interest rates beinglower in the fiscal year ended December 31, 2018 than in the fiscal year ended December 31, 2017; and

 

133146 

Table of Contents

This variation was

an increase of R$1,275 million in net fee and commission income for the year ended December 31, 2018, compared to the year ended December 31, 2017, mainly due to (i) an increase in revenues from credit and debit cards, (ii) an increase in revenues from current accounts, and (iii) an increase in revenues from insurance and premium bonds. These results were partially offset by:

 

·A decrease of R$5,645 million in gains/losses on financial assets and liabilities (net) and exchange differences (net) for the year ended December 31, 2017, compared to the year ended December 31, 2016. This variation is mainly explained by a decrease of R$6,590 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$6,726 million in gains/losses on financial assets and liabilities (net) and exchange differences (net) for the year ended December 31, 2018, compared to the year ended December 31, 2017. This variation is mainly due to a decrease of R$5,057 million in derivatives transactions as a consequence of our results of hedging on investment abroad. For further information, see “— Other Factors Affecting Our Financial Condition and Results of Operations—Hedging in Foreign Investments.”

 

Excluding the effects of the hedge offor investments held abroad effect on our revenues, our operating profit before taxes would have been R$12.019.6 billion, 84.7%7.5% higher than in the fiscal year ended December 31, 2016.2018. For the year ended December 31, 2017 our adjusted operation profit before tax was R$12.0 billion. Operating profit before taxes excluding the hedge of investments held abroad is a non-GAAP measure. For further information, see “Item 3. Key Information—A. Selected Financial Data—Reconciliation of Non-GAAP Measures and Ratios to Their Most Directly Comparable IFRS Financial Measures.”

 

2016 and 2015

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.

Global Wholesale Banking

 

 

For the year ended December 31,

 For the Year Ended December 31,
 2017

 2016

 2015

 % Change 2017/2016

 %Change2016/2015

 2019 2018 2017 % Change 2019/2018 

%

Change 2018/2017

 (in millions of R$, except percentages) (in millions of R$, except percentages)
Net interest income  2,554   3,221   4,297   (20.7)  (25.0)  2,277   2,531   2,554   (10.0)  (0.9)
Income from equity instruments  14   23   -     (38.7)  -   
Net fee and commission income  1,460   1,397   1,243   4.5   12.4   1,790   1,595   1,460   12.2   9.2 
Gains/losses on financial assets and liabilities (net) and exchange differences (net)  1,600   1,972   (849)  (18.9)  (332.1)  1,215   1,163   1,600   4.5   (27.3)
Other operating income (expenses)  (31)  (14)  (12)  132.9   14.5   (39)  (90)  (31)  (57.0)  190.3 
Total income  5,582   6,576   4,678   (15.1)  40.6   5,258   5,222   5,582   0.7   (6.5)
Administrative expenses  (943)  (1,009)  (942)  (6.5)  7.1   (1,248)  (1,202)  (943)  3.8   27.5 
Personnel expenses  (771)  (739)  (675)  4.3   9.4   (774)  (802)  (771)  (3.6)  4.0 
Other administrative expenses  (172)  (270)  (267)  (36.5)  1.3   (474)  (400)  (172)  18.5   132.6 
Depreciation and amortization  (102)  (101)  (129)  0.9   (21.6)  (95)  (103)  (102)  (8.0)  1.0 
Provisions (net)  (119)  (39)  12   n.d.   (439.4)  (13)  (53)  (119)  (75.7)  (55.5)
Impairment losses on financial assets (net)  (1,105)  (1,694)  (1,269)  (34.7)  33.5   54   (294)  (1,105)  (118.2)  (73.4)
Impairment losses on other assets (net)  (21)  (0)  (0)  

n.d.

   

n.d.

 
Impairment losses on non-financial assets (net)  (58)  (58)  (21)  0.3   176.2 
Operating profit before tax  3,293   3,732   2,349   (11.8)  58.9   3,898   3,512   3,293   11.0   6.7 
                    

134147 

Table of Contents

20172019 and 20162018

 

Profit before tax attributed to the Global Wholesale Banking segment for the year ended December 31, 20172019 was R$3.33.9 billion, a 11.8%11.0%, or R$439385 million decrease from R$3.7 billion for the year endedincrease compared to December 31, 2016.2018.

 

This variation was mainly due to:

 

·a decrease of R$666347 million in impairment losses on financial assets (net) principally owing to our preventive management.

·an increase of R$195 million in net interestfee and commission income principallymanly due to lower incomean increase in revenues from market activities with customerssecurities underwriting and our proprietary trading;placement and an increase in revenues from administration and custody.

These results were partially offset by:

 

·a decrease of R$372253 million in net interest income mainly lower volume in the corporate portfolio.

2018 and 2017

Profit before tax attributed to the Global Wholesale Banking segment for the year ended December 31, 2018 was R$3.5 billion, a 6.7%, or R$220 million, a decrease from R$3.3 billion for the year ended December 31, 2017.

This variation was mainly due to:

·an increase of R$812 million in impairment losses on financial assets (net) principally as a result of our risk management strategy and recovery campaigns for our customers.

These results were partially offset by:

·a decrease of R$437 million in gains/losses on financial assets and liabilities (net) and exchange differences (net), mainly explained by a decrease in gains from derivatives and market positions. This variation was partially offset bypositions and a decrease of R$589 million in impairment losses on financial assets (net), primarily due to our risk management.

2016 and 2015

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); andproprietary trading.

 

·5B.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.Liquidity and Capital Resources

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.

 

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.

 

148 

Table of Contents

See also “Item 4. Information on the Company—B. Business Overview—Selected Statistical Information.”Information” and Note 47. Risk Management from Item 18. Financial Statements of this form.

 

135 

Table of Contents

Liquidity and Funding

 

Market conditions and prospects, as well as the Brazilian Central Bank requirements for compulsory deposits and stress tests determine ourIn addition to a minimum liquidity levels.level that meets our stress scenarios, we monitor concentration of funding ratios and the short term (LCR) and long term (Net Stable Funding Ratio) liquidity metrics, which aims to guarantee a stable funding profile. 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:funding: (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.

 

For further information, see Notes 16. Deposits from the Brazilian Central Bank and Deposits from credit institutions, 17. Client deposits, 18. Marketable debt securities, 19. Subordinated liabilities and 20. Debt Instruments Eligible to Compose Capital from Item 18. Financial Statements of this form.

The following tables present the composition of our consolidated funding at the dates indicated.

 

 As of December 31, As of December 31,
 2017 2016 2015 2019 2018 2017
 (in millions of R$) (in millions of R$)
Customer deposits  276,042   247,445   243,043   336,515   304,198   276,042 
Current accounts  17,560   15,868   15,580   29,524   18,854   17,560 
Savings accounts  40,572   36,051   35,985   49,040   46,068   40,572 
Time deposits  146,818   94,479   89,986   175,994   190,983   146,818 
Repurchase agreements  71,092   101,047   101,492   81,957   48,293   71,092 
Backed operations with Private Securities(1)  33,903   59,460   61,174   8,743   6,978   33,903 
Backed operations with Public Securities(1)  37,189   41,586   40,318 
Backed operations with Government Securities(1)  73,214   41,316   37,189 
Deposits from the Brazilian Central Bank and credit institutions  79,375   78,634   69,451   99,271   99,023   79,375 
Demand deposits  306   314   145   685   710   306 
Time deposits(2)  52,739   49,549   55,795   56,602   47,227   52,739 
Repurchase agreements  26,329   28,771   13,512   41,984   51,086   26,329 
Backed operations with Private Securities(1)  —   446   85   9,506   6,978   -   
Backed operations with Public Securities(1)  26,329   28,324   13,427 
Backed operations with Government Securities(1)  32,478   44,108   26,329 
Total deposits  355,417   326,079   312,494   435,786   403,221   355,417 
Marketable debt securities  70,247   99,843   94,658   73,702   74,626   70,247 
Agribusiness Credit Notes  8,854   6,981   2,097   14,777   11,925   8,854 
Treasury Bills  31,686   61,157   55,301   27,587   30,721   31,686 
Real Estate Credit Notes  27,714   23,983   23,795   21,266   27,160   27,714 
Bonds and other securities  1,993   7,722   13,465   10,072   4,820   1,993 
Debt Instruments Eligible to Compose Tier 1 and Tier 2 Capital  8,437   8,312   9,959   10,176   9,780   8,437 
Subordinated liabilities  519   466   8,097   -     9,886   519 
Total Funding  434,620   434,700   425,209   519,664   497,513   434,620 

 

(1)Refers primarily to repurchase agreements backed by debentures of own issue.

 

149 

Table of Contents

(2)This includes transactions with credit institutions in connection with export and import financing lines, BNDES and FINAME on-lendingonlending and abroad on other credit lines abroad.

 

136 

Table of Contents

Deposits

 

Customer Deposits

 

Our balance of customer deposits was R$336.5 billion on December 31, 2019, R$304.2 billion on December 31, 2018, and R$276.0 billion on December 31, 2017, R$247.4 billion on December 31, 2016,representing 64.8%, 61.1% and R$243.0 billion on December 31, 2015, representing 63.5%, 56.9% and 57.2% of our total funding, respectively.

 

Current Accounts

 

Our balance of current accounts was R$29.5 billion on December 31, 2019, R$18.9 billion on December 31, 2018 and R$17.6 billion on December 31, 2017, R$15.9 billion on December 31, 2016 and R$15.6 billion on December 31, 2015, representing 4.9%6.8%, 4.9%4.7%, and 5.0%4.9% of total deposits, respectively.

 

Customer Savings Deposits

 

Our balance of customer savings deposits was R$49.0 billion on December 31, 2019, R$46.1 billion on December 31, 2018 and R$40.6 billion on December 31, 2017, R$36.0 billion on December 31, 2016representing 11.3%, 11.4% and R$36.0 billion on December 31, 2015, representing 11.4%, 11.1% and 11.5% of total deposits, respectively.

 

Customer Time Deposits

 

Our balance of customer time deposits was R$176.0 billion on December 31, 2019, R$191.0 billion on December 31, 2018 and R$146.8 billion on December 31, 2017, R$94.5 billion on December 31, 2016representing 40.4%, 47.4% and R$90.0 billion on December 31, 2015, representing 41.3%, 29.0% and 28.8% 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 decreasedincreased to R$82.0 billion on December 31, 2019 from R$48.3 billion on December 31, 2018 and R$71.1 billion on December 31, 2017, from R$101.0 billion on December 31, 2016representing 18.8%, 12.0% and R$101.5 billion on December 31, 2015, representing 20.0%, 31.0% and 32.5% 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$99.3 billion on December 31, 2019, R$99.0 billion on December 31, 2018 and R$79.4 billion on December 31, 2017, R$78.6 billion on December 31, 2016representing 22.8%, 24.6% and R$69.4 billion on December 31, 2015, representing 22.3%, 24.1% and 22.2% 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 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.

 

137150 

Table of Contents

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$73.7 billion on December 31, 2019, R$74.6 billion on December 31, 2018 and R$70.2 billion on December 31, 2017, R$99.8 billion on December 31, 2016representing 14.2%, 15.0% and R$94.7 billion on December 31, 2015, representing 16.2%, 23.0% and 22.3% 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,acceptances. The balance for these instruments reached R$14.8 billion on December 31, 2019, R$11.9 billion on December 31, 2018, and R$8.9 billion on December 31, 2017, R$6.9 billion on December 31, 2016, and R$2.1 billion on December 31, 2015.2017.

 

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$31.727.6 billion as of December 31, 2017,2019, a 48.2%10.2% decrease from December 2016.2018.

 

Real estate credit notes (Letras de Crédito Imobiliário) increased 15.6%decreased 21.7%, from R$23.927.2 billion on December 31, 20162018 to R$27.721.3 billion on December 31, 2017.2019.

 

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$1.910.1 billion on December 31, 20172019 and R$7.74.8 billion on December 31, 2016.2018. This change was principally due to the non-replacementnon 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, 20172019 the balance for both Tier 1 and Tier 2 debt instruments was R$8.410.2 billion compared to R$8.39.8 billion as of December 31, 2016.2018. This variation was caused by:

a)new issuances on November 2018 as of:

i.  R$1.25 billion bearing interest at 7.25% per year with no maturity (perpetual) and interest paid semiannually, as of May 8, 2019; and

ii.  R$1.25 billion bearing interest at 6.125% per year maturing in November 2028 and interest paid semiannually, as of May 8, 2019.

b)The reclassification of the balances of December 31, 2017 to Subordinated Liabilities as approved by the Brazilian Central Bank on December 17, 2018, as of the date of their issuance, Levels I and II of Regulatory Capital must be excluded.

The issuances generated from November 2018 were made through the depreciationCayman Agency and, consequently, there is no incidence of the U.S. dollar against thereal.Income Tax at Source.

 

Subordinated Liabilities

 

AsOur subordinated liabilities as of December 31, 2017 and 2016, our subordinated liabilities amounted to a total of R$0.5 billion of certificates of deposit2018 were repurchased on January 2019, with the approval issued by usthe Brazilian Central Bank on December 18, 2018. For further information, see note

151 

Table of Contents

“19 - Subordinated liabilities” in the local market in various issuances at average interest rates indexed to CDI or IPCA.“Item 18. Financial Statements”.

 

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 requirementsrequirement 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 toin accordance with 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
201520162017201820192020
40%60%80%100%100%100%

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.

 

138 

Table of Contents

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 15.8% as of December 31, 2017. For more information, see note “31 - Operational Ratios” in “Item 4. Information on18. Financial Statements,” which contains our audited consolidated financial statements prepared in accordance with IFRS as issued by the Company—B. Business Overview—Regulation and Supervision—Capital Adequacy and Leverage—Basel.”IASB.

  As of December 31,
   2017(1)(2)  2016(1)  2015(1)
   (in millions of R$, except percentages)
Tier I Regulatory Capital  56,386.0   56,264.0   52,785.0 
CET 1 Common Equity Tier I  52,196.9   52,136.8   47,840.2 
Supplementary Capital  4,189.1   4,127.2   4,944.9 
Tier II Regulatory Capital  4,250.4   4,280.8   5,182.1 
Regulatory Capital (Tier I and II)  60,636.4   60,544.9   57,967.1 
Required Regulatory Capital  383,132.7   36,669.6   40,531.2 
Portion of Credit Risk(3)  324,696.5   31,309.9   36,355.9 
Market Risk Portions(4)  25,857.1   2,388.6   2,301.0 
Operational Risk Portion(5)  32,579.1   2,971.0   1,874.3 
Tier I Ratio  14.7%  15.2%  14.3%
Basel Principal Capital  13.6%  14.0%  13.0%
Basel Ratio  15.8%  16.3%  15.7%

(1)Amounts calculated based on the applicable consolidated prudential conglomerate definition, which took effect as of January 2015.

 

(2)5C.As of 2017, the amounts of required regulatory capital have been informed as the risk-weighted assets correspondentResearch and in the prior years the amounts were being informed as the allocated portions. For better comparison to the prior years, the respective recalculated amounts of portions for 2017 are: Portion of credit risk R$30,034, Market risk portion R$2,392Development, Patents and Operational risk portion R$3,014.Licenses, etc.

(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.

(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.”

(5)To calculate the capital allocation for the Operational Risk Portfolio we considered Brazilian Central Bank Circular Nº 3.640 of March 4, 2013, which amends the resolution No. 4.193 of March 1, 2013.

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

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;

The 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 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;

Financial problems in certain countries in Europe, including in the United Kingdom or in other countries as a result of the exit of the United Kingdom from the European Union, 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;

 

139152 

Table of Contents

·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 towardstoward 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;

 

·Failure to adequately protect ourselves against risks relating to cyber-security;

 

·Our dependence on the proper functioning of information technology systems; 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

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. For more information, see note “44 – Other disclosures” in “Financial Statements”.

 

Lending-Related Financial Instruments and Guarantees

 

We use 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 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 forthFor further information, see note “44 – Other Information” in “Item 18. Financial Statements,” which contains our audited consolidated financial statements prepared in accordance with IFRS as issued by the maximum potential amount of future payments under credit and financial guarantees.IASB.

 

  As of December 31,
  2017 2016 2015
  (millions of R$)
Contingent liabilities            
Guarantees and other sureties  40,730   32,630   42,836 
Documentary credits  1,915   635   774 
Total contingent liabilities  42,645   33,265   43,611 

140 

Table of Contents

We also manage certain funds that are not recorded on our balance sheet as detailed below for the periods indicated:

  As of December 31,
  2017 2016 2015
  (millions of R$)
Funds under management  1,748   1,534   2,542 
Total  1,748   1,534   2,542 

Finally, we hold certain third-party securities in custody which are not recorded on our balance sheet. As of December 31, 2017, 2016 and 2015, we held in custody debt securities and equity instruments entrusted to Santander Brasil by third parties totaling R$40.4 million, R$27.8 million and R$38.4 million, respectively.

5F. Contractual Obligations

5F.Contractual Obligations

 

Our contractual obligations as of December 31, 20172019 are summarized as follows:

 

  As of December 31, 2017
  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  79,375   66,727   6,798   2,718   3,131 
Customer deposits  276,042   216,363   42,494   17,176   9 
Marketable debt securities  70,247   49,952   17,923   1,492   880 
Debt Instruments Eligible to Compose Capital(1)  8,437   114   —   —   8,323 
Subordinated liabilities  519   519   —   —   — 
Contractual Interest payments(2)  45,976   17,788   11,687   7,854   8,648 
Total  480,596   351,464   78,903   29,239   20,991 

153 

Table of Contents

  As of December 31, 2019
  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  99,271   66,073   25,656   4,877   2,666 
Customer deposits  336,515   275,480   44,112   16,923   -   
Marketable debt securities  73,702   11,370   37,269   3,900   21,163 
Debt Instruments Eligible to Compose Capital(1)  10,176   171   -     -     10,005 
Total  519,664   523,923   107,037   25,7   33,834 

 

(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—Operating And Financial Review And Prospects—Operating Results.”

(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, 2017 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, 20172019 reflected assetsliabilities of R$4141,983 million, compared to assetsliabilities of R$4,466103 million as of December 31, 2016.2018.

 

In addition, we lease many properties under standard real estate lease contracts, which can be canceledcancelled at our option and include renewal options and escalation clauses. Total future minimum payments of non-cancelable operating leases as of December 31, 20172019 was R$2,4582,291 million, of which R$624651 million matures in up to one year, R$1,5451,492 million from one year to up to five years and R$288147 million after five years. Additionally, we have contracts with indeterminate maturities totaling R$10.9 million per month.

 

5G. Safe Harbor

5G.Safe Harbor

 

See “Forward-Looking Statements.”

 

141 

Table of Contents

ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

 

6A. Board of Directors and Board of Executive Officers

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 ofcomprises a minimum of five members and a maximum of twelve members. A minimum of 20.0% of the members, of the board of directorswhich at least 20.0% must be independent members. The board of directors has a Chairmanchairman and a Vice-Chairman,vice-chairman, each elected at the general shareholders’ meeting by majority vote.

 

Our board of executive officers is composed ofcomprises a minimum of two members and a maximum of 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,officers, executive officers and officers without specific designation. Certaindesignations. Some 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:

 

154 

Table of Contents

Members of the Board of Directors:

 

Name

Position

Date of Birth

Álvaro Antonio Cardoso de SouzaChairmanSeptember 5, 1948
Sergio Agapito Lires RialVice-ChairmanJuly 28, 1960
Conrado EngelMemberMay 30, 1957
José Antonio Álvarez ÁlvarezMemberJanuary 6, 1960
José Maria Nus BadíaMemberFebruary 9, 1950
José de Paiva FerreiraMemberMarch 1, 1959
José Maria Nus BadíaMember December 9, 1950
Celso Clemente GiacomettiIndependent MemberOctober 13, 1943
Deborah Patricia WrightIndependent MemberSeptember 4, 1957
Deborah Stern VieitasIndependent MemberAugust 21, 1957
José Luciano Duarte PenidoMarília Artimonte RoccaIndependent MemberMarch 8, 1948January 31, 1973

 

Members of the Board of Executive Officers:

 

Name

Position

Date of Birth

Sergio Agapito Lires RialChief Executive OfficerJuly 28, 1960
JoséAlberto Monteiro de Paiva FerreiraQueiroz NettoSenior Vice President Executive OfficerMarch 1, 1959November 30, 1967
Angel Santodomingo MartellVice President Executive Officer and Investor Relations OfficerNovember 16, 1965
Alessandro TomaoVice President Executive OfficerMarch 8, 1977
Antonio Pardo de Santayana MontesVice President Executive OfficerNovember 5, 1971
Carlos Rey de VicenteVice President Executive OfficerFebruary 20, 1974
Ede Ilson Viani ………………….Vice President Executive OfficerSeptember 5, 1967
Jean Pierre DupuiVice President Executive OfficerSeptember 23, 1968
Juan Sebastián Moreno BlancoVice President Executive OfficerDecember 17, 1964
Manoel Marcos MadureiraVice President Executive OfficerDecember 30, 1951
Mário Roberto Opice LeãoVice President Executive OfficerJuly 21, 1975
Patricia Souto AudiVice President Executive OfficerMay 15, 1968
Vanessa de Souza Lobato BarbosaVice President Executive OfficerDecember 24, 1968
José Alberto Zamorano HernandezExecutive OfficerMay 9, 1962
José Roberto Machado FilhoExecutive OfficerAugust 25, 1968
Alexandre Grossmann ZancaniOfficerOctober 14, 1977
Amancio Acúrcio GouveiaOfficerMarch 31, 1963

142 

Table of Contents

Name 

Ana Paula Vitali Janes Vescovi….

Position 

Officer

Date of Birth 

April 08, 1969
André de Carvalho NovaesOfficerApril 14, 1969
Carlos Aguiar NetoOfficerMarch 5, 1971
Cassio SchmittOfficerApril 23, 1971
Cassius SchymuraOfficerFebruary 19, 1965
Claudenice Lopes DuarteOfficerJuly 25, 1972
Ede Ilson VianiDaniel Fantossi Assa……………………………OfficerDecember 12, 1975
Elita Vechin Pastorelo Ariaz……………………OfficerMarch 28, 1970
Franco Luigi FasoliOfficerSeptember 5, 196718, 1975
Geraldo José Rodrigues Alckmin Neto(*)...........OfficerSeptember 8, 1981
Germanuela de Almeida de AbreuOfficerDecember 6, 1975
Gilberto Duarte de Abreu FilhoOfficerAugust 7, 1973
Gustavo Alejo VivianiOfficerAugust 26, 1975
Igor Mario PugaOfficerNovember 10, 1981
Jean Paulo Kambourakis...............OfficerMay 09, 1980
José Teixeira de Vasconcelos NetoOfficerMarch 8, 1975
Leopoldo Martinez CruzOfficerAugust 19, 1974
Luis Guilherme Mattos de Oliem BittencourtOfficerDecember 4, 1973
Luiz Masagão Ribeiro FilhoOfficerJanuarySeptember 1, 1976
Marcelo MalangaOfficerMay 18, 1969
Marino Alexandre Calheiros AguiarOfficerMay, 14, 1971
Nilton Sergio Silveira CarvalhoOfficerJanuary 1, 1957
Rafael Bello NoyaOfficerOctober 19, 1977
Ramón Sanchez DíezOfficerOctober 29, 1968
Ramon Sanchez Santiago………………………OfficerMay 25, 1969
Reginaldo Antonio RibeiroOfficerMay 19, 1969
Roberto de Oliveira Campos NetoAlexandre Borges Fischetti………...OfficerJuneAugust 28, 19691975
Robson de Souza RezendeOfficerJanuary 24, 1967
Rodrigo CurySandro Kohler Marcondes(*)...............................OfficerJuly 17, 1976April 16, 1964
Ronaldo Wagner RondinelliSandro Rogério da Silva Gamba(*)OfficerAugust 2, 1973
Sergio GonçalvesOfficerAugust 7, 195631,1975
Thomas Gregor IlgOfficerSeptember 12, 1968
Ulisses Gomes GuimarãesVitor Ohtsuki(*)...................................................OfficerMarch 14, 1971June 05, 1977

(*) Pending approval by the Brazilian Central Bank

 

Below are the biographies of the members of our board of directors and board of officers.

 

Members of the Board of Directors:

 

Álvaro Antonio Cardoso de Souza. Mr. Souza is Portuguese and was born on September 5, 1948.

155 

Table of Contents

He holds degrees 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, heHe is an Officerthe Managing Director of AdS – Gestão, Consultoria e Investimentos Ltda.- Management, Consulting and Investments, a firm which provides advice on investments and general management. He is a Certified Director, 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. As Vice-President Executive Officer of Citibank New York, he led the Cross Border Finance Group, the Global Private Bank, the Consumer Bank USA and the Latin America Consumer Bank. He was also Chairman of the boardBoard of directorsSantander Brasil and a member of CitibankSantander Global Board in Switzerland,Spain. He developed his career in the banking business and has worked at Citigroup for thirty-two years, in Brazil and abroad. Outside Citigroup, Álvaro was the President of Banco ABC-Roma, a subsidiary of the media and entertainment Globo Group, Chairman of the board of directors of Banco Crefisul, Chairman of the boards of directorsDeliberative Council of Fundo Brasileiro para a Biodiversidade (FUNBIO), of WWF Brasil, of Board Trustees of WWF Inernacional and of Credicard in Brazil, besides participating in the board of directors of Citibank Equity Investments (Argentina) and AMBEV. 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, Duratex and Grupo Libra. He was also member of the board of directors of MasterCard International and President of the American Chamber of Commerce in São Paulo. Currently, hePaulo (AmCham). He was also a board member of WWF International, WWF Brazil and of several Brazilian companies such as AmBev S.A., Celbrás, Ultraquímica, SPCI Computers, Signature Lazard Brazil, Triângulo Bank, CSU Cardsystems, Duratex S/A. and Gol Airlines. He served as a board member of MasterCard International. He is the Chairman of our board of directors andalso a member of our risk and compliance committee, and chairman of the Group Board Risk and Compliance Committee Compensation Committee and Nomination and Governance Committee.

 

Conrado EngelSérgio Agapito Lires Rial. Mr. EngelRial is Brazilian and was born on May 30, 1957.July 28, 1960. He holdshas a degree in Aeronautical EngineeringLaw from the Instituto TecnológicoUniversidade Federal do Rio de Aeronáutica - ITA. He started hisJaneiro and in Economics from Universidade Gama Filho, and also holds an MBA from IBMEC in São Paulo, as well as specialization degrees from Harvard Business School, the Wharton School of Business at the University of Pennsylvania and INSEAD, in France. His professional 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

143 

Table of Contents

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 officeincludes serving as Chief Executive Officer of HSBC Brasil in June 2009, where he remained until March 2012. As one of our SeniorMarfrig Global Foods S.A, Vice-President Executive Officers, he has been responsible for the Wealth Management & Specialized Businesses Vice-Presidency, including Auto Joint Ventures, until January 2018. Currently he isOfficer and World Chief Financial Officer of Cargill. He was also a member of our Board of Directors, a member of our Risk and Compliance Committee of Santander Brasil, Chairman of the board of directors of Banco Olé Bonsucesso Consignado S.A.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 advisory board of directors of ABN AMRO Bank in the Netherlands, as well as a member of the board of directors of Mosaic Fertilizers. Currently he is Vice-Chairman of the Board of Directors and the Chief Executive Officer of Santander Brasil, Gestão de Recursos Ltda.and Chairman of the Board of Directors of Universia Brasil S.A.

 

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 startedMr. Álvarez became CEO of Santander Group on January 1, 2015, and Executive Vice President on January 15, 2019. Earlier, from 2004 to 2015, he was Executive Vice President of Finance of Santander Spain, and Head of the Finance Division from 2002 to 2004. Before working at Santander Spain in 2002 as the head of finance management and in November 2004Group, 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 presidentVice President of Finanpostal Gestión Fondos de Inversión y Pensiones, from 1990 to 1993, and held rolespositions at Banco de Crédito Industrial and Instituto Nacional de Industria. He was a member of the boardBoard of directorsDirectors of Santander Consumer Finance S.A, Santander Consumer Bank AG and Banco de Crédito Local S.A. from 2000 to 2002S.A and Presidentserved on the supervisory boards of Santander Group's independent subsidiaries, such as Poland, Germany and the United States. He was Chairman of the European Banking Federation’sFederation Board and chaired the Banking Supervision Committee from 2009 to 2012. Currently, heMr. Álvarez is the Chief Executive Officer of the Santander Group,currently 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 memberDirectors of the Supervisory Board of Santander Consumer Bank AGSAM Investments Holdings Limited and Santander Consumer Holding GmbH and was a member of the Supervisory Board of Santander Holdings USA, Inc. until January 2015. He has been a member of our boardBoard of directorsDirectors 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, 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.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

156 

Table of Contents

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 boardBoard of directors,Directors, and joined the Boardboard 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 sinceFrom July 2013 to December 2019, he alsoreturned to Santander Brasil and acted as Senior Vice President Executive Officer, responsible for the Human Resources, Organization, Property, Proceedings, Operations, Technology and Costs. HeCurrently, he is also Chairman of the board of directors of Santander Leasing S.A. Arrendamento Mercantil, a member of the boardour Board of directors of TECBAN – Tecnologia Bancária, and Getnet Adquirência e Serviços para Meios de Pagamento S.A., officer of Gestora de Investimentos Ipanema S.A.Directors and a member of our Riskrisk and Compliance Committee.compliance committee.

 

144 

Table of Contents

Sergio Agapito Lires RialJosé Maria Nus Badía. Mr. RialBadía is BrazilianSpanish and was born on July 28, 1960.December 9, 1950. He holds a degree in Business Administration, Economics and Political Science from the Business School of the University of Zaragoza. He started at Santander as Chief Executive and Chief Risk Officer at Banco Español de Credito, S.A. (Banesto). In 2010, Mr. Badía served as Chief Risk Officer of Santander UK and was Chief ExecutiveRisk Officer of Marfrig Global Foods S.A. His professional career includes the posts of Vice-President ExecutiveSantander Group. He also has been its Chief Risk Officer and World Chief Financial Officer of Cargill. Hesince June 2018. Previously, Mr. Badía was also a memberthe Executive Vice President for Risk at Banco Bilbao Vizcaya Argentaria and Bankinter. Currently, he is Senior Executive Vice President and Risk Advisor of the boardChairman of directorsthe Board of Cargill for nine years. He was a Managing DirectorDirectors of Bear Stearns & Co., in New York, Officer of ABN AMRO BankSantander Group and a member of the boardBoard 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 from the Universidade Federal do Rio de Janeiro and in Economics from 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 OfficerDirectors 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.Brasil.

 

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 sciencesAccounting 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 boardBoard of directorsDirectors 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 boardBoard of directors,Directors, a body over 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 partnerManager 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 boardBoard of directors,Directors, as well as a member of our Compensation Committee and Chairman of our Nomination and Governance Committee.

 

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-PresidentVice 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 2002.2001. From 2002 to 2007, she was Corporate Vice-President/Vice President/Commercial Vice-PresidentVice 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 a 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; andGroup Gender Diversity – Women in Boards. Currently sheShe is also an independent member of our board of directors, a member of our Nominationnomination and Governance Committeegovernance committee and Compensation Committee.a chairwoman of our compensation committee.

157 

Table of Contents

 

Deborah Stern Vieitas. Mrs. Vieitas is Brazilian and was born on August 21, 1957. She holds a degree in Public Administration from FGV-SP and Journalism from the School of Communications and Arts (Escola de Comunicações e Artes) of the University of São Paulo. She also holds a master’s degree in Business from FGV-SP and in Public Administration from École Nationale d’Administration. She is currently the CEOChief Executive Officer of American Chamber of Commerce Brazil (Amcham Brazil) and a board. From 2015 to 2017, she was an independent member of the Board of AXA Seguros S.A.SA. From 2008 to 2014, she was a CEO and a memberBoard Member of the Board of Banco Caixa Geral – Brasil. From 2000 to 2008, she was an Executive Vice President of Banco BNP Paribas Brasil, responsible for Corporate Coverage and Loan and Financing portfolios. From 1998 to 2000, she was an Executive Vice President of Banco CCF Brasil.Brasil and in charge of Large Corporate & Corporate Coverage, Capital Markets, Trade Finance and Foreign Exchange. Currently she is aan independent member of our RiskBoard of Directors and Compliance Committee.Audit Committee coordinator.

 

José Luciano Duarte PenidoMarília Artimonte Rocca.. Mr. PenidoMs. Rocca is Brazilian and was born on March 8, 1948. HeJanuary 31, 1973. She holds a Mining Engineering degree in Business Administration from the EngineeringFundação Getúlio Vargas of São Paulo and an MBA in Business Administration from Columbia Business School, of Universidade Federal de Minas Gerais. He started hisNew York. She attended the Executive – Family in Business Program at Harvard Business School in Boston. Ms. Rocca began her career at ICOMI – Indústria e Comércio de Minérios in the manganese mineOperations Department of Serra do Navio, in Amapá, where he worked until August 1973. From September 1973 to 1988, heWalmart Brazil, and worked at SAMITRI, a miningthe company from the Belgo

145 

Table of Contents

Mineira Group, where he played several mineral research, mining,until 1998. She had managed nonprofit organizations for six years and industrial project management roles. From 1989 to 2003, he worked for SAMARCO, where he started as Development Officerco-founded and was the Chief Executive Officer for 12 years. From 2004General Director of Endeavor Brazil, NGO leader in high-impact entrepreneurship, and Brava Foundation, an organization dedicated 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 memberpromoting public management. She inaugurated and still develops part of the boardsFamily Office of directorsthe Lemann, Sicupira and Telles families. She also was Vice President of COPERSUCAR, Química Amparo YPÊTOTVS and the ALGAR Group. Additionally, he ispartner of Mãe Terra. Ms. Rocca was a member of the Instituto Votorantim’s board. In his socio-environmental activities, Mr. Penido acts as ChairmanBoards of the ACEVP – Paraíba River Valley’s Ecological Corridor AssociationDirectors of TOTVS from 2001 to 2012 and asof Endeavor Brasil from 2005 to 2012. She was also a member of the Board of Directors of the Rede Cidadã NGO.IBMEC Group from 2004 to 2008 and was appointed to the position of member of the External Evaluation Committee of Insper. From 2012 to 2016, Ms. Rocca served as an independent member of the Board of Directors of Santander Brasil and from August 2016 to June 2018, she served as Executive Director of Ticket. Currently heshe is alsoCEO of the Hinode Group and is an independent member of our Board of Directors and coordinator of our Audit Committee and a coordinator of ourthe Sustainability Committee.

 

Members of the Board of Executive Officers:

 

SergioSérgio Agapito Lires Rial. See “—Members of the Board of Directors.”

 

JoséAlberto Monteiro de Paiva FerreiraQueiroz Netto. See “—Members Mr. Monteiro is Brazilian and was born on November 30, 1967. He holds a bachelor’s degree in Business Administration from Faculdade de Ciências Políticas e Econômicas do Rio de Janeiro. He also completed a post graduate degree in Banking at Universidade de São Paulo and an MBA in corporate finance at Fundação Getúlio Vargas do Rio de Janeiro. From 2009 to 2011, he served as Chief Financial Officer and Investor Relations Officer at CSN – Companhia Siderúrgica Nacional. Between 2011 and 2014, he was also Chief Financial Officer and Investor Relations Officer of Suzano Papel e Celulose SA. Between 2014 and 2016, he held the position of Executive Vice President at Graninvestimentos S.A. responsible for finance. In 2017, Mr. Monteiro served as Executive Vice President at Banco do Brasil S.A. in charge of the Finance, Investor Relations and M&A Departments. Currently Mr. Monteiro is the Vice President Executive Officer and Head of the Private Banking Segment of Santander Brasil. He is also a member of the Advisory Board of Directors.”Santander Brasil Gestão de Recursos Ltda.

 

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 Investor Relations Officer. He started at the Santander Group in 2005 as Head of International Developments and Asset Management and then became globally responsible for the investor relations area. He was the Country Headhead of Grupo Fortis in Brazil and an officer and board member at Banesto Bolsa. He

158 

Table of Contents

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 the CFA Society in Spain, where he acted as founding 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 (Asociació(Asociación Española de Relaciones con Inversores) boardInversores) Board of directors.Directors. He is also Chief Executive Officer of Aymoré CFI, Santander Leasing S.A. Arrendamento Mercantil, Santander Corretora de Seguros, Investimentos e Serviços S.A. and Atual Companhia SecuritizadoraServiços de Recuperação de Créditos Financeirose Meios Digitais S.A., Executive Officer of Santander Cultural and Santander Holding Imobiliária S.A., Chairman of the Boardboard of Directorsdirectors of Webmotors S.A. and a member of the boards of directors of Banco Olé Bonsucesso ConsignadoHyundai Capital Brasil S.A., Banco PSA Finance Brasil S.A., Banco RCI Brasil S.A., Santander Leasing S.A. Arrendamento Mercantil and Super Pagamentos e Administração de Meios Eletrônicos S.A. and Getnet Adquirência e Serviços para Meios de Pagamento S.A.

 

Alessandro Tomao. Mr. Tomao is Brazilian and was born on March 8, 1977. He holds a bachelor’s degree in Law from the FMU University and a master’s in Business Administration - HR degree from the University of São Paulo. As one of our Executive Vice-Presidents,Vice Presidents, he has been responsible for the Company’s Legal and Corporate Affairs department since February 2018. From June 2010 to February 2018, he has beenwas the headHead of the legal litigation, legal consultingLegal Litigation, Legal Consulting in laborLabor and pension funds departmentsPension Funds Departments at Santander Brasil. From January 2000 to May 2010, he served as the head of labor and pension funds legal department at Banco Itaú S.A. Previously, from 1998 to 2000, he acted as a trainee at Whirlpool Brazil, where he started his career. Since 2015, he has been a permanent member of the legal counsel of FEBRABAN, where he acted from 2011 to 2015 as the coordinator of the labor committee. Currently, sinceSince January 2017, he is a member of the Legal Counsel of ABRAPP (Brazilian Association of Pension Funds) as well.. He is also a member of the board of directors of Santander Cultural and Santander Caceis Brasil Distribuidora de Títulos e Valores Mobiliários S.A.

 

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 schoolSchool of the Universidade Pontifícia Comillas. As one of our Vice-PresidentVice President Executive Officers, he is responsible for the risk management department, having previously held 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 analystSenior Risk Analyst for Santander Central Hispano/Santander Investment from 1998 to 2000 and senior manager of Monitor Company from 2000 to 2005. He 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, Sancap Investimentos e Participações S.A. and Santander Finance Arrendamento Mercantil S.A.

 

146 

Table of Contents

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 of 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, at one of which he was partnera Partner and founder,Founder, dealing mainly with insurance and civil responsibility. Currently, Mr. Rey is our Vice President Executive Officer responsible for the Finance, Strategy and Quality department. He is also a member of the boardsBoards of directorsDirectors of Santander Leasing S.A. Arrendamento Mercantil, Super Pagamentos e Administração de Meios Eletrônicos S.A., Santander Securities ServicesCaceis Brasil Distribuidora de Títulos e Valores Mobiliários S.A., 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., Administrative Officer of Norchem Participações e Consultoria S.A. and Vice-PresidentVice President Officer of Santander Cultural. He is also a member of our Sustainability Committee.

 

Ede Ilson Viani. Mr. Viani is Brazilian and was born on September 5, 1967. He holds a degree in Accounting from Faculdade Tibiriçá and an MBA from Instituto de Ensino e Pesquisa - Insper. He was an auditor at Banco Itaú S.A. from 1986 to 1990, and worked at BankBoston S.A for 16 years as a Senior Auditor, the Credit Risk Management Superintendent, the local Currency Loans Head Officer

159 

Table of Contents

and the small and medium companies head officer. He joined Santander Brasil in 2007 as officer (or Head Officer) for small and medium business banking and, from July 2010 to 2014, as Retail Banking Risk Management Director (or Head Officer). As one of our officers, he was responsible for our retail banking branches until December 2019, when he was promoted to the position of Vice President Executive Officer, responsible for the Organization, Property, Proceedings, Operations, Technology and Costs area. He is also a member of the Board of Directors of Super Pagamentos e Administração de Meios Eletrônicos S.A.

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, both 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 department.Debt Capital Markets 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 departmentDepartment 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 and Banco Bandepe S.A. and member of the boardBoard of directorsDirectors of Santander Securities ServicesCaceis Brasil Distribuidora de Títulos e Valores Mobiliários S.A. He is also a member of our Sustainability Committee.

 

Juan Sebastián 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 areaCommercial Department 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 boardBoard of directors, steering committee, assetDirectors, Steering Committee, Asset and liability committee, finance committeeLiability Committee, Finance Committee and risk committee.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. andan Executive Officer of Banco Bandepe 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 Chief Executive Officer of Santander Cultural and Rojo Entretenimento S.A. and Executive Officer of Universia Brasil S.A.

147 

Table of Contents

Mário Roberto Opice Leão. Mr. Leão is Brazilian and was born on July 21, 1975. He holds a degree in Production Engineering from the Escola Politecnica of the Universidade de São Paulo. He began his career in 20011996 as an associate at Citigroup, in the financial control area, being the financial analystFinancial Analyst of all wholesale products from Citigroup Brazil, including global markets, financing, and corporate banking account.accounts. In 2006, he served as Global Markets Manager. He alsoManager, and had an active role in the development and innovation of derivatives in Brazil. From 2006 to 2008, he worked at Goldman Sachs as Fixed Income, Currencies and Commodities Manager. From 2011Manager, and, between 2008 to 2015, he wasas Global Capital Markets Executive Superintendent at Morgan Stanley responsible for corporate finance and member of the Committee of Global Solutions at Morgan Stanley. Since October 2015, he has been part of the executive team of Santander Brasil, being responsible for wholesale banking, leading a team of 70 people servicing more than 700 large national and international companies in Brazil. This position also covers foreign exchange loans and treasury products. As one of our Vice President Executive Officers, he is also a member of our Sustainability Committee.

 

Patricia Souto Audi.Ms. Audi is Brazilian and was born on May 15, 1968. She holds a bachelor’s degree in Business Administration and she is an expert in public policies and government management. Between 2015 and 2018, she served as the secretary of Transparency and Prevention of Corruption at the Brazilian Ministry of Transparency; director of Benefits at INSS (National Institute of Social Security); coordinator at ILO (International Labor Organization) in Brazil; secretary of Management at the Ministry of Planning, Budget and Management of the Federal government and secretary of the

160 

Table of Contents

Social Development Council at Civil House, a governmental body directly connected to the Presidency of the Republic of Brazil. She joined Santander Brasil in August 2018 as Executive Superintendent Head of the Institutional Relations Department. Since January 2019, she is one of our Vice President Executive Officers, responsible for the Communication, Marketing, Institutional Relations and Sustainability Departments of Santander Brasil. She is also chief executive officer of Rojo Entretenimento S.A., Executive Officer of Universia Brasil S.A. and a member of the Board of Directors of Santander Cultural.

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 from 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 marketingmicromarketing 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 its 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 was Executive Superintendent of one of our branch network,networks, 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: Campinas, Jundiaí, Sorocaba, Piracicaba, Limeira and Americana. As one of our Vice President Executive Officers, she is currently responsible for the Human Resources department. She is also a member of the Board of Directors of Santander Cultural.

 

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, economicsBusiness, Economics and financeFinance from the Universidade de São Paulo. He was an engineer for Keumkang Limited from 1990 to 1991, a foreign exchange managerExchange Manager from 1992 to 1995 and a managerManager of the 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 IndividualsIndividual Businesses area. He is also Executive Officer of Banco Bandepe S.A., administrator of Santander Brasil Administradora de Consórcio Ltda. and a member of the boards of directors of Super Pagamentos e Administração de Meios Eletrônicos S.A., Zurich Santander Brasil Seguros e Previdência S.A., Zurich Santander Brasil Seguros S.A., Santander Cultural, and B3.B3- Brasil, Bolsa, Balcão.

 

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 Digital Businesses. He also serves as a member of the board of directors of Banco PSA Finance Brasil S.A.

148 

Table of Contents

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,officers, he has been acting as a controller working in accountingthe Accounting and fiscalFiscal management areas of our companies since 2001. He was an audit managerAudit Manager for KPMG until 1991 and an accounting manager of Unibanco – União de Bancos Brasileiros S.A. from 1991 to 1999, and assistant superintendent of BankBoston Banco Múltiplo S.A. from 1999 to 2001. He is Chief Executive Officer of Banco Bandepe S.A. and Executive Officer of Santander Leasing S.A. Arrendamento Mercantil, Atual Companhia SecuritizadoraServiços de Recuperação de Créditos Financeirose Meios Digitais S.A., Santander Capitalização S.A., Aymoré CFI, Evidence Previdência S.A., Santander Finance Arrendamento Mercantil S.A. and SANCAPSancap Investimentos e Participações S.A. He is also administratorAdministrator of Santander Brasil Administradora de Consórcio Ltda. He also serves as a member of the Fiscal Council of the Brazilian Federation of Banks, of the National Federation of Banks, of the Brazilian Institute of Banking Science and of the Banks Union in the States of São Paulo, Paraná, Mato Grosso, Mato Grosso do Sul, Acre, Amazonas, Pará, Amapá, Rondônia and Roraima. He has professional experience as a teacher: at ABEU—Faculdades Integradasm as Professor III, between March 1991 and February 1999, as a teacher for General Accounting under the accounting degree curriculum; at the Faculdade de Direito Cândido Mendes, as a substitute professor between March of 1997 and December of 1998 where he taught Elements of Accounting under the law degree curriculum; and at the Sponsor of Seminars promoted by IOB and IBRACON, in the year 1990, where he taught as part of the Training Programs of Accounting for Non-Accountants.

161 

Table of Contents

Ana Paula Vitali Janes Vescovi. Mrs. Vescovi is Brazilian and was born on April 8, 1969. She graduated in Economics from Universidade Federal do Espírito Santo, Master in Public Administration from Brazilian School of Public Administration at Fundação Getúlio Vargas/RJ, Master in Public Economics from Universidade de Brasilia/DF and postgraduate in Public Policies and Government Management from the National School of Public Administration/DF. Since 1999, she has worked in public service, with an emphasis on fiscal and financial management and public policies, with executive experience in the three spheres of government. Since 2015, she served as Chairman of the board of directors of Banco do Estado do Espírito Santo – BANESTES, Instituto de Resseguros do Brasil and Caixa Econômica Federal, and member of the Board of Directors of Eletrobras. As one of our officers, she is responsible for the macroeconomic research area.

 

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 coordinatorProducts 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, Creditcommercial operator, credit and Collection Chief.collection chief. In 1996, he served as coordinator of products in São Paulo. From 1997 to 2001, he served as Commercial Manager.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 the 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. OnIn December 2012, he became the commercial coordinatorCommercial Coordinator of Aymoré CFI, with responsibility for the Commercial and Partnerships team. Currently, Mr. Novaes is head of Aymoré CFISantander Financiamentos and reports to the Vice Presidency of Wealth Management & Specialized Businesses.CFO. He is also Executive Officer of Aymoré CFI, Vice-ChairmanVice Chairman of the boardBoard of directorsDirectors and Vice-PresidentVice President Officer of Webmotors S.A., a member of the Board of Directors of Banco Hyundai Capital Brasil S.A. and Santander Auto S.A. and a member of the boardBoard of directorsDirectors and Institutional Relations Officer of Banco RCI Brasil S.A.

 

Carlos Aguiar Neto. Mr. Aguiar is Brazilian and was born on March 5, 1971. He holds a degree in Electrical Engineering from FAAP (FundaçFundação Armando Alvares Penteado – São Paulo) with specialization in Business Administration from FGV (FundaçFundação Getúlio Vargas – São Paulo).Vargas. From 1996 to 2007, he worked as Treasurer of Cargill Agrícola S.A., Officerofficer of Cargill Previdência and Executive Officer of Banco Cargill S/A. From 2007 to 2010, he was responsible for the financialCFO and investor relations areasInvestor Relations at BrasilAgro – Cia Brasileira de Propriedades Agrícolas S.A. From 2010 to 2015, he was CEO at Macquarie Crop Partners LP at Macquarie Bank responsible for funds that invest in Farmsfarms and grain production in Brazil and Australia. Since 2015, he has been responsible for the agribusiness area of Santander Brasil. He is also a member of our Sustainability Committee.

 

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).Technology. He was treasury economistthe Economist of Banco de Crédito Nacional S.A. from 1995 to 1996, and senior economistSenior Economist at UNIBANCO – União de Bancos Brasileiros S.A. from 1996 to 1999. He was an associate of the leveraged financeLeveraged Finance team of UBS Warburg in 2000 project finance superintendentin New York, Project Finance Superintendent of UNIBANCO from 2001 to 2003 and corporate banking superintendentCorporate Banking Superintendent of UNIBANCO Representative Office in New York from 2003 to 2004. He was a superintendent inbecame responsible for the M&A/Project Financeproject 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 was the Director responsible for the GCB clientsClients Risk Department, and untilfrom 2013 to 2014 he was responsible for Global Transaction Banking. CurrentlyBanking and from 2015 to 2018 he iswas the Officer responsible for Credit Recovery Businesses. He is also 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 isofficer responsible for the Multichannel Platform, including call centerCredit Recovery Business and electronic channels. He was investment products analyst at Banco Nacional S.A. from 1989 to 1991, productsPersonal 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 HamiltonReal Estate Loans. Currently, Mr. Schmitt serves as our officer in 1999, a membercharge of the board of directorsCompanies Business, Government 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 Chairman of the board of directors of Super Pagamentos e Administração de Meios Eletrônicos S.A.Institutional Retail sector.

 

149 

Table of Contents

Claudenice Lopes Duarte. Mrs. Duarte is Brazilian and was born on July 25, 1972. She holds a degree in Journalism from FIAM (FaculdadesFaculdades Integradas Alcântara Machado)Machado with a specialization in Business Communication from FGV (FundaçFundação Getúlio Vargas – São Paulo).Vargas. From 1996 to 2009, she worked at GWA Comunicação

162 

Table of Contents

Integrada as Senior Director. From 2009 to 2010, she was Executive Manager of press relationsPress Relations at Santander Brasil. From 2011 to 2012, she was Superintendent of relationsRelations with the pressPress and Institutional Relations at Santander Brasil and, since July 2012,as one of our officers, she has beenis currently responsible for Internal and External Communications at Santander Brasil.

 

Ede Ilson VianiDaniel Fantoni Assa.. Mr. VianiAssa is Brazilian and was born on December 12, 1975. He holds a degree in Business Administration from Fundação Alberto Alvares Penteado and an MBA from Instituto Brasileiro de Mercado de Capitais. He started his career at Banco Real working at Corporate and Investment Bank and was responsible for structuring the areas of the commercial bank and investment bank. At Santander Brasil, between 2008 and 2011, he was Executive Superintendent of Corporate & Investment Banking; between 2011 and 2014, he was Executive Superintendent of Credit Recovery; between 2015 and 2016, he was Executive Superintendent of Corporate; and between 2016 and 2019, he was Executive Superintendent of Wholesale Risk. As one of our officers, he is responsible for the Corporate Risks area.

Elita Vechin Pastorelo Ariaz. Ms. Vechin is Brazilian and was born on March 28, 1970. She holds a degree in Law from Universidade de São Paulo, Master of Laws (LL.M.) from Temple University – Pennsylvania, and is a graduate of the Special Program in Corporate Finance from New York University. She is a member of the Bar Association in both Brazil and New York. Between 1992 and 1996, she was a lawyer at Tenege – Técnica Nacional de Engenharia S.A; between 1997 and 1998, she was foreign attorney at Cameron & Hornbostell LLP, Washington, DC; between 1998 and 2001, she was associate at Lebouf, Lamb, Greene and Macre, LLP in New York, NY. In 2002, she was Senior Counsel at Grupo Ultra. Between 2002 and 2018, she was head of the Legal Department of the Investment Bank at Grupo Safra. In 2018, she joined Santander Brasil as Executive Superintendent of the Legal Affairs Department, where she now serves as one of our officers.

Franco Luigi Fasoli.Mr. Fasoli is Brazilian and was born on September 5, 1967.18, 1975. He holds a degree in AccountingBusiness Administration from Fundação Alberto Alvares Penteado and an MBAa postgraduate degree in Financial Economics from InstitutoUniversidade de Ensino e Pesquisa - Insper. He was an auditorSão Paulo. Working since 1997 with financial institutions, he started his career at Santander Brasil as Senior Manager of Products and Marketing. In 2001, he started 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 sequenceReal as OfficerSenior Manager of Loans and Products and Officer for the banking sector aimed at small and medium companies. He joinedMarketing. After returning to Santander Brasil in 20072001, he was Head of Trade Finance & Correspondent Banking & Cash Management at foreign branches such as OfficerArgentina, Italia and Spain. Since 2014, in Brazil, he has served as Head of Commercial Network for SmallMiddle Market and Medium Business Banking and was the Officer responsible for Retail Banking Risk Management from July 2010 to 2014.Retail. As one of our Officers,officers, he is currently responsible for our Companies and Institutions segment.the SP Capital branches network.

 

Geraldo José Rodrigues Alckmin Neto.Mr. Rodrigues is Brazilian and was born on September 8, 1981. He graduated in Business Administration from Pontifícia Universidade Católica de São Paulo. At Santander Brasil he served as Executive Superintendent since 2013. Between 2008 and 2013 he was Executive Superintendent of Insurances at Banco Santander México, attending the “Programa de Futuros Diretivos”. From 2004 to 2008, he served as Relationship Manager and Foreign Trade.

Germanuela de Almeida de Abreu. Mrs. de Abreu is Venezuelan and was born on December 6, 1975. She holds a degree in Economics from Universidad Católica Andrés Bello – Caracas/Venezuela with an MBA in Human Resources from USP (Universidade de São Paulo – São Paulo). She completed the Development programProgram for Board Members by Fundação Dom Cabral. She served at Banco da Venezuela (Grupo Santander Caracas) as Senior Risk Analyst from 1999 to 2001. At Santander Brasil, she was senior sales support managerSenior Sales Support Manager between 2001 and 2002, HRHuman Resources Training Consultant between 2002 and 2003, HR Risk Consultant between 2003 and 2006, Executive Manager of HR between 2006 and 2008 and Superintendent of HRHuman Resources between 2008 and 2013. Still at Santander Brasil, sinceSince 2013 she has been our officer responsible for strategy related to performance management, career development, compensation, benefits and budget and spending management.

 

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 an MBA from the Massachusetts Institute

163 

Table of Technology. 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 Sancap Investimentos e Participações S.A. and ABECIP, Executive Officer of Banco Bandepe S.A. and a member of the boards of directors of Zurich Santander Brasil Seguros e Previdência S.A. and Zurich Santander Brasil Seguros S.A.Contents

Gustavo Alejo Viviani. Mr. Alejo is ArgentineArgentinian and was born on August 26, 1975. He holds a degree in Economics from Pontifícia Universidade Católica PUC –of São Paulo/Brasil.Paulo and a CFA (Chartered Financial Analyst) from the CFA Society of the United States. He completed Academic Extensionacademic extension courses in Business Administration at the University of California-Berkeley and Advanced Corporate Finance at the London Business School. From July 1997 to March 1999, he was a Junior Research Analyst of sharesShares and fixed incomeFixed Income at Citibank (Brasil). He has served at Santander Brasil since 2000, where he has been a Credit Consultant, a Trader, a Senior Relationship Manager, Superintendent of Corporate and Investment Banking, Executivethe Superintendent of Corporate and Investment Banking and Executive Superintendentthe Managing Director of our Corporate and executiveInvestment Banking Division. He currently serves as our officer responsible for the BusinessCredit and Wholesale Recoveries area.Recovery Division.

 

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 a degree in statisticsStatistics and applied researchApplied 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 managerPropaganda’s Digital Media Manager (from 2005 to 2006). From 2007 to 2014, as founding partnerFounding Partner and general officer,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 joined Santander Brasil in 2016, as the Officerofficer responsible for the Marketing department.Department. He is also a member of the Board of Directors of Santander Cultural.

 

Jean Paulo Kambourakis.Mr. Kambourakis is Brazilian and was born on May 9, 1980. He holds a degree in Electrical Engineering from Universidade de São Paulo and a degree in Business Administration from Fundação Getúlio Vargas. He started his career at Banco Real, where between 2004 and 2006, he was trainee, Senior Project Analyst and Project Consultant. He has been at Santander Brasil since 2006, where he has been Superintendent of Projects; Executive Superintendent of Organization and Efficiency; Executive Superintendent of Planning; and Executive Superintendent of Planning, Expenses and Efficiency. As one of our officers, he is currently responsible for the Securitization area.

José Teixeira de Vasconcelos Neto. Mr. Neto is Brazilian and was born on March 8, 1975. He holds a degree in business administrationBusiness Administration from the Universidade de Pernambuco - FCAP and in Economic Sciences from the Universidade Católica de Pernambuco. He completed specialization courses in Finance from FCAP-University of Pernambuco, an MBA in Marketing from Fundação Getúlio Vargas (FGV) and an MBA in Retail (GVPEC) from Fundação Getúlio Vargas (FGV).Vargas. He was General Manager of the Banco Citibank S.A. from 2000 to 2003. He

150 

Table of Contents

served as Commercial Superintendent and Executive Superintendent at Banco Citibank S.A. - Consumer Finance Unit (Citifinancial(Citi Financial) from 2003 to 2007. He was Regional Superintendent at Santander Brasil from August 2007 to July 2010. From August 2010 to September 2015, he wasMr. Neto served as the Executive Superintendent of the Network in Banco HSBC Brasil. He has been servingserved as one of the officers responsible for our branchBranch network since 2015.

Leopoldo Martinez Cruz. Mr. Cruz is Brazilian2015, and was born on August 19, 1974. He holds a degree in Administration with an emphasis in Finance from PUC-SP, with a specialization in Marketing from ESPM. He began his career in 1996 as an Expert Analyst in planning and strategy for sales and credit analysis at PHILIO MORRIS & KRAFT SUCHARD. In 1999,since January 2019, he served as an expert in asset management product development at CITIBANK – Asset Management. From 1999 to 2000, he worked as a Specialist in Marketing and Private Banking Products at MERYL LYNCH BR – Private Banking. He worked for Accenture PLC from 2005 to 2017, and was a Consultant, Manager, Senior Manager, and subsequently Customer Relationship Manager for the Financial Services Industry. He also served as Officer and head of financial services management, consulting for Latin America and later as Officer and head of the Banking Sector for Latin America. He currently works in the Operations area of Santander Brasil,has been responsible for the factory of components that serve all platforms, segments and that can be reused by different products.Direct network.

 

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 serveshas served in Santander Brasil, initially as Executive Superintendent of CRM, Digital Channels and Management Information System, Customers Intelligence and CRM and, currently serves as the Officerofficer responsible for Commercial Intelligence and Trade Marketing.Customers’ Service.

 

Luiz Masagão Ribeiro FilhoFilho.. 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.Getulio Vargas. He started his career in 1997, serving as Operator of Interest Rates Options in Brazil at Banco Citibank S.A. until 2005. He was the Senior Operator of Foreign Exchange Options from February 2005 to September 2005 in ING Bank

164 

Table of Contents

N.V. Back to Banco Citibank S.A., he was Executive Manager from 2005 to 2008 and Superintendent from 2008 to 2009. HeMr. Masagão served as Executive Superintendent of Fixed Income Sales from 2009 to 2010 at Morgan Stanley and then joined Santander Brasil’s team, initially serving as Chief of the GCB/Corporate Sales team, from 2010 to 2014, and last as Brazil’s Sales Executive Superintendent. Currently,On November 2018, he isbecame 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 segmentsTreasurer of Santander Brasil, (retail, corporateresponsible for treasury operations, including Proprietary Trading, Market Making, Sales and GCB).Products. He is also Executive Officer of Banco Bandepe S.A. and Santander Corretora de Seguros, Investimentos e Serviços S.A.

 

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 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 Branch Executive Superintendent.

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 analystSystems Analyst at Accenture in Portugal, responsible for Functional Design and Technical Computer Systems. From 1996 to 1999, he had the task of coordinatorCoordinator and, in 1999, became managerManager 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 Officerofficer from 2006 to 2008, with responsibilityresponsible for developing the commercial and relationship strategy of the insuranceInsurance segment. Between 2008 and 2010, he worked for CPM Braxis as an Officer,officer, with responsibility for the technology program of a major financial institution in Brazil. In 2010, he wasMr. Aguiar became a statutory officer at Accenture Brazil, with responsibilityresponsible for technology services to the financial industry in Latin America. He is currently one of our Officers,officers, and is responsible for our technologyTechnology area in the Vice Presidency of Proceedings, Technology and Operations unit. He is also Superintendent Executive Officer of Santander Brasil Tecnologia S.A.

151 

Table of Contents

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 Security, Premises and Facilities department, and he is also Executive Officer of Banco Bandepe S.A., Rojo Entretenimento S.A., Evidence Previdência S.A. and Santander Capitalização S.A., Deputy Director of Banco RCI Brasil S.A. and Tecnologia Bancária S.A. – TECBAN.

 

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 fromcompleted several courses, including Building and Sustaining Competitive Advantage at Harvard Business School, and Leadership in Talent Management and Development at IMD International. He also completed the LEAD Program fromat the IE Business School and Corporate Leadership Program at IESE Business School. He startedbegan his career inat Citibank, in the division of commercial operations and finance, as analyst and negotiator,where he worked 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 2003.2007 across several divisions. He thenalso served as senior negotiator, from 2003 to 2005, and then as Superintendent from 2005 to 2007.a member of the Citibank Credit Committee. He joined Santander Brasil in 2007, and was an Assistant Superintendent from 2007 to 2015, with responsibilitywhere he became responsible for customerclients coverage in the following sectors: real estate, logistics, aviation, celluloseCorporate Investment Banking Department. From June 2015 to August 2017, Mr. Noya was the Head of the Credit Markets Unit at Santander Brasil, where he was responsible for a team of 70 specialists on the origination and paper, industry, cement, constructionexecution of operations in the areas of Capital Markets (both domestic and infrastructure, steel, energy, petrochemistryinternational), Syndicated Loans, Project Financing, Acquisitions and construction materials. Currently,Asset and Capital Structuring. During this period, he is an Officer with responsibilitywas also the Chairman of the Board of Directors and a member of the Human Resources Executive Committee at BW Guirapa I S.A. Since August 2017, Mr. Noya has been the Head of Banking, where he has been responsible for generating localleading a team of approximately 60 people that covers the largest Brazilian corporate companies, financial institutions and international capital markets, risk syndication, projects and acquisitions financing and capital and assets structuring.private equity institutions. He is also Executive Officeran officer of Atual Companhia Securitizadora de Créditos Financeiros S.A. and Santander Leasing S.A. Arrendamento Mercantil.Mercantil and of Atual Serviços de Recuperação de Crédito e Meios Digitais S.A.

 

Ramón Sanchez Díez. Mr. DíezSanchez is Spanish and was born on October 29, 1968. He holds a bachelor’s degree in Economics from the Universidad Autónoma de Madrid and has completed an Advanced Management Program at Thethe Wharton School of Business at the University of Pennsylvania. He is a Certified Regulatory and Compliance Professional (CRCP) and a Certified Anti-Money Laundering Specialist (CAMS).  He served as a Financial Analyst and Portfolio Manager for Santander Brasil’s New York branch from 1992 to 1997, and as an Officerofficer for Strategy and Analysis for Latin American banks at Santander Spain in Madrid from 1997 to 2003. He was an Officerofficer 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,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 Presidentpresident of the Spanish Chamber of Commerce in Brazil between 2006 and 2009. As one of our Officers,officers, he is responsible for our compliance department.Compliance Department. He also serves as Executive Officer of Banco Bandepe S.A. and Santander Corretora de Seguros, Investimentos e Serviços S.A.

165 

Table of Contents

Ramon Sanchez Santiago. Mr. Ramon Sanchez Santiago is Spanish and was born on May 25, 1969. He graduated in Law from the University of Salamanca, Spain. Between 2010 and 2011, he was Project Leader of the Santander Group, responsible for the project to reduce the Risk Weighted Assets (RWA) throughout the Group. He was also Head of Internal Audit at Santander UK from 2011 to 2014. From 2015 to 2018, he served as Internal Audit Officer of the Santander Group for Capital and Solvency. As one of our Executive Officers, Mr. Santiago has been responsible for our Internal Audit area since September 2018.

 

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,officers, he is responsible for accounting and tax issues,procedures, planning strategies and corporate reorganization processes. He also serves as Executive OfficerAdministrator of Aquanima Brasil Ltda. and Summer Empreendimentos Ltda., as Executive Officer of Atual Companhia SecuritizadoraServiços de Recuperação de Créditos Financeirose Meios Digitais S.A., Banco Bandepe S.A., Fundação Santander and Santander Holding Imobiliária S.A., Vice-Presidentas Vice President Officer of Santander Corretora de Seguros, Investimentos e Serviços S.A. and as Administrative Officer of Norchem Participações e Consultoria S.A.

 

Roberto de Oliveira Campos NetoAlexandre Borges Fischetti. Mr. CamposFischetti is Brazilian and was born on Junein August 28, 1969.1975. He holds a degree in Economics and a specialization degree in Economics with a focus on Finance from the business school of the University of California, Los Angeles. He worked at Banco Bozano Simonsen from 1996 to 1999, where he served as Operator of Derivatives of InterestSão Paulo (Faculdade de Economia, Administração e Contabilidade (FEA), Universidade de São Paulo). Mr. Fischetti has acted in the Brazilian financial market 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).banking industry since 1998. From 20001998 to 2003, he servedworked at Deustche Bank as Head of the International Area and Fixed Income in Santander Brasil. InTrader, responsible for management of proprietary interest and exchange positions. From 2004 he served as Portfolio Manager of Claritas. He joined Santander Brasil in 2005 as Operator and in 2006to 2007, he was HeadSuperintendent of the Trading Desk. In 2010, he becameTreasury Products at Banco Real, responsible for the Proprietary Tradingstructuring of operations and Market Making Local & International.treasury products and coordination of the product team. Since 2007, Mr. Fischetti was Financial Executive Superintendent of Santander Brasil, responsible for the management of structural interest and exchange rate exposures, local and external liquidity management, and the pricing of commercial operations. As one of our officers, he is responsible for the ALM financial management. He is currently responsible for our treasury department. He also serves as Executive Officera member of the Board of Directors of Banco BandepeRCI Brasil S.A.

 

Robson de Souza Rezende. Mr. Rezende is Brazilian, and was born on January 24, 1967. He holds a degree in Statistics from UniversidadeAssociação - Salgado de Oliveira – RJ.de Educação e Cultura in Niteroi in the state of Rio de Janeiro and an MBA in Marketing from ESPM-SP. He startedbegan his career at Unibanco, where he servedworked between 1985 and 1999 in the Management of Agencies and later in the FormationHuman Resources Area working in Training and Development area focusedwith a focus on the BranchesAgencies of Unibanco

152 

Table of Contents

and Chief Manager of the Branch Network.Unibanco. Mr. Rezende joined Santander Brasil in 1999. From 1999 to 2003, he served as a Superintendent of Human Resources Superintendent.Resources. From 2003 to 2008, he served as Regional Superintendent. From 2008 to 2010, he servedworked as Superintendent of Commercial Model Superintendent, a period inModels, during which time he participated in the Commercial Model Integrationintegration of the commercial model of Santander Brasil and Banco Real. Currently, he isHe also led the Santander branch expansion project in Brazil for three years from 2010 to 2013. He was responsible for the Branch network in the state of Rio de Janeiro, and Espírito Santo branch networks, directly managing approximately 330 branches.290 branches and 3,700 employees in the region. As one of our officers, he is currently responsible for the Commercial Retail Network.

 

Rodrigo CurySandro Kohler Marcondes.. Mr. CuryMarcondes is Brazilian and was born on April 16, 1964. He graduated in July 17, 1976. He holds a degree in Advertising and MarketingBusiness Administration from Mackenzie University.Unicentro Paraná. He completed his MBAMaster Degree in Financial Management from the CEF, Madrid, and Innovation and Entrepreneurship from Stanford University. He was Manager of Credit Policies and Scoring from 2005 to 2007 at Spain Citifinancial.Business Administration by Fundação Getúlio Vargas. At Barclays Bank Spain,Santander Brasil since 2018, he served as Executive Superintendent Global Debt Financing. In 2018, he served as Executive Officer of Consumer Lending, Mortgages & CardsFinancing and Investor Relations at Neoenergia S.A. From 2005 to 2018 he served as Executive Officer at Banco do Brasil S.A. and also at Banco do Brasil S.A. from 20081999 to 2011,2004 he served as General Manager in Paris and as Head of Consumer Finance Credit Risk from 2007 to 2008. He worked at Citi from 2011 to 2015 as Head of Credit Cards for Central America and Caribbean and Executive Superintendent of Citi Credit Cards Brazil. He has been serving in the Cards, Bills and Rates area at Santander Brasil since 2015.Assistant General Manager.

 

Ronaldo Wagner RondinelliSandro Rogério da Silva Gamba. –. Mr. RondinelliGamba is Brazilian and was born on August 2, 1973.31, 1975. He holds a degreegraduated in EconomicsCivil Engineering from FAAP – FundaçãUniversidade Mackenzie, post graduated in Production Engineering from Universidade de São Armando Álvares Penteado,Paulo –USP and inReal State 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 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 ÁlvaresAlvares Penteado São Paulo, with an International– FAAP and MBA from Insper. At Gafisa S.A., from 1998 to 2004 held positions like: engineer, coordinator and manager; from 2004 to 2007 he served as new business manager; from 2007 to 2011 served as Director; from 2011 to 2014 served as Executive MBA degreeOfficer and, at last, he served as CEO from 2014 to 2018. In addition, he served as member of the Universidade de São Paulo. Since November 2000, he has been oneBoard of our Officers,Directors of Construtora Tenda from 2012 to 2014 and he is currently responsible for the Companies, Government & Institutions departments. He worked as Corporate Banking Officer for 16 years (from 1979of Alphaville Urbanismo from 2017 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.).2019.

 

166 

Table of Contents

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 2630 years, including 15almost 20 years with Santander Brasil and 10 years with The First National Bank of Boston, where he first joined as a Traineetrainee 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,area, and now, as an Officer,currently he is responsible for our retail risks function.SMEs Retail Risks area. He is also deputy directora member of the Board of Directors of Banco RCI Brasil S.A.

 

Ulisses Gomes GuimarãesVitor Ohtsuki.. Mr. GuimarãesOhtsuki is Brazilian and was born on March 14, 1971.June 5, 1977. He holds a degreegraduated in MechanicalProduction Engineering from ITA – Instituto TecnológicoUniversidade de Aeronáutica and an ExecutiveSão Paulo. He completed the MBA in Finance from IBMEC. He started his careerMarketing by Universidade de São Paulo and Master’s Degree in Global Management by Stanford University. At Santander Brasil since 2004, he served as trainee and, then, as an analyst at Citibank from 1994 to 1997. He was manager, thenPrivate Banking Head, Executive Superintendent of Wealth Management, Private Banking Superintendent, Executive Manager and General Manager. Also, he served as Marketing Manager at Banco Real/ABN AMRO BankCitibank S.A. from 19972000 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.2004.

 

153 

Table of Contents

Certain Arrangements and Relationships

 

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

6B.Compensation

 

Compensation of Directors, Executive Officers and Members of the Audit Committee

 

Our shareholders establish the maximum total annual aggregate compensation of our directorsDirectors and officersOfficers at the annual shareholders’ meeting. CompensationThe compensation of the members of our Audit Committee is established by our Board of Directors. The compensation of our directors, officers and members of our audit committee is established by our board of directors.as follows:

 

All membersBoard of the board of directors are entitled to a fixedDirectors

Fixed compensation composed of monthly feespayments 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 chairmanChairman of our boardBoard of directorsDirectors may also receive an annual variable compensation for his or her duties as determined by the compensation committeeCompensation Committee and the boardBoard of directors,Directors, within the annual limit set forth byat 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 and/or Clawback clause with the possibility of reducing and/or returning up to 100% of the value of the variable compensation in the assumptions.compensation.

 

In the cases where a memberBoard 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.Executive Officers

 

The members of the board of executive officers are entitled toFixed compensation composed of monthly payments, benefits, pensions and variable remuneration,compensation, always within the overall limit of the annual compensation, 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 and/or Clawback clause with the possibility of reducing and/or returning up to 100% of the value of the variable compensation in the assumptions.

 

The following payment summarizes the applicable rules of payment as of December 31, 2017.

2018 

2019 

2020 

2021 

At the time of the award 

Deferred 

30% in cashRemaining 20% in cash
Payment calculated on ⅓ cash awardedPayment calculated on ⅓ cash awardedPayment calculated on ⅓ cash awarded
30% in units
(with one year lockup)		Remaining 20% in units
Payment calculated on ⅓ units awardedPayment calculated on ⅓ units awardedPayment calculated on ⅓ units awarded

If the amount of the variable compensation is between R$5.5 million and R$8 million, the deferral is 50%, 25% of which is deferred and paid in cash and the other 25% is paid in up to 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 which is deferred and paid in cash and the other 30% is paid in up to 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% paid in accordance with each of the items mentioned above.

154167 

Table of Contents

Audit Committee

Fixed compensation consisting of monthly fees, as established by the Board of Directors. In cases where a member of the Board of Directors is also a member of our Audit Committee, in accordance with the applicable regulations and internal rules of the committee itself, such member should elect to receive compensation in relation to their functions for either the Board of Directors or the Audit Committee.

Supervisory Board

Fixed compensation composed of monthly fees in the amount approved at our General Shareholders' Meeting.

In relation to the other Advisory Committees, such members are also entitled to a fixed compensation composed of monthly fees.

Compensation Plan Overview

At the general shareholders meeting held on April 26, 2019, the compensation limit was set up to R$400 million for our Directors and Executive Officers and R$4.0 million for our Audit Committee, for the 12-month period starting on January 1, 2019, as proposed by the Board of Directors at the meeting held on March 27, 2019. For the abovementioned twelve-month period, members of our Board of Directors and Executive Officers received a total of approximately R$277 million and members of our Audit Committee received a total of approximately R$3.2 million. The total amount of contributions for pension plans of our Board of Directors in 2019 was R$38 million.

Under Brazilian law, companies are required to disclose the highest, lowest and average compensation of our directors,Directors, members of the audit committeeFiscal Council, if installed, and officers without indicating any individual name. However, as membersPlease find below the information for the years 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.2017, 2018 and 2019:

 

 Board of Executive OfficersBoard of Directors Fiscal Council 
12/31/201912/31/201812/31/201712/31/201912/31/201812/31/201712/31/201912/31/201812/31/2017
Nº of members41.7042.2044.009.9010.0010.002.50--
Nº of paid members40.9040.8040.504.805.004.171.30--
Value of highest compensation (Reais)45,325,345.0043,068,683.2629,985,549.151,752,022.721,563,056.441,444,916.6055,370.00--
Value of lowest compensation (Reais)1,843,405.072,026,240.061,795,457.14769,131.80700,542.46544,316.60---
Average value of compensation (Reais)6,647,842.606,884,079.475,675,740.271,012,232.27772,680.82752,412.19132,888.00--

Shareholders at the general shareholders meeting held on April 28, 2017 set compensation for

As approved by our directors and executive officers at a totalBoard 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, 2017, as proposed by the board of directorsDirectors at the meeting held on March 28, 2017. For the abovementioned twelve-month period, members ofDecember 23, 2009, we indemnify our board of directorsDirectors and executive officers received a total of approximately R$211 millionExecutive Officers and members of the Audit Committee from claims arising during the time they occupy their respective offices. This relates, exclusively to court or administrative costs and attorneys’ fees, except in cases of bad faith, gross negligence, willful misconduct or mismanagement by our audit committee received a totalDirectors or Executive Officers. This indemnity was also granted to the members of approximately R$2.63 million. The total amount of contributions for pension plans of our board of directors in 2017 was R$4.5 million.the Audit Committee and the Compensation Committee.

Variable Compensation

 

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 board168 

Table 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.Contents

Compensation Plan OverviewLong Term Incentive Programs

 

We have four programs for long-term compensation: (i) the Deferral Program; (ii) the Stock Option Plan;Long Term Incentive Plan - Private Ultra High; (iii) the First Long-Term Incentive Global Plan CRDIV – Grant 2014; and (iv) the Second Long-Term Incentive Global Plan CRDIV – Grant 2015.2015 and (iv) LTIP Technology.

 

Executive officersOfficers and executivesExecutives in key positions are eligible to participate in these plans. The plans, which last three years, promotingand promote our executive officersExecutive Officers and executives’Executives’ commitment to our long-term results. Members of the boardBoard of directorsDirectors can only participate in these plans only if they are executive officers, otherwise, the board members are not eligible to participate in any of these plans.Executive Officers.

 

Deferral Program

 

Our deferral program is available to our statutory officers, officersStatutory 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 deferralThe 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, 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.

The following table summarizes the rules of payment to variable compensation taking as an example the exercise ended of December 31, 2019.

2020

2021

2022

2023

At the time of the award

Deferred

30% in cashRemaining 20% in cash
Payment calculated on ⅓ cash awardedPayment calculated on ⅓ cash awardedPayment calculated on ⅓ cash awarded
30% in units
(with one year lockup)		Remaining 20% in units
Payment calculated on ⅓ units awardedPayment calculated on ⅓ units awardedPayment calculated on ⅓ units awarded

If the amount of the variable compensation is between R$5.5 million and R$8 million, the deferral is 50%, which shall be paid in up to five tranches, 25% of which is paid in cash and the other 25% is paid in units, each with a one-year lock-up. If the variable compensation amount is equal to or greater than R$8 million, the deferral is 60%, which shall be paid in up to five tranches, 30% of which is paid in cash, and the other 30% paid in units with a one-year lock-up. In the case of the Chief Executive Officer, the deferral in this program is at least 50%, with at least 25% paid in accordance with above.

Still 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 as defined in our business plan or loss in the period); (ii) failure to comply with internal policies, especially 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.

 

155 

Table of Contents

We renew and update our deferral program every year. As of December 31, 2017,2019, we had threefive plans outstanding: one for each fiscal year: 2014, 2015, 2016, 2017, 2018 and 2017.2019. As of December 31, 2017,2019, werecorded total expenses of R$206.764203 million in connection with our Deferral Program compared to total expenses of R$132.294126 million in 2016.2018.

169 

Table of Contents

 

Deferral Program – 2014, 2015,–2015, 2016, 2017 2018 and 20172019

 

Our 2014, 2015 2016 and 2017to 2019 deferral programs wereare 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 other employees. Deferred compensation will be paid 100% in cash, indexed to 100% of the CDI.

 

Stock Option Plan – SOPFrom the financial year 2019, the rule for the Collective Unidentified was changed to:

 

The Stock Option• Superintendents:Employees. Superintendent-level employees are eligible for this program. Deferred compensation is paid 50% in cash, and 50% in units.

• Other: Employees.Employees with variable remuneration above a minimum stipulated amount are eligible. Deferred compensation is paid 50% in cash, and 50% in units.

Long-Term Incentive Plan or SOP is an option plan to purchase our Units for our top management. The- Private Ultra High

Released in 2017, its objective of this plan is to retain our employees’ commitmentalign the interests of Banco Santander and the participant aiming, on the one hand, to long-term results.the growth and profitability of the Private business and, on the other, to the recognition of the participant's contribution. The Plan’s objective is the payment of variable compensation by the Bank to the participants.

 

DuringOn December 31, 2019 the fiscal year 2017, a total amount of options equivalentperformance period ended and as the indicators had no minimum achievement, there will be no payment to R$17.8 million was exercised under the current SOP 2013participants in this plan.

 

Our Stock Option Plan consists of three-year stock option plans to purchase our Units. The periodLTIP Technology

It is a retention plan 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 bykey positions launched in July 2019 where the participant during a period of one year from the exercise date. Plan participants must remain with us duringin employment until the term of the plan in orderpayment date 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 rightentitled to receive Units were excluded. On December 31, 2017, there were 1,117 outstanding options under the plan.

Fair Value and Performance Parameters of SOP

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 2013(1) 

 

(% of Shares exercisable) 

1100%
275%
350%
40%

(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).

156 

Table of Contents

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.

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 8th100.0%
9th to 12th50.0%
13th to 16th0.0%

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 4th100.0%
5th87.5%
6th75.0%
7th62.5%
8th50.0%
9th to 16th0.0%

it.

 

Each executive hashad a targetreference value defined inreais, Reais, which was converted into shares of the Santander Group forBrasil (SANB11) at a price of R$19.2893,44.66, which will be delivered in installments in 2016, 2017 and 2018,July 2022, with a lock-up of one year after each delivery.1-year restriction.

 

InPayment is subject to the year ended December 31, 2017 there were no expenses related to cycle costsapplication of the first Malus / Clawback clauses, which may reduce or cancel the shares to be delivered in cases of non-compliance with internal rules and exposure to excessive risks.

Global Long-Term Incentive Program.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).

 

170 

Table of Contents

1.       TSR vs. Competitor

 

RTA in 2015

“Coefficient RTA 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.

 

157 

Table of Contents

2.       ROTE Bank (Return on Tangible Equity) vs Budgeted

 

ROTE in 2015

“Coefficient ROTE 2015”
(% on the ROTE 2015 budgeted)

“Coefficient ROTE 2015” 

≥ 90%1
> 75% to < 90%0.75 – 1 (*)
≤ 75%0

 

(*)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 3rd1
4th or subsequent0

 

4.       Client satisfaction

 

Position among the best banks according to client satisfaction index in 2017

“Coefficient Clients”

1st to 3rd1
4th or subsequent0.5 – 1 (*)

 

5.       Business bindings vs Budgeted

 

Clients companies 1 and 2 linked

“Coefficient Companies”
(% 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 hashad a target inreais, which has been converted into Santander Group shares for a price of R$17.473 which will bewas delivered in 2019, with a lockup of one year after each delivery.

171 

Table of Contents

Due to the Group's capital increase (2017), the number of target shares was increased by approximately 1.5%.

At the end of the benchmarking period, the achievement of Phase 1 was 91.5% and Phase 2 was 73.09%, resulting in the plan's final achievement of 66.88%.

Payment for the SAN shares resulting from the final achievement of the plan was made in cash in March / 2019 based on the quotation of R $ 45.49, to the “Extended Group” participants (without restriction of disposal) and to the participants of the Identified Collective, in March 2020, after the 1 year restriction period.

 

In the year ended December 31, 2017,2019, there were no “pro rata” expenses in an amount of R$4,797 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 terminationTermination

 

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,SBPrevi, while they are affiliated with Santander Brasil.

For further information on SantanderPrevi,SBPrev, please see “— D. Employees.”

 

6C. Board Practices

6C.Board Practices

 

Our shareholders elect members of our boardBoard of directorsDirectors at the annual general shareholders’ meeting for two-year terms (members may be reelected). The boardBoard of directorsDirectors appoints our executive officers for two-year terms (members may be reelected).

 

158 

Table of Contents

The current members of the boardBoard of directorsDirectors were elected at the ordinary shareholdersshareholders’ meeting held on April 28, 2017 and at the extraordinary shareholders meeting held on July 20, 2017,26, 2019, to serve until the ordinary shareholders meeting to be held in 2019. The current executive officers were elected at the board of directors meetings held on May 2, 2017, August 25, 2017, November 1, 2017, February 1, 2018 and February 26, 2018, with terms of office until the first board of directors meeting occurring after the ordinary shareholders’ meeting to be held in 2019.The board2021. The current Executive Officers were elected at Board of directorsDirectors meetings held on May 3, 2019, July 2, 2019 and February 3, 2020 for terms of office until the first Board of Directors meeting occurs after the ordinary shareholders’ meeting, which is to be held in 2021. The Board of Directors usually meets normally foureight times in eacha year, but meetings may be held more frequently ifas the chairmandiscretion of the boardChairman of directors so wishes.the Board of Directors. The executive officersExecutive Officers meet as often as required by the chief executive officerChief Executive Officer, or by the persona designated by him.person.

 

On August 31, 2017, our boardBoard of directorsDirectors approved its regulations. Shareholders may access such coderegulations, which can be accessed by shareholders on the website www.ri.santander.com.br,www.santander.com.br/ri, in the section entitled “Corporate Governance—Management—Management Board—Regulations of the Board of Directors.”Directors”. The information contained on our website, any website mentioned in this annual report, or any website directly or indirectly linked to these websites, is not part of and is not incorporated by reference in, this annual report.

 

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-tenthone percent of the voting shares or fivetwo percent of the nonvoting shares. CurrentlyThe fiscal council was installed at our ordinary shareholders’ meeting held on April 26, 2019. All current members of our fiscal council is not installed. were elected at the ordinary shareholders’ meeting held on April 26, 2019 to serve until the ordinary shareholders’ meeting to be held in 2020.

172 

Table of Contents

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.

 

The following table sets forth the members of our fiscal council as of the date of this annual report:

Name

Position

Date of Birth

Antonio Melchiades BaldiseraMemberJanuary 26, 1952
João Guilherme de Andrade So ConsiglioMemberDecember 7, 1968
Louise BarsiMemberSeptember 7, 1994

Below are the biographies of the members of our fiscal council.

Antonio Melchiades Baldisera. Mr. Baldisera is Brazilian and was born on January 26, 1952. He graduated with a degree in Accounting, a postgraduate degree in Accounting Management from the Fundação Getúlio Vargas and with an MBA in Controlling, Audit and Tax Management from Fundação Getúlio Vargas. He served as General Accounting Manager at Banco Noroeste S.A. until 1997. At Santander Brasil, he served as General Manager and Deputy Officer of the Accounting Department from 1998 to 2000. He was General Audit Manager of Banco Sudameris do Brasil S.A. from 2000 to 2003. He was also representative at FEBRABAN at the Electronic Fraud and Operational Security Subcommissions (Subcomissão de Fraudes Eletrônicas e Subcomissão de Segurança Operacional), and representative at FEBRABAN at the Internal Audit Committee. He was Executive Superintendent of Santander Brasil between 2003 and 2018, working in the Internal, External and Electronic Fraud Management area. He is currently a Consultant at AMB - Business Consulting in Prevention and Treatment of Financial Fraud, Operational Safety and Audit.

João Guilherme de Andrade So Consiglio. Mr. Consiglio is Brazilian and Italian and was born on December 7, 1968. He is graduated in Economics from the Universidade de São Paulo (USP), with a postgraduate degree from Degli Studi University, Genova, Italy. He has worked in the financial market and as an economist for more than 25 years. He was Executive Vice President of Santander Brasil and member of the Executive Committee of the Bank in Brazil for seven years, responsible for business with large corporate clients (Corporate). He was also Product Officer of ABN AMRO/Banco Real and worked in the Corporate Development area, leading acquisitions and divestments of the Bank in Brazil, Private Equity and Capital Market operations. Prior to joining the financial market he was an economist at the Bunge Group. He has participated in several boards of directors such as Banco RCI Brasil S.A, CIP (Interbank Chamber of Payments) and Cia. Brasileira de Soluções e Serviços, among others. He is currently a board member of Unipar Carbocloro S.A.

Louise Barsi. Ms. Barsi is Brazilian and was born on September 7, 1994. She holds a degree in Economics from Universidade Presbiteriana Mackenzie and in Accounting from Fundação Escola de Comércio Álvares Penteado (FECAP). Currently she holds a post-graduate degree in Capital Markets at the Fundação Escola de Comércio Álvares Penteado (FECAP) and a master's degree in Accounting with a financial specialization from Fundação Escola de Comércio Álvares Penteado (FECAP). Ms. Barsi is a CNPI analyst at Elite Investimentos and participated in the Fiscal Council of Unipar Carbocloro from April 2016 to October 2017. She is currently member of the board of directors at Eternit since April 2018 and has been a substitute member of the board of directors at Unipar Carbocloro since April of 2018 and an Alternate Member of the Fiscal Council of Eletropaulo (a subsidiary of Enel).

173 

Table of Contents

Board Advisory Committees

 

Audit Committee

 

According to Brazilian Central Bank regulations, an audit committee is a statutory board, separate from the board of directors and 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 the 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, and 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 independent auditor;

 

·to review, prior to publication, the interim financial statements, including the notes, the management report and the opinion of the independent auditor;

 

·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 independent or internal auditors; and

 

·to prepare, at the end of the six-month period ended on June 30 and December 31 of each year, the report of the audit committee, meeting the applicable legal and regulatory provisions.

 

159 

Table of Contents

The current members of the audit committee are Luiz Carlos Nannini, who acts as financial expert and Elidie Palma Bifano,Maria Elena Cardoso Figueira, Julio Sergio de Souza Cardozo and José Luciano Duarte Penido,Deborah Stern Vieitas, who act as coordinator. Our audit committee meets ordinarily once a month. The current members of the audit committee were appointed on May 2, 20173, 2019 to serve until the first board meeting after the ordinary shareholders’ meeting to be held in 2018.for a one-year term.

 

Set forth below are the biographies of the members of our audit committee:

 

Elidie Palma BifanoMaria Elena Cardoso Figueira.. Mrs. Bifano Ms. Figueira is Brazilian, and was born on May 16, 1947. She holds a bachelor’s degreeNovember 29, 1965 and graduated in Law and Social SciencesEconomics from the FaculdadePontifical Catholic University of Rio de Direito da Universidade de São Paulo. She holds a specialization degree in Tax Law from Universidade de São Paulo and PontifíJaneiro (Pontifícia Universidade Católica do Rio de São Paulo andJaneiro). Ms. Figueira is 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 acertified member of the InternationalBoard of Directors and supervisory Board of IBGC (the Brazilian Institute of Corporate Governance) and a partner of Figueira Consultoria Financeira, her individual financial advisory firm. Ms. Figueira has attended training programs in Brazil (through ISE, FAAP, KPMG and IBGC) and abroad (through IESE and IE) and has extensive professional experience in finance and tax, including at Arthur Andersen, Banco Bilbao Vizcaya, KPMG, Santander (in Brazil, as Deputy Director in charge of Tax Law Magazine’s Editorial Council, at Quartier Latin Publishing. ShePlanning, and in Spain, from April 2012 to May 2014, where she worked in the Department of Financial Regulation and Accounting Standards focusing on capital allocation). Since 2004, Ms. Figueira has beenalso served as a member of the Audit Committees and advisory Boards of: (i) Santander Brasil, acting as an independent member of the Audit Committee since May 2018; (ii) HSBC Brasil S.A . - Banco de Investimentos

174 

Table of Contents

(from June 2017 to April 2018), as a member and Chairman of the Advisory and Audit and Risk Committee; (iii) HSBC Brasil S.A. - Banco Múltiplo, from October 2014 to June 2016, as chairman and member of the Advisory Board and the Audit and Risk Committee; and (iv) Santander Brasil, from August 2004 to April 2012, as an independent member of the Audit Committee, Coordinator and financial expert. Since 2015, Ms. Figueira has been an associate member of the IBGC Financial Institutions Governance Committee, a member of the Women Corporate Directors - WCD - Brazil chapter and, since 2017, she is an associate member of the Strategic Governance Committee of Santander Brasil since 2012.American Chamber of Commerce in Brazil (Amcham Brasil).

 

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. Furthermore, Mr. Nannini has significant experience in audit committees and fiscal councils of publicly held Brazilian companies. Currently he is a member and financial expert of our Audit Committee.

 

Julio Sergio de Souza Cardozo. Mr. Cardozo is Brazilian, born on August 18, 1944. He holds a degree in Accounting and Business Administration from Universidade Presbiteriana Mackenzie of Rio de Janeiro and a PhD equivalent in Finance and Internal Controls from the Universidade do Estado do Rio de Janeiro, State University, where he acted as AuditingAuditor and Accounting professorProfessor at the undergraduate and master degreegraduate levels until August 2016. From 1985 to 2001, he served as Audit Partner at Ernst & Young Brazil. From 2001 to 2007, he held the positionpositions of CEO and Chairman of the Board of Ernst & Young Brazil, as well as Board Membermember of Ernst & Young Americas (New York). DuringIn the same time,period, he served as CEO and Chairman of the Board of Ernst & YoungEY South America.America and a member of the Fiscal Council of USIMINAS, Santa Catarina Power Plants and BRADESPAR. He has also served as Fiscal Councila member of USIMINAS, Centrais Elétricas de Santa Catarina and BRADESPAR. Also, served asthe Board of Directors and coordinator member andof the Audit Committee Coordinator with Administradora de Cartões de Créditoof the credit card manager AVISTA S.A. Currently, Mr. Cardozo is the managing partnerManaging Partner of JulioJúlio Sergio Cardozo & Associados Consultoria deem Negócios Ltda.; Membermember of the Board of Directors of Saraiva S.A.-LivreirosS.A. Livreiros e Editores; Member coordinatormember of the Audit Committee of Fibria Celulose S.A.; Fiscal Council member of Centrais Elétricas do Ceará and professor of the MBA Program in finance withFinance of Fundação Getúlio Vargas.

 

José Luciano Duarte PenidoDeborah Stern Vieitas. 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,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 aboutregarding our internal compensation policy and the repercussionrepercussions 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.

 

Our compensation committee has as its main functions:

 

·to develop internal compensation policies applicable to our management and makesmake proposals to our board of directors regarding policies for variable and fixed compensation, benefits, and special programs for recruiting and terminations;

 

160175 

Table of Contents

·to supervise the implementation and coming into operation of the compensation policy for our management;

 

·to propose to the board of directors the aggregate compensation of our management 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 recommendsrecommend changes to align our policies with market practice if significant differences from market practice are identified;

 

·to prepare annually, within ninety90 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 management compensation policy is compatible with our risk management policy, the goals and current and expected financial condition, as well as with the provisions set forth in applicable regulatory provisions and regulations published by the Brazilian Central Bank.

 

The current members of the compensation committee are Deborah Patricia Wright (who acts as coordinator), Álvaro Antonio Cardoso de Souza, Celso Clemente Giacometti and Luiz Fernando Sanzogo Giorgi. The current members of the compensation committee were appointed on May 2, 20173, 2019 to serve until the first board of directors meeting occurring after the ordinary shareholders’ meeting to be held on 2019.in 2021.

 

Set forth below are the biographies of the members of our compensation committee:

 

Deborah Patricia Wright. See “—Members of the Board of Directors.”

 

Álvaro Antonio Cardoso de Souza. See “—Members of the Board of Directors.”

 

Celso Clemente Giacometti. 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’bachelor’s degree in Business Administration fromFundação 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 chairmanVice 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 Boardboard of Directorsdirectors of Santher S.A.; from 2007 to 2011, he served as a full member of the Boardboard of Directorsdirectors of J. Macedo Alimentos S.A.; in 2008, he served as a full member of the Boardboard of Directorsdirectors of Vix Logística S.A.; from 2007 to 2008, he served as a member of the HR Committee of the Boardboard of Directorsdirectors of Grupo Libra S.A.; and in 2013, he served as a member of the Boardboard of Directorsdirectors of Itautec S.A. Currently, he serves as a member of the Boardsboards of Directorsdirectors of Vonpar S.A. and Empresas Concremat. He is also a member of the Advisory Board of Heads Agencia DeAgência 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 riskRisk and compliance committeeCompliance Committee is a consultative body, which has the responsibility of advising our boardBoard of directorsDirectors 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 enhance our management regarding the transparency and the monitoring of the compliance functions of the institution. For more details about risk management, see the information under note 47: Risk Management of the financial statements.

176 

Table of Contents

 

The risk and compliance committee is composed of three to six members, provided that the majority of them: (i) may not be, nor may they have been, employees of Santander Brasil in the last six months prior to their appointment; (ii) may not be the spouse or relative of a person referred to in item (i) of this list;herein; (iii) cannot receive from us any compensation that does not relate to their role as a member of the risk and compliance committee or the board of directors; (iv) must have experience in risk management; and (v) may not be a controlling shareholder of

161 

Table of Contents

Santander Brasil nor participate in decisions at the executive level. The term of office is of two years, re-electionreelection 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 Deborah Stern VieitasBernardo Parnes (who acts as coordinator), Álvaro Antônio Cardoso de Souza, Conrado Engel, José de Paiva Ferreira Bernardo Parnes and René Luiz Grande. The current members of the risk and compliance committee were appointed on May 2, 20173, 2019, to serve until the first board of directors meeting occurring after the ordinary shareholders’ meeting to be held in 2019.2021.

 

Deborah Stern Vieitas. See “—Members of the Board of Directors.”

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.”

Bernardo Parnes. Mr. Parnes is Brazilian and was born on March 4, 1960. He holds a degree in Business Administration with a focus on finance from Fundação Armando Álvares Penteado, SP, and Law from Faculdade de Direito da Universidade de São Paulo, focused in Business Law. He also has a postgraduate in Economics and Finance from Fundação Getúlio Vargas. Mr. Bernardo was CEO of Deutsche Bank Latin America and Chief Country Officer of Deutsche Bank Brazil. At Deutsche Bank, he was also a member of the Americas’ Executive Committee, the Regional Management Executive Committee and the Latin American Advisory Board. Prior to Deutsche Bank, he was CEO of Banco Bradesco BBI S.A., and before that, he was CEO of JSI Investimentos Ltda., Partpart of the Safra Group. Mr. BernardoParnes also worked for 14 years at Merrill Lynch, where he was Country Head of Brazil, and worked for 7seven years at Citigroup in Brazil. He is currently a member of the board of directors of Albert Einstein Hospital, MASP (São Paulo Art Museum) and Unibes (Brazilian Israeli Social Welfare Union), as well as a memberCoordinator of our Risk and Compliance Committee.

Álvaro Antônio Cardoso de Souza. See “—Members of the Arlon Advisory Board in Latin America.of Directors.”

 

José de Paiva Ferreira. See “—Members of the Board of Directors.”

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 analystAnalyst from 1975 to 1978; technical assistantTechnical Assistant from 1978 to 1989; inspection supervisorInspection Supervisor from 1989 to 1999; headHead of the Banking Supervisory and Technical Department from 1999 to 2003,2003; and deputy headDeputy 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 headHead of Human Resources with the Companhia Brasileira de Embalagens Metálicas BRASILATA from 1973 to 1975. Currently, Mr. Grande is a member of our Risk and Compliance Committee, having held the position of Coordinator of our Audit Committee from 2012 to 2017.

 

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 seven members, and the majority of those members must be independent and, preferably, also members of the board of directors. The term of office is of two years, re-electionreelection 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.

 

177 

Table of Contents

The current members of the nomination and governance committee are Celso Clemente Giacometti (who acts as coordinator), Álvaro Antonio Cardoso de Souza, Deborah Patricia Wright and Luiz Fernando Sanzogo Giorgi. The current members of the nomination and governance committee were appointed on May 2, 20173, 2019 to serve until the first board of directors meeting occurring after the ordinary shareholders’ meeting to be held in 2019.2021.

 

Celso Clemente Giacometti. See “—Members of the Board of Directors.”

 

Álvaro Antonio Cardoso de Souza. See “—Members of the Board of Directors.”

 

Deborah Patricia Wright. See “—Members of the Board of Directors.”

 

Luiz Fernando Sanzogo Giorgi. See “—Compensation Committee.”

 

162 

Table of Contents

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 ofcomprises three to five members, and at least one of these members must be independent. The term of office is of two years, re-electionreelection 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 PenidoMarília Artimonte Rocca (who also acts as coordinator), Carlos Rey de Vicente, Jean Pierre DupuiCarlos Aguiar Neto, Mário Roberto Opice Leão and Tarcila Reis Corrêa Ursini. The current members of the sustainability committee were appointed on May 2, 20173, 2019, August 6, 2019 and December 31, 2019 to serve until the first board of directors meeting occurring after the ordinary shareholders’ meeting to be held in 2019.2021.

 

José Luciano Duarte PenidoMarília Artimonte Rocca.See “—Members of the Board of Directors.”

 

Carlos Rey de Vicente. See “—Members of the Board of Executive Officers.”

 

Jean Pierre DupuiCarlos Aguiar Neto. See “—Members of the Board of Executive Officers.”

 

Mario Roberto Opice Leão. See “—Members of the Board of Executive Officers.”

Tarcila Reis Corrêa Ursini. Ms. TarcilaCorrêa Ursini is Brazilian, born on May 9, 1974. She holds a degree in economicsEconomics from FEA/USP,the University of São Paulo (Universidade de São Paulo), a lawLaw degree from PUC/SPthe Pontifical Catholic University of São Paulo (Pontifícia Universidade Católica de São Paulo) and a master's degree in Development and Law from Kings College, London. TarcilaMs. Corrêa Ursini began her career as a lawyer, with work experiences in Brazil, Spain and England. She was an associated lawyer at Machado, Meyer, Sendancz and Opice from 1997 to 2000 in the corporateCorporate and mergersMergers and acquisitionsAcquisitions area. Since 20002001 she has been working on sustainability strategy, management and research, advising organizations from the most diverse sectors, sizes and cultures. She was manager of the Ethos Institute from 2003 to 2007. She was international representative of Brazil in the development of ISO 26000. Ms. TarcilaCorrêa Ursini was a member of the International Council of Stakeholders of the Global Reporting Initiative (GRI), Netherlands. She is an independent member of the Duratex S.A. Board of Sustainability Committee since June 2012, beginning to preside it in 2016; is an independent member of the Sustainability Committee of the Baumgart Group Council since Feb/February 2017; is an independent member of the Sustainability Committee of Precon Engenharia since 2016. She is a member of the Brazilian Institute of Corporate Governance - IBGC, of the Sustainability Studies Committee since its foundation, was part of the 40th group of Formation Counselors. She is a member of WCD - Women Corporate Directors (IFC / IBGC / KPMG), Women's Leadership Group for Sustainability, Ministry of the Environment and voluntary supporter of various civil society organizations. She is a postgraduate professor in socio-environmental managementSocio-Environmental Management at FIA. She is co-author of The World Guide to CSR, chapter Brazil, Greenleaf 2009, a collaborator of Communication in Progress of the United Nations Global Compact, co-author of the Term of Reference that defined the Sustainability of the Sebrae System.

 

178 

Table of Contents

Executive Committee

 

The Chief Executive Officer, Senior Vice President Executive Officers and Vice President Executive Officers make up the executive committeeExecutive 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.

 

6D. EmployeesContract termination

Employment contracts have an undefined term. The voluntary termination of the employment relationship or termination for non-fulfillment of obligations does not entitle executives to any financial compensation.

6D.Employees

 

On December 31, 2017,2019, we had 47,40447,819 full-time, permanent employees. The following table presents the breakdown of our full-time, permanent employees (in accordance with local criteria) at the date indicated.

 

 As of December 31, 2017 As of December 31,
 2017 2016 2015 2019 2018 2017
Administrative employees  10,936   10.256   9,884   12,188   12,480   10,936 
Commercial areas employees  36,468   36.996   40,140   35,631   35,532   36,468 
Total  47,404   47,252   50,024   47,819   48,012   47,404 

163 

Table of Contents

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 contemplatingbased on 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. Currently the main plan is SantanderPrevi, a plan that since July 2018 is closed for new participants. As of January 2018, the onlySBPrev pension plan, currently openadministered by Icatu Seguros, was implemented for new membership. Most of our current employees are registered with the SantanderPrevi plan.and new members. As of December 31, 2017, 43,1752019, 38,379 participants were enrolled in thatSantanderPrevi plan, making the total assets under management under the plan was approximately R$4,082 billion. As of December 31, 2019, in the SBPrev plan, we had 3,770 registered participants, with total amount under management approximatelyof R$3.5 billion.195,188 million. 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,Every two years, 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 2017the period 2018-2020 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.

 

179 

Table of Contents6E. Share Ownership

6E.Share Ownership

 

The following table provides the names of our directors and executive officers, as well as members of our fiscal council who owned shares of Santander Brasil as of  April 5, 2018.March 6, 2020.

ShareholdersCommon SharesPercentage of Outstanding Common SharesPreferred SharesPercentage of Outstanding Preferred SharesPercentage of Total Share Capital
Alberto Monteiro de Queiroz Netto       38,753                  (1)       38,753                (1)               (1)
Alessandro Tomao       97,861                  (1)       97,861                (1)               (1)
Amancio Acúrcio Gouveia     170,226                  (1)     170,226                (1)               (1)
André de Carvalho Novaes       34,165                  (1)       34,165                (1)               (1)
Angel Santodomingo Martell     146,632                  (1)     146,632                (1)               (1)
Antonio Melchiades Baldisera       10,096                  (1)       10,096                (1)               (1)
Antonio Pardo de Santayana Montes     144,860                  (1)     144,860                (1)               (1)
Carlos Aguiar Neto       45,155                  (1)       45,155                (1)               (1)
Carlos Rey de Vicente     172,260                  (1)     172,260                (1)               (1)
Cassio Schmitt     137,906                  (1)     137,906                (1)               (1)
Celso Clemente Giacometti                1                  (1)               -                   (1)               (1)
Claudenice Lopes Duarte       16,816                  (1)       16,816                (1)               (1)
Conrado Engel     653,191                  (1)     653,191                (1)               (1)
Daniel Fantoni Assa     101,892                  (1)     101,892                (1)               (1)
Ede Ilson Viani     115,288                  (1)     115,288                (1)               (1)
Elita Vechin Pastorelo Ariaz       17,534                  (1)       17,534                (1)               (1)
Germanuela de Almeida de Abreu       36,781                  (1)       36,781                (1)               (1)
Gilberto Duarte de Abreu Filho     192,060                  (1)     192,060                (1)               (1)
Gustavo Alejo Viviani     195,593                  (1)     195,593                (1)               (1)
Igor Mario Puga       15,924                  (1)       15,924                (1)               (1)
Jean Paulo Kambourakis       60,253                  (1)       60,253                (1)               (1)
Jean Pierre Dupui     338,095                  (1)     338,095                (1)               (1)
João Guilherme A S Consiglio     160,645                  (1)     160,645                (1)               (1)
José Antônio Alvarez Alvarez                1                  (1)               -                   (1)               (1)
José de Paiva Ferreira     429,607                  (1)     429,607                (1)               (1)
José Roberto Machado Filho     106,614                  (1)     106,614                (1)               (1)
José Teixeira de Vasconcelos Neto       28,011                  (1)       28,011                (1)               (1)
Juan Sebastian Moreno Blanco     595,436                  (1)     595,436                (1)               (1)
Luis Guilherme Mattos de Oliem Bittencourt       48,160                  (1)       48,160                (1)               (1)
Luiz Masagão Ribeiro Filho     176,413                  (1)     176,413                (1)               (1)
Manoel Marcos Madureira     151,164                  (1)     151,164                (1)               (1)
Marino Alexandre Calheiros Aguiar       24,319                  (1)       24,319                (1)               (1)
Mário Roberto Opice Leão     155,466                  (1)     155,466                (1)               (1)
Patrícia Souto Audi       10,132                  (1)       10,132                (1)               (1)
Rafael Bello Noya       71,793                  (1)       71,793                (1)               (1)
Ramón Sanches Santiago         8,588                  (1)         8,588                (1)               (1)
Ramón Sanchez Díez       79,548                  (1)       79,548                (1)               (1)
Reginaldo Antonio Ribeiro       59,915                  (1)       59,915                (1)               (1)
Roberto Alexandre Borges Fischetti     162,860                  (1)     162,860                (1)               (1)
Robson de Souza Rezende       34,329                  (1)       34,329                (1)               (1)

  

Shareholders Common Shares Percentage of Outstanding Common Shares Preferred Shares Percentage of Outstanding Preferred Shares Percentage of Total Share Capital
Alessandro Tomao  63,152   (1)  63,152   (1)  (1)
Alexandre Grossmann Zancani  19,162   (1)  19,162   (1)  (1)
Amancio Acurcio Gouveia  103,438   (1)  103,438   (1)  (1)
Andre de Carvalho Novaes  27,857   (1)  27,857   (1)  (1)
Angel Santodomingo Martell  155,453   (1)  155,453   (1)  (1)
Antonio Pardo de Santayana Montes  102,937   (1)  102,937   (1)  (1)
Carlos Aguiar Neto  21,592   (1)  21,592   (1)  (1)
Carlos Rey de Vicente  285,702   (1)  285,702   (1)  (1)
Cassio Schmitt  93,099   (1)  93,099   (1)  (1)
Cassius Schymura  48,706   (1)  48,706   (1)  (1)
Celso Clemente Giacometti  1   (1)  0   (1)  (1)
Conrado Engel  580,768   (1)  580,768   (1)  (1)
Ede Ilson Viani  132,145   (1)  132,145   (1)  (1)
Felipe Pires Guerra de Carvalho  101,671   (2)  101,671   (2)  (2)
Germanuela de Almeida de Abreu  23,786   (1)  23,786   (1)  (1)
Gilberto Duarte de Abreu Filho  64,747   (1)  64,747   (1)  (1)
Igor Mario Puga  9,076   (1)  9,076   (1)  (1)
Jean Pierre Dupui  232,347   (1)  232,347   (1)  (1)
Jose Alberto Zamorano Hernandez  172,483   (1)  172,483   (1)  (1)
Jose Antonio Alvarez Alvarez  1   (1)  0   (1)  (1)
Jose de Paiva Ferreira  300,289   (1)  300,288   (1)  (1)
Jose Roberto Machado Filho  92,908   (1)  92,908   (1)  (1)
Juan Sebastian Moreno Blanco  234,370   (1)  234,370   (1)  (1)
Leopoldo Martinez Cruz  57,948   (1)  57,948   (1)  (1)
Luis Guilherme Mattosso de Oliem Bittencourt  32,631   (1)  32,631   (1)  (1)
Luiz Masagao Ribeiro Filho  110,996   (1)  110,996   (1)  (1)
Manoel Marcos Madureira  286,410   (1)  286,410   (1)  (1)

164180 

Table of Contents

 

Shareholders Common Shares Percentage of Outstanding Common Shares Preferred Shares Percentage of Outstanding Preferred Shares Percentage of Total Share Capital
Marcelo Malanga  26,044   (1)  26,044   (1)  (1)
Marcelo Zerbinatti  34,572   (2)  34,572   (2)  (2)
Marino Alexandre Calheiros Aguiar  13,012   (1)  13,012   (1)  (1)
Mario Roberto Opice Leao  110,942   (1)  110,942   (1)  (1)
Nilton Sergio Silveira Carvalho  33,804   (1)  33,804   (1)  (1)
Rafael Bello Noya  40,095   (1)  40,095   (1)  (1)
Ramon Sanchez Diez  51,934   (1)  51,934   (1)  (1)
Reginaldo Antonio Ribeiro  31,623   (1)  31,623   (1)  (1)
Roberto de Oliveira Campos Neto  454,935   (1)  454,935   (1)  (1)
Robson de Souza Rezende  38,240   (1)  38,240   (1)  (1)
Rodrigo Cury  21,118   (1)  21,118   (1)  (1)
Ronaldo Wagner Rondinelli  35,293   (1)  35,293   (1)  (1)
Sergio Agapito Lires Rial  303,314   (1)  303,314   (1)  (1)
Sergio Goncalves  26,949   (1)  26,949   (1)  (1)
Thomas Gregor ILG  72,514   (1)  72,514   (1)  (1)
Ulisses Gomes Guimaraes  27,210   (1)  27,210   (1)  (1)
Vanessa de Souza Lobato Barbosa  38,635   (1)  38,635   (1)  (1)
Employees  4,010,408   0.12%  4,015,096   0.12%  0.12%
Total  8,724,317       8,729,002         
Sergio Agapito Lires Rial     496,197                  (1)     496,197                (1)               (1)
Thomas Gregor Ilg       90,551                  (1)       90,551                (1)               (1)
Ulisses Gomes Guimarães       29,256                  (1)       29,256                (1)               (1)
Vanessa de Souza Lobato Barbosa     105,012                  (1)     105,012                (1)               (1)
Employees  3,907,014

0.11

 

  3,914,470

0.12

 

            0.12
Total  9,672,373   9,679,827  

 

 

(1)Owns less than 0.01%.

(2)No longer an officer.

 

Shares held by members of our board of directors, and our officers and members of our fiscal council 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––Employees ––B. Compensation.”

 

181 

Table of Contents

ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

 

7A. Major Shareholders

7A.Major Shareholders

 

As of April 5, 2018,March 6, 2020, Santander Spain directly and indirectly through its subsidiaries, Grupo Empresarial Santander, S.L. and Sterrebeeck B.V., owned approximately 89.5% 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 April 5, 2018.February 28, 2020.

 

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(1)  1,809,583   47.39%  1,733,643   47.11%  3,543,226   47.25%
Grupo Empresarial Santander SL  1,107,672   29.01%  1,019,645 �� 27.71%  2,127,317   28.37%
Banco Santander, S.A.  521,964   13.67%  519,268   14.11%  1,041,232   13.89%
Treasury Shares(2)  16,820   0.44%  16,701   0.45%  33,521   0.45%
Employees(3)  9,672   0.25%  9,679   0.26%  19,351   0.26%
Other minority shareholders  352,981   9.24%  380,897   10.35%  733,878   9.79%
Total  3,818,692   100%  3,679,833   100%  7,498,525   100%

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 (1)  1,809,583   47.39%  1,733,643   47.11%  3,543,226   47.25%
Grupo Empresarial Santander SL  1,107,672   29.01%  1,019,645   27.71%  2,127,317   28.37%
Banco Santander, S.A.  521,964   13.67%  519,268   14.11%  1,041,232   13.89%
Treasury Shares (2)  2,832   0.07%  2,832   0.08%  5,664   0.08%
Employees (3)  8,587   0.22%  8,592   0.23%  17,179   0.23%
Other minority shareholders  368,054   9.64%  395,853   10.76%  763,907   10.19%
Total  3,818,692   100.00%  3,679,833   100.00%  7,498,525   100.00%

 

(1)An affiliate within the Santander Group.

 

(2)On September 18, 2017, our shareholders approved the cancellation of 64,551,366 shares held in treasury (32,275,683 common shares and 32,275,683 preferred shares).

 

(3)Includes members of senior management. See “—E.“6E. Share Ownership.”

 

165 

TableFor further information of Contentsour ownership structure, see Item 18. Financial Statements of this form in notes 28 - Shareholders’ equity (letter a) and 46 - Related party transactions (letter c).

The

Regarding the total number of ADRs held by U.S. investors as of December 31, 2017,2019, is 194,699,689.161,153,083. The total number of Units held by U.S. investors as of December 31, 2017,2019, is 60,255,76458,273,917 (excluding Units held by The Bank of New York Mellon as depositary).

 

Significant Changes in Percentage Ownership of Principal Shareholders

 

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, 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.

On April 11, 2017, Qatar Holding LLC, (theor the “Selling Shareholder”)Shareholder,” participated in a secondary offering of 80,000,000 units, each of which is composed of one common share, no par value, and one preferred share, no par value, of Santander Brasil. Furthermore, the Selling Shareholder granted the international underwriters the option to purchase up to 12,000,000 additional ADSs of Santander Brasil within 30 days from, but not including, April 5, 2017, solely to cover over-allotments of ADSs, if any. The international underwriters exercised the option for 5,065,000 ADSs, and the settlement of took place on May 9, 2017.

 

On September 18, 2017, our shareholders approved the cancellation of 64,551,366 shares held in treasury, representing 32,275,683 common shares and 32,275,683 preferred shares. Such treasury shares corresponded, as of that date, to the totality of the shares then held in treasury.

 

On December 31, 2017,2018, we held 11,689,10626,633,004 shares in treasury, of which 5,844,53313,316,502 were common shares and 5,844,55313,316,502 were preferred shares.

 

On December 31, 2019, we held 34,466,574 shares in treasury, of which 17,233,287 were common shares and 17,233,287 were preferred shares.

182 

Table of Contents

On February 20, 2020, we held 35,356,574 shares in treasury, of which 17,678,287 were common shares and 17,678,287 were 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

7B.Related Party Transactions

 

We have a documentedrelated party transactions policy with respect to related party transactions, which requires that any related transactions be approved by the board of directors, whichdirectors. This is intended to ensure that all transactions covered by the policy are conducted based onin our interest and that any related party transactions are conducted on an arm’s length basis on terms substantially similar to those of our shareholders.comparable transactions in the market. The policy defines the power to approve certain transactions byas resting with the board of directors. The rules are also applied to allpolicy defines related transactions as those occurring between us and our shareholders, our subsidiaries, our employees, directors senior management,and officers as well as our subsidiaries’ employees, directors and subsidiaries.officers. 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, 2017,2019, borrowings and deposits from the Santander Group represented approximately 2%1% 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 on an arm’s-length basis, 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.

 

Information Technology Platform

 

We enterhave entered into certain agreements with some affiliates of the Santander Group (Ingeniería de Software Bancário(Santander Global Technology, S.L. (Spain), ISBAN S.A. (Chile), Produban Servicios Informáticos Generales S.L. (Spain), and ProdubanSantander Brasil Tecnologia LtdaS.A (Brazil) and Santander Global Technology Brasil Ltda. for the outsourcing of certain products and services relating to our information technology

166 

Table of Contents

platform, including software development hosting and information processing. maintenance, infrastructure and cybersecurity.

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 20172019 and 2016,2018, Santander Group affiliates received approximately R$697859 million and R$761586 million, respectively, for the products and outsourcing provided above. See “Item 4. Information on the Company—B. Business Overview— Technology and Commercial Transformation—Technological Infrastructure.”

 

Procurement Services

 

We have entered into agreements with Aquanima Brasil Ltda., an affiliate of the Santander Group, which offersprovides procurement services (sourcing, e-procurement, outsourcing and consultancy) to Santander Brasil. Volume aggregation betweenwith Santander Brasil and other client companies allow forits affiliates. We contract solutions in Trade negotiations, Tactical and Strategic Purchasing, Online Procurement, Supplier Management, Outsourcing and Consulting. Among the strategies used, we highlight possible joint purchases forof

183 

Table of Contents

materials and services between different customers and other economic groups, which allow greater efficiency in price negotiations and rationalization of different clients. The agreements entered into with Aquanima Brasil Ltda. were on an arm’s-length basis.services. We paid Aquanima Brasil Ltda. approximately R$2629 million in 20172019 and R$2527 million in 2016.2018.

 

Other Related Party Transactions

 

From time to time, we engageFor further information, see note “46 - Related party transactions (letter d)” in lending and borrowing transactions to fund“Item 18. Financial Statements,” which contains our operations and other miscellaneous transactionsaudited consolidated financial statements prepared in accordance with various companies ofIFRS as issued by 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, 2017 and December 31, 2016 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, 2017 and December 31, 2016. 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.IASB.

  As of December 31, 2017 As of December 31, 2016
  Parent(1) Jointly-controlled companies Other Related Party(2) Parent(1) Jointly-controlled companies Other Related Party(2)
  (in thousands of R$)
Assets  8,214,739   1,214,312   926,994   10,919,116   794,800   556,248 
Financial assets for trading, net  (173,065)  —   (74,873)  (184,304)  —   (400,570)
Santander Spain  (173,065)  —   —   (184,304)  —   — 
Abbey National Treasury Services Plc(2)  —   —   (71,672)  —   —   (91,828)
Real Fundo de Investimento Multimercado Santillana Crédito Privado(2)  —   —   (3,201)  —   —   (308,742)
Loans and amounts due from credit institutions–Cash and overnight operations in foreign currency  8,363,038   —   76,009   10,900,941   —   94,530 
Santander Spain(3) (5)  8,363,038   —   —   10,900,941   —   — 
Banco Santander Totta, S.A(2).  —   —   2,733   —   —   1,261 
Abbey National Treasury Services Plc(2)  —   —   71,751   —   —   92,118 
Bank Zachodni(2).  —   —   177   —   —   117 
Banco Santander, S.A. – México(2)  —   —   1,348   —   —   1,034 
Loans and advances to customers  132   9,661   925,858   —   136,354   862,288 
Zurich Santander Brasil Seguros S.A.  —   —   925,835   —   —   862,553 
Webmotors S.A.  —   9,661   —   —   136,354   — 
Abbey National Treasury Services Plc(2).  —   —   23   —   —   — 
Santander Spain(1).  132   —   —   —   —   — 
Santander Brasil Gestão de Recursos Ltda.  —   —   —   —   —   (265)
Loans and amounts due from credit institutions(1)  23,896   1,203,032   —   25,546   656,806   — 
Santander Spain  23,896   —   —   25,546   —   — 
Banco RCI Brasil S.A  —   1,203,032   —       656,806     
Other Assets  738   1,619   —   176,933   1,640   — 
Santander Spain  738   —   —   176,933   —   — 

167 

Table of Contents

  As of December 31, 2017 As of December 31, 2016
  Parent(1) Jointly-controlled companies Other Related Party(2) Parent(1) Jointly-controlled companies Other Related Party(2)
  (in thousands of R$)
Banco RCI Brasil S.A.  —   1,619   —   —   1,640   — 
Liabilities  (12,360,383)  (57,221)  (2,107,677)  (11,984,199)  (106,527)  (1,222,556)
Deposits of Brazil Central Bank and deposits of credit institutions  (387,937)  (47,423)  (1,862,058)  (327,466)  (40,202)  (980,702)
Santander Spain(4)  (387,937)  —   —   (327,466)  —   — 
Santander Securities Services Brasil DTVM S.A.  —   —   (300,074)  —   —   (208,059)
Santander Brasil Asset(2)  —   —   (16,766)  —   —   (12,079)
Banco RCI Brasil S.A.  —   (47.423)  —   —   (40,202)  — 
Real Fundo de Investimento Multimercado Santillana Credito Privado(2)  —   —   (1,543,752)  —   —   (757,874)
Banco Santander, S.A. – Uruguay(2)  —   —   (1,466)  —   —   (2,158)
Others  —   —   —   —   —   (532)
Customer Deposits  —   (9,798)  (222,473)  —   (66,325)  (189,794)
ISBAN Brasil S.A  —   —   (20,893)  —   —   (22,232)
Santander Securities Services Brasil Participações S.A.(2)  —   —   (71,947)  —   —   (52,484)
Produban Serviços de Informática S.A.(2)    —   —   (34,410)  —   —   (19,653)
Zurich Santander Brasil Seguros e Previdência S.A.(1)  —   —   (55,935)  —   —   (44,840)
Santander Brasil Gestão de Recursos Ltda.  —   —   (32,334)  —   —   (39,361)
Webmotors S.A.  —   (9,798)  —   —   (66,325)  — 
Others  —   —   (6,954)  —   —   (11,224)
Other financial liabilities – Dividends and interest on capital Payable  (3,992,820)  —   (1,132)  (3,794,130)  —   (16,494)
Santander Spain  (620,264)  —   —   (589,227)  —   — 
Grupo Empresarial Santander S.L. (1)  (1,264,470)  —   —   (1,201,612)  —   — 
Sterrebeeck B.V.(1)  (2,108,086)  —   —   (2,003,291)  —   — 
Banco Madesant – Sociedade Unipessoal S.A.  —   —   (1,132)  —   —   (1,075)
Santusa Holding, S.L.  —   —   —   —   —   (15,419)
Other payables  (2,050)  —   (22,014)  (2,954)  —   (35,566)
Santander Spain  (2,050)  —   —   (2,954)  —   — 
Santander Brasil Asset(2)  —   —   (69)  —   —   (70)
ISBAN Brasil S.A.(2)  —   —   237   —   —   (339)
Produban Servicios Informáticos Generales, S.L. (Produban Espanha)(2)  —   —   (905)  —   —   — 
Santander Securities Services Brasil DTVM S.A.  —   —   6,762   —   —   (4,430)
Zurich Santander Brasil Seguros e Previdência S.A.  —   —   (27,748)  —   —   (30,684)
Others  —   —   (291)  —   —   (43)
Debt instruments Eligible Capital(7)  (7,977,576)  —   —   (7,859,649)  —   — 
Santander Spain  (7,977,576)  —   —   (7,859,649)  —   — 

(*)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)7C.Santander Brasil is indirectly controlled by Santander SpainInterests of Experts and through its subsidiaries Grupo Empresarial Santander and S.L. Sterrebeeck B.V.Counsel

(2)Refers to the subsidiaries of Santander Spain.

(3)In December 31, 2017, refers to the cash of R$587,531 (2016 – R$582,571, and 2015 – R$1,866,683).

(4)As of December 31, 2017, refers to raising funds through operations transfers abroad amounted to R$387,937 (2016 - R$327,466 and 2015 - R$219,037), with maturity until November, 2018 and interest between 0.56% and 6.65% p.a.

(5)On December 31, 2017, refers to investments in foreign currency maturing on January 2, 2018 in the amount of R$7,384,335 (2016 - R$10,269,812 and 2015 - R$20,699,539) and interest of 1.43% p.a. held at Santander Brasil Establecimiento Financiero de Credito, Santander Brasil and our Grand Cayman Branch.

(6)Refers to issuances of Eurobonds of Santander Brasil’s 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 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.

168 

Table of Contents

  As of December 31, 2017 As of December 31, 2016
  Parent(1) Joint-controlled companies Other Related–Party(2) Parent(1) Joint–controlled companies Other Related–Party(2)
  (in thousands of R$)
Income  389,663   126,781   1,210,444   (798,022)  136,111   1,197,489 
Interest and similar income—Loans and amounts due from credit institutions  87,217   87,381   1,417   39,677   114,909   396 
Santander Spain  87,217   —   —   39,677   —   — 
Abbey National Treasury Services Plc  —   —   879   —   —   396 
Banco RCI Brasil S.A.(6)  —   87.381   -   —   114,909   — 
Cibrasec  —   —   538   —   —   — 
Interest expenses and similar charges—Deposits from customers  —   (4,486)  (41,026)  (4,192)  (26,996)  (49,420)
ISBAN Brasil S.A  —   —   (2,145)  —   —   (3,560)
Produban Serviços de Informática S.A.  —   —   (1,547)  —   —   (2,117)
Webmotors S.A  —   (4,486)  —   —   (26,996)  — 
Santander Brasil Gestão de Recursos Ltda.  —   —   (6,636)  —   —   (12,417)
Santander Spain  —   —   —   (4,192)  —   — 
Santander Cultural  —   —   (69)  —   —   (11)
Real Fundo de Investimento Multimercado Santillana Credito Privado  —   —   —   —   —   (31,097)
Santander Securities Services Brasil Participações S.A.  —   —   (6,190)            
Santander Securities Services Brasil DTVM S.A.  —   —   (24.344)            
Others  —   —   (95)  —   —   (218)
Interest expenses and similar charges—Deposits from credit institutions  (13,038)  (3,026)  (113,569)  (512)  (10,959)  (115,458)
Santander Spain  (13,038)  —   —   (512)  —   — 
Banco RCI Brasil S.A.(6)  —   (3,026)  —   —   (10,959)  — 
Real Fundo de Investimento Multimercado Santillana Credito Privado  —   —   (112,211)  —   —   (88,467)
Santander Securities Services Brasil DTVM S.A.  —   —   —   —   —   (20,979)
Santander Asset Management, S.A. SGIIC  —   —   (1,263)  —   —   (1,760)
Santander Securities Services Brasil Paticipações S.A.(2)  —   —   —   —   —   (4,119)
SAM Brasil Participações S.A.  —   —   (95)  —   —   (133)
Fee and commission income (expense)  (5,099)  14,999   2,453,179   5,334   20,133   1,955,255 
Santander Spain  (5,099)  —   —   5,334   —   — 
Banco RCI Brasil S.A.(6)  —   14,996   —   —   19,211   — 
Banco Santander Internacional  —   —   20,480   —   —   20,959 
Santander Securities Services Brasil DTVM S.A.  —   —   —   —   —   1,896 
Webmotors S.A.  —   3   —   —   922   — 
Zurich Santander Brasil Seguros S.A.  —   —   295,508   —   —   218,773 

169 

Table of Contents

  As of December 31, 2017 As of December 31, 2016
  Parent(1) Joint-controlled companies Other Related–Party(2) Parent(1) Joint–controlled companies Other Related–Party(2)
  (in thousands of R$)
Zurich Santander Brasil Seguros e Previdência S.A.  —   —   2,134,755   —   —   1,711,138 
Others  —   —   2,436   —   —   2,489 
Gains (losses) on financial assets and liabilities (net) and Exchange differences (net)  592,919   31,913   (39,534)  (613,168)  39,024   267,983 
Santander Spain  592,919   —   —   (613,168)  —   — 
Real Fundo de Investimento Multimercado Santillana Crédito Privado  —   —   (79,480)  —   —   257,475 
Abbey National Treasury Services Plc  —   —   23,843   —   —   38,274 
Banco RCI Brasil S.A.(6)  —   31,913   —   —   39,024   — 
Santander Securities Services Brasil DTVM S.A.(2)  —   —   (26,102)  —   —   (16,038)
Santander Investment Securities Inc.  —   —   (13,492)  —   —   (15,115)
Zurich Santander Brasil Seguros e Previdência S.A.  —   —   52,981   —   —   — 
Zurich Santander Brasil Seguros S.A.        
  —   —   1,788   —   —   — 
Others  —   —   928   —   —   3,387 
Administrative expenses and amortization  (50,271)  —   (1,028,750)  —   —   (840,739)
Banco Santander, S.A. – Spain  (50,271)  —   —   —   —   — 
ISBAN Brasil S.A.  —   —   (337,161)  —   —   (290,430)
Produban Serviços de Informática S.A.  —   —   (242,191)  —   —   (209,253)
ISBAN Chile S.A.  —   —   (23)  —   —   (26)
Ingeniería de Software Bancario, S.L.  —   —   (70,385)  —   —   (42,519)
Produban Servicios Informáticos Generales, S.L  —   —   (46,494)  —   —   (21,525)
TECBAN—Tecnologia Bancária S.A.  —   —   (262,046)  —   —   (213,194)
Aquanima Brasil Ltda.  —   —   (25,638)  —   —   (24,557)
Santander Securities Services Brasil Participações S.A.(2)  —   —   (42,603)  —   —   (35,882)
Others  —   —   (2,209)  —   —   (3,353)
Others Administrative expenses—Donation  —   —   (21,273)  —   —   (20,528)
Santander Cultural  —   —   (3,513)  —   —   (2,737)
Fundação Santander  —   —   (1.837)  —   —   (3,452)
Instituto Escola Brasil  —   —   (873)  —   —   (939)
Fundação Sudameris  —   —   (15,050)  —   —   (13,400)
Debt Instruments Eligible Capital  (222,065)  —   —   (225,161)  —   — 
Santander Spain  (222,065)  —   —   (225,161)  —   — 

(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.

 

170 

Table of Contents

ITEM 8. FINANCIAL INFORMATION

 

8A. Consolidated Statements and Other Financial Information

Consolidated Financial Statements

8A.Consolidated Statements and Other Financial Information

 

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;contracts;

 

·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.

 

184 

Table of Contents

As of December 31, 2017,2019, our judicial and administrative proceedings classified as probable loss risk (tax, labor and civil) and legal obligation amounted to approximately R$14.19.2 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$20.127.6 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 obligationobligations 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

171 

Table of Contents

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 with a favorable decision applicable 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 with a favorable decision applicable to Santander Brasil. The appeal related to PIS, as well as the appeals submitted by other companies in the group, are pending. As of December 31, 2017, such claims amounted to R$3,501 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, 2017, the amount related2019, such claims amounted to this injunction totaled R$9053,756 million which isand are fully provisioned.

 

As of December 31, 2017,2019, our probable loss risk for tax litigation amounted to approximately R$2.4 billion6,277 million fully provisioned and our possible loss risk for tax litigation amounted to approximately R$18.7 billion.24,708 million.

 

The main judicial and administrative proceedings to which probable loss risk assessment relates are:

 

·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, 2017,2019, amounts related to these proceedings totaled R$238225 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, 2017,2019, amounts related to these proceedings totaled R$265282 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 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(Conselho Administrativo de Recursos Fiscais)Fiscais), or the “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, 2017 totaled R$1,432 million. Based on the assessment of legal counsel, a provision of R$715 million was made to cover the probable risk of loss in these proceedings.

185 

Table of Contents

lawsuit requesting the cancellation of both tax assessments. The lawsuit was judged unfavorably and a decision on an appeal is currently pending judgment in court. The amount as of December 31, 2019 totaled R$1,489 billion. Based on the assessment of legal counsel, a provision of R$743 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, 20172019 the amount related to this challenge was approximately R$4361,517 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, 2019 amounts related to these infraction notices totaled approximately R$6,587 million.

172 

Table of Contents

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, 2017 amounts related to these infraction notices totaled approximately R$3,929 million.

 

·IRPJ and CSLL – Capital Gain. The Brazilian Federal Revenue Service issued a tax assessment against Santander Seguros S.A. (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 awaiting a decision by the CARF. 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, 20172019 the amount related to this proceeding was approximately R$292400 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 obtainedWe are awaiting a judgment in our favor in the first instance. The Federal Revenue Service filed an appeal before CARF 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.CARF. As of December 31, 20172019 the amounts related to this proceeding totaled approximately R$1.3 billion.1,416 million. 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, 20172019 the amount related to this proceeding was approximately R$609634 million.

186 

Table of Contents

 

·Unrecognized Compensation. We are currently engaged in legal and administrative proceedings with the Brazilian federal revenue service relating to the failure to ratify certain tax offsets with credits due to overpayment or undue payment. As of December 31, 20172019 the amount related to these proceedings was approximately R$2,2304,182 million. The risk of loss is classified as possible.

·Tax on Services (ISS) - Financial Institutions - We are currently party to proceedings relating to the payment of ISS to various municipalities with respect to various revenues arising from operations that are usually not classified as services. On December 31, 2019 the amounts related to these proceedings totaled approximately R$3,032 million.

 

Accession toJoined Certain Tax Repayment Programs

 

In August 2017 we joined the Special Tax Regularization Program (Programa Especial de Regularização Tributária), or PERT. The program allows for certain tax debts to be repaid in installments. In connection with our participation in this program, we are repaying in installments certain amounts due as a result of lawsuits and administrative proceedings relating to corporate income tax and social security contributions for the periods from 1999 to 2005 in a total amount of R$492 million in January 2018 (taking into account the reduction arising from our participation in the program). A payment of R$191.9 million was due in August 2017 and a further payment of R$299.7 million was due by January 2018, both of which we have made within the prescribed time limits. As a result, we recorded expenses in an amount of R$364 million (after tax) in the third quarter of 2017.

·In August 2017 we joined the PERT. The program allows for certain tax debts to be repaid in installments. In connection with our participation in this program, we are repaying in installments certain amounts due as a result of lawsuits and administrative proceedings relating to corporate income tax and social security contributions for the periods from 1999 to 2005 in a total amount of R$492 million in January 2018 (taking into account the reduction arising from our participation in the program). A payment of R$191.9 million was due in August 2017 and a further payment of R$299.7 million was due by January 2018, both of which we have made within the prescribed time limits. As a result, we recorded expenses in an amount of R$364 million (after tax) in the third quarter of 2017.

 

In October 2017 we joined the Incentive Payment Programs and Installments (Programa de Parcelamento Incentivado) created by the cities Rio de Janeiro and São Paulo. The program allows for certain tax debts to be repaid in installments. In connection with our participation in this program, we are repaying in installments certain amounts due as a result of lawsuits and administrative proceedings relating to ISS for the periods from 2005 to 2016 in a total amount of R$293 million as of December 31, 2017. As we had made provisions for these losses, we registered income of R$435 million as a result of the reversal of certain provisions, net of tax effects, in an amount of R$96 million.

·In October 2017 we joined the Incentive Payment Programs and Installments (Programas de Parcelamento Incentivado) created by the cities of Rio de Janeiro and São Paulo. The programs allow for certain tax debts to be repaid in installments. In connection with our participation in these programs, we are repaying in installments certain amounts due as a result of lawsuits and administrative proceedings relating to ISS for the periods from 2005 to 2016 in a total amount of R$293 million as of December 31, 2017. As we had made provisions for these losses, we registered income of R$435 million as a result of the reversal of certain provisions, net of tax effects, in an amount of R$96 million.

 

173 

Table of Contents

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, 2017,2019, our probable loss risk of labor-related litigation amounted to R$3.43.3 billion, which amount has been provisioned. Our possible loss risk of labor-related litigation amounted to R$28.7220.2 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 envisagedcontemplated in the entity’s by-lawsbylaws of Banespa in the event that the entityBanespa obtained a profit and that the distribution of this profit were approved by the boardBoard of directors.Directors. The bonus was not paid in 1994 and 1995 since the bank didBanespa had not makemade 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 Labor Court and the High Employment Court ordered the bankSantander Brasil, as successor to Banespa, to pay this half-yearly bonus in September 2005 andfor the bank filed an appeal againstperiod from 1996 to the present. On March 20, 2019, a decision withfrom the High EmploymentFederal Court (“TST”of Justice (Supremo Tribunal Federal or “STF”) and, subsequently, with the STF. The TST confirmed the judgment against the bank, whereas the STF rejected the extraordinary appeal filed by Santander Brasil. We have brought a rescission action to revert the bankdecision 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 bankmain proceedings and AFABESP. Only the appeal lodged by the bank has been allowed leave to proceed and will be decided upon by the STFsuspend procedural enforcement. While there is an injunction 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.force authorizing

187 

Table of Contents

certain steps of the execution any acts of seizure of assets or freezing of funds are prohibited until the judgment present is delivered in ongoing rescission action. Our legal advisors have classified the risk of loss as probable. The current court decision does not define a specific amount to be paid by the defendants (this would only be determined once a final decision is issued and the enforcement process has begun).

IGPDI

 

·A claim was filed in 2002 in Federal Court 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. In Provisional Execution calculations were presented by Santander Brasil 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 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.claim.

Abusive Targets Class Action - 2017

The labor Federal Public Prosecutor’s Office (Ministério Público Federal) filed a class action against Santander Brasil alleging that our management of our employees is in appropriate. Specifically, the class action alleges that we apply constant pressure to meet abusive, excessive and continuously increased goals, make excessive and inappropriate demands, impose excessive workloads resulting in physical and psychological strain, make constant threats of dismissal for failure to meet targets, have a staff too small to deal with the existing workload, run an organizational model based on stress and humiliation, and that, as a result, we have allegedly caused irreparable damage to employees’ physical and mental health as a result of which the public social security system has suffered losses of more than R$90 million due to the 7,677 accident-related and social security benefits granted to employees from 2010 to 2015.

The Federal Public Prosecutor’s Office’s claim demands that we refrain from subjecting employees to abusive targets, to reduce the target levels, refrain from increasing targets by more than 10% per year, institute a quarterly targeting system, and refrain from adopting targets for operational areas. There is also a claim for the payment of indemnity for collective moral damages in an amount not below R$460 million and that we be prohibited from contracting with the government for 10 years. The Federal Public Prosecutor’s Office is also demanding that a fine of R$500 thousand be set for any breach by us of the obligations imposed on us following the judgment.

The lower court ruling prohibited submitting employees to abusive targets. It also determined that the targets should be reviewed only annually and their annual variation should be subject to collective bargaining between Santander Brasil and the unions. The ruling also prohibited setting targets for employees in the back office and control departments and required payment of indemnity for collective moral damages in the amount of R$274.4 million, in addition to imposition of certain daily fines. Finally, the ruling determined that we are required to implement a new experimental target program under the terms provided for in the decision from January 1, 2020. We estimate the risk of loss as remote.

 

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:categories: (i) actions requesting the review of contractual terms and conditions or seeking monetary adjustments, including the alleged effects of implementation of certain

188 

Table of Contents

economic government plans (as described below); (ii) actions arising from loan agreements; (iii) execution actions; and (iv) actions seeking damages. As of December 31, 2017,2019, our probable loss risk in connection with civil litigation liabilities amounted to R$2.5 billion, which has been provisioned in full and our possible loss risk in connection with civil litigation liabilities amounted to R$1.31,5 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.

 

174 

Table of Contents

Economic Plans

 

Like the rest of the banking system, we have been the subject of claims from customers mostlyand 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. The claims relate to the adjustments to the calculation of inflation applied on the amounts held in (i) savings deposit accounts (depósitos em conta poupança); (ii) time deposits (CDBs); and (iii) court deposits (depósito judicial).

In April 2010, the High Court of Justice, (“STJ”)or “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 reduceclaimants. There are no new claims in connection with this matter due to the numberstatute of actions brought and the amounts claimed in this connection. As regards the substance of the matter, thelimitations. The decisions issued to date have been adverse for the banks, although some proceedings have been brought atto the STJ and the STF with which the matter isare 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”“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 wereare stayed until the court issues a final decision ondecision. Although 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. TheIn December 2017, the Brazilian Attorney-General’s Office (Advocacia-Geral da União), the Brazilian Central Bank, the Brazilian Consumer Protection Institute (Instituto Brasileiro de Defesa do Consumidor), the Brazilian Savers’ Association (Frente Brasileira pelos Poupadores) and the Brazilian Federation of Banks (Federação Brasileira dos Bancos) have signed an agreement to resolve existing disputes over the impact of the economic plans.plans on the amounts held by claimants in savings deposit accounts. The settlement discussions did not address the full value of the payments, and focused on setting the amount that would be paid to each person according to the relevant balance at the plan date. The total value of the payments will depend on the number of persons adhering, as well as on the number of savers who have proved in court the existence of the account and the balance on the date of the anniversary of the change in indices. The terms of agreement were negotiated between the parties and submitted to the STF, which approved the terms of the agreement on March 1, 2018.2018 (for further details about the agreement please see the specific section “Cartilha Planos Econômicos” on the website of Brazilian Banks Federation, which is not incorporated herein by reference). All existing claims were suspended for two years in which period claimants must decide whether or not they will adhere to the agreement.

In November 2018, the STF handed down a decision recognizing the leading court status (repercussão geral) of an appeal discussing the matter of understated inflation in the monetary restatement of court deposits and determined that procedures related to this matter will be stayed until a final decision is reached by the court.

 

Insilene Indústria de Silenciosos do Nordeste Ltda.

 

This is a judicial claim filed against our wholly-owned subsidiary Banco Bandepe S.A. (“Bandepe”), or “Bandepe,” in connection with a loan agreement entered into between Bandepe and Insilene Indústria de Silenciosos do Nordeste Ltda. (“Insilene”), or “Insilene”. According to the complaint, Bandepe never provided the loan provided forforeseen in the agreement, as a result of which Insilene towent into bankruptcy. In this judicial process, the judge ruled in favor of Insilene and such decision has already become unappealable.may no longer be appealable. The

189 

Table of Contents

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. Bandepe filed an appeal to the STJ to change the form of liquidation to a form which is more favorable to Bandepe, since Insilineon the basis that Insilene could have foreseen the damages. We estimateThis appeal was successful and the liquidation phase will be restarted. After such decision and considering the changes in the form of liquidation, the risk of effective financial loss was reclassified as possible.remote.

 

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”)or 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 Court of Justice reversed the decision of the lower court as a result of which the case will be retried following the expert phase. We estimate the risk of loss as possible.

Similar proceedings have been brought by the Federal General Accounting Office (Tribunal de Contas de União- TCU) and the CVM, to determine the liability for losses caused to pension funds as a result of their investments in the Fund. In the CVM proceeding, pension funds are PETROS - Fundação Petrobras de Seguridade Social and Postalis – Instituto de Previdência Complementar and in the TCU proceeding only the liability for losses caused to POSTALIS pension fund is under discussion.. In both proceedings, we have presented our defense.

 

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, or “Camargo Corrêa”)a,” in connection with the association agreement entered into for the implementation of the control and administration of Banco Geral do Comércio S.A. (“BGC”), or “BGC,” and its affiliates, (“Association Agreement”).or the “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 and which were only were revealeddisclosed 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. There is still a possibility of appealing from Camargo Correa. We estimate the risk of loss aspossible possible.

.IBAMA

 

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 us alleging that we had financed the production of corn in a protected area. The amount of the fine was set at R$47.5 million (approximately U.S.$15 million). According to IBAMA, financing seed production in protected areas is considered an environmental infraction due to the potential environmental damage which it may cause. We filed an administrative defense on November 9, 2016, stating that we had not financed production in a protected area, given that the financing agreement with the property owner had no connection with the 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, we believe that the chance of loss in the administrative proceedings is possible. If we were to lose the administrative proceedings, we may seek a review of the administrative finding by a court.

190 

Table of Contents

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 these 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 particular period, depending upon, among other factors, the size of the loss or liability imposed and our level of income for that period.

 

175 

Table of Contents

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 werehave not been 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, a 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 the fine, and the 2002 fiscal year, which was already being subject to the statute of limitation. Because of these two items, the assessment was reduced to R$1.8 billion. In, December 2017, that decision was reformed in favor of the Brazilian Federal Revenue Service, and Santander Brasil will fileService. Concurrently with the administrative proceeding, through “Popular Action,” the administrative proceeding was returned to the CARF for a lawsuit to request the cancellation of tax assessment.new judgment. In June 2010, the Brazilian Federal Revenue Service issued two other two 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, but onethe proceedings were partially unfavorable. We have filed claims for cancellation of the infraction notice was judged unfavorably, ending the administrative discussion. The other one is still pending final judgment.these tax assessments. 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 pendingand this was accepted. We are currently awaiting final judgment.decision. 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 aforementionedThrough this transaction, we acquired all the shares of Banco Real and AAB Dois Par throughby providing the delivery toshareholders of these entities’ shareholders of newly-issuednewly 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

191 

Table of Contents

acquisition cost of the shares delivered in the exchange. We filed an appeal against the infraction notice before the CARF which was dismissed in March 2018, in a split decision, settled by the casting vote of the Chairman, dismissed the appeal filed by Santander Brasil.2019. This decision will be subject to clarification action and further appeal at the CARF. Based on the advice of our external legal counsel, that the position taken by the Brazilian tax authorities is not correct, thatand there are arguments for appeal against the infraction notice and that, asnotice. As a result, the risk of loss is considered to be 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.

176 

Table of Contents

On December 8, 2016, the General SuperintendencySuperintendent of the Brazilian Anti-Trust Authority (Superintendencia Geral do Conselho Administrativo de Defesa Econômica), or “CADE,”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. On January 8, 2018, we filed an administrative defense stating our understandings that there is no evidence that we were involved in the alleged conduct. We expect that these investigations will not have an adversea significant financial impact on it.us.

 

According to reports in the news media and other unofficial sources, the Brazilian Federal Public Prosecutor’s Office (“MPF”)The MPF has submitted to a federal judge in Sao Paulo a request for the indictmentcharged one of several individuals, including an executive officer of Santander Brasil,our officers in connection with the alleged bribery of a Brazilian tax auditor to secure favorable decisions in tax cases resulting in a claimed R$83 million (approximately U.S.$25 million) tax credits benefit to Santander Brasil. Pursuantus. On October 23, 2018, the officer was formally indicted and asked to Brazilian law,present his defense. On November 5, 2018 the request for indictment must be approved by the judgeofficer in orderquestion presented his defense. The proceedings is currently in course. We are not a party to proceed. As of the date of this annual report neither Santander Brasil nor the relevant executive officer has been officially served with the proposed indictment or is aware of whether the indictment request has been accepted or rejected. Santander Brasil is cooperating fully withthese proceedings. We have voluntarily provided information to the Brazilian authorities and hashave relinquished the benefit of certain tax credits to which the allegations relate in order to show its good faith. If the indictment were to be approved, our business could suffer reputational harm.

 

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.

 

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-annualsemiannual 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-annualsemiannual 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.

 

However, Brazilian Corporate Law allows however, our shareholders to suspend dividends distribution if our board of directors reports toat 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

192 

Table of Contents

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.

 

177 

Table of Contents

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 werebeing 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 Caceis Brasil Distribuidora de Títulos e Valores Mobiliários S.A. (currently the corporate name of 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 inreais 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 immediately, the amount of U.S. dollars payable to holders of ADRs may be adversely affected by depreciationchanges in the exchange rate of the Brazilian currency.real with the U.S. dollar.

 

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 Appendix I of our audited consolidated financial statements for the years ended December 31, 2017, 20162019, 2018 and 2015.2017.

 

 For the year ended December 31, For the year ended December 31,
 2017 2016 2015 2019 2018 2017
 (in millions of R$) (in millions of R$)
Net Income under Brazilian GAAP  7,996   5,522   6,983   14,088   12,166   7,996 
(-) Legal Reserve  391   276   349   704   608   391 
(=) Amounts Available for distribution  7,605   5,246   6,634   13,384   11,558   7,605 
Mandatory Dividends – 25.0%  1,901   1,312   1,658   3,346   2,890   1,901 
Interest on Shareholder’s Equity  3,800   3,850   1,400   4,010   4,080   3,800 
Dividends  2,500   1,400   4,800   6,790   2,520   2,500 
Total (Interest on Shareholder’s Equity and Dividends)  6,300   5,250   6,200   10,800   6,600   6,300 
Dividends distributed in excess of the Mandatory Dividend  4,399   3,938   4,542   7,454   3,710   4,399 

 

History of Payment of Dividends and Interest Attributable to Shareholders’ Equity

 

In 2017,2019, we declared dividends and interest on shareholders’ equity in the gross amount of R$6,300 million, R$1,50010,800 million, of which R$1,000 million was paid on May 26, 2017, August 25,April 29, 2019, R$1,000 million on July 31, 2019, R$1,000 million on October 26, 201730, 2019 and R$4,8007,800 million which was paid on February 26, 2018.The21, 2020.

193 

Table of Contents

The table below shows the amounts paid to our shareholders in the periods indicated.

 

  For the year ended December 31,
  2019 2018 2017 2016 2015
  (in millions of R$, except per share figures)
Dividends  6,790   2,520   2,500   1,400   4,800 
Interest attributable to shareholders’ equity  4,010   4,080   3,800   3,850   1,400 
Total  10,800   6,600   6,300   5,250   6,200 
Dividends and interest on capital per 1,000 shares                    
Common shares  1,378.87   841.68   776.17   666.21   784.90 
Preferred shares  1,516.76   925.85   853.79   732.83   863.39 

178 

Table of Contents

  For the year ended December 31,
  2017 2016 2015 2014 2013
  (in millions of R$, except per share figures)
Dividends  2,500   1,400   4,800   840   2,100 
Interest attributable to shareholders’ equity  3,800   3,850   1,400   690   300 
Total  6,300   5,250   6,200   1,530   2,400 
Dividends and interest on capital per 1,000 shares                    
Common shares  776.17   666.21   784.90   193.26   302.15 
Preferred shares  853.79   732.83   863.39   212.59   332.36 
8B.Significant Changes

 

8B. Significant Changes

There has been no significant change since the date of our last audited financial statements.statements, except for the subsequent events related to the sale of Superdigital, described in “Item 4. Information on the Company—History and Development of the Company—Important Events—Sale of equity stake in Super Pagamentos e Administração de Meios Eletrônicos S.A.” and to the acquisition of the remaining 40% of non-controlling interest held by Bosan Participações in Banco Olé Consignado, in each case as referred to in note 48 to our audited consolidated financial statements in "Item 18. Financial Statements." 

 

ITEM 9. THE OFFER AND LISTING

 

9A. Offering and Listing Details

9A.Offering and Listing Details

 

Market Price and Volume Information

 

On September 18, 2009, our boardBoard of directorsDirectors approved the implementation of the global public offering,Global Public Offering, which included the issue of 525,000,000 Units (each representing, at that date, 55 common shares and 50 preferred shares), which were all registered, without par value, free and clear of any liens or encumbrances, consistingencumbrances. This offering consisted 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 ADSs registered with the SEC under the Securities Act.

 

On October 6, 2009, the Global Public Offering priced shares at R$23.50 per unit and U.S.$13.40 $13.40 per ADR. The Units have been traded on the B3 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 BDRsBrazilian depositary receipts or ADRs representative of Santander Spain’s common shares.

 

On October 30, 2014, the Brazilian Exchange Offer and the 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). AlsoFurther, as a result of the offer in Brazil, our Units were delisted from the Level 2 Segment and are now traded at the basic listing segment of B3.

 

The following table shows our outstanding publicly traded common shares and preferred shares as of April 5, 2018:February 28, 2020:

 

Free Float B3 NYSE B3 NYSE
Common shares  185,410,370   185,703,811   204,840,333   152,473,083 
Preferred shares  213,214,785   185,703,811   232,644,747   152,473,083 
Total  398,625,155   371,407,622   437,485,080   304,946,166 

194 

Table of Contents

Units, Common and Preferred Shares tradedTraded on B3

The table below sets forth the high, low and last daily sales prices inreais for our shares on the B3 for the periods indicated.

 

  Reais per share – SANB3 (Common Shares)
  High  Low  Last 
2014 Annual(1)  8.50   0.10   6.70 
2015 Annual  10.80   6.10   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 
2017 Annual  22.92   13.01   18.49 
1st Quarter  22.92   16.00   16.13 
2nd Quarter  17.60   13.01   14.75 
3rd Quarter  17.40   14.30   15.10 
4th Quarter  20.03   14.90   18.49 
2018 Annual  24.60   14.06   22.22 
1st Quarter  23.00   16.91   23.00 
2nd Quarter  24.60   14.16   15.05 
3rd Quarter  21.05   14.06   19.40 
4th Quarter  23.72   19.01   22.22 
2019 Annual  28.99   20.30   25.45 
1st Quarter  26.65   20.49   21.94 
2nd Quarter  23.71   20.50   23.00 
3rd Quarter  24.60   20.30   23.77 
4th Quarter  28.99   22.27   25.45 
Last 6 Months  24.40   20.70   23.77 
September 2019  28.99   22.27   26.05 
October 2019  27.24   23.99   23.99 
November 2019  28.00   23.80   25.45 
December 2019  26.90   21.41   21.41 
January 2020  22.33   20.36   21.15 
February 2020  24.40   20.70   23.77 

179 

Table of Contents

  Reais per share – SANB3 (Common Shares)
  High Low Last
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 
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 
2017 Annual  22.92   13.01   18.49 
1st Quarter  22.92   16.00   16.13 
2nd Quarter  17.60   13.01   14.75 
3rd Quarter  17.40   14.30   15.10 
4th Quarter  20.03   14.90   18.49 
Last 6 Months  22.49   14.90   21.10 
October 2017  18.50   14.90   16.50 
November 2017  17.90   16.20   16.38 
December 2017  20.03   16.33   18.49 
January 2018  21.83   16.91   18.25 
February 2018  22.49   19.50   21.20 
March 2018  23.00   20.57   23.00 
April 2018 (through April 5, 2018)  23.20   22.42   22.42 

 

(1)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. This 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.

 

  Reais per share – SANB4 (Preferred Shares)
  High Low Last
2014 Annual(1)  8.18   0.10   6.02 
2015 Annual  7.92   5.52   7.23 
2016 Annual  10.59   5.40   10.05 
1st Quarter  8.00   5.40   7.40 
2nd Quarter  8.27   7.20   8.09 
3rd Quarter  9.64   7.86   8.53 
4th Quarter  10.59   8.57   10.05 
2017 Annual  14.04   9.31   13.22 
1st Quarter  13.79   9.31   11.68 
2nd Quarter  11.60   9.80   10.08 
3rd Quarter  13.58   9.99   12.50 
4th Quarter  14.04   12.16   13.22 
2018 Annual  22.89   13.50   20.53 
1st Quarter  16.95   13.53   16.89 
2nd Quarter  17.57   13.50   13.90 
3rd Quarter  17.30   13.71   16.25 
4th Quarter  22.89   15.97   20.53 
2019 Annual  24.73   19.32   23.53 
1st Quarter  24.73   20.26   21.70 
2nd Quarter  23.44   20.59   22.70 
3rd Quarter  23.85   19.32   21.80 
4th Quarter  23.56   19.59   23.53 

  Reais per share – SANB4 (Preferred Shares)
  High Low Last
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 
2016 Annual  10.59   5.40   10.05 
1st Quarter  8.00   5.40   7.40 
2nd Quarter  8.27   7.20   8.09 
3rd Quarter  9.64   7.86   8.53 
4th Quarter  10.59   8.57   10.05 
2017 Annual  14.04   9.31   13.22 
1st Quarter  13.79   9.31   11.68 
2nd Quarter  11.60   9.80   10.08 
3rd Quarter  13.58   9.99   12.50 
4th Quarter  14.04   12.16   13.22 
Last 6 Months  16.95   12.16   15.52 
October 2017  13.49   12.16   12.30 
November 2017  13.35   12.20   12.21 
December 2017  14.04   12.21   13.22 
January 2018  15.75   12.93   13.15 
February 2018  16.95   14.80   15.20 
March 2018  16.89   15.34   16.89 
April 2018 (through April 5, 2018)  17.50   17.10   17.20 
Last 6 Months  23.85   19.32   23.53 
September 2019  22.14   19.98   21.80 
October 2019  22.50   20.10   20.80 
November 2019  21.18   19.59   20.05 
December 2019  23.56   19.89   23.53 
January 2020  25.35   20.30   20.50 
February 2020  21.19   19.60   20.26 

 

(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.

 

180195 

Table of Contents

  B3
  Units – SANB11
  High Low Last
  R$ per share
2014 Annual  16.49   10.84   13.46 
2015 Annual  17.99   12.21   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 
2017 Annual  36.13   22.75   31.88 
1st Quarter  36.13   27.42   27.65 
2nd Quarter  29.24   22.75   25.00 
3rd Quarter  29.55   24.94   27.64 
4th Quarter  33.21   27.23   31.88 
2018 Annual  45.19   28.02   42.70 
1st Quarter  40.00   31.62   39.91 
2nd Quarter  40.80   28.02   29.30 
3rd Quarter  38.35   28.80   35.71 
4th Quarter  45.19   35.01   42.70 
2019 Annual  50.68   40.35   49.52 
1st Quarter  50.68   41.14   43.97 
2nd Quarter  46.77   41.28   45.46 
3rd Quarter  48.36   40.35   45.33 
4th Quarter  50.17   42.97   49.52 
Last 6 Months  46.40   41.11   45.33 
September 2019  49.87   42.97   47.06 
October 2019  48.59   43.90   44.10 
November 2019  50.17   44.00   49.52 
December 2019  51.58   41.65   42.07 
January 2020  43.42   40.19   41.19 
February 2020  46.40   41.11   45.33 

  B3
Units – SANB11
  High Low Last
  R$ per share
2013 Annual  16.07   12.64   13.98 
2014 Annual  16.49   10.84   13.46 
2015 Annual  17.99   12.21   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 
2017 Annual  36.13   22.75   31.88 
1st Quarter  36.13   27.42   27.65 
2nd Quarter  29.24   22.75   25.00 
3rd Quarter  29.55   24.94   27.64 
4th Quarter  33.21   27.23   31.88 
Last 6 Months  38.88   27.23   36,57 
October 2017  31.83   27.23   28.61 
November 2017  30.87   28.27   28.90 
December 2017  33.21   28.57   31.88 
January 2018  37.20   30.98   31.46 
February 2018  38.88   34.22   36.60 
March 2018  40.00   35.95   39.91 
April 2018 (through April 5, 2018)  40.43   39.65  39.70 

 

(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. Bonus Shares and Reverse Share Split (Inplit).

 

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 tradedTraded 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.

 

  NYSE
ADR – BSBR
  High Low Last
  U.S.$ per ADR
2013 Annual  8.08   5.71   5.97 
2014 Annual  7.18   4.48   5.02 
2015 Annual  5.98   2.96   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 

181196 

Table of Contents

 

  NYSE
ADR – BSBR
  High Low Last
  U.S.$ per ADR
2017 Annual  11.75   6.86   9.67 
1st Quarter  11.75   8.67   8.82 
2nd Quarter  9.40   6.86   7.53 
3rd Quarter  9.48   7.48   8.74 
4th Quarter  10.00   8.36   9.67 
Last 6 Months  11.93   8.36   11.22 
October 2017  9.89   8.60   8.69 
November 2017  9.43   8.36   8.75 
December 2017  10.00   8.74   9.67 
January 2018  11.72   9.78   9.99 
February 2018  11.93   10.36   11.52 
March 2018  12.05   10.96   12.02 
April 2018 (through April 5, 2018)  12.11   11.82   11.87 

  NYSE
  ADR – BSBR
  High Low Last
  U.S.$ per ADR
2014 Annual  7.18   4.48   5.02 
2015 Annual  5.98   2.96   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 
2017 Annual  11.75   6.86   9.67 
1st Quarter  11.75   8.67   8.82 
2nd Quarter  9.40   6.86   7.53 
3rd Quarter  9.48   7.48   8.74 
4th Quarter  10.00   8.36   9.67 
2018 Annual  12.25   7.20   8.72 
1st Quarter  12.05   9.78   9.99 
2nd Quarter  12.11   7.20   11.91 
3rd Quarter  10.20   7.32   7.38 
4th Quarter  12.25   8.65   8.72 
2019 Annual  13.72   9.68   12.13 
1st Quarter  13.72   10.44   11.23 
2nd Quarter  12.17   10.05   11.87 
3rd Quarter  12.85   9.68   10.89 
4th Quarter  12.45   10.27   12.13 
Last 6 Months  12.85   9.68   12.13 
September 2019  11.16   9.85   10.89 
October 2019  12.45   10.43   11.74 
November 2019  11.98   10.27   10.39 
December 2019  12.36   10.44   12.13 
January 2020  12.68   9.67   9.70 
February 2020  10.11   9.20   9.38 

 

9B. Plan of Distribution

9B.Plan of Distribution

 

Not applicable.

 

9C. Markets

9C.Markets

 

Our Units, common and preferred shares are traded on the B3. The regulation of Brazilian securities markets which affects suchthese securities is describeddiscussed 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 by the Brazilian Corporate Law, as well as the CMN and the Brazilian Central Bank.

 

Under Brazilian Corporate Law, a corporation is either publicly held (companhia aberta) or privately held (companhia fechada) and unlisted. All publicly-heldpublicly 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 publicly held company may also be traded privately.

 

In Brazil, 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-counter markets, in which the transactions are not supervised by self-regulating entities authorized by the CVM.supervised. In either

197 

Table of Contents

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 B3, a company must apply for registration with the CVM and B3.

 

Trading on the B3 (current name of BM&FBOVESPA)

 

The B3 currently gathersfacilitates 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.

 

182 

Table of Contents

The trading of securities on the B3 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 B3 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 B3.

 

In addition, in order to maintain control over the fluctuation of the B3 index, the B3 has adopted a “circuit breaker” system pursuant toin which trading sessions may be suspended for a period of 30 minutes, one hour, or a time to be defined by B3, whenever the B3 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 B3, the trade is settled in threetwo 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 thirdsecond 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 B3, which handles the multilateral settlement of both financial obligations and transactions involving securities. According to the regulations of the B3, 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 B3 custody system. All deliveries against final payment are irrevocable.

 

In order to keep our securities listed on the B3, we are required to comply with the provisions of the B3’s Issuer Manual (Manual do Emissor), which establishes technical and operational procedures and criteria applicable to companies that have securities for listed on the B3. The most up to dateup-to-date version of the B3’s Issuer Manual became effective as of January 1, 2018.

 

Corporate Governance Practices

 

In 2000, B3 introduced three special listing segments, known as Levels 1 and 2 of Corporate Governance and Novo Mercado, which were aimed at fostering a secondary market for securities issued by Brazilian companies listed on the B3, and it prompted such companies to follow good corporate governance practices. The listing segments are designed for the trading of shares issued by companiesthat 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 the Level 2 Segment and are now traded at the basic listing segment of B3.

 

198 

Table of Contents

Within the B3, we are a part of one sustainability index: ISE. Thethe ISE (Índice de Sustentabilidade Empresarial – Entrepreneurial Sustainability Index) which is a reference for socially responsible investments in Brazil. To be part of the portfolio, currently composed byof 40 companies, the company participates in a careful process to evaluate itscompany’s performance is evaluated 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 CodeIt sets forth corporate governance related principles, guidelines and actions applicable for publicly-heldpublicly held companies and establishes a “comply or explain” enforcement model. On June 8, 2017, following a public consultation on the implications of the Governance Code for Brazilian companies, the CVM issued Normative Ruling No. 586 introducing the necessary changes to the existing securities regulation in order to make these consistent with the provisions of the Governance Code.

 

The new rules established by new CVMthis ruling apply to companies (i) which are registered as category “A” issuers, (ii) whose securities have been traded on the B3 since January 1, 2018, and (iii) which, on the publication date of CVM Instruction 586,had at least one of their securities included in the Brazil Index 100 – IBrX-100 (Índice Brasil 100) or within the Bovespa Index – IBOVESPA (Índice Bovespa). We fulfill all three of these criteria and are therefore subject to the new CVM rules.

 

183 

Table of Contents

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, ofenacted on September 29, 2014, (“CMNor “CMN Resolution 4,373”),4,373,” which revokedsuperseded 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 makingto make investments in local currency with funds held in their foreign bank accounts, of the non-resident investor, or with bills of payment denominated inreais 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 through an 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 offor 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, foreignForeign 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.”

 

199 

Table of Contents

Since March 30, 2015, CMN Resolution 4,373 also deals with investments of foreign capitalscapital in Brazil through Depositary Receipts, (“DRs”),or “DRs,” and revokedsuperseded 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 such ADRs for the underlying Units, the holder will be entitled to (i) sell the Units on the B3 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 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.Units.

 

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 involverequire the needUnits to change the Unitsbe converted into shares.

 

184 

Table of Contents

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 federal 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— Other Applicable Laws and Regulations Foreign Investment in Brazilian Financial Institutions.”

 

9D.Selling Shareholders

9D. Selling Shareholders

Not applicable.

9E.Dilution

Not applicable.

9F.Expenses of the Issue

 

Not applicable.

 

9E. DilutionITEM 10. ADDITIONAL INFORMATION

200 

Table of Contents

10A.Share Capital

 

Not applicable.

 

201 

9F. ExpensesTable of the IssueContents

 

Not applicable.

10B.By-Laws

 

ITEM 10. ADDITIONAL INFORMATION

10A. Share Capital

Not applicable.

10B. By-Laws

We describe belowBelow we provide 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-heldpublicly 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), (ii) carry out foreign exchange transactions; (iii) manage investment portfolios; (iv) any other transaction that would be allowed by law and regulations in force; and (v) participate, as shareholder or quotaholder, in other companies.

 

Managers’ Role and Conflict of Interests

 

Brazilian Corporate Law imposes on the members of the boardBoard of directorsDirectors and officersOfficers the duty of diligence during the performance of their functions, as well as the duty of loyalty to the company, besides prohibiting the membermembers of the boardBoard of directorsDirectors and the officersOfficers 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

185 

Table of Contents

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.

 

As we are a financial institution, we are subject to certain prohibitions established by the Banking Reform Law, as amended by Law 13,506 of November 13, 2017, or “Law 13,506/17,” as well as related regulations. For more information in relation to such prohibitions, see “Item 4B. Information on the Company—Regulation and Supervision—Principal Limitations and Obligations of Financial Institutions.”

 

In addition to these provisions, Article 10 of our By-Laws provides that board members of the Board of Directors and officersOfficers 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 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 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,meetings, however, 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

202 

Table of Contents

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.

 

AsIn regards to the election of members of the boardBoard of directors,Directors, the Brazilian Corporate Law sets forth that, when members of the boardBoard of directorsDirectors 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,following parties have the right to elect one member of our boardBoard of directors in a separate vote. Directors:

·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, in a separate vote.

Nevertheless, these rights can only be exercised by the holders of shares thatwho 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;

 

·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.

 

186 

Table of Contents

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 thatchanges which would have

203 

Table of Contents

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.shareholders.

 

Brazilian Corporate Law also sets forth that the following shareholders’ rights cannot be repealed or modified 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 linked to the Units, and their 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 ServicesCaceis 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 thename. 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 sentof which are retained by the holders of the Units, as well as the court authorizations or transfer orders.custodian. 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 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 ifwhen 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.

 

187 

Table of Contents

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.

 

204 

Table of Contents

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 the 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

(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 the number of cancelled shares from each Unit holder’s account and proceed with the automatic cancellation 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 the shares which 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;

(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. In this way, the accounts will maintain a ratio of one common share and one preferred share issued by us and represented by Units, and the custodian will deliver to holders the shares which 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 issueissuance 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.

 

Unit holders will be entitled to receive any shares issued as a result of our spin-off, consolidation or merger.

 

General Meetings

 

At our duly convened and installed general meetings, our shareholders are authorized to resolvemake resolutions on business relatedmatters relating to our activities and to take themake decisions they deemdeemed to be in our best 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 boardBoard of directorsDirectors and fiscal council Fiscal Councilare, as a general rule, elected at annual general meetings unless for an exceptional reason they have to be elected at an extraordinary general meeting.

 

188205 

Table of Contents

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 to at least to athe 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 other two mass circulation newspapernewspapers in São Paulo, where the B3 is located. Our call notices offor 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 ourOur 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 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.

 

206 

Table of Contents

Responsibility for Calling General Meetings

 

It is usually the responsibility of our boardBoard of directorsDirectors 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 boardBoard of directorsDirectors fail to call a meeting intended to install a fiscal council,Fiscal Council, within eight days of the request being made; and (iv) the fiscal councilFiscal Council (if already installed), if our boardBoard of directorsDirectors fails to call the annual general meeting; and the fiscal councilFiscal Council can also call an extraordinary general meeting whenever there are serious or urgent reasons.

 

189 

Table of Contents

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-heldpublicly 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-heldpublicly held companies.

 

Since January 1, 2017, the rule became applicable to all publicly-heldpublicly 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, since the beginning of 2017, we have put 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, (“CVMor “CVM Instruction 358”),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 boardBoard of Directors, Executive Officers and members of our fiscal councilFiscal 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 toby us.

 

Among other matters, our policy establishes that the persons subject to itour policy shall refrain from buying or selling, by themselves or via theirthrough 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:derivatives, including:

207 

Table of Contents

 

(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 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.

 

190 

Table of Contents

Our policy also establishes that our controlling shareholders, officers, and members of our boardBoard of directors,Directors, members of our fiscal councilFiscal 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 feasiblemanaging 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-ownedwholly 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 3three general indexindexes 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 10

208 

Table of Contents

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 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.

 

191 

Table of Contents

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 boardBoard of directorsDirectors 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 boardBoard of directorsDirectors to approve the purchase of our own shares. In any of the following circumstances, the decision will only become effective upon prior approval byat 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

209 

Table of Contents

subsidiaries and affiliated companies. This limit does not apply to reimbursed shares, or forfeited shares, andor 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-heldpublicly held company. We may also purchase or issue put or call options on our shares.

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

 

On September 18, 2017, our shareholders approved the cancellation of 64,551,366 shares held in treasury, representing 32,275,683 common shares and 32,275,683 preferred shares. Such treasury shares corresponded, as of that date, to the totality of the shares then held in treasury.

 

On November 1, 2017,2019, our boardBoard of directorsDirectors approved the Unit repurchase program to cover the acquisition of up to 38,717,20437,256,072 Units or ADRs, representing 38,717,20437,256,072 common shares and 38,717,20437,256,072 preferred shares or ADRs by us or our branch in Cayman, corresponding to approximately 1.03%1% of the totality of our corporate capital. The repurchase program ends on November 5, 2018.4, 2020.

 

192 

Table of Contents

Cancellation of Registration as a Publicly-HeldPublicly Held Company

 

We may cancel our registration as a publicly-heldpublicly 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 a suspensive or resolutory condition, that the acquirer undertakesis obligated to make a public offer to acquire all the shares held by our other shareholders, both common and preferred,preferred. This is further pursuant to the conditions and deadlines required by the current legislation, so as to ensureensuring 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 controlcontrolling power over us.

 

Requirement for Disclosure of Information

 

As a publicly-heldpublicly 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-heldpublicly held companies issued by the CVM, including CVM Instruction 358, provide that we must disclose a number of items ofboth 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).

 

210 

Table of Contents

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 7seven business days of the date of the respective change. This document contains complete information regarding us including,and, in general, includes the matters addressed in this annual report.

 

CVM Instruction 457, of July 13, 2007, as amended, (“CVMor “CVM Instruction 457”)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;to English; or (ii) disclose our financial statements or consolidated financial statements in accordance with IFRS as issued by the IASB, accompanied by the independent auditors’ review report.

 

193 

Table of Contents

Disclosure of Information aboutAbout Trading by Our Managers and Related Persons

 

Our officers,Officers, members of our boardBoard of directors, fiscal council,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,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 B3 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 ofon September 17, 2015, it also became mandatory to provide the CVM and B3 within the same time period the information related to the securities traded by us, our entities and affiliated companies.

 

Disclosure of Information about ourAbout Our Shareholders with Relevant Interest

 

CVM Instruction 358, as amended, 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 forwardedsent 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.

 

211 

Table of Contents

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 officerInvestor Relations Officer is responsible for sending this information to CVM and to B3 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 ourmade by a controlling shareholder, of aby the general shareholders’ meeting or ofby any of our management bodies, or by 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 officerInvestor Relations Officer is responsible for the disclosure of any material facts to the market.

 

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.

 

194 

Table of Contents

10C. Material Contracts

10C.Material Contracts

 

For the two years immediately preceding the publication of this annual report,report. we were not a party to any material contract outside the ordinary course of business.

 

10D. Exchange Controls

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, (theor 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

212 

Table of Contents

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 inreais 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.

 

The Brazilian Congress is currently debating a bill to amend Law 4,131 and other laws that govern the Brazilian foreign exchange market. See “Item 4. Information on the Company—B. Business Overview—Regulation and Supervision—Foreign Exchange Market”.

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.

 

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 inreais but issued abroad.

 

195 

Table of Contents

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;

 

213 

Table of Contents

·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.

 

CVM Instruction No. 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

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.

 

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.

 

196 

Table of Contents

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.

 

214 

Table of Contents

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 – TJLPTLP), 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%50% 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%50% 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%15%, or 25.0%25% 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.

 

197 

Table of Contents

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, a progressive tax rate will be applied as provided for in Law No. 13,259/16, as follows: (i) at a rate of 15% for the portion of the gain up to R$5 million, (ii) at a rate of 17.5% for the portion of the gain that exceeds R$5 million but does not exceed R$10 million, (iii) at a rate of 20% for the portion of the gain that exceeds R$10 million but does not exceed R$30 million, and (iv) 22.5% for the portion of the gain that exceeds R$30 million; and

215 

Table of Contents

 

·If the Non-Resident Holder is located in a Tax Haven, the tax rate will be 25.0%25%.

 

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”)or “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%15%. 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%15% 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.

 

(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 following progressive rates: (i) 15% for the portion of the gains up to R$5 million, (ii) 17.5% for the portion of the gain that exceeds R$5 million but does not exceed R$10 million, (iii) 20% for the portion of the gain that exceeds R$10 million but does not exceed R$30 million, and (iv) 22.5% for the portion of the gain that exceeds R$30 million for a Non-Resident Holder not located in a Tax Haven or up to 25.0%25% for a Non-Resident Holder located in a Tax Haven, for the year of 2017.Haven.

 

As mentioned above, in this case, as from January 1, 2017, althoughAlthough 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%25%.

 

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.

 

198216 

Table of Contents

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 with the Brazilian Central Bank 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 with the Brazilian Central Bank 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 the following progressive rates: (i) 15% for the portion of the gains up to R$5 million, (ii) 17.5% for the portion of the gain that exceeds R$5 million but does not exceed R$10 million, (iii) 20% for the portion of the gain that exceeds R$10 million but does not exceed R$30 million, and (iv) 22.5% for the portion of the gain that exceeds R$30 million), 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 aforementioned progressive rates previously noted or, in the case of a Tax Haven resident, 25.0%25%.

 

As mentioned above, in this case, from January 1, 2017 pursuantPursuant 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 ResidentNon-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%25%.

 

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.

 

Tax on Foreign Exchange Transactions (IOF/Exchange)

 

The Tax on Foreign Exchange Transactions, (“IOF/Exchange”)or “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);zero;

 

217 

Table of Contents

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;

 

199 

Table of Contents

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.returns 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%25%. 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%1% 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”)or “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 domiciledresidents 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%.

 

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;

 

218 

Table of Contents

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;

 

200 

Table of Contents

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 shares by vote or value;

 

x.persons holding ADRs or units in connection with a trade or business conducted outside the United States; and

 

xixi.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”),or 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.

 

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.

219 

Table of Contents

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

201 

Table of Contents

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 thereaisreceived, 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 anyreais 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 ofreais 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.

 

220 

Table of Contents

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. 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 purchase of units and the IOF/Bonds Tax on the deposit 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.

 

202 

Table of Contents

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, including 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, 2017.2019. 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.

 

221 

Table of Contents

If we were to be treated as a PFIC in any taxable year in which a U.S. holderHolder held units or ADRs, a U.S. holderHolder 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.

 

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.

 

203 

Table of Contents

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 payments of 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. However, regulations proposed in 2018 (the preamble to which specifies that taxpayers are permitted to rely on them pending finalization) eliminate the withholding requirement on payments of gross proceeds of a taxable disposition. The United States has entered into an intergovernmental agreement regarding the implementation of FATCA with Brazil, (theor the “IGA”). For further information, see “Item 4. Information on the Company—B. Business Overview—Regulation and Supervision—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

10F. Dividends and Paying Agents

Not applicable.

10G.Statement by Experts

 

Not applicable.

 

222 

Table of Contents10G. Statement by Experts

Not applicable.

10H.
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 which we have 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 B3. The address of the B3 website is http://www.bmfbovespa.com.br.

 

10I. Subsidiary Information

10I.Subsidiary Information

 

Not applicable.

 

ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Overview

 

To manage the risks of our operations, inIn 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.to ensure a consistent worldwide approach

 

In addition, committees headedled by senior management are responsible for controlling risks by overseeing credit approval and risk control, taking into accountcompliance with the parameters and limits of exposure policies defined and approved by the Bank’s board of directors.

 

204 

Table of Contents

The Control department and Risk Consolidation department provided their respective 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.management. 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 managementsuch 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 differentThe type of information and highlights in each report varies depending on the intended audiences within senior management, whethersuch as the Santander Group, its financial entities, or its foreign branches, depending on the kind of information and of each type of report highlights.branches. Information maycan be transmitted to senior management either through our intranet risk reporting tool, throughby e-mail or bythrough live presentations.

 

Information, analyses and decisions are also disseminated through the channels described below, fostering communication among all areas within Santander Brasil and withinof the risk management process:organization:

 

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;

 

223 

Table of Contents

iv.e-mail;

 

v.video and teleconferences with Santander Spain; and

 

vi.risk committees, including the Executive Risk Committeeexecutive risk committee for Brazil and the RCC Risk control committee.

 

Information is prepared in an effort to improvewith the goal of improving risk management and is classified as standard information or non-standard information.into two groups:

 

i.Standard information: includesthis information and reportsis generated on a regular basis and with fixed content, subject to revisions, which isrevision, made available to senior management for differentselect target areas, depending on the type of information included in eachthe report. This information isThe reports are used to facilitate knowledge about the risk for which the Risk Management department is responsible, including credit use, instrument valuation and the results, generated, in addition toas well as 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. Standard information delivered to our senior management is intended to facilitate the understanding of all risks for which the risk management department is responsible.

 

ii.Non-standard information: this includes presentations and other information not included in the reports above 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.request. When the request for certain information becomes more regular, such reporting becomes standard and is generated automatically.integrated into automated “Standard information”.

 

iii.The content of eachEach report fits within one of two fundamental bases:varied by the nature of the information and its frequency. The nature of the information preparedprovided 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 analyzeaddressed the liquidity and market risks,risk (trading and solvency risks. Information related to liquidity and market riskbanking book) which 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.

 

205 

Table of Contents

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 consequencesknown 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 bydepends on 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;portfolio. Also includes LCR 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. liquidity buffer calculation.

 

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.

224 

Table of Contents

 

Monthly information:

 

i.liquidity and market risk: facilitates the analysis of the current situation of different activities,activity, including structural and interest rate risks; it also includes a detailed analysis of alternative measures, stress scenarios and stress scenarios;

ii.solvency risk: facilitates an assessment of the current situation in different segments, compared to the budgeted situationsshort, long and an analysis of the causes of deviations; also introduces credit rating with a basis of analysis;concentration liquidity metrics.

 

Monthly information is generally more detailed than weekly information.

 

Risk Management Committees

 

The following table describes our principal credit and marketthe main risk management committees in Brazil the(which are responsible for credit decisions and for ongoing control of credit risk matters), including their responsibilities, members and membersfrequency of each such committee and the frequency with which such committees meets.meetings.

 

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.areas;

·CEO

Weekly
 ·     Approves the risk appetite that will be proposed to the board of directors of Santander Brasil;

·Vice President Executive OfficersOfficer (Chief Risk Officer; Legal; GCB and Corporate) that are member of the Executive Committee.

Officer).		 
 ·      Manage exposures from different clients, economic sectors and types of risks, including, among others, the following functions:

206 

Table of Contents

·      Approve risk, including among others, fixed      Vice President Executive Officer of Legal and variable income securing, customer limits and limits / products for Treasury, asset and liability committee, restructuring proposals and payment arrangements;Corporate Affairs

 
 ·      Approve risk proposals for credit and market operations, including, among others, underwriting operations of fixed and variable income, customer limits for Treasury products, ALCO limits, debt restructuring proposals and payment arrangements;

·      Executive Superintendent of Wholesale’s Risks

·       Handle general issues related to market risk, cross-border limits, country risk, global banking operations, enterprises and retail clients;market risk approvals;·      Vice-President Executive Officer of Corporate and Investment Banking 
 ·      Adopt and, if necessary, validate, portfolio sales or individual asset-credits;·      Vice President Executive Officer of Corporate 
 ·      Approve internal risk regulations;
·      Approveregulations as well as changes in risk policies with an impact on revenue, margin or provision·      Vice President Executive Officer of Private Banking and Wealth

225 

Table of Contents

      expenses on the Strategic Business Plan as well as on any related matters;Management 
 ·      Authorize management tools, improvement initiatives, follow up on projects and any other relevant activities related to risk management;  
 ·      Approve policiesthe policy and standards for methodologiesof methodological models and validate their internal validations;effectiveness;  
 ·      Gather knowledge      Be aware of 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;  

207 

Table of Contents

 ·      Provide information to the board of directors and to the executive committee the information and assistance, if needed, in order to execute the tasks inassigned to risk management that were assigned to it by applicable law, the by-laws, the board of directors´ rules of procedure and the regulation of the Risk Executive Committee; and  
 ·      Approve the creation, modification and termination of other committees or decision bodies itsand their regulations and delegate to those committees or people authorization inempowerment on decision-making and risk management.

226 

Table of Contents

Committee

Responsibilities

Members

Meeting Frequency

  
Risk Control Committee·      Oversee the Risk Identification and Assessment (RIA). exercise;

·Chief Financial Officer

Chief Risk Officer

Biweekly
 ·      Conduct a full segment and regular follow up of all risks, checking if the risk profile is set in accordance with the risk

·     Chief Risk Officer

·     Chief IT Officer

        appetite, the commercial and strategic plan and the budget approved by the board of directors.directors;

Chief IT Officer

Executive Superintendents for Risk Architecture and Risk Control

Executive Superintendent for T&O Retail.

 
 ·      Carry out      Conduct an independent and periodicalperiodic control ofreport on risk management activities, which include:includes:

Vice President·      Executive Officer for FinanceSuperintendents of Risk Architecture and Strategy.

Chief Compliance Officer

Risk Control		 
 ·      Full risk profile view of the different businesses, including among others, benchmarking of the main competitors of the bankBank and monitoring of key strategic projects.projects;

·Chief Internal Audit

Chief Data Officer

Client Services Quality Officer

 
 

·      Detect and report alerts on relevant risks as well as possible breaches or other significant aspects regarding risks.

·      Monitor the observance of appetite and risk policies, advising the board risk committee on these issues.issues;

·      Monitor all relevant aspects of capital management and its impacts.

·      Vice President Executive Officer of Finance and Strategy.

·      Chief Compliance Officer

 

208 

Table of Contents

 ·      Support and assist the board in carrying out stress tests, in particular valuing the scenarios and assumptions to be used inand the results of these tests valuing the results and analyzing the measures proposed by the risk function as a consequence of the results.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) to the board.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.audit;

  
 

·      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 board of directors´ rules of procedure and the regulation of the Risk Control Committee – RCC.RCC;

·       Approve the operation of hierarchically lower-risk control committees and their respective regulations;

  

 

Our executive credit committee makes

227 

Table of Contents

The Executive Risk Committee and Risk Control Committee, which are described above in detail, make 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 Executive Committee. The main responsibilities of the executive credit committeeExecutive Risk Committee and Risk Control Committee include defining our level of risk tolerance, monitoring our loan portfolios and market conditions, as well as following up on any recommendations made by the Brazilian Central Bank. The executive credit committeeThey also raisesraise any matters to our board of directors that exceed the authority of the committee. Each of our risk management committees hashave certain powersauthority 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.

209 

Table of Contents

Credit Risk

 

The Santander GroupGroup’s risk management model is based on a prudent management, driven by the risk managementappetite defined by the unit and approved by the definition of risk tolerance by our board of executive officers.headquarters. We operate within the risk management culturelimits of the Santander Group following theGroup's risk management guidelines of our board of executive officers, theand Brazilian Central Bank regulations, and international best practices,in order to protect and optimize capital and promote profitability. One of our credit risk management principles is independence among our business areas, which providesproviding sufficient autonomy to accomplish appropriatefor proper risk management. Another important characteristic of our credit modelrisk management is the direct involvement of our senior management in the decision-making process through credit committees. Our credit approvalrisk management process, particularly theespecially new loan approval of new loans and risk monitoring, is structured according to our classification of customerscustomer and products between ourproduct classifications, and is divided into retail and wholesale lending operations.lending.

 

Retail Lending

 

In retail banking, credit requests made by individuals are analyzed by a credit approval system, applying various types of processes dependingwhich assigns a credit rating based on our policies and approved scoring model, which takes into account the credit history of the individual, the individual’s relationship with us and the type of credit requested. For standard credit

These requests approval is generally made atcan come from one of our many service channels, including branches, basedinternet banking, mobile applications and ATMs.

We use two distinct scoring models depending on an automatic, standardized process. When the customer’s request is submitted for credit approval, we collect relevant credit information fromphase of 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(the “application” phase 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.“behavior” 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

228 

Table of Contents

already had a relationship with us for a period established by our risk management policies.policies (i.e., during the “ongoing” phase). 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)businesses), the method used to grant approval is determined based on credit risk approval process can involve an automated scoringlimits developed internally, as well as the customer´s creditworthiness. These approval methods include system based on credit policies, and/automation, 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 preliminarymanual individual analysis, alsowhich generates a credit risk rating based on our internal models. Additional information, such as the characteristics of the financing product being offered, including related terms and conditions, andas well as collateral granted in connection therewith, is also taken into account as part ofin the approval process.

 

Pre-approved limits on lines of credit for a particular individualboth individuals or an SMESMEs are granted based on the creditworthiness, and size as determined according toby 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 thatwhich define the rules and responsibilities of the memberseach member of eachthe 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 ofby the relevant authorized organizational body through applying the relevant scoring model and individualized analysis by the relevant authorized organization body.analysis.

 

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$70680 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.

(1) For individuals, the maximum value is R$200,000. For SMEs the maximum is R$500,000.

 

(3)Members of the higher Risk Committee include, among others, the officers of Wholesale, Retail, Market Risk, Recovery and representatives of the Risk departments.

(2) Members of risk decision-making centers include superintendents and other representatives of the risk area.

 

210 

Table(3) Members of Contentsthe higher Risk Committee include, among others, the Chief Executive Officer of the group, the officers of Wholesale, Retail, Market Risk, Recovery and representatives of the Risk and Compliance Departments.

Wholesale Lending

 

With respect to our wholesale customers, the approval process is determined forIn Wholesale banking, each customer taking into accountis analyzed on an individual basis. Commercial and risk areas analyze the customer’s financial condition as well as other relevant information pertainingclient's needs and indicators, checking profitability, creditworthiness and adequacy in the risk appetite metrics of Santander Group RAS – Risk Appetite Statement, to determine and take the proposed limit for approval.

Wholesale risk appetite metrics and limits are set annually and tracked monthly through reports sent to the customer. Santander headquarters. These limits are defined considering the risk appetite of the Group, in line with current regulations (Brazilian Central Bank and European Central Bank), and the expectations of the commercial area. Individual and sectoral portfolio concentrations are monitored to mitigate the risk of the portfolio.

All credit requests byfrom our wholesale customers must be approved by the competenta credit committees.committee, which are outlined below:

 

Authorization Required

Limit

Territorial CommitteeUp to R$6050 million
Superior and High Risk CommitteeUp to R$150170 million
Wholesale CommitteeUp to R$300 million
Executive Risk CommitteeUp to R$600340 million

 

229 

Table of Contents

Credit Monitoring

 

Credit lines to retail banking SME customers are reviewed on a weekly, basis. Credit lines to retail bankingwhereas individual clients are systematically reviewed, systemically, on a daily, basis, based on athe client’s credit rating. This process allows for improvements in the credit exposure offor customers who have presentedpresent good credit quality. SpecificFurther specific early warnings are automatically generated in the case of thewhen deterioration of a customer’s credit quality. Inquality is identified. When this case, with the identification of the client’s solvency problem,occurs, a process to reduce credit risk designed toand prevent default is implemented. For example, early warnings are automatically generated for SMEs, andthis includes monthly monitoring of 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,area. These processes are implemented, with the aimgoal 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, forWhen any specific concern in regard to the credit quality of a certain customer, we use a system of customer monitoring system known as SCAN (Santander CostumerCustomer Assessment Note), withwhich allows possible actions to be taken under the following categories: “monitoring,” “intensive monitoring,” “proactive monitoring” or “block and exit.” 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

LowSmaller than 2.1%
Medium-lowBigger than 2.1% and Smaller than 4.1%
MediumBigger than 4.1% and Smaller ofthan 6.3%
Medium-highBigger than 6.3% and Smaller than 10.0%
HighBigger 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—InternalInformation —Assets —Internal Risk Rating.”

 

Recovery

 

Our business recovery area is responsible for all of our non-performingnonperforming 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 developthen defines, implements and monitors strategies for more effective recovery. related to these portfolios, seeking to ensure maximum recovery subject to applicable Brazilian law and regulation.

Customers with greater probability of payment are classified as low risklow-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.

 

211 

Table of Contents

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 are overdue more than 60 days.

230 

Table of Contents

 

·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-performingnonperforming 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 reducereducing the impact on us.

 

Assets and Liabilities Committee

 

Our asset and liability management strategy is defined by our assets and liabilities committee (ALCO), which operates under the strict guidelines and procedures established by the Santander Group. Members of the committee include our Chief Executive Officer, Chief Risk Officer,  Chief Executive Officer, Vice President Executive Officer for- Finance and Strategy, Vice President Executive Superintendent ofOfficer - CFO, Director - Financial Management and the Chief Economist. The assets and liabilities committee establishes strategies, policies and procedures with the objective of managing our balance sheet and risk structure.

 

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 wheredue to 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)and Luxembourg branches), 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 thereal within established limits.

 

212 

Table of Contents

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 isrelates to the risk derived from thepotential negative effect of potential changechanges in commodity prices.

231 

Table of Contents

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 changesvolatility in the volatility of a number of risk factors, including volatility of interest rates, exchange rates, share prices and 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:

 

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 makersparticipants or institutional investors, the execution of large volumes of operations, market instability andor 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 toreceived as a result of the prepayment will 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 B3. Our principal derivative instruments include interest rate swaps, interest

213 

Table of Contents

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 haveAs no credit derivativesmarket exists in Brazil, as there is no market forwe do not use credit derivatives in Brazil.

 

232 

Table of Contents

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 arisesthe above identified areas, 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 summarizeoutlines the principal market risks tomain source of risk for which we are exposed.

On the basis of the origin of the risk to which we are exposed, our activities are classified as follows:exposed:

 

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, securitiescommodities and foreign exchange products, we are exposed to interest rate, equity price and foreign exchange ratetheir respective market risks. We are also exposed to volatility when non-linear derivatives are used.

 

Non-trading book (banking/structural)

 

The non-trading book is constitutedconsists 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 thereal 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 thereal (hedging(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 intoinvest in and maintain. The risk committee monitors our overall performance in light ofrelation 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, andas well as 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 restare built on five basic pillars, which we believe are vital for correct management of market risks:

 

i.Market and structural risk measurement, analysis and control;

 

214 

Table of Contents

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

 

233 

Table of Contents

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.

 

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.

 

215 

Table of Contents

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.

234 

Table of Contents

The principal limits include:

 

Trading limits

 

i. VaR limits;

 

i.ii.limits of equivalent positions and/or nominal;

 

ii.iii.sensitivity limits to interest rates;

 

iii.iv.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.

 

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.for short, long and concentration metrics and considering BAU and Stress scenario.

 

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 between the 1% percentile and the 1% weighted percentile of the simulated PnL distribution. The first VaR figure gives the same weight to all observed values, and the second one applies an exponential declining factor to give a higher weight for the most recent observations. 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.

 

216235 

Table of Contents

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 methodologymarket risk 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.scenarios. 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 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 eventualfuture 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 ofwith 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 twenty-one days.portfolios.

 

·Analysis of results arising from the interest rate scenarios established by Circular No. 3,876 of stress test: We apply threethe Brazil Central Bank: there are six shock scenarios for the performance of interest rates: six standard deviations upMVE sensitivity 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 revenuetwo for the year.NIM sensitivity.

 

·Liquidity risk: Liquidity risk is associated with our capacityability 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.

 

217236 

Table of Contents

·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 20172019

 

Our risk performance with regard to trading activity in financial markets between 20152017 and 2017,2019, measured by daily VaR (measured at a 99% of confidence level, over a one day time frame), is shown in the following graph.

 

 

During 2017,2019, VaR was highly volatile,presented a low volatility, fluctuating between R$25.020.8 million and R$267.385.4 million (on March 21 2019, when it was announced the arrest of Michel Temer), with an average of R$41.9 million. The 2017 average VaR was R$72.8 million, reaching peak levels in mid-May due to disclosure in the press regarding certain alleged corruption at a major Brazilian meat producing corporation, and in August and September due to increase of interest rates as a result of expected improvements in Brazil’s fiscal outlook. The histogram below shows the distribution of average risk in terms of VaR in 20172019 where the accumulation of days with VaR levels between R$5030 million and R$8060 million can be observed in 56.6%88.9% of the distribution.

 

218237 

Table of Contents

 

VaR by Risk Factor

 

The minimum, maximum, average and year-end 20172019 VaR values by risk factor were as follows:

 

 2016 2017 2018 2019
 Period End Low Average High Period End Period End Low Average High Period End
 (in millions of R$) (in millions of R$)
Trading VaR  37.7   25.0   72.8   267.3   28.0   46.5   20.8   41.9   85.4   20.9 
Diversification Effect  (10.0)  3.8   (11.5)  (129.4)  (10.7)  (23.8)  1.7   (11.4)  (32.8)  (10.7)
Interest Rate VaR  34.7   20.8   52.5   297.1   23.1   33.9   14.7   31.0   66.0   16.7 
Equity VaR  2.7   1.6   11.8   24.3   8.1   11.6   2.0   8.6   29.2   7.4 
Foreign Exchange VaR  10.3   2.5   19.9   51.3   7.5   24.6   1.6   13.8   31.3   7.5 
Commodities VaR  0.2   0.0   0.0   0.4   0.0 

 

The average VaR for 20172019 was R$72.841.9 million, with most of the risk due to interest rate positions. Santander Brasil was relatively conservative in equity and commodities trading activity.

 

The average VaR of the three main risk factors, interest rates, equity prices and exchange rates, were R$52.531.0 million, R$11.88.6 million and R$19.913.8 million, respectively, with a negative average diversification effect of R$11.511.4 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).

 

219238 

Table of Contents

 

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.instruments.

 

The chart below shows the VaR Vega performance of our structured derivatives business in 2015, 20162019, 2018 and 2017, which2017. In the most recent year, this figure fluctuated around an average of R$2.844.5 million. In general, the periods with higher VaR Vega levels are related to episodes of significant increases in market volatility.

 

 

220 

Table of Contents

Scenario analysis

 

Different stress test scenarios were analyzed during 2017.2019. A correlation break scenario generated the results presented below.

239 

Table of Contents

 

Worst Case Scenario

 

The table below shows the maximum daily losses for each risk factor (fixed-income, equities and currencies) as of December 31, 2017,2019, 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 Exchange Rate Fixed Income Equity Total
 (in millions of R$) (in millions of R$)
Total trading  (22.2)  (73.3)  (21.3)  (166.8)  (54.8)  (79.0)  (35.1)  (168.8)

 

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$116.8168.8 million.

 

Non-trading Activity

 

Quantitative Analysis of Interest Rate Risk in 20172019

 

Convertible Currencies

 

At the end of 2017,2019, the sensitivity of NIM at one year, to a parallel rise of 100 basis points in the local yield curve was R$378334 million.

 

In addition, at the end of 2017,2019, the sensitivity of net worth to parallel rises of 100 basis points in the yield curves was R$2,0662,063 million in the local currency yield curve.

 

Structural Gap

 

The following table shows the managerial gaps between the re-pricing dates of our assets and liabilities as of December 31, 20172019 in millions ofreais.

 

 Total 0-1 month 1-3 months 3-6 months 6-12 months 1-3 years 3-5 years > 5 years Not Sensitive 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$) (in millions of R$)
Structural Gap                                                      
Money Market  264,101   74,447   1,043   1,248   15,761   26,403   16,259   35,028   93,911   272,311   83,617   696   1,208   11,398   23,946   19,059   37,881   94,506 
Loans  259,116   63,587   32,065   34,085   31,435   43,712   16,192   21,922   16,119   337,639   80,230   43,964   41,351   48,774   59,367   22,408   25,053   16,492 
Permanent  15,089   —   —   —   —   —   —   —   15,089   16,782   -     -     -     -     -     -     -     16,782 
Other  145,404   38,842   44   13   7   —   —   —   106,498   231,613   50,960   259   129   36   -     -     -     180,230 
Total Assets  683,710   176,876   33,152   35,346   47,203   70,115   32,451   56,951   231,616   858,346   214,808   44,919   42,687   60,207   83,314   41,467   62,934   308,009 
Money Market  (113,954)  (72,220)  (2,719)  (1,531)  (2,701)  (14,660)  (5,557)  (5,428)  (9,138)  (122,348)  (74,002)  (1,917)  (3,293)  (3,208)  (3,950)  (13,957)  (8,457)  (13,564)
Deposits  (342,410)  (170,410)  (7,585)  (3,092)  (6,756)  (15,732)  (9,346)  (24,221)  (105,267)  (404,842)  (200,816)  (5,377)  (6,174)  (9,587)  (24,901)  (13,092)  (27,995)  (116,899)
Equity and Other  (227,346)  (47,296)  (16,283)  (8,194)  (19,555)  (16,365)  —   (2,778)  (116,874)  (331,156)  (54,789)  (11,339)  (6,784)  (7,361)  (722)  (599)  (2,490)  (247,074)
Total Liabilities  (683,710)  (289,927)  (26,587)  (12,816)  (29,013)  (46,757)  (14,903)  (32,427)  (231,280)  (858,346)  (329,607)  (18,633)  (16,251)  (20,156)  (29,573)  (27,648)  (38,942)  (377,537)
– Balance Gap  —   (113,051)  6,565   22,529   18,190   23,358   17,548   24,524   336   -     (114,799)  26,286   26,437   40,052   53,741   13,819   23,993   (69,528)
Off-Balance Gap  31,757   36,101   (13,530)  172   (1,234)  (16,785)  2,372   (5,425)  (33,428)  -     58,910   (7,262)  (3,197)  (13,889)  (19,836)  (2,377)  (11,425)  30,838 
Total Structural Gap  31,757   (76,950)  (6,965)  22,701   16,957   6,573   19,920   19,099   (33,092)  -     (55,889)  19,024   23,240   26,162   33,905   11,442   12,568   (38,689)
Accumulated Gap  31,757   (45,193)  (52,158)  (29,457)  (12,500)  (5,927)  13,993   33,092   —   -     (55,890)  (36,866)  (13,626)  12,536   46,441   57,883   70,451   31,762 

 

240 

Table of Contents

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, decreasedincreased R$7135 million during 2017,2019, reaching a maximum of R$458334 million in June.December. The sensitivity of the market value increaseddecreased R$3202 million during 2017,2019, reaching a maximum of R$2,1772,342 million in September.October. The main factors in 20172019 that influenced the sensitivity were the volatility of the yieldinterest curve, updating of methodologies and the portfolio decay, the methodologieseffects of strategies in the cash flows and the effect of liquidity.business areas.

 

221 

Table of Contents

The following chart shows our NIM and MVE sensitivity during each month in 2017.2019.

 

 

 

Interest Rate Risk Profile as of December 31, 20172019

 

The currency gap tables below show the managerial distribution of risk by maturity and currency in Brazil as of December 31, 20172019 in millions ofreais.

 

 Total 0-1 month 1-3 months 3-6 months 6-12 months 1-3 years 3-5 years > 5 years Not Sensitive 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                                    

Gaps in

Local

currency

                  
Money Market  231,362   62,273   412   675   15,310   24,837   14,379   27,332   86,143   243,106   82,104   646   1,023   10,980   21,542   12,671   30,916   83,223 
Loans  229,686   58,044   24,400   24,539   28,706   42,389   15,384   21,286   14,939   285,391   61,762   30,786   32,699   43,599   58,580   20,151   23,682   14,132 
Permanent  15,089   —   —   —   —   —   —   —   15,089   16,782   -     -     -     -     -     -     -     16,782 
Others  87,816   29,000   —   —   —   —   —   —   58,816   103,613   24,461   -     -     -     -     -     -     79,153 
Total Assets  563,953   149,318   24,812   25,213   44,016   67,226   29,763   48,618   174,987   648,892   168,326   31,432   33,722   54,579   80,122   32,823   54,598   193,289 
Money Market  (103,906)  (72,078)  (2,174)  (1,365)  (1,852)  -6,749   (5,501)  (5,048)  (9,138)  (104,130)  (72,943)  (609)  (1,126)  (2,662)  (3,583)  (2,187)  (7,456)  (13,564)
Deposits  (331,212)  (168,118)  (4,200)  (2,680)  (6,080)  (15,514)  (9,346)  (22,589)  (102,686)  (385,544)  (194,698)  (3,876)  (4,431)  (8,136)  (21,281)  (11,499)  (26,695)  (114,927)
Equity and Other  (137,310)  (26,658)  (7,277)  (5,058)  (10,103)  (15,124)  —   (2,778)  (70,312)  (177,481)  (27,448)  -     -     -     -     -     309   (150,342)
Total Liabilities  (572,428)  (266,854   (13,651)  (9,103)  (18,035)  (37,388)  (14,847)  (30,415)  (182,136)  (667,155)  (295,089)  (4,486)  (5,557)  (10,799)  (24,864)  (13,686)  (33,842)  (278,832)
Off-Balance Gap  49,484   47,605   14,275   (591)  (1,154)  (15,185)  1,158   95,407   (53,933)  (56,847)  57,544   8,092   1,330   (4,276)  (14,620)  (485)  (10,361)  (62,310)
Gap  41,008   (69,931)  25,437   15,520   24,828   14,653   16,073   12,796   (61,083)  (75,111)  (69,218)  35,039   29,496   39,504   40,638   18,652   10,396   (147,854)

 

  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  32,739   12,174   630   574   451   1,566   1,880   7,696   7,768 
Loans  29,430   5,543   7,665   9,546   2,729   1,323   808   637   1,179 
Permanent  —   —   —   —   —   —   —   —   - 
Others  57,588   9,842   44   13   7   —   —   —   47,682 
Total Assets  119,757   27,559   8,340   10,133   3,187   2,889   2,688   8,333   56,629 
Money Market  (10,048)  (143)  (545)  (165)  (849)  (7,910)  (56)  (380)  — 
Deposits  (11,198)  (2,292)  (3,386)  (412)  (676)  (218)  —   (1,632)  (2,581)
Equity and Other  (90,036)  (20,638)  (9,006)  (3,136)  (9,452)  (1,240)  —   —   (46,562)
Total Liabilities  (111,282)  (23,073)  (12,937)  (3,714)  (10,978)  (9,369)  (56)  (2,012)  (49,144)
Off-Balance Gap  (17,727)  (11,505)  (27,805)  762   (80)  (1,600)  1,215   (18)  20,505 
Gap  (9,252)  (7,019)  (32,402)  7,181   (7,871)  (8,080)  3,847   6,303   27,991 

222241 

Table of Contents

  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		  29,206   1,513   50   185   418   2,404   6,388   6,965   11,283 
Loans  52,248   18,469   13,178   8,651   5,175   787   2,256   1,371   2,360 
Permanent  1   -     -     -     -     -     -     -     1 
Others  128,000   26,500   259   129   36   -     -     -     101,077 

Total

Assets

  209,454   46,482   13,487   8,965   5,629   3,191   8,644   8,336   114,720 
Money Market
  (18,218)  (1,060)  (1,308)  (2,167)  (546)  (367)  (11,770)  (1,001)  -   
Deposits  (19,298)  (6,118)  (1,501)  (1,743)  (1,451)  (3,620)  (1,593)  (1,300)  (1,972)
Equity and Other
  (153,675)  (27,340)  (11,339)  (6,784)  (7,361)  (722)  (599)  (2,799)  (96,732)

Total

Liabilities

  (191,191)  (34,518)  (14,148)  (10,694)  (9,357)  (4,709)  (13,961)  (5,100)  (98,705)
Off-Balance Gap  56,847   1,366   (15,354)  (4,527)  (9,613)  (5,216)  (1,893)  (1,064)  93,149 
Gap  75,110   13,329   (16,015)  (6,256)  (13,342)  (6,733)  (7,209)  2,172   109,165 

Market Risk: VaR Consolidated Analysis

 

Our total daily VaR as of December 31, 20162018 and December 31, 2017,2019, 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.

 

 2017 2016 2019 2018
 Low Average High Period End Period End Low Average High Period End Period End
 (in millions of R$) (in millions of R$)
Trading  25.0   72.8   267.3   28.0   37.7   20.8   41.9   85.4   20.9   46.5 
Non-trading  1,137.8   2,293.8   3,039.2   1380.1   3,330.2   1,336.3   1,915.0   2,203.7   1,755.1   1,743.7 
Diversification effect  —   —   —   —   —   -     -     -     -     -   
Total  1,162.8   2,366.6   3,306.5   1,408.1   3,367.9   1,357.1   1,956.9   2,289.1   1,776.0   1,790.2 

 

Note:VaR figures for trading and non-trading portfolios were added, thus disregarding the diversification effect. During 2017, the horizon of the VaR metric for the non-trading portfolio was changed from 1 to 21 business days.

 

Our daily VaR estimates of interest rate risk, foreign exchange rate risk and equity price risk were as set forth below:

 

242 

Table of Contents

Interest Rate Risk

 

  2017 2016
  Low Average High Period End Period End
  (in millions of R$)
Interest rate risk                    
Trading  20.8   52.5   297.1   23.1   34.7 
Non-trading  1,137.8   2,293.8   3,039.2   1,380.1   3,330.2 
Diversification effect  —   —   —   —   — 
Total  1,158.6   2,346.3   3,336.3   1,403.2   3,364.9 

  2019 2018
  Low Average High Period End Period End
  (in millions of R$)
Interest rate risk          
                     

Interest rate risk          
Trading  14.7   31.0   66.0   16.7   33.9 
Non-trading  1,336.3   1,915.0   2,203.7   1,755.1   1,743.7 
Diversification effect  -     -     -     -     -   
Total  1,351.0   1,946.0   2,269.7   1,771.8   1,777.6 

 

Note:VaR figures for trading and non-trading portfolios were added, thus disregarding the diversification effect. During the year of 2017, the horizon of the VaR metric for the non-trading portfolio was changed from 1 to 21 business days.

 

Foreign Exchange Rate Risk

 

 2017 2016 2019 2018
 Low Average High Period End Period End Low Average High Period End Period End
 (in millions of R$) (in millions of R$)
Exchange rate risk                              
Trading  2.5   19.9   51.3   7.5   10.3   1.6   13.8   31.3   7.5   24.6 
Non–trading  N.A.   N.A.   N.A.   N.A.   N.A.   N.A.   N.A.   N.A.   N.A.   N.A. 
Diversification effect  —   —   —   —   —   -     -     -     -     -   
Total  2.5   19.9   51.3   7.5   10.3   1.6   13.8   31.3   7.5   24.6 

 

Note:VaR figures for trading and non-trading portfolios were added, thus disregarding the diversification effect.

 

Equity Price Risk

 

 2017 2016 2019 2018
 Low Average High Period End Period End Low Average High Period End Period End
 (in millions of R$) (in millions of R$)
Equity price risk                    
Trading  1.6   11.8   24.3   8.1   2.7   2.0   8.6   29.2   7.4   11.6 
Non–trading  N.A.   N.A.   N.A.   N.A.   N.A.   N.A.   N.A.   N.A.   N.A.   N.A. 
Diversification effect  —   —   —   —   —   -     -     -     -     -   
Total  1.6   11.8   24.3   8.1   2.7   2.0   8.6   29.2   7.4   11.6 

 

Note:VaR figures for trading and non-trading portfolios were added, thus disregarding the diversification effect.

 

Commodity Price Risk

  2019 2018
  Low Average High Period End Period End
  (in millions of R$)
Commodities price risk          
Trading  0.0   0.0   0.4   0.0   0.2 
Non–trading  N.A.   N.A.   N.A.   N.A.   N.A. 
Diversification effect  -     -     -     -     -   
Total0.00.00.40.00.2

223243 

Table of Contents

Our daily VaR estimates by activity were as set forth below:

 

 2017 2016 2019 2018
 Low Average High Period End Period End Low Average High Period End Period End
 (in millions of R$) (in millions of R$)
Trading                    
Interest rate risk  20.8   52.5   297.1   23.1   34.7   14.7   31.0   66.0   16.7   33.9 
Exchange rate risk  2.5   19.9   51.3   7.5   10.3   1.6   13.8   31.3   7.5   24.6 
Equity  1.6   11.8   24.3   8.1   2.7   2.0   8.6   29.2   7.4   11.6 
Commodities price risk  0.0   0.0   0.4   0.0   0.2 
Total Trading  25.0   72.8   267.3   28.0   37.7   20.8   41.9   85.4   20.9   46.5 
Non-trading                                        
Interest rate  1,137.8   2,293.8   3,039.2   1,380.1   3,330.2   1,336.3   1,915.0   2,203.7   1,755.1   1,743.7 
Exchange rate  N.A.   N.A.   N.A.   N.A.   N.A.   N.A.   N.A.   N.A.   N.A.   N.A. 
Equity  

N.A.

   

N.A.

   

N.A.

   

N.A.

   

N.A.

    N.A.    N.A.    N.A.    N.A.    N.A. 
Total Non-Trading  1,137.8   2,293.8   3,039.2   1,380.1   3,330.2   1,336.3   1,915.0   2,203.7   1,755.1   1,743.7 
Total (Trading + Non-Trading)  1,162.8   2,366.6   3,306.5   1,408.1   3,367.9   1,357.1   1,956.9   2,289.1   1,776.0   1,790.2 
Interest rate  1,158.6   2,346.3   3,336.3   1,403.2   3,364.9   1,351.0   1,946.0   2,269.7   1,771.8   1,777.6 
Exchange rate  2.5   19.9   51.3   7.5   10.3   1.6   13.8   31.3   7.5   24.6 
Equity  1.6   11.8   24.3   8.1   2.7   2.0   8.6   29.2   7.4   11.6 
Commodities price risk  0.0   0.0   0.4   0.0   0.2 

 

Note:VaR figures for trading and non-trading portfolios were added, thus disregarding the diversification effect. During the year of 2017, the horizon of the VaR metric for the non-trading portfolio was changed from 1 to 21 business days.

 

Operational Risk

 

We adopted the definition of the Basel Committee and Brazilian Central Bank for operational risk, which is defined as the possibility of losses resulting from inadequate processes, people and systems, failures or even from external events such as natural disasters, terrorism, robbery and vandalism.events. This definition includes the legal risk associated with the inadequacy or deficiency in executed agreements, as well as penalties for noncompliance with legal provisions and damages for third parties resulting from our activities. Operational risk losses may result in financial losses, adversely affectaffecting the continuity of our business and also negatively affect the public’s image of us.our public image.

 

To accomplish our operational risk objectives, we have established an operationala 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 to its activities;

  

244 

Table of Contents

·Second line of defense: the control of operational risks and internal control of technological and cybernetic risk units isdepartments are responsible for monitoring and ensuring soundcontrol over operational and control of technological risk management practices throughout the organization. It is also responsible for implementing and disseminatingcommunicating 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 an adequate business contingency planningplan in place throughout the organization;

 

·Third line of defense: the internal audit departmentInternal 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.lines.

 

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;

 

224 

Table of Contents

·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 in order to ensure we have a structured process of operational risk management and decision making:maker:

 

·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;

 

·OperationalIntegrated Risk Operational Committee (Comitê OperacionalIntegrado 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 and is compliant with the applicable regulatory requirements.

 

Social and Environmental Risk

 

We have aOur Social and Environmental Responsibility Policy (PRSA), which complies with National Monetary Council Resolution 4,327/2014 and the SARB 14 self-regulation issued by Febraban, establishes guidelines and consolidates specific policies for social-environmental practices used in business and stakeholder relations. These practices including social and environmental risk management, system for analyzing clientsimpacts and opportunities related themes, such as, adequacy in the concession or use of credit, supplier management and analysis of the social and environmental risk which is carried out through the analysis of the socio-environmental practices of wholesale segment. Under this system, clients whoand Empresas Nucleo (Core Companies) SMES customers, that have limits or credit risk greater than R$5 million and are part ofincluded in one of ourthe 14 sectors of special social and environmental attention, and havein order to mitigate operational, capital, 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 2017,2019, we screened 20511,340 wholesale corporate clients, including about 89customers and 697 Empresas Nucleo (Core Companies) customers, as well as 49 major new projects, both subject to Equator Principles and non-Equator Principles,not subject, 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,customers are screened, for environmental and social concerns by the new clients’customers´ acceptance area. Thearea, when

245 

Table of Contents

initiating their commercial relationship with us. Since 2009, we are a signatory of the Equator Principles, whose standards are applied in order to mitigate 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.risks when financing large projects.

 

Cyber Security Risk

 

We have put in place extensive security measures in place 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. TheOur security measures, which we currently have in place include, but are not limited to access and privilege management, separationsegregation of test and production environments, network security analysis, cyber 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, solutions and solutions to enact such securitydissemination of these measures, including regular compliance checks and maintaining continuous monitoring of network activity by our Security Operations Center.Center (SOC). 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—Services - Information Sharing and Analysis Center community.

 

In 2017, we set up our cyber security department, which is responsible for all matters relating to cyber security within Santander Brasil. This new structure aims to segregate the functions of the information security group and the cyber security group, thereby enabling each to focus on its designated activities and strategies.

225 

Table of Contents

ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

 

12A. Debt Securities

12A.Debt Securities

 

Not applicable.

 

12B. Warrants and Rights

12B.Warrants and Rights

 

Not applicable.

 

12C. Other Securities

12C.Other Securities

 

Not applicable.

 

12D. American Depositary Receipts

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 Wall240 Greenwich 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:

 

·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;

 

246 

Table of Contents

·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

 

226 

Table of Contents

·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, 2017,2019, such reimbursements amounted to U.S.$5.73,2 million.

 

227247 

Table of Contents

PART II

 

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

15A.Disclosure Controls and Procedures

 

As of December 31, 2017, under2019, with the supervision and with the participation of our management, including our chief executive officer, chief financial officerChief Executive Officer (CEO) and chief accounting officer,Chief Financial Officer (CFO), 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, asAs described below, there are 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 officerCEO and chief accounting officerCFO 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 officerCEO and chief accounting officer,CFO, as appropriate to allow timely decisions regarding required disclosures.

 

In addition to this and in accordance with the applicable legal requirements (Resolutions 2,554/98 and Circular 3,467/09), we produced and issued an internalare in process of preparing the report on March 19, 2018, according to the Brazilian Central Bank’s requirements regarding the effectivenessevaluation of the Bank's internal control environment. This report will be issued within the determined period of 45 (forty-five) days of publication of the our Brazilian GAAP financial statements, which is March 13, 2020 (Brazilian Central Bank GAAP).

 

15B. Management’s Annual Report on Internal Control over Financial Reporting

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 process is a process designed by, or under the supervision of, our principal executive and principal financial officers and also incorporates supervision from effected by our boardBoard of directors,Directors, management and other personnel,personnel. The purpose is 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

 

248 

Table of Contents

·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, projectionsprojected effectiveness of any evaluation of effectiveness tocontrols in future periods areis 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.deteriorates.

 

228 

Table of Contents

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”)or “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 thesets development guidelines for its development and supervised itssupervises execution at the unit level.

 

The general framework is consistent, as it assigns specific responsibilities 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.

 

UnderWith the supervision and with the participation of our management, including our Chief Executive Officer, Chief Financial OfficerCEO and Chief Accounting Officer,CFO, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2017,2019, based on the framework set by the COSO Integrated Framework 2013.

 

Based on this assessment, which was carried out through April 9, 2018,March 6, 2020, our management concluded that, as of December 31, 2017,2019, its internal control over financial reporting was effective based on those criteria.

 

Our

PricewaterhouseCoopers Auditores Independentes which has audited the consolidated financial statements of Santander Brasil for the year ended 31 December 2019, has also audited the effectiveness of Santander Brasil’s internal control over financial reporting as of December 31, 2017, 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, 2017, for which see “Item 15C. Audit Reportunder auditing standards of the Registered Public Company Accounting Firm.Oversight Board (United States) as stated in their report appearing in our consolidated financial statements included in “Item 18. Financial Statements.”

 

15C. Audit Report of the Registered Public Accounting Firm

15C.Audit Report of the Registered Public Accounting Firm

 

For the report, of PwC,dated March 6, 2020 from PricewaterhouseCoopers Auditores Independentes, our registered public accounting firm, dated April 9, 2018, on the effectiveness of our internal control over financial reporting as of December 31, 2017,2019, see “Item 18. Financial Statements.”

 

15D. Changes in Internal Control over Financial Reporting

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 16. [RESERVED]

 

ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT

ITEM16A.AUDIT COMMITTEE FINANCIAL EXPERT

 

The boardBoard of directorsDirectors 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,Audit Committee, deemed independent under the applicable Brazilian law and the regulations of the SEC and NYSE.

 

249 

Table of Contents

For more details about the audit committee seeAudit Committee, refer to “Item 6. Directors, Senior Management and Employees—C. Board Practices—Board Advisory Committees—Audit Committee”

 

ITEM 16B. SANTANDER BRASIL’S CODE OF ETHICAL CONDUCT

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 boardsBoards of directors, executive officersDirectors, Executive Officers 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 broadenpromote it, by championing and striving for its enforcement. To that effect,

229 

Table of Contents

Persons Subject to the Code of Ethical Conductenforcement, and also have the obligation to attend and participate in all assigned 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’our values.

 

The Code of Ethical Conduct helps us to establish respectful and transparent relationships and aims for the accomplishment of Santander Brasil’s obligations withto 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, which does not form part of this annual report on Form 20-F, is available on our website atwww.santander.com.br/riri..

 

ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES

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 (1) PwCPricewaterhouseCoopers Auditores Independentes for the fiscal years ended December 31, 20172019, December 31, 2018 and December 31, 2016 and (2) to Deloitte for the fiscal year ended December 31, 2015,2017, as follows:

 

  For the year ended December 31,
  2017 2016 2015
  (in R$ millions)
Audit of the annual financial statements of the companies audited (constant scope of consolidation)(1)  17.5   9.2   12.0 
Audit related  3.9   0.1   1.5 
Tax  —   —   – 
All other  1.3   0.7   1.7 
Total  22.7   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.
  For the year ended December 31,
  2019 2018 2017
  (in R$ millions)
Audit of the annual financial statements of the companies audited (constant scope of consolidation)  25.2   19.9   17.5 
Audit related  0.1   0.5   3.9 
Tax  -     -     -   
All other  0.3   0.1   1.3 
Total  25.6   20.5   22.7 

 

The approximate value of withholding taxes in respect of the audit fees for the year ended December 31, 20172019 according to applicable law totaled R$3.73.6 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 tomust be pre-approved by the audit committee.

 

Our audit committeeAudit Committee pre-approves all audit and non-audit services to be performed by our registered public accounting firm.

 

250 

Table of ContentsITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

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 committeeAudit Committee composed of members of the boardBoard of directors,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,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 committeeAudit Committee of the boardBoard of directorsDirectors of an American company, which we refer to as our “audit committee.“Audit Committee.”

 

230 

Table of Contents

Our audit committeeAudit Committee observes Brazilian legislation and performs all the functions of an audit committeeAudit Committee under Rule 10A-3. As provided in Brazilian law, our boardBoard of directorsDirectors and the audit committee areAudit Committee and distinct statutory entities. Moreover, according to Brazilian law, the function of hiring independent auditors is a power reserved exclusively to the boardBoard of directorsDirectors of the company, under the specific and express recommendation issued from the audit committee,Audit Committee, as the case may be, for the engagement or replacement of independent auditors, and our boardBoard of directorsDirectors acts as our audit committee for the purposes of nominating such independent auditors.

 

Except in these respects, our audit committeeAudit Committee is comparable to an audit committeeAudit Committee of the board and performs the same functions of an American company. Our audit committeeAudit Committee is able to act independently in carrying out the responsibilities of an audit committeeAudit 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

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 2017.2019.

 

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 2016  678,400   25.695921   678,400     
December 2016  911,400   26.262221   911,400     
January 2017  0   0   0     
February 2017  40,000   32.290000   40,000     
March 2017  30,716   16.448717   30,716     
April 2017  0   0   0     
May 2017  5,807,100   26.685148   5,807,100     
June 2017  3,065,400   25.030526   3,065,400     
July 2017  0   0   0     
August 2017  1,042,900   27.43204097   1,042,900     
September 2017  2,783,800   28.614697   2,783,800     
October 2017  552,300   29.810967   552,300     
Total  14,912,016       14,912,016   39,391,314 
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 2018  1,438,400   10.7684   1,438,400   -   
December 2018  818,500   11.0285   818,500   -   
January 2019  683,500   12.9728   683,500   -   
February 2019  1,579,900   12.9271   1,579,900   -   
March 2019  1,098,900   11.4158   1,098,900   -   
April 2019  -     -     -     -   
May 2019  894,000   10.9507   894,000   -   
June 2019  718,400   11.6827   718,400   -   
July 2019  -     -     -     -   
August 2019  632,800   10.3023   632,800   -   
September 2019  -     -     -     -   
October 2019  659,200   11.9678   659,200   -   

 

251 

Table of Contents

November 2019  199,000   10.6889   199,000   -   
December 2019              -   
Total  8,722,600   115   8,722,600   37,753,760 

 

(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, 2017.2018, and on November 1, 2018 for the period from November 6, 2018 to November 5, 2019. A new buyback program was approved by our board of directors on November 1, 2019 for the twelve (12)-month period starting on November 6, 2019.

 

(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 20152018 to November 20162019 as approved by our board of directors. The number of Units that may be repurchased for the period from November 4, 20166, 2018 to November 3, 20175, 2019 as approved by our board of directors is 38,402,972.37,753,760.

 

(3)The “Total Number of Units Purchased” 2,305,800was 199,000 in November 20172019 and 1,283,6000.00 in December 2017.2019.

 

(4)The “Average Price Paid per Unit in U.S.$” was 29.7202404010,6889 in November 20172019 and U.S.$31.1097930,00 in December 2017.2019

 

(5)The “Total Number of Units Purchased as Part of Publicly Announced Plans or Programs” was 2,305,800199,000 in November 20172019 and 1,283,6000.00 in December 2017.2019.

 

(6)The repurchase plans define an annual maximum of Units to be repurchased but without a monthly limit.

231 

Table of Contents

Santander Brasil – Buyback Program ADRs

MonthsTotal 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 2016————
December 2016————
January 2017————
February 2017————
March 2017————
April 2017————
May 2017————
June 2017————
July 2017————
August 2017————
September 2017————
October 2017————
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 2017 and December 2017.

(4)The “Average Price Paid per ADRs in U.S.$” was zero in each of November 2017 and December 2017.

(5)The “Total Number of ADRs Purchased as Part of Publicly Announced Plans or Programs” was zero in November 2017 and December 2017.

(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

ITEM 16F.CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT

 

Not applicable.

 

ITEM 16G. CORPORATE GOVERNANCE

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 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.

 

232 

Table of Contents

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, and have approved all subsequent amendments since then (the latest one was approved in December 2019), 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.

 

252 

Table of Contents

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 B3, 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 committeeAudit 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-compliancenoncompliance 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 boardBoard of directorsDirectors 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 boardBoard of directorsDirectors are deemed independent (representing 50%56% of the composition of our boardBoard of directors)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 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 2two years.

 

233 

Table of Contents

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-thirdone third of the members of the boardBoard of directorsDirectors can be elected from management members. Our Chief Executive Officer, Mr. Sergio Agapito Lires Rial, and the Senior Vice President Executive Officer, Mr. José de Paiva Ferreira are membersis a

253 

Table of Contents

member of our boardBoard of directors.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 committeeNominating/Corporate Governance Committee and a remuneration committeeRemuneration 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 committeeNominating/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,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-compensationincentive compensation and equity-based plans.

 

In January 2016,February 2017, our boardBoard of directorsDirectors approved the terms for the establishment of our Nomination and Governance Committee. The Nomination and Governance Committee also oversees 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 boardBoard of directorsDirectors on matters in connection with, but not limited to (i) fixed and variable remunerationcompensation 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 committeeAudit Committee that (i) is composed of a minimum of three independent directors who are all financially literate, (ii) meets the SEC rules regarding audit committeesAudit 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 committeeAudit Committee of at least three independent members. The audit committeeAudit Committee is elected by the boardBoard of directors.Directors. SEC Rule 10A-3 provides that the listing of securities of foreign private issuers will be exempt from the audit committeeAudit Committee requirements if the issuer meets certain requirements. Our audit committeeAudit Committee allows us to meet the requirements set forth by this rule. See “Item 16D. Exemptions from the Listing Standards for Audit Committees.”

 

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.

254 

Table of Contents

 

Corporate Governance Guidelines

 

NYSE rules require that listed companies adopt and disclose corporate governance guidelines. Wecomply 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.

 

234 

Table of Contents

Pursuant to bestthe practices of corporate governance guidelines, on September 22, 2010, our boardBoard of directorsDirectors approved a policy that regulates related party transactions, which was last revised on March 18, 2015.27, 2019. 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, directorsDirectors and executive officersExecutive Officers of Santander Brasil.

 

Code of Business Conduct and Ethics

 

NYSE rules require that listed companies adopt and disclose a code of conduct and ethics for directors, officersDirectors, Officers and employees, and promptly disclose any waivers of the code for directorsDirectors or executive officers.Executive Officers. Applicable Brazilian law does not have a similar requirement. We adopted a Code of Ethical Conduct 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 Ethical Conduct 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 committeeAudit Committee with ongoing assessments of the company’s risk management processes and system of internal control.controls.

 

Our internal audit department works independently to conduct methodologically structured examinations, analysis,analyses, surveys and fact findingfact-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.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 boardBoard of directorsDirectors 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) internal audit; (ii) accounting and disclosure of financial information; (iii) risk control; (iv) communication and branding; (v) human resources; (vi) information technology; and (vii) money launderingmoney-laundering protection. Currently, we have a total of sixteen16 frameworks (Marcos Corporativos)(Marcos Corporativos) in force. OnceWe believe that these frameworks, areonce all of them have been adopted, by us, we believe they will continue to 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.” The information contained on our website, any website mentioned in this annual report, or any website directly or indirectly linked to these websites is not part, of and is not incorporated by reference in, this annual report.

 

ITEM 16H. MINE SAFETY DISCLOSURE

ITEM 16H.MINE SAFETY DISCLOSURE

 

Not applicable.

 

235255 

Table of Contents

PART III

 

ITEM 17. FINANCIAL STATEMENTS

ITEM 17.FINANCIAL STATEMENTS

 

We have responded to Item 18 in lieu of this item.

 

ITEM 18. FINANCIAL STATEMENTS

ITEM 18.FINANCIAL STATEMENTS

 

Consolidated Financial Statements are filed as part of this annual report, see pages F-11 to F-135.159.

 

ITEM 19. EXHIBITS

ITEM 19.EXHIBITS

 

(a)       Index to Consolidated Financial Statements

 

 

Page

Report of PricewaterhouseCoopers Auditores IndependentesF-1F-2
Report of Deloitte Touche Tomahtsu Auditores IndependentesF-3
Consolidated Statement of Financial PositionBalance Sheets for the years ended December 31, 2017, 20162019, 2018 and 20152017F-4F-7
Consolidated Income Statements for the years ended December 31, 2017, 20162019, 2018 and 20152017F-6F-9
Consolidated Statements of Profit or Loss and Other Comprehensive Income for the years ended December 31, 2017, 20162019, 2018 and 20152017F-7F-10
Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2017, 20162019, 2018 and 20152017F-8F-11
Consolidated Statements of Cash Flow Statements for the years ended December 31, 2017, 20162019, 2018 and 20152017F-9F-13
Notes to the Consolidated Financial Statements for the years ended December 31, 2017, 20162019, 2018 and 20152017F-11F-14

 

(b)       List of Exhibits.

 

We are filing the following documents as part of this annual report on Form 20-F:

 

Exhibit Number

Description

1.1English translation of the By-laws of Santander Brasil, amended and restated on September 18, 2017April 26, 2019 (incorporated by reference to our Form 6-K (file no. 001-34476) filed with the SEC on September 18, 2017)April 29, 2019).
2.1Form 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 (incorporated by reference to Exhibit 1 to our Registration Statement on Form F-6 (file no. 333-207353) filed with the SEC on October 9, 2015).
2.2Subordinated Indenture dated as of January 29, 2014, among Santander Brasil and The Bank of New York Mellon, as trustee (incorporated by reference to Exhibit 2.3 to our Annual Report on Form 20-F (file no. 001-34476) filed with the SEC on April 30, 2014).
2.3First 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 Exhibit 2.4 to our Annual Report on Form 20-F (file no. 001-34476) filed with the SEC on April 30, 2014).
2.4Second 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 Exhibit 2.5 to our Annual Report on Form 20-F (file no. 001-34476) filed with the SEC on April 30, 2014).
2.5Description of Securities

256 

Table of Contents

4.1Option 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).
4.2Long-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).

236 

Table of Contents

4.3Deferred 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).
4.4Deferred 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).
4.5Long-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).
4.6Deferred Bonus Plans related to 2013 (incorporated by reference to Exhibit II to our Form 6-K (file no. 001-34476) filed with the SEC on May 1, 2013).
4.7Deferred Bonus Plans related to 2014 (incorporated by reference to Exhibit V to our Form 6-K (file no. 001-34476) filed with the SEC on April 1, 2015).
4.8Deferred Bonus Plans related to 2015 (incorporated by reference to Exhibit II to our Form 6-K/A (file no. 001-34476) filed with the SEC on December 3, 2015).
8.1List of Subsidiaries (incorporated by reference to Note 3 to our Consolidated Financial Statements filed with this Form 20-F).
11.1English translation of the Code of Ethical Conduct of Santander Brasil (incorporated by reference to Exhibit 11.1 to our Annual Report on Form 20-F (file no. 001-34476) filed with the SEC on March 28, 2017).
12.1Section 302 Certification by the principal executive officer.
12.2Section 302 Certification by the principal financial officer.
13.1Section 906 Certification by the Chief Executive Officer.
13.2Section 906 Certification by the Chief Financial Officer.
15.1Consent Letter of PwC
15.2Consent Letter of DeloittePricewaterhouseCoopers

237 

Table of Contents

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: April 9, 2018March 6, 2020

 

238257 

Table of Contents

BANCO SANTANDER (BRASIL) S.A.

CONSOLIDATED FINANCIAL STATEMENTS

BANCO SANTANDER (BRASIL) S.A.
CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTAL INFORMATION
INDEXPagePg.
Independent Auditors’ ReportF-1
Independent Auditors’ ReportF-3
Consolidated Statement of Financial PositionF-4
Consolidated Income StatementsF-6
Consolidated Statements of Profit or Loss and Other Comprehensive IncomeF-7
Consolidated Statements of Changes in EquityF-8
Consolidated Statement of Cash FlowsF-9

 

Notes to the Report of Independent Registered Public Accounting FirmF-2
Consolidated FinancialBalance SheetsF-7
Consolidated Income StatementsF-9
Consolidated Statements of Comprehensive IncomeF-10
Consolidated Statements of Changes in Stockholders’ EquityF-11
Consolidated Cash Flow StatementsF-13
 
Note11.   Introduction, basis of presentation of the consolidated financial statements and other informationF-11F-14
Note22.   Accounting policies and method of measurementF-16F-25
Note33.   Basis of consolidationF-32F-39
Note4Change in the scope of consolidationF-35
Note54.   Cash and balances with the Brazilian Central BankF-36F-42
Note65.   Loans and amounts due from credit institutionsF-36F-43
Note76.   Debt instrumentsF-37F-44
Note87.   Equity instrumentsF-38F-45
Note98.   Derivative financial instruments and Short positionsF-38F-46
Note109.   Loans and advances to customersclientsF-46F-54
Note1110.   Non-current assets held for saleF-50F-59
Note1211.   Investments in associates and joint venturesF-50F-60
Note1312.   Tangible assetsF-54F-64
Note1413.   Intangible assets - GoodwillF-56F-65
Note1514.   Intangible assets - Other intangible assetsF-57F-66
Note1615.   Other assetsF-58F-67
Note1716.   Deposits from the Brazilian Central Bank and Deposits from credit institutionsF-58F-67
Note17.   Client deposits18 Customer depositsF-59F-68
Note1918.   Marketable debt securitiesF-59F-69
Note2019.   Subordinated liabilitiesF-61F-70
Note2120.   Debt Instruments Eligible to Compose CapitalF-61F-71
Note2221.   Other financial liabilitiesF-62F-72
Note2322.   Provisions for pensions and similar obligationsF-62F-72
Note2423.   Provisions for judicial and administrative proceedings, commitments and other provisionsF-68F-79
Note2524.   Tax assets and liabilitiesF-73F-84
Note2625.   Other liabilitiesF-76F-87
Note2726.   Other Comprehensive IncomeF-76F-87
Note2827.   Non-controlling interestsF-78F-88
Note28.   Stockholders’ equity29 Shareholders’ equityF-79F-89
Note3029.   Earnings per shareF-80F-92
Note3130.   Fair value of financial assets and liabilitiesF-80F-93
Note3231.   Operational RatiosF-86F-99
Note3332.   Interest and similar incomeF-88F-100
Note3433.   Interest expense and similar chargesF-88F-100
Note3534.   Income from equity instrumentsF-89F-100
Note3635.   Fee and commission incomeF-89F-101
Note3736.   Fee and commission expenseF-90F-102
Note3837.   Gains (losses)or losses on financial assets and liabilities (net)F-90F-102
Note3938.   Exchange differences (net)F-90F-102
Note4039.   Other operating expense (net)income and expensesF-90F-103
Note4140.   Personnel expensesF-91F-103
Note4241.   Other general administrative expensesF-95F-105
Note42.   Gains or losses on non financial assets and investments, net43 Gains (losses) on disposal of assets not classified as non-current assets held for saleF-95F-106
Note4443.   Gains (losses) on disposal and expenses of non-current assets held for sale not classified as discontinued operationsF-95F-106
Note4544.   Other disclosuresF-96F-106
Note4645.   Business segment reportingF-99F-111
Note4746.   Related party transactionsF-101F-115
Note4847.   Risk managementF-110F-118
48.   Subsequent EventsF-144

Supplemental information

APPENDIX I - RECONCILIATION OF SHAREHOLDERS’STOCKHOLDERS' EQUITY AND NET INCOME - BRGAAP vs IFRS

F-132F-146
APPENDIX II - STATEMENTS OF VALUE ADDEDF-135F-149

 


 

Table of Contents

 

Report of Independent Registered Public Accounting Firm

 

To the Board of Directors and Stockholders of

Banco Santander (Brasil) S.A.

 

Opinions on the Financial Statements and Internal Control over Financial Reporting

 

We have audited the accompanying consolidated statement of financial positionbalance sheets of Banco Santander (Brasil) S.A. and its subsidiaries (the “Company”) as of December 31, 20172019, 2018 and 2016,2017, and the related consolidated income statement, statementstatements, statements of profit or loss and other comprehensive income, statementstatements of changes in stockholders’ equity and statement of cash flowsflow statements for each of the twothree years in the period then ended December 31, 2019, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2017,2019, based on criteria established inInternal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 20172019, 2018 and 2016,2017, and the results of theirits operations and theirits cash flows for each of the three years thenin the period ended December 31, 2019 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, 2017,2019, based on criteria established inInternal Control - Integrated Framework (2013) issued by the COSO.

 

Change in Accounting Principle

As discussed in Note 1.c.2.1.iii to the consolidated financial statements, the Company changed the manner in which it accounts for financial instruments in 2018.

Basis for Opinions

 

The Company's management is responsible for these consolidated 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 accompanyingItem 15B – Management´s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB")(PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

 

Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis,

F-1

Table of Contents

evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

 

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 

Table of Contents

 

Supplemental Information

 

The reconciliation of shareholders'stockholders' equity and net income – BRGAAP vs IFRS as of and for the years ended December 31, 20172019, 2018 and 20162017 and the statements of value added for the years ended December 31, 20172019, 2018 and 2016,2017, 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. TheThis 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 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'stockholders' equity and net income – BRGAAP vs IFRS as of and for the years ended December 31, 20172019, 2018 and 20162017 and the statements of value added for the years ended December 31, 20172019, 2018 and 20162017 are fairly stated, in all material respects, in relation to the consolidated financial statements as a whole.

 

Definition and Limitations of Internal Control over Financial Reporting

 

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 

April 9, 2018Critical Audit Matters

 

We have served asThe critical audit matters communicated below are matters arising from the Company’s auditor since 2016.

F-2 

Tablecurrent period audit of Contents

 

Deloitte Touche Tohmatsu 

Dr. Chucri Zaidan Avenue, nº 1.240 

4th to 12thfloors - 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 sheet of Banco Santander (Brasil) S.A. and its subsidiaries (the “Bank”) as of December 31, 2015, and the related consolidated income statement, statements of comprehensive income and changes in total equity, and cash flows statement for the year then ended, 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 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. 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 referredthat were communicated or required 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 the results of their operations and their cash flows for the year then ended, 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 IIbe communicated to the notes under the caption Statement 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

DELOITTE TOUCHE TOHMATSU

Auditores Independentes

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, LinkedIn or Twitter.

© 2018 Deloitte Touche Tohmatsu. All rights reserved.

 

F-3 

Table of Contents

BANCO SANTANDER (BRASIL) S.A.

CONSOLIDATED FINANCIAL STATEMENTS OF FINANCIAL POSITION
(Thousands of Brazilian Reais - R$)

Assets

Note

2017

2016

2015

     
Cash and Balances With The Brazilian Central Bank5100,866,081110,604,91189,143,353
Financial Assets Held For Trading 52,439,57684,873,66350,536,731
Debt instruments734,879,68159,994,94625,193,598
Equity instruments8489,770398,461404,973
Trading derivatives9.a17,070,12524,480,25624,938,160
Other Financial Assets At Fair Value Through Profit Or Loss 1,692,0571,711,2042,080,234
Debt instruments71,658,6891,668,7491,506,570
Equity instruments833,36842,455573,664
Available-For-Sale Financial Assets 85,823,38457,815,04568,265,606
Debt instruments784,716,74755,829,57267,103,274
Equity instruments81,106,6371,985,4731,162,332
Held to maturity investments710,214,45410,048,76110,097,836
Loans and Receivables 322,336,767296,048,506306,268,788
Loans and amounts due from credit institutions632,300,09527,762,47342,422,638
Loans and advances to customers10272,420,157252,002,774252,033,449
Debt instruments717,616,51516,283,25911,812,701
Hedging Derivatives9.a192,763222,7171,312,202
Non-Current Assets Held For Sale111,155,4561,337,8851,237,493
Investments in Associates and Joint Ventures12866,564990,0771,060,743
Tax Assets2528,825,74128,753,18434,769,848
Current 4,047,6634,316,0724,194,344
Deferred 24,778,07824,437,11230,575,504
Other Assets164,578,2705,104,0123,802,118
Tangible Assets136,509,8836,646,4337,005,914
Intangible Assets 30,202,04330,236,84229,813,662
Goodwill1428,364,25628,355,03928,332,719
Other intangible assets151,837,7871,881,8031,480,943
TOTAL ASSETS 645,703,039634,393,240605,394,528

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

F-4 

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

CONSOLIDATED FINANCIAL STATEMENTS OF FINANCIAL POSITION
(Thousands of Brazilian Reais - R$)

Liabilities and Stockholders’ Equity

Note

2017

2016

2015

Financial Liabilities Held For Trading 49,322,54651,619,86942,387,768
Trading derivatives9.a16,514,15419,925,60022,340,137
Short positions9.b32,808,39231,694,26920,047,631
Financial Liabilities at Amortized Cost 478,880,704471,579,467457,281,656
Deposits from Brazilian Central Bank and deposits from credit institutions1779,374,68578,634,07269,451,498
Customer deposits18276,042,141247,445,177243,042,872
Marketable debt securities1970,247,01299,842,95594,658,300
Subordinated debts20519,230466,2468,097,304
Debt Instruments Eligible to Compose Capital218,436,9018,311,9189,959,037
Other financial liabilities2244,260,73536,879,09932,072,645
Hedging Derivatives9.a163,332311,0152,376,822
Provisions 13,986,91611,776,49111,409,677
Provisions for pensions funds and similar obligations233,923,4572,710,6272,696,653
Provisions for judicial and administrative proceedings, commitments and other provisions2410,063,4599,065,8648,713,024
Tax Liabilities258,248,0196,094,7405,253,125
Current 5,751,4884,826,7034,436,000
Deferred 2,496,5311,268,037817,125
Other Liabilities268,013,9218,199,0996,850,196
Total Liabilities 558,615,438549,580,681525,559,244
Stockholders’ Equity2987,425,07585,434,85583,531,754
Share capital 57,000,00057,000,00057,000,000
Reserves 28,966,45127,881,32624,388,967
Treasury shares (148,440)(514,034)(423,953)
Option for Acquisition of Equity Instrument (1,017,000)(1,017,000)(1,017,000)
Profit for the year attributable to the Parent 8,924,0647,334,5639,783,740
Less: dividends and remuneration (6,300,000)(5,250,000)(6,200,000)
Other Comprehensive Income (774,368)(1,347,800)(4,131,532)
Stockholders’ Equity Attributable to the Parent 86,650,70784,087,05579,400,222
Non - Controlling Interests28436,894725,504435,062
Total Stockholders’ Equity 87,087,60184,812,55979,835,284
Total Liabilities and Stockholders’ Equity 645,703,039634,393,240605,394,528

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

F-5 

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

CONSOLIDATED INCOME STATEMENTS
(Thousands of Brazilian Reais – R$, except for per share data)

 

Note

2017

2016

2015

Interest and similar income3371,418,34977,146,07769,870,200
Interest expense and similar charges34(36,471,860)(46,559,584)(38,533,089)
Net interest income 34,946,48930,586,49331,337,111
Income from equity instruments3583,120258,545142,881
Income from companies accounted for by the equity method1271,55147,537116,312
Fee and commission income3615,815,54313,548,48111,797,191
Fee and commission expense37(3,093,675)(2,570,885)(2,313,682)
Gains (losses) on financial assets and liabilities (net)38969,0903,016,156(20,002,859)
Financial assets held for trading 1,174,1113,166,399(19,936,801)
Other financial instruments at fair value through profit or loss 30,69482,63846,859
Financial instruments not measured at fair value through profit or loss (122,115)(115,202)(120,523)
Other (113,600)(117,679)7,606
Exchange differences (net)39605,0564,574,81410,084,420
Other operating expense (net)40(672,013)(624,571)(347,123)
Total Income 48,725,16148,836,57030,814,251
Administrative expenses (16,120,595)(14,920,410)(14,515,132)
Personnel expenses41(8,937,278)(8,377,265)(7,798,792)
Other administrative expenses42(7,183,317)(6,543,145)(6,716,340)
Depreciation and amortization (1,662,247)(1,482,639)(1,490,017)
Tangible assets13(1,190,967)(1,154,588)(1,029,706)
Intangible assets15(471,280)(328,051)(460,311)
Provisions (net) (3,309,239)(2,724,742)(4,001,294)
Impairment losses on financial assets (net) (12,338,300)(13,301,445)(13,633,989)
Loans and receivables10.c(12,338,141)(13,389,834)(13,110,319)
Other financial instruments not measured at fair value through profit or loss (159)88,389(523,670)
Impairment losses on other assets (net) (456,711)(114,321)(1,220,645)
Other intangible assets15(306,110)(5,838)(679,254)
Other assets (150,601)(108,483)(541,391)
Gains (losses) on disposal of assets not classified as non-current assets held for sale43(64,302)3,816780,615
Gains (losses) on non-current assets held for sale not classified as discontinued operations44(260,083)87,07350,493
Operating Profit Before Tax 14,513,68416,383,902(3,215,718)
Income taxes25(5,375,636)(8,918,984)13,049,544
Consolidated Profit for the Year 9,138,0487,464,9189,833,826
Profit attributable to the Parent 8,924,0647,334,5639,783,740
Profit attributable to non-controlling interests28213,984130,35550,086
Earnings Per Share (Brazilian Reais)30   
Basic earnings per 1,000 shares (Brazilian Reais)    
Common shares 1,133.43929.931,236.96
Preferred shares 1,246.771,022.921,360.66
Diluted earnings per 1,000 shares (Brazilian Reais)    
Common shares 1,132.44929.031,235.79
Preferred shares 1,245.691,021.931,359.36
Net Profit attributable - Basic (Brazilian Reais)    
Common shares 4,332,0263,560,2884,748,896
Preferred shares 4,592,0383,774,2755,034,844
Net Profit attributable - Diluted (Brazilian Reais)    
Common shares 4,331,9553,560,2224,748,810
Preferred shares 4,592,1093,774,3415,034,930
Weighted average shares outstanding (in thousands) - Basic    
Common shares 3,822,0573,828,5553,839,159
Preferred shares 3,683,1453,689,6963,700,299
Weighted average shares outstanding (in thousands) - Diluted    
Common shares 3,825,3133,832,2113,842,744
Preferred shares 3,686,4013,693,3523,703,884

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

F-6 

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME
(Thousands of Brazilian Reais - R$,)

 

2017

2016

2015

Consolidated Profit for the Year9,138,0487,464,9189,833,826
Other Comprehensive Income that will be reclassified subsequently to profit or loss when specific conditions are met:1,194,3353,725,565(3,069,317)
Available-for-sale financial assets1,147,3843,311,607(2,718,709)
Valuation adjustments - Gains / (Losses)1,789,2865,458,735(4,155,414)
Amounts transferred to income statement30,69482,63846,859
Income taxes(672,596)(2,229,766)1,389,846
Cash flow hedges46,951413,958(350,608)
Valuation adjustments73,238761,423(842,073)
Amounts transferred to income statement-1,580144,196
Income taxes(26,287)(349,045)347,269
Net investment hedge-634,207(791,228)
Net investment hedge-1,209,338(1,460,720)
Income taxes-(575,131)669,492
Translation adjustments investment abroad-(634,207)791,228
Exchange on investments Abroad-(634,207)791,228
Other Comprehensive Income that will not be Reclassified to net Income:(620,903)(941,833)739,706
Defined benefits plan(620,903)(941,833)739,706
Defined benefits plan(992,156)(1,568,122)1,186,862
Income taxes371,253626,289(447,156)
Total Comprehensive Income9,711,48010,248,6507,504,215
Attributable to the parent9,497,49610,118,2957,454,129
Attributable to non-controlling interests213,984130,35550,086
Total Comprehensive Income9,711,48010,248,6507,504,215

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

F-7 

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
(Thousands of Brazilian Reais - R$,)

  

Stockholders´ Equity Attributable to the Parent

  
         

Other Comprehensive Income

  
 NoteShare CapitalReservesTreasury SharesOption for Acquisition of Equity InstrumentProfit
Attributed
to the
Parent		Dividends and RemunerationTotal Stockholders’ EquityAvailable-
for-sale Financial
Assets		Defined Benefits planTranslation adjustments investment abroadGains and losses - Cash flow hedge and investmentTotalNon-controlling interestsTotal Stockholders’ Equity
Balances at December 31, 2014 56,806,38420,594,135(445,501)(950,000)5,630,023(1,530,000)80,105,04173,292(1,881,350)702,349(696,212)78,303,120380,17378,683,293
Total comprehensive income ----9,783,740-9,783,740(2,718,709)739,706791,228(1,141,836)7,454,12950,0867,504,215
Appropriation of net profit for the year -5,630,023--(5,630,023)---------
Dividends and interest on capital29.b-(1,530,000)---(4,670,000)(6,200,000)----(6,200,000)-(6,200,000)
Share based compensation41.b-160,916----160,916----160,916-160,916
Treasury shares29.d--(246,975)---(246,975)----(246,975)-(246,975)
Capital restructuring --(50)---(50)----(50)-(50)
Results of treasury shares29.d-(3,918)----(3,918)----(3,918)-(3,918)
Option for Acquisition of Equity Instrument ---(67,000)--(67,000)----(67,000)(240,000)(307,000)
Cancellation of Shares -(268,573)268,573-----------
Other29.a193,616(193,616)----------244,803244,803
Balance at December 31, 2015 57,000,00024,388,967(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)79,400,222436,06279,835,284
Total comprehensive income ----7,334,563-7,334,5633,311,607(941,833)(634,207)1,048,16510,118,295130,35510,248,650
Appropriation of net profit for the year -9,783,740--(9,783,740)---------
Dividends and interest on capital29.b-(6,200,000)---950,000(5,250,000)----(5,250,000)-(5,250,000)
Share based compensation41.b (35,463)----(35,463)----(35,463)-(35,463)
Treasury shares29.d--(90,031)---(90,031)----(90,031)-(90,031)
Capital restructuring --(50)---(50)----(50)-(50)
Treasury shares income29.d-(11,574)----(11,574)----(11,574)-(11,574)
Other -(44,344)----(44,344)----(44,344)160,087115,743
Balance at December 31, 2016 57,000,00027,881,326(514,034)(1,017,000)7,334,563(5,250,000)85,434,855666,190(2,083,477)859,370(789,883)84,087,055725,50484,812,559
Total comprehensive income ----8,924,064-8,924,0641,147,384(620,903)-46,9519,497,496213,9849,711,480
Appropriation of net profit for the year -7,334,563--(7,334,563)---------
Dividends and interest on capital29.b-(5,250,000)---(1,050,000)(6,300,000) ---(6,300,000)-(6,300,000)
Share based compensation -37,161----37,161----37,161-37,161
Treasury shares29.d-(744,419)365,643---(378,776)----(378,776)-(378,776)
Capital restructuring29.d--(49)---(49)----(49)-(49)
Treasury shares income29.d-(2,498)----(2,498)----(2,498)-(2,498)
Other -(289,682)----(289,682)----(289,682)(502,594)(792,276)
Balance at December 31, 2017 57,000,00028,966,451(148,440)(1,017,000)8,924,064(6,300,000)87,425,0751,813,574(2,704,380)859,370(742,932)86,650,707436,89487,087,601

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

F-8 

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

CONSOLIDATED STATEMENT OF CASH FLOWS
(Thousands of Brazilian Reais - R$,)

 

Note

2017

2016

2015

1. Cash Flows From Operating Activities    
Consolidated profit for the year 9,138,0487,464,9189,833,826
Adjustments to profit 17,015,11320,143,702(8,904,694)
Depreciation of tangible assets131,190,9671,154,5881,029,706
Amortization of intangible assets15471,280328,051460,311
Impairment losses on other assets (net) 456,711114,3211,220,645
Provisions and Impairment losses on financial assets (net) 15,647,53916,026,18717,635,283
Net Gains (losses) on disposal of tangible assets, investments and non-current assets held for sale43&44324,385(90,889)(831,108)
Share of results of entities accounted for using the equity method12(71,551)(47,537)(116,312)
Changes in deferred tax assets and liabilities25.d(406,395)5,343,885(9,417,913)
Monetary Adjustment of Escrow Deposits (637,124)(749,040)(650,314)
Recoverable Taxes (210,834)(215,228)(985,776)
Effects of Changes in Foreign Exchange Rates on Cash and Cash Equivalents -2,289,849(2,106,652)
Effects of Changes in Foreign Exchange Rates on Assets and Liabilities 33,691(3,924,662)(7,349,318)
Others(1) 216,444(85,823)(7,793,246)
Net (increase) decrease in operating assets (16,745,263)(59,866,978)(65,884,338)
Balance with the Brazilian Central Bank 10,535,759(24,156,755)(35,884,381)
Financial assets held for trading 32,410,414(33,996,130)5,997,510
Other financial assets at fair value through profit or loss 18,988457,419(1,607,210)
Available-for-sale financial assets (27,214,188)9,976,210(16,217,109)
Loans and receivables (35,295,311)(5,473,968)(34,360,873)
Held to maturity investments (26,266)(449,792)2,563,141
Other assets 2,825,341(6,223,962)13,624,584
Net increase (decrease) in operating liabilities 44,163,38243,247,08070,151,518
Financial liabilities held for trading (2,297,323)9,232,10122,817,977
Financial liabilities at amortized cost 43,702,28332,696,89446,967,102
Other liabilities 2,758,4221,318,085366,439
Paid taxes25.a(3,280,230)(4,240,115)(1,170,020)
Total net cash flows from operating activities (1) 50,291,0506,748,6074,026,292
2. Cash Flows From Investing Activities    
Investments (2,197,918)(1,945,372)(2,135,943)
Capital increase in Investments in associates and Joint Ventures12(34,154)(3,105)-
Acquisition of subsidiary, less net cash in the acquisition (275,091)(392,998)59
Tangible assets13.a(1,106,406)(873,140)(1,070,288)
Intangible assets (738,554)(670,576)(710,176)
Non - current assets held for sale11(43,713)(10,462)(355,538)
Change in the scope of consolidation4-4,909-
Disposal 744,913677,0881,375,108
Net cash received from disposal of subsidiaries --857,830
Capital reduction of investee in joint control12.b-76,860-
Tangible assets13&4337,46742,22655,220
Non - current assets held for sale11434,553208,232317,321
Dividends and interest on capital received 272,893349,770144,737
Total net cash flows from investing activities (2) (1,453,005)(1,268,284)(760,835)
3. Cash Flows From Financing Activities    
Own shares Acquisition29.d(378,776)(90,031)(247,025)
Issuance of other long-term financial liabilities1959,663,42050,313,46972,936,057
Dividends paid and interest on capital (5,652,081)(3,210,762)(3,992,956)
Payments of subordinated liabilities20-(8,362,652)(216,075)
Payments of other long-term financial liabilities19(97,009,957)(56,164,769)(63,516,234)
Payment of Debt Instruments Eligible to Compose Capital21(623,146)(701,671)(609,035)
Increase/ Decrease in non-controlling interests28(296,184)23,9094,803
Total net cash flows from financing activities (3) (44,296,724)(18,192,507)4,359,535
Exchange variation on Cash and Cash Equivalents (4) -(2,289,849)2,106,652
Net Increase in Cash (1+2+3+4) 4,541,321(15,002,033)9,731,644

F-9 F-2

Table of Contents

 

Note

2017

2016

2015

Cash and cash equivalents at beginning of year 18,129,58133,131,61423,399,970
Cash and cash equivalents at end of year 22,670,90218,129,58133,131,614
Cash and cash equivalents components    
Cash55,242,8694,445,9407,141,137
Loans and other617,428,03313,683,64125,990,477
Total of cash and cash equivalents 22,670,90218,129,58133,131,614
Non-cash transactions    
Foreclosures loans and other assets transferred to non-current assets held for sale11524,497834,903293,440
Dividends and interest on capital declared but not paid29.b4,455,0004,750,0003,000,000
Supplemental information    
Interest received 73,094,24875,818,51170,566,274
Interest paid 37,948,82846,051,07037,912,698

(1) 2015 includes mainly the effect noted in footnote 25.a.

The accompanying Notescommittee and that (i) relate to accounts or disclosures that are an integral part of these consolidated financial statements.

F-10 

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Brazilian Reais - R$, unless otherwise stated))

1. Introduction, basis of presentation ofmaterial to the consolidated financial statements and other information

a) Introduction

Banco Santander (Brasil) S.A. (Banco Santander(ii) involved our especially challenging, subjective, or Bank), directly and indirectly controlled by Banco Santander, S.A., basedcomplex judgments. The communication of critical audit matters does not alter in Spain (Banco Santander Spain), isany way our opinion on the lead institution of the Financial and Prudential Group (Conglomerate Santander) under the authority of 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, loans and advances, mortgage loans, leasing, credit card operations and foreign exchange. Through its subsidiaries, the Bank also operates in the payment institution, leasing, shares club management, securities and 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, fortaken as a whole, and we are not, by communicating the year endedcritical audit matters below, providing separate opinions on December 31, 2017, were authorizedthe critical audit matters or on the accounts or disclosures to be issued by the Board of directors at the meeting held on February 15, 2018.which they relate.

 

b) BasisMeasurement of presentation ofexpected credit losses

As described in Notes 1.c.2.1.iii, 2.i, 9 and 47.b to the consolidated financial statements,

These consolidated financial statements were prepared management measures the expected credit losses at the probability-weighted estimate of credit losses, that involves management’s judgment, as set forth 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 International Financial Reporting Interpretations Committee - 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.

c) Other information

c.1) Adoption of new standards and interpretations

The Bank adopt the rules and interpretations that came into force since January 1, 2017. The following rules and interpretations are applicable to the Bank and did not have relevant effect over the financial statement:

• Annual Improvements of IFRS

2015-2017 cycle (Public Consultation) - Subjects under discussion related to: IAS 12 - Income Taxes, IAS 23 - Borrowing Costs and IFRS 9 - Financial InstrumentsInstruments. At December 31, 2019, the impairment losses on loans and IAS 28 - Investments in Associatesreceivables was BRL 22,625,750 thousand on total loans and Joint Ventures.

IAS 12 - Income Taxes -receivables at amortized cost of BRL 347,256,660 thousand. Management calculates expected credit losses (‘ECL’) using three main components: a probability of default (‘PD’), loss given default (‘LGD’) and exposure at default (‘EAD’) including individual and collective models. The subject under discussionECL measurement is relatedbased on management’s estimate of present value expected to be received, including the presentation of income tax consequences of payments on, and issuing costs of, financial instruments that are classified as equity, i.e. whether an entity recognizes the relevant income tax consequences directly in equity or in profit or loss.

IAS 23 - Borrowing Costs - Clarify whether an entity transfers specific borrowings to the general borrowings pool once the constructionuse of a qualifying asset is complete.

Standardsvariety of assumptions such as historical loss experience, credit quality, concentration, economic factors and Interpretations that became effective after December 31, 2017

At the date of preparation of these consolidated financial statements, the following standards and interpretations which effectively came into force after December 31, 2017 had not yet been adopted by the Bank:

IFRS 9 - Financial Instruments, issued in July 2014 by the International Accounting Standards Board (IASB) in order to replace IAS39 – Financial instruments, establishing the requirements for the recognition and measurement of financial instruments to be applied as from January 2018. The update establishes changes to the IFRS 9 - Financial Instruments: Disclosure, requiring additional disclosure due to such changes.

1. Model proposed by IFRS 9estimated future cash flows.

 

The main aspects of the new standard are as follows:

1.a) Classification of financial instruments

The criteriaprincipal considerations for the financial assets classification will depend both on the business management model and the features of the contractual cash flows, aiming to identify specifically if these meet the SPPI criteria. Based on the aforementioned, the financial asset will be classified into: i) amortized cost, ii) fair value with changes in income statement, or iii) fair value with changes in equity. IFRS 9 also establishes other option of designating an instrument in fair value with changes in income statement under certain conditions.

F-11 

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Brazilian Reais - R$ - unless otherwise stated)

The main activity of Banco Santander is the concession of retail banking operations and does not concentrate its exposure on complex financial products. The Bank has made 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 the performed analysis, the Bank does not expect significant changes in the composition of the portfolios, due the factour determination that there will be no significant changes with respectperforming procedures relating to the classification under pre-existing regulation:

·Financial assets classified as Loans and Advances and Held-to-Maturity under IAS 39 are generally intended to be classified as 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 as 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 as fair value through profit and loss will generally continue to be classified in this category.

With regard to financial liabilities, the classification remains essentially unchanged relative to the current standard.

Based on the adopted models, the Bank estimatedmeasurement of expected credit losses is a non material impactcritical audit matter are (i) there was significant judgment used by management in its equity arising from the IFRS 9 adoption, related to the application of the new financial assets classification requirements. This amount will be booked when the standard becomes fully applied, on January 1, 2018, registering the counterparties in each financial asset heading.

1.b) Credit risk impairment model

The IFRS 9 introduces a new impairment model to be applied to financial assets which requiresdetermining the expected credit loss (ECL) recognition insteadlosses, in particular the assumptions used in determining the PD and LGD, which in turn led to a high degree of incurred loss, accordingauditor judgment, subjectivity and effort in performing procedures and in evaluating audit evidence obtained relating to these assumptions; and (ii) the current rule.audit effort involved use of professionals with specialized skill and knowledge to assist in evaluating those assumptions.

 

UnderAddressing the current standard, the incurred losses are calculated basedmatter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on reasonable and substantiated information about past events and current conditions. According to the IFRS 9 the expectation of future events and economic conditions must also be considered.

The Bank does not recognize interest from the moment Management understands that the recognition of this revenue is not probable, due to the significant uncertainty of future receipt. Banco Santander estimated that this unrecognized balance is not significant.

Scope of application

The IFRS 9 financial assets impairment model has the application scope bigger than the incurred loss model, currently used, being applied on the Financial Assets classified into "amortized cost" and on the debt instruments classified into "fair value through OCI" as well as the consideration of lease, risks and contingent commitments.

Classification of financial instruments by phases

The financial instruments portfolio for impairment purposes will be divided into three categories, based on the phase of each instrument 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. The impairment over the financial instrument represents the expected loss resulting from possible defaults within the 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 provision for expected loss reflects the estimated loss throughout the residual lifetime of the financial instrument. In order to assess the significant increase in credit risk, shall be used quantitative indicators used in the ordinary credit risk management and other qualitative variables such as the indication that the operation is not impaired if it is considered refinanced or if the operation is included as special agreement.

- Stage 3: a financial instrument is included in this phase when it is considered to be effectively impaired. In this case, the provision for losses will be he expected credit risk losses throughout the residual lifetime 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 outstanding balance exposure that could be provided at default. Developed models incorporate assumptions over the modifications in the payment schedule.

F-12 

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Brazilian Reais - R$ - unless otherwise stated)

- 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. It reflects the percentage of exposure that could not be recovered in the event of a default. It depends mainly on the collaterals, which are considered as credit risk mitigating factor associated with each credit 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 which its purpose is to equalize the net present value of the financial instrument and the carrying value. When calculating the discount rate, expected losses for default when estimating future cash flows are not generally taken into consideration, except in cases in which the asset is considered to be impaired, in which case the interest rate applied will take into consideration such losses and it will be known as the effective interest rate adjusted for credit risk.

In order to estimate the above parameters, the Bank has applied its experience in developing internal models for parameters calculation 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 factors, resulting in three scenarios such as: basis, pessimist and optimist. 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.

Based on the adopted models, the Bank estimated an impact of R$1.5 billion in its equity net of tax effects arising from the IFRS 9 adoption, related to financial assets impairment. This amount will be booked when this rule becomes fully applied, on January 1, 2018, registering the counterparty in the heading "Allowance for Credit Losses" related to the expected losses for financial assets classified at "amortized cost", for debt instruments classified at "fair value with changes in other comprehensive instruments", as well as the lease consideration. For the other risks and contingent commitments the register will be in the heading "provisions".

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, allowing a greater variety of derivative financial instruments which can be considered to be hedging instruments.

The Bank decided to keep its Hedge Accounting coverage aligned with IAS 39 requirements, considering that IFRS 9 exempts the application of the new Hedge Accounting concepts while IASB has not determined the new accounting treatment and concepts for Macro Hedge yet.

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, it 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.

At December 31, 2017, the aforementioned requirements must be applied retrospectively adjusting the opening balance of January 1, 2018, and it is not necessary to re-issue the comparative Financial Statements.

The project’s main phases and milestones

The main milestones achieved include:

- the definition and implementation of the functional requirements and the design of an operation model adapted to the IFRS 9 demands;

- the need identification of the technological environment and the necessary adjustments to the existing controls frame.

- The implementation of models and other requirements to the provisions calculation.

F-13 

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Brazilian Reais - R$ - unless otherwise stated)

• 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. This 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.

The IFRS 15’s basic principle consists in the fact that an entity recognizes revenues to describe the transference of products or services rendered to clients using the value that reflects the consideration which the entity expects to receive in return of such products or services rendered. An entity recognizes revenues according to this basic principle through the following steps:

Step 1: To identify the contract(s) with a client – a contract is the agreement between two or more parties which creates feasible rights and obligations. The IFRS 15’s requirements are applied to every contract signed with a client and which is according to specific criteria.

Step 2: To identify the performance obligations in the contract – a contract includes promises of products transfer or services to a client. If these products or services are different, the promises become performance obligations and they are registered separately.

Step 3: To determine the transaction price - the transaction price is the value of the contract´s consideration which an entity expects to receive in return of the products transfer or services rendered to a client.

Step 4: To allocate the transaction price into the performance obligation of the contract – an entity normally allocates the transaction price into each performance obligation based on the individual sales price related to each good or service promised in contract.

Step 5: To recognize the revenue when (or as) the entity meets a performance obligation – an entity recognizes revenues when (or as) it meets an performance obligation due to the good transferred or service rendered to a client. The amount of revenue recognized is the value allocate to the performance obligation met.

After the analysis on the commissions/fees applied by the Banco Santander versus the new IFRS 15 concepts, it was possible to conclude that there will not be significant impact on the revenues current recognized.

• IFRS 16 – Leasing contracts – Issued in January 2016 with the mandatory enforcement date since January 1st, 2019. This rule contains a new approach for the leasing contracts, which requires from the lessee the assets and liabilities recognition based on the rights and obligations created by the contract. That way, first the entity shall evaluate whether the contract is or contain a leasing characteristics. The contract is or contain leasing characteristics, if it transmits the right to control the identified asset use in a defined period in return of a consideration.

"Effective from January-2019, the Banks still in the process of analyzing this new rule, looking carefully the new concept of leasing, specially acting as tenant. Acting as lessee, the Bank does not expect great changes.

• IFRS 17 – In May 2017, IASB issues this rule for insurance contracts which its goal is to replace IFRS 4. The enforcement date of IFRS 17 is on January 1st, 2021. The rule´s purpose is to improve the disclosure on the financial statement being one of the main changes the profit recognition during the time that the insurance services are being rendered, evaluating the insurance company´s performance during time.

The possible impacts due to the changes applied since 2018 are under Bank´s analysis, which shall be concluded until the date of enforcement of the rule.

c.2) Estimates used

The consolidated results and the determination of consolidated equity are influenced by the accounting policies, assumptions, estimates and measurement methods used by the management of the Bank in preparing the consolidated financial statements. The Bank makes estimatesThese procedures included understanding and testing the effectiveness of controls relating to management’s measurement of expected credit losses, which included controls over the assumptions that affectused. These procedures also included, among others: (i) the reported amountsinvolvement of assetsprofessionals with specialized skill and liabilitiesknowledge to assist in testing management’s process for determining the expected credit losses, including evaluating the appropriateness of future periods. All estimatesthe methodology and assumptions required,models, testing the accuracy and completeness of data used, and evaluating the reasonableness of significant assumptions; (ii) the analysis of management’s accounting policies in conformitycomparison with IFRS are best estimates undertaken9; and (iii) analysis over management’s disclosures in accordance with the applicable standard.financial statements.

 

InProvisions for judicial and administrative proceedings

As described in Notes 1.c.2.1.v, 2.r and 23 to 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.

c.2.1) 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 notes, are described below:

F-14 

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Brazilian Reais - R$ - unless otherwise stated)

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 taxes (IRPJ), Social Contribution (CSLL), Social Integration Program (PIS) and Tax for Social Security Financing (COFINS)

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 carryforwards. These amounts are measured at the tax rates that are expected to apply in the period when the asset is carried out or the liability is settled. Deferred tax assets are only recognized for temporary differences to the extent that they are 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 carryforwards) 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 financial statement date in order to ascertain whether they still exist, and the appropriate adjustments are made on the basis of the findings of the assessment performed. Under the current regulation, the expected tax credits carrying out is 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 and those that are not measured at fair value through income statement 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 consideration 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 the effects of such study are recognized in the headings of the income statement "Interest expense and similar Charges" and "Provisions (net)", during the current period.

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.x & 23.iii present the accounting policies for Post-employment benefits and sensitivity analysis, respectively.

F-15 

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Brazilian Reais - R$ - unless otherwise stated)

v. Provisions, contingent assets and liabilities

Provisions for the lawsuitsjudicial and administrative proceedings are recorded when their risk of loss are considered probable and the amounts can be reliably measured, based on the nature, complexity and history of lawsuits and the opinion of legal counselcounsel. At December 31, 2019, the Company has recorded provisions for judicial and administrative proceedings of BRL 9,226,735 thousand. The Company also discloses the contingency in circumstances where management concludes no loss is probable or reasonably estimable, but it is reasonably possible that a loss may be incurred.

F-3

Table of Contents

The principal considerations for our determination that performing procedures relating to provisions for judicial and administrative proceedings is a critical audit matter are there was significant judgment by management when assessing the likelihood of a loss being incurred and the potential amount of the judicial and administrative proceedings. This in turn led to a high degree of auditor judgment and effort in evaluating management’s assessment of the provisions for judicial and administrative proceedings, including the involvement of professionals with specialized skills and knowledge.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included the understanding and testing the design and the effectiveness of controls relating to identifying, assessing, monitoring, measuring, recording, and disclosing the provisions for judicial and administrative proceedings, including the completeness and accuracy of the data used. Our procedures also included testing the recognition and measurement of the Company’s provisions for judicial and administrative proceedings and performing external confirmation procedures with law firms responsible for a sample of the judicial and administrative proceedings to evaluate the reasonableness of management’s assessment of the provisions. With the assistance of our professionals with specialized skill and knowledge, we evaluated the reasonableness management’s assessment of a sample of proceedings taking into account the individual progress of similar proceedings.

Valuation of Level 3 financial instruments

As described in Notes 1.c.2.1.ii, 2.e and 30 to the consolidated financial statements, if there is low liquidity, the Company uses valuation techniques based on internal models with the use of significant non-observable inputs for which the determination of fair value requires significant management judgment or estimation. At December 31, 2019, the Company has recorded as level 3 fair value measurements certain financial instruments including financial assets of BRL 4,322,668 thousand and financial liabilities of BRL 2,164,757 thousand. The Company determines the fair value of certain Level 3 financial instruments using quantitative models that utilize multiple significant non-observable inputs, including long-dated volatility, estimated future inflation and forward price, as applicable.

The principal considerations for our determination that performing procedures relating to these financial instruments is a critical audit matter due to a high degree of management judgment in the valuation process since the techniques carried out with internal models are based on subjective non-observable inputs. This in turn led to a high degree of auditor judgment and effort in performing procedures, including the involvement of professionals with specialized skill and knowledge to assist in evaluating certain audit evidence.

F-4

Table of Contents

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included the understanding and testing the effectiveness of controls relating to valuation models, significant non-observable inputs, and data. Our procedures also included, the involvement of professionals with specialized skill and knowledge to calculate an independent estimate of fair value for a sample of certain financial instruments and compare management’s estimate with the independently developed estimate of fair value. Developing the independent estimate involved testing the completeness and accuracy of data provided by management and evaluating the reasonableness of management’s assumptions used to develop the significant non-observable inputs.

/s/PricewaterhouseCoopers Auditores Independentes

São Paulo, Brazil

March 6, 2020

We have served as the Company’s auditor since 2016.

F-5

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

CONSOLIDATED BALANCE SHEETS

(Thousand of Brazilian Reais - R$) 

AssetsNote201920182017
     
Cash and Balances With The Brazilian Central Bank420,127,36419,463,58720,642,321
     
Financial Assets Held For Trading --86,271,097
Debt instruments6--34,879,681
Equity instruments7--489,770
Trading derivatives8.a--17,070,125
Balances With The Brazilian Central Bank --33,831,521
Financial Assets Measured At Fair Value Through Profit Or Loss 32,342,30643,711,800-
Debt instruments63,735,0763,171,746-
Balances With The Brazilian Central Bank 28,607,23040,540,054-
Financial Assets Measured At Fair Value Through Profit Or Loss Held For Trading 57,020,90368,852,314-
Debt instruments634,885,63150,066,469-
Equity instruments72,029,470766,333-
Trading derivatives8.a20,105,80218,019,512-
Non-Trading Financial Assets Mandatorily Measured At Fair Value Through Profit Or Loss 171,453917,477-
Equity instruments7171,453298,297-
Loans and advances to customers9-619,180-
Other Financial Assets At Fair Value Through Profit Or Loss --1,692,057
Debt instruments6--1,658,689
Equity instruments7--33,368
Available-For-Sale Financial Assets --85,823,384
Debt instruments6--84,716,747
Equity instruments7--1,106,637
Financial Assets Measured At Fair Value Through Other Comprehensive Income96,120,23385,436,677-
Debt instruments695,962,92785,395,691-
Equity instruments7157,30640,986-
Held to maturity investments6--10,214,454
Loans and Receivables --368,729,006
Loans and amounts due from credit institutions5--78,692,334
Loans and advances to customers9--272,420,157
Debt instruments6--17,616,515
Financial Assets Measured At Amortized Cost 474,680,904429,731,475-
Loans and amounts due from credit institutions5109,233,12891,859,759-
Loans and advances to customers9326,699,480301,072,207-
Debt instruments638,748,29636,799,509-
Hedging Derivatives8.a339,932343,934192,763
Non-Current Assets Held For Sale101,325,3351,380,2311,155,456
Investments in Associates and Joint Ventures111,070,7621,053,315866,564
Tax Assets2433,599,17831,565,76728,825,741
Current 3,304,1163,885,1894,047,663
Deferred 30,295,06227,680,57824,778,078
Other Assets155,061,3374,800,4674,578,270
Tangible Assets129,781,9576,588,9756,509,883
Intangible Assets 30,595,78830,018,98830,202,043
Goodwill1328,375,00428,378,28828,364,256
Other intangible assets142,220,7841,640,7001,837,787
TOTAL ASSETS 762,237,452723,865,007645,703,039
     
The accompanying Notes are an integral part of these consolidated financial statements.

F-6

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

CONSOLIDATED BALANCE SHEETS

(Thousand of Brazilian Reais - R$) 

Liabilities and Stockholders' EquityNote201920182017
     
Financial Liabilities Held For Trading --49,322,546
Trading derivatives8.a--16,514,154
Short positions8.b--32,808,392
     
Financial Liabilities Measured At Fair Value Through Profit Or Loss Held For Trading 46,064,66950,938,992-
Trading derivatives8.a22,229,01618,243,315.00-
Short positions8.b23,835,65332,695,677.00-
     
Financial Liabilities Measured At Fair Value Through Profit Or Loss 5,319,4161,946,056-
Deposits from Brazilian Central Bank and deposits from credit institutions215,319,4161,946,056.00-
     
Financial Liabilities at Amortized Cost 575,230,401547,295,169478,880,704
Deposits from Brazilian Central Bank and deposits from credit institutions1699,271,41599,022,80679,374,685
Customer deposits17336,514,597304,197,800276,042,141
Marketable debt securities1873,702,47474,626,23270,247,012
Subordinated debts19-9,885,607519,230
Debt Instruments Eligible to Compose Capital2010,175,9619,779,9448,436,901
Other financial liabilities2155,565,95449,782,78044,260,735
     
Hedging Derivatives8.a200,961223,520163,332
     
Provisions 16,331,82514,695,89813,986,916
Provisions for pensions funds and similar obligations224,960,6203,357,6543,923,457
Provisions for judicial and administrative proceedings, commitments and other provisions2311,371,20511,338,24410,063,459
     
Tax Liabilities2410,960,0758,074,7648,248,019
Current 5,419,2025,043,3755,751,488
Deferred 5,540,8733,031,3892,496,531
     
Other Liabilities2510,920,9449,095,1488,013,921
     
Total Liabilities 665,028,291632,269,547558,615,438
     
Stockholders' Equity2896,736,29091,944,33387,425,075
Share capital 57,000,00057,000,00057,000,000
Reserves 34,877,49330,440,28828,966,451
Treasury shares -       681,135(461,432)(148,440)
Option for Acquisition of Equity Instrument -         67,000(1,017,000)(1,017,000)
Profit for the year attributable to the Parent 16,406,93212,582,4778,924,064
Less: dividends and remuneration -  10,800,000(6,600,000)(6,300,000)
     
Other Comprehensive Income -         85,710(878,863)(774,368)
     
Stockholders' Equity Attributable to the Parent 96,650,58091,065,47086,650,707
     
Non - Controlling Interests27558,581529,990436,894
     
Total Stockholders' Equity 97,209,16191,595,46087,087,601
Total Liabilities and Stockholders' Equity 762,237,452723,865,007645,703,039

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

F-7

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

CONSOLIDATED INCOME STATEMENTS

(Thousand of Brazilian Reais - R$) 

 Note201920182017
     
Interest and similar income3272,841,06070,478,39371,418,349
Interest expense and similar charges33(28,519,953)(28,557,051)(36,471,860)
Net interest income 44,321,10741,921,34234,946,489
Income from equity instruments3418,93332,62383,120
Income from companies accounted for by the equity method11149,48865,95871,551
Fee and commission income3520,392,45817,728,45215,815,543
Fee and commission expense36(4,679,306)(3,596,293)(3,093,675)
Gains (losses) on financial assets and liabilities (net)372,462,545(2,782,802)969,090
Financial assets held for trading --1,174,111
Financial Assets At Fair Value Through Profit Or Loss 252,253(138,673)-
Financial Assets Measured At Fair Value Through Profit Or Loss Held For Trading2,391,080(2,764,859)-
Non-Trading Financial Assets Mandatorily Measured At Fair Value Through Profit Or Loss11,50161,239-
Other financial instruments at fair value through profit or loss --30,694
Financial instruments not measured at fair value through profit or loss (57,522)(138,104)(122,115)
Other (134,767)197,595(113,600)
Exchange differences (net)38(2,788,537)(2,806,471)605,056
Other operating expense (net)39(1,107,719)(1,055,850)(672,013)
Total Income 58,768,96949,506,95948,725,161
Administrative expenses (16,941,526)(16,792,138)(16,120,595)
Personnel expenses40(9,327,714)(9,206,007)(8,937,278)
Other administrative expenses41(7,613,812)(7,586,131)(7,183,317)
Depreciation and amortization (2,391,857)(1,739,959)(1,662,247)
Tangible assets12(1,870,836)(1,216,704)(1,190,967)
Intangible assets14(521,021)(523,255)(471,280)
Provisions (net) (3,681,586)(1,999,604)(3,309,239)
Impairment losses on financial assets (net) (13,369,905)(12,713,435)(12,338,300)
Loans and receivables9.c--(12,338,141)
Financial Assets Measured At Amortized Cost and contingent commitments(13,369,905)(12,713,532)-
Gains (losses) due to derecognition of financial assets measured at amortized cost-97(159)
Impairment losses on other assets (net) (131,435)(508,310)(456,711)
Other intangible assets14(103,924)(300,865)(306,110)
Other assets14(27,511)(207,445)(150,601)
Gains (losses) on disposal of assets not classified as non-current assets held for sale4210,646(25,476)(64,302)
Gains (losses) on non-current assets held for sale not classified as discontinued operations439,843181,734(260,083)
Operating Income Before Tax 22,273,14915,909,77114,513,684
Income taxes24(5,641,699)(3,109,853)(5,375,636)
Consolidated Net income for the period 16,631,45012,799,9189,138,048
Profit attributable to the Parent 16,406,93212,582,4778,924,064
Profit attributable to non-controlling interests27224,518217,441213,984
Earnings Per Share (Brazilian Reais)29   
Basic earnings per 1,000 shares    
Common shares 2,094.831,604.341,133.43
Preferred shares 2,304.321,764.781,246.77
Diluted earnings per 1,000 shares    
Common shares 2,094.831,604.341,132.44
Preferred shares 2,304.321,764.781,245.69
Net Profit attributable - Basic    
Common shares 7,965,1946,108,3494,332,026
Preferred shares 8,441,7386,474,1284,592,038
Net Profit attributable - Diluted    
Common shares 7,965,1946,108,3494,331,955
Preferred shares 8,441,7386,474,1284,592,109
Weighted average shares outstanding (in thousands) - Basic    
Common shares 3,802,3033,807,3863,822,057
Preferred shares 3,663,4443,668,5273,683,145
Weighted average shares outstanding (in thousands) - Diluted    
Common shares 3,802,3033,807,3863,825,313
Preferred shares 3,663,4443,668,5273,686,401

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

F-8

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Thousand of Brazilian Reais - R$) 

  201920182017
     
Consolidated Profit for the Year 16,631,45012,799,9189,138,048
     
Other Comprehensive Income that will be reclassified subsequently to profit or loss when specific conditions are met: 1,468,651558,9671,194,335
Available-for-sale financial assets --1,147,384
Valuation adjustments - Gains (Losses) --1,789,286
Amounts transferred to income statement --30,694
Income taxes --(672,596)
Financial Assets Measured At Fair Value Through Other Comprehensive Income 1,352,702475,809-
Financial Assets Measured At Fair Value Through Other Comprehensive Income 2,926,285388,481-
Gains (Losses) on financial assets previously classified as available-for-sale and reclassified to the income statement (net) -7,982-
Gains (Losses) on financial assets previously classified as available-for-sale and reclassified to reserves (net) -296,802-
Income taxes (1,573,583)(217,456)-
Cash flow hedges 115,94983,15846,951
Valuation adjustments 270,119140,81173,238
Amounts transferred to income statement 6,767(6,767)-
Income taxes (160,937)(50,886)(26,287)
Other Comprehensive Income that will not be Reclassified to net Income: (675,497)(366,660)(620,903)
Defined benefits plan (675,497)(366,660)(620,903)
Defined benefits plan (1,358,578)(418,768)(992,156)
Income taxes 683,08152,108371,253
     
Total Comprehensive Income 17,424,60412,992,2259,711,480
     
Attributable to the parent 17,200,08612,774,7849,497,496
Attributable to non-controlling interests 224,518217,441213,984
Total Comprehensive Income 17,424,60412,992,2259,711,480

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

F-9

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Thousand of Brazilian Reais - R$) 

                 
  Stockholders´ Equity Attributable to the ParentNon-controlling
Interests		Total
Stockholders'
Equity
     
 NoteShare
Capital		ReservesTreasury
Shares		Option for Acquisition of Equity InstrumentProfit
Attributed
to the Parent		Dividends and
Remuneration		Total Stockholders´
Equity		Financial Assets available for saleFinancial Assets Measured At Fair Value Through Other Comprehensive IncomeDefined Benefits planTranslation adjustments investment abroadGains and losses - Cash flow hedge and InvestmentTotal
Balance at December 31, 2016 57,000,00027,881,326(514,034)(1,017,000)7,334,563(5,250,000)85,434,855666,190-(2,083,477)859,370(789,883)84,087,055725,50484,812,559
                 
Total comprehensive income----8,924,064-8,924,0641,147,384-(620,903)-46,9519,497,496213,9849,711,480
Net profit ----8,924,064-8,924,064-----8,924,064213,9849,138,048
Other comprehensive income-------1,147,384-(620,903)-46,951573,432-573,432
Financial Assets Measured At Fair Value Through Other Comprehensive Income-------1,147,384----1,147,384-1,147,384
Pension plans ---------(620,903)--(620,903)-(620,903)
Gain and loss - Cash flow and investment hedge-----------46,95146,951-46,951
Appropriation of net income from prior years-7,334,563--(7,334,563)----------
Dividends and interest on capital28.b-(5,250,000)---(1,050,000)(6,300,000)-----(6,300,000)-(6,300,000)
Share based compensation40.b-37,161----37,161-----37,161-37,161
Treasury shares28.d-(744,419)365,643---(378,776)-----(378,776)-(378,776)
Capital restructuring --(49)---(49)-----(49)-(49)
Treasury shares income28.d-(2,498)----(2,498)-----(2,498)-(2,498)
Other0-(289,682)----(289,682)-----(289,682)(502,594)(792,276)
Balance at December 31, 2017 57,000,00028,966,451(148,440)(1,017,000)8,924,064(6,300,000)87,425,0751,813,574-(2,704,380)859,370(742,932)86,650,707436,89487,087,601

Change in the initial adoption of IFRS 9		 -(1,245,023)----(1,245,023)(1,813,574)1,516,772---(1,541,825)-(1,541,825)

Balances on January 1, 2018		 57,000,00027,721,428(148,440)(1,017,000)8,924,064(6,300,000)86,180,052-1,516,772(2,704,380)859,370(742,932)85,108,882436,89485,545,776
Total comprehensive income----12,582,477-12,582,477-475,809(366,660)-83,15812,774,784217,44112,992,225
Net profit ----12,582,477-12,582,477-----12,582,477217,44112,799,918
Other comprehensive income--------475,809(366,660)-83,158192,307-192,307
Financial Assets Measured At Fair Value Through Other Comprehensive Income--------475,809---475,809-475,809
Pension plans ---------(366,660)--(366,660)-(366,660)
Gain and loss - Cash flow and investment hedge-----------83,15883,158-83,158
Appropriation of net income from prior years-8,924,064--(8,924,064)----------

Option to Acquire Own Instrument		-106,440----106,440-----106,440(106,440)-
Dividends and interest on capital28.b-(6,300,000)---(300,000)(6,600,000)-----(6,600,000)-(6,600,000)
Share based compensation40.b-(17,854)----(17,854)-----(17,854)-(17,854)
Treasury shares28.d--(312,305)---(312,305)-----(312,305)-(312,305)
Capital restructuring --(687)---(687)-----(687)-(687)
Treasury shares income28.d-(15,868)----(15,868)-----(15,868)-(15,868)
Other -(40,517)----(40,517)- ---(40,517)44,6904,173
Balance at December 31, 2018 57,000,00030,377,693(461,432)(1,017,000)12,582,477(6,600,000)91,881,738-1,992,581(3,071,040)859,370(659,774)91,002,875592,58591,595,460

F-10

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Thousand of Brazilian Reais - R$) 

                 
                 
  Stockholders´ Equity Attributable to the ParentNon-controlling
Interests		Total
Stockholders'
Equity
     
 NoteShare
Capital		ReservesTreasury
Shares		Option for Acquisition of Equity InstrumentProfit
Attributed
to the Parent		Dividends and
Remuneration		Total Stockholders´
Equity		Financial Assets available for saleFinancial Assets Measured At Fair Value Through Other Comprehensive IncomeDefined Benefits planTranslation adjustments investment abroadGains and losses - Cash flow hedge and InvestmentTotal
Balance at December 31, 2018 57,000,00030,377,693(461,432)(1,017,000)12,582,477(6,600,000)91,881,738-1,992,581(3,071,040)859,370(659,774)91,002,875592,58591,595,460
                 
Total comprehensive income----16,406,932-16,406,932-1,352,702(675,497)-115,94917,200,086-17,200,086
Net profit ----16,406,932-16,406,932-----16,406,932-16,406,932
Other comprehensive income--------1,352,702(675,497)-115,949793,154-793,154
Financial Assets Measured At Fair Value Through Other Comprehensive Income--------1,352,702---1,352,702-1,352,702
Pension plans ---------(675,497)--(675,497)-(675,497)
Gain and loss - Cash flow and investment hedge-----------115,949115,949-115,949
Appropriation of net income from prior years-12,582,477--(12,582,477)----------

Own Instrument Acquisition Option		-(1,598,336)-950,000--(648,336)-----(648,336)-(648,336)
Dividends and interest on capital28.b-(6,600,000)---(4,200,000)(10,800,000)-----(10,800,000)-(10,800,000)
Share based compensation -50,886----50,886-----50,886-50,886
Treasury shares28.d--(219,703)---(219,703)-----(219,703)-(219,703)
Treasury shares income28.d-5,796----5,796-----5,796-5,796
Other -58,976----58,976-----58,976(34,004)24,972
Balance at December 31, 2019 57,000,00034,877,492(681,135)(67,000)16,406,932(10,800,000)96,736,289-3,345,283(3,746,537)859,370(543,825)96,650,580558,58197,209,161

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

F-11

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

CONSOLIDATED CASH FLOW STATEMENTS

(Thousand of Brazilian Reais - R$) 

 Note201920182017
1. Cash Flows From Operating Activities    
Consolidated profit for the year 16,631,45012,799,9189,138,048
Adjustments to profit 14,654,87714,765,40417,015,113
Depreciation of tangible assets121,870,8361,216,7041,190,967
Amortization of intangible assets14521,021523,255471,280
Impairment losses on other assets (net) 131,435508,310456,711
Provisions and Impairment losses on financial assets (net) 17,051,49114,713,03915,647,539
Net Gains (losses) on disposal of tangible assets, investments and non-current assets held for sale42&43(20,489)(156,258)324,385
Income from companies accounted by the equity method11(149,488)(65,958)(71,551)
Changes in deferred tax assets and liabilities24.d(2,912,281)(1,594,440)(406,395)
Monetary Adjustment of Escrow Deposits (574,399)(664,003)(637,124)
Recoverable Taxes (182,469)(222,402)(210,834)
Effects of Changes in Foreign Exchange Rates on Cash and Cash Equivalents99--
Effects of Changes in Foreign Exchange Rates on Assets and Liabilities(2,609,679)1,173,75733,691
Other 1,528,800(666,600)216,444
Net (increase) decrease in operating assets (42,332,510)(79,913,313)(16,745,263)
Balance with the Brazilian Central Bank 85516,629,126(7,043,255)
Financial assets held for trading --44,950,707
Financial Assets Measured At Fair Value Through Profit Or Loss 11,080,730(8,791,116)-
  Other Financial Assets Measured At Fair Value Through Profit Or Loss-1,692,15418,988
Financial Assets Measured At Fair Value Through Profit Or Loss Held for Trading11,831,411(16,412,738)-
Non-Trading Financial Assets Mandatorily Measured at Fair Value Through Profit or Loss746,024(419,851)-
Available-for-sale financial assets --(27,214,188)
Financial Assets Measured At Fair Value Through Other Comprehensive Income(8,835,552)(4,323,459)-
Loans and receivables --(30,256,590)
Financial Assets Measured At Amortized Cost (60,462,247)(75,906,801)-
Held to maturity investments --(26,266)
Other assets 3,306,2697,619,3722,825,341
Net increase (decrease) in operating liabilities 41,219,16764,293,93444,163,382
Financial liabilities held for trading --(2,297,323)
Financial Liabilities Measured At Fair Value Through Profit Or Loss held for trading(4,874,323)1,616,446-
Financial Liabilities Measured At Fair Value Through Profit Or Loss 3,373,3591,946,056-
Financial liabilities at amortized cost 40,961,04657,833,93543,702,283
Other liabilities 1,759,0852,897,4972,758,422
Tax paid24.a(5,301,184)(3,668,571)(3,280,230)
Total net cash flows from operating activities (1) 24,871,8008,277,37250,291,050
     
2. Cash Flows From Investing Activities    
Investments (3,500,499)(3,157,794)(2,197,918)
Capital increase in Investments in associates and Joint Ventures11-(36,051)(34,154)
Acquisition of subsidiary, less net cash in the acquisition (746)(111,224)(275,091)
Tangible assets12.a(1,924,783)(1,394,299)(1,106,406)
Intangible assets (1,519,725)(1,616,222)(738,554)
Corporate Restructuring10(55,245)2(43,713)
Disposal 987,164797,716744,913
Capital reduction of investee in joint control11.b---
Tangible assets12&4229,911122,00937,467
Non - current assets held for sale10808,980563,607434,553
Dividends and interest on capital received 148,273112,100272,893
Total net cash flows from investing activities (2) (2,513,335)(2,360,078)(1,453,005)
     
3. Cash Flows From Financing Activities    
Acquisition of own shares28.d(219,703)(312,305)(378,776)
Issuance of Debt Instruments Eligible to Compose Capital20-9,347,750-
Issuance of other long-term financial liabilities1853,017,03973,765,08159,663,420
Dividends and interest on capital paid (6,953,718)(6,076,073)(5,652,081)
Payments of other long-term financial liabilities18(61,914,716)(78,903,009)(97,009,957)
Payments of subordinated liabilities19(9,885,607)(544,566)-
Payments of interest of Debt Instruments Eligible to Compose Capital20(328,892)(683,783)(623,146)
Net increase in non-controlling interests27(14,266)55,869(296,184)
Capital Increase in Subsidiaries, by Non-Controlling Interests27100,00048,000-
Total net cash flows from financing activities (3) (26,199,863)(3,303,036)(44,296,724)
Exchange variation on Cash and Cash Equivalents (4) (99)--
Net Increase in Cash (1+2+3+4) (3,841,497)2,614,2584,541,321
Cash and cash equivalents at beginning of year 25,285,16022,670,90218,129,581
Cash and cash equivalents at end of year 21,443,66325,285,16022,670,902
     
Cash and cash equivalents components    
Cash and Balances With The Brazilian Central Bank420,128,21919,463,58720,642,321
Loans and other51,315,4445,821,5732,028,581
Total of cash and cash equivalents 21,443,66325,285,16022,670,902
     
Non-cash transactions    
Foreclosures loans and other assets transferred to non-current assets held for sale10735,864785,139524,497
Dividends and interest on capital declared but not paid28.b4,800,0004,800,0004,455,000
Supplemental information    
Interest received 71,777,47670,831,20573,094,248
Interest paid (27,654,965)(29,796,455)(37,948,828)

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

F-12

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Thousand 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., headquartered in Spain (Banco Santander Spain), is the lead institution of the Financial and Prudential Conglomerates (Conglomerate Santander) before the Central Bank of Brazil (Bacen), established as a joint-stock corporation, with head office at Avenida Presidente Juscelino Kubitschek, 2041 and 2235 – Building A - Vila Olímpia, in the City of São Paulo, State of São Paulo. Banco Santander operates as a multiple service bank, conducting its operations by means of its commercial, investment, loans, mortgage loans, leasing and foreign exchange portfolios. Through its subsidiaries, also operates in the segments of payments, management of shares’ club, securities and insurance brokerage operations, capitalization plans, consumer finance, payroll loans, digital platforms, benefit vouchers, management and recovery of non-performing loans and private pension products. The operations are conducted within the context of a group of institutions that operates in the financial market on an lintegrated basis. The corresponding benefits and costs of providing services are absorbed between them and are conducted in the normal course of business and under commutative conditions.

The Board of Directors authorized the issuance of the Financial Statements for the year ended on December 31, 2019, at the meeting held on March 6, 2020.

These Financial Statements and the accompanying documents were the subject of a recommendation for approval issued by the Company's Audit Committee and a favorable opinion of the Company's Fiscal Council.

b)Basis of presentation of the consolidated financial statements

The consolidated financial statements have been prepared in accordance with the standards of the International Financial Reporting Standards (IFRS) issued by the Accountant Standards Board (IASB), and interpretations issued by the IFRS Interpretations Committee (current name International Financial Reporting Interpretations Committee - IFRIC). All relevant information specifically related to the financial statements of Banco Santander, and only in relation to these, are being evidenced, and correspond to the information used by Banco Santander in its management.

c) Other information

c.1) Adoption of new standards and interpretations

• IFRS 16- as of January 1, 2019, the Bank adopted IFRS 16, which replaces IAS 17.

I.Transition

As permitted by the specific transition provisions, Banco Santander opted to apply the regulations in a retrospective modified manner, the effects of which were applied in January 1, 2019.

The changes in accounting practices resulting from the adoption of IFRS 16 were applied to the right of use assets as part of tangible assets and lease liabilities as other liabilities in the balance sheet.

II.Lease Identification

In adopting IFRS 16, the Bank recognized lease liabilities involving leases that had already been classified as "commercial leases" in accordance with the principles of IAS 17 - Leases.

For the initial application of the standard, the Bank used the following permitted practical expedients:

• The exclusion of the initial direct costs for the measurement of the right to use asset at the date of initial application;

• It was decided not to separate the service provision component embedded in lease agreements; and

• The Bank also decided not to apply IFRS 16 to contracts that were not identified as containing a lease under IAS 17 and IFRIC 4 - Determination as to whether a Contract contains a Lease.

In addition, the following recognition exemptions are also used:

• The accounting of operating leases with a remaining term of less than 12 months as of January 1, 2019 as short-term leases;

• The accounting for operating leases whose underlying asset is of immaterial;

• Until January 1, 2019, leases of fixed assets, in which the Bank as the lessee, held substantially all the risks and benefits of the property, were classified as financial leases. The balances presented are immaterial.

The majority of the lease contracts in which the bank is a lessor relates to real estate and equipment at the branches.

Banco Santander does not have rights-of-use assets that fall within the definition of investment properties

III.Lease term

Lease agreements are formalized, analyzed and negotiated individually and contain a wide range of different terms and conditions. The Bank evaluates the term of the contract, as well as the intention to remain in the real estate. Thus, estimates of terms may vary according to contractual conditions, considering extension options, and also according to legal provisions.

The Bank assumes that the fines for contractual termination charged before the maturity date are not significant.

Lease agreements do not contain restrictive clauses, but leased assets can not be used as collateral for loans.

F-13

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

IV.Initial Measurement

In their initial recognition, leases are recognized as a right of use asset and a corresponding liability on the date the leased asset becomes available for use by the Group.

The right of use to be recorded is measured at cost against the lease liability, which represents the present value of the lease payments that are not made to date. Lease payments are discounted using the incremental interest rate incremental borrowing interest rate. There is no onerous contract that required an adjustment in usage rights to be recorded as assets on the date of the initial adoption.

The use rights are measured at amortized cost in accordance with the following:

• The value of the initial measurement of the lease liability;

• Any lease payments made before or on the start date of any incentive received;

• any directly attributed initial cost; and

• Restoration costs, if the requirements of IAS 37 are met for the recording of Provisions, Contingent Liabilities and Contingent Assets.

The recognized rights of use assets related to each type of asset are as follows:

 
 12/31/2018

Adoptions Effects -

IFRS 16

01/01/2019
Real Estate and Properties-2,373,9592,373,959
Data processing systems-91,79191,791
Total-2,465,7502,465,750

The Santander Group uses as an incremental rate the rate of interest that a lessee would have to pay to borrow over a similar term, and with a similar security, the funds necessary to obtain an asset of a similar value to the right-of-use asset in a similar economic environment, by term, guarantee and similar economic scenario, represented in Santander Brasil by the funding cost curve of a risk-free asset, applied individually to each contract according to the estimates projected as the lease term.

Lease liabilities include the net present value of the following lease payments:

• Reduced fixed payments of any incentive;

• Variable payments that are based on a rate or indexer;

• Expected amounts to be paid by the lessee based on the residual value of collateral;

• The exercise price of a call option, if the lessee is reasonably certain about the exercise of the option; and

• Payment of penalties for the termination of the lease if the term of the operation reflects the exercise of the option by the lessee.

In the analysis of the Santander Group's contracts, only contracts with fixed and non-incentive payments or residual guarantee values were identified or the purchase option was embedded, thus, the effects on the accounting of liabilities arising from the initial adoption:

Lease Contracts as of December 31, 2018 -
Operating lease contracts discounted by the incremental interest rate2,203,382
(-) Short-term leases as expenses(19,252)
(+)/(-) Adjustments as a result of a different treatment of the termination dates of the contract281,620
Balance as of January 1, 20192,465,750
Liabilities recognized as of January 1, 2019 - Other financial liabilities2,465,750

Effects on accounting for the year ended on December 31, 2019 due to the initial adoption (there were no impacts on the results of the comparative periods generated by the initial adoption):

01/01 to
12/31/2019
Effects on results arising from the adoption of IFRS 16:
Rental Expense - Other administrative expenses693,660
Asset amortization expenses - Tangible Assets(564,132)
Interest expense on liabilities - Interest and similar income(201,601)
Incremental interest tax effect - Income taxes28,836
Total(43,237)

F-14

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

Effects on the accounting of the financial liability on the period ended December 31, 2019:

Adoption of IFRS 16 in 01/01/20192,465,750
   New contracts origination267,268
Accrued interests198,433
Renew of the existing contracts422,755
Payments(693,704)
Other movements(61,465)
Financial liability measured at amortized cost – Leasing Contracts as of 12/31/20192,599,037

Below is presented the projected inflation (IGP-M) on December 31, 2019:

Projected IGP-M (annualized)
   Up to 3 months3.29%
From 3 to 12 months3.26%
From to 1 to 3 years2.62%
From 3 to 5 years2.94%
More than 5 years3.21%

V.Subsequent measurement

After the initial measurement, the values of the assets recorded as right of use are being updated using the cost method, so any accumulated depreciation is deducted monthly, according to the criteria of CPC 27 - Property, Plant and Equipment depreciation of the right-of-use asset and any remeasurement of the lease liability, when applicable.

The initially recorded lease liability is updated monthly by increasing the liability amount of the interest portion of each lease and reducing the amount of monthly lease payments and corrected for any remeasurement lease, when applicable. The majority of the lease contracts in which the bank is a lessor relates to real estate and equipment at the branches.

The lease liability is remeasured, in case of changes in the lease term or in the contract value, the amount resulting from the new determination of the lease liability is recorded as a contra entry to the corresponding right of use asset.

The effects of adopting IFRS 16 impacts exclusively the operating segment Commercial Bank.

•IFRIC 23- Published in June 2017 by the IASB, IFRIC 23 - Uncertainty over Income Tax Treatments on Profit has mandatory application as of January 1, 2019 and aims to clarify procedures for the application of recognition and measurement requirements established in the IAS 12 of Taxes on Profit when there is uncertainty about the treatments to be adopted for the Taxes on Profit.

The Bank carried out analyzes on the procedures already adopted for accounting and presentation of Income Taxes in relation to the content of IFRIC 23 and it was possible to conclude that there are no impacts on the disclosures made up to December 31, 2018, as well as from the adoption of the new standard on January 1, 2019.

Standards and interpretations that will come into effect after December 31, 2019

At the date of preparation of these consolidated financial statements, the following standards and interpretations that have effective adoption date after December 31, 2019 and have not yet been adopted by the Bank are:

• IFRS 17- In May 2017, the IASB issued the IFRS for insurance contracts to replace IFRS 4. IFRS 17 is scheduled to be implemented January 1, 2021. The purpose of this standard is to demonstrate greater transparency and useful information in condensed financial statements, one of the main changes being the recognition of profits as the delivery of insurance services, in order to evaluate the performance of insurers over time. Banco Santander is evaluating the possible impacts when adopting the standard.

•Amendments to IFRS 9, IFRS 7 and IAS 39 - In September 2019, the IASB changed its IFRS 9 and IAS 39 standards as well as the related disclosure standard, IFRS 7, on some requirements for hedge accounting. The changes were implemented on January 1, 2020. The amendments modify some specific requirements on hedge accounting in order to clarify potential effects of the uncertainty caused by the IBOR reform project. In addition, such changes require entities to provide additional information about their hedge relationships that are directly affected by these uncertainties. Banco Santander concluded that there are no significant impacts as from the adoption of the new standards on January 1, 2020.

c.2) Estimates used

The consolidated results and the calculation of consolidated equity are impacted by the accounting policies, assumptions, estimates and measurement methods used by the Bank's directors in the preparation of interim 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 accordance with IFRS, are the best estimates in accordance with the applicable standard.

In interim consolidated financial statements, estimates are made by management of the Bank and consolidated entities in order to quantify certain assets, liabilities, revenues and expenses and disclosures of explanatory notes.

F-15

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

c.2.1) Critical estimates

The main estimates were discussed in detail for the preparation of the consolidated financial statements as of December 31, 2019. In the exercise ended December 31, 2019, there were no significant changes in the estimates made at the end of the year 2018, in addition to those indicated in these statements financial statements, especially arising from the application of IFRS 16.

The critical estimates and assumptions that have the most significant impact on the accounting balances of certain assets, liabilities, revenues and expenses and the disclosure of explanatory notes are described below:

i. Corporate Income Tax (IRPJ) and Social Contribution on Net Income (CSLL), Social Integration Program (PIS) and Contribution for the Financing of Social Security

The income tax expense is obtained by adding the Income Tax, Social Contribution, PIS and Cofins. Current Income Tax and Social Contribution arise from the application of the respective tax rates on the real income, and the rates of PIS and Cofins applied on the respective calculation basis provided for in the specific legislation, together with the changes in deferred tax assets and liabilities recognized in the consolidated statement of income. The CSLL rate, for banks of any kind, was increased from 15% to 20% effective as of March 1, 2020, pursuant to article 32 of Constitutional Amendment 103, published on November 13, 2019.

Deferred tax assets and liabilities include temporary differences, identified as the amounts expected to be paid or recovered on the differences between the carrying amounts of the assets and liabilities and their respective bases of calculation, and accumulated tax credits and tax losses. These amounts are measured at the rates that are expected to be applied in the period in which 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 may be used and the deferred tax assets do not result from the initial recognition (except in one combination of business) of other assets and liabilities in an operation that does not affect either the taxable income or the taxable income. Other deferred tax assets (tax credits and accumulated tax losses) are only recognized if it is considered probable that the consolidated entities will have sufficient future taxable income for them to be used.

The deferred tax assets and liabilities recognized are revalued at the balance sheet date, and the appropriate adjustments are made based on the findings of the analyzes carried out. The expected realization of the Bank's deferred tax assets is based on projections of future results and based on a technical study.

Additional details are in notes 2.aa.

ii. Valuation of the fair value of certain financial instruments

Financial instruments are initially recognized at fair value and those that are not measured at fair value through profit or loss are adjusted for transaction costs.

Financial assets and liabilities are subsequently measured at the end of each period using valuation techniques. This calculation is based on assumptions, which take into account the Management's judgment based on information and market conditions existing at the balance sheet date.

Banco Santander classifies the measurements at fair value using the hierarchy of fair value that reflects the model used in the measurement process, segregating the financial instruments between Levels I, II or III.

Additional details are in notes 2.e and 47.c8 of the Consolidated Financial Statements of December 31, 2019, which present the sensitivity analysis for Financial Instruments.

iii. IFRS 9 - Financial Instruments:issued in its final format in July 2014, the International Accounting Standards Board (IASB) approved IFRS 9, which replaced IAS 39 Financial Instruments, in accordance with the guidelines defined by the G20 by finance ministers of the world's 20 largest economies) in April 2009, establishing requirements for the recognition and measurement of financial instruments. This standard was adopted from January 1, 2018.

Provisions for losses on receivables

The book value of non-recoverable financial assets is adjusted by recording a provision for loss of debit from "Losses on financial assets (net) - Financial assets measured at amortized cost" in the consolidated statement of income. The reversal of previously recorded losses is recognized in the consolidated statement of income in the period in which the impairment loss decreases and can be objectively related to a recovery event.

To determine the balance of "Provision for impairment", Banco Santander first assesses whether there is objective evidence of impairment individually for financial assets that are significant, and individual or collective for non-recoverable financial assets.

In order to individually measure the impairment loss on loans assessed for impairment, the Bank considers the conditions of the counterparty, such as its economic and financial situation, level of indebtedness, income generation capacity, cash flow, management, corporate governance and quality of internal controls, payment history, industry experience, contingencies and credit limits, as well as characteristics of assets, such as their nature and purpose, type, sufficiency and guarantees of liquidity and total credit value , and also based on historical experience of impairment and other circumstances known at the time of valuation.

In order to measure the impairment loss on loans assessed collectively for impairment, the Bank separates financial assets into groups taking into account the characteristics and similarities of credit risk, ie, according to the segment, type of assets, guarantees and other factors associated with the historical experience of impairment and other circumstances known at the time of valuation.

Further details are in note 2.i of the Consolidated Financial Statements of December 31, 2019, which present the sensitivity analysis for Financial Instruments.

F-16

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

Transition

As permitted by the transitional provisions of IFRS 9, the Group chose not to restate comparative figures, upon initial adoption in January 1, 2018. Any adjustments in the carrying amounts of financial assets and liabilities at the transition date were recognized in the initial net income and other reserves of the current period. The Group also opted to continue applying the hedge accounting requirements of IAS 39 in adopting IFRS 9.

Financial assets and liabilities

Initial Recognition and Measurement

The Bank initially recognizes loans and advances, deposits, debt securities issued and subordinated liabilities at the date of origin.

All other financial instruments (including regular purchases and sales of financial assets) are recognized on the trade date, which corresponds to the date on which the Bank becomes part of the contractual provisions of the instrument.

A financial asset or liability is initially measured at fair value, plus, in the case of an item not designated at fair value through profit or loss, transaction costs directly attributable to its acquisition or issue.

Ranking

Financial assets

On initial recognition, a financial asset is classified as measured at amortized cost, at fair value through Other Comprehensive Income or at fair value through profit or loss.

A financial asset is measured at amortized cost if it meets the following conditions and is not designated at fair value through profit or loss:

• The asset is maintained within a business model whose objective is to maintain assets to receive contractual cash flows;

• The contractual terms of the financial asset generate, at specific dates, cash flows that refer exclusively to payments of principal and interest on the principal amount outstanding.

A debt instrument is measured at fair value through Other Comprehensive Income if it meets the following conditions and is not designated at fair value through profit or loss:

• The asset is maintained within a business model whose objective is achieved through the receipt of contractual cash flows and the sale of financial assets; and

• The contractual terms of the financial asset generate, at specific dates, cash flows that refer exclusively to payments of principal and interest on the outstanding principal amount.

In the initial recognition of an equity instrument not held for trading, the Bank may irrevocably elect to present subsequent changes in fair value through Other Comprehensive Income. This option is made considering each investment individually and was not used by the Bank.

All other financial assets are classified as measured at fair value through profit or loss.

In addition, at initial recognition, the Bank may irrevocably designate at fair value through profit or loss a financial asset that would otherwise meet the measurement requirements at amortized cost or at fair value through Other Comprehensive Income, if such designation eliminate or substantially reduce an accounting mismatch that may exist. This option was not used by the Bank.

Business model evaluation

The Bank evaluates the objective of a business model in which an asset is maintained at the portfolio level, for better reflecting how the business is managed and what information is provided to Management. The information considered includes:

- Defined policies and objectives for the portfolio and the application of these policies in practice. Including, if Management's strategy is focused on earning contractual interest income, maintaining a specific interest rate profile, aligning the duration of the assets;

- How the performance of the portfolio is evaluated and reported to the Bank's Management;

- The risks that affect the performance of the business model (and financial assets held within that business model) and how those risks are managed;

- How the managers of the business are remunerated - for example, if the remuneration is based on the fair value of the managed assets or the contractual cash flows received;

- The frequency, volume and timing of sales in prior periods, the reasons for such sales and their expectations about future sales. However, sales activity information is not considered in isolation, but as part of an overall assessment of the Bank's stated purpose of managing financial assets.

Financial assets held for trading or managed, whose performance is valued at fair value, are measured at fair value through profit or loss, since (i) they are not held to receive contractual cash flows (ii) nor maintained to receive cash flows and sell financial assets.

F-17

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

Assessment to determine whether contractual cash flows refer exclusively to payments of principal and interest

For the purposes of this valuation, "principal" is defined as the fair value of the financial asset at initial recognition. "Interest" is defined as the consideration for the value of the currency over time and for the credit risk associated with the principal amount outstanding for a specific period and for other underlying risks and costs of the borrowings (eg liquidity risk and costs) as well as the profit margin.

In assessing whether contractual cash flows refer exclusively to payments of principal and interest, the Bank considers the contractual terms of the instrument. This includes assessing whether the financial asset contains a contractual term that could change the term or value of the contractual cash flows so that it would not meet this condition. In carrying out the evaluation, the Bank considers:

- contingent events that would alter the value and term of the cash flows;

- leverage;

- terms of advance payment and extension;

- terms limiting the Bank's right to cash flows of assets; and

- resources that modify the consideration of the value of the currency in time, for example, periodic readjustment of interest rates.

Reclassification of categories of financial assets

Financial assets are not reclassified subsequent to their initial recognition, except in the period after the Bank changes its business model to manage financial assets.

Derecognition of Financial Assets

The Bank derecognizes a financial asset when the contractual rights to the cash flows of the asset expire or when it transfers the rights to the receipt of the contractual cash flows in a transaction in which essentially all the risks and benefits of ownership of the financial asset are transferred or in which the Bank does not transfer or retain substantially all the risks and rewards of ownership of the financial asset and does not control the financial asset.

The difference between the carrying amount of the asset (or book value allocated to the portion of the asset disposed) and the sum (i) of the consideration received (including any new assets obtained, less any new liabilities assumed) and (ii) any accumulated gains or losses recognized in "Other Comprehensive Income" is recorded in the income statement.

As from the date of the adoption of IFRS, mentioned above, any accumulated gains / losses recognized in "Other Comprehensive Income" in relation to equity instruments designated at fair value through Other Comprehensive Income are not recorded in the statement of income through the write-off of these securities.

The Bank carries out transactions in which it transfers the assets recognized in its balance sheet, but maintains all or substantially all the risks and benefits of the assets transferred or part thereof. In these cases, the transferred assets are not downloaded. Examples of such operations include assignments of co-sponsored loan portfolios.

In operations in which the Bank does not retain or transfer substantially all the risks and rewards of ownership of a financial asset and hold control of the asset, the Bank continues to recognize the asset in the extent of its continued involvement, determined by the extent to which it is exposed to changes in the value of the transferred asset.

Derecognition of Financial Liabilities

The Bank derecognizes a financial liability when its contractual obligations are terminated, canceled or when they expire.

Effective interest rate

The effective interest rate is one that exclusively discounts future cash payments or receipts estimated during the expected life of the financial asset or financial liability at the gross carrying amount of a financial asset (i.e. its amortized cost before any provision for reduction recoverable amount) or the amortized cost of a financial liability. The calculation does not consider expected credit losses and includes transaction costs, premiums or discounts and fees paid or received that are an integral part of the effective interest rate, such as origin taxes.

Changes in financial assets and liabilities

Financial assets

If the terms of a financial asset are modified, the Bank assesses whether the cash flows of the modified asset are substantially different. If the cash flows are substantially different, the contractual rights to the cash flows of the original financial asset will be considered as due. In this case, the original financial asset is written off and a new financial asset is recognized at fair value.

If the cash flows of the modified asset measured at amortized cost are not substantially changed, the change does not result in a derecognition of the financial asset. In this case, the Bank recalculates the gross carrying amount of the financial asset and recognizes the amount resulting from the adjustments to the gross carrying amount as gain or loss of change in profit or loss. If such a change is made due to the financial difficulties of the debtor, gains or losses are presented together with the impairment losses. In other cases, they are presented as interest income.

F-18

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

Interest Revenue

Interest income is calculated by applying the effective interest rate to the gross carrying amount of the financial assets, except:

(a) Financial assets acquired or originated with credit impairment, for which the original effective interest rate adjusted to the credit is applied to the amortized cost of the financial asset.

(b) Financial assets that are not acquired or originated with credit impairment, but subsequently presented a default event (or "stage 3"), for which interest income is calculated by applying the effective interest rate to its net amortized cost of the provision.

Equity Instruments

Equity instruments are those that meet the definition of stockholders 'equity from the issuer's point of view, that is, instruments that do not contain a contractual obligation to pay and show a residual interest in the issuer's stockholders' equity. Examples are equity instruments that include common shares.

Generally, all equity instruments are measured at fair value through profit or loss, except where the Bank's management has elected, at the time of initial recognition, the irrevocable designation of an equity investment at fair value through Other Comprehensive Income. The Bank's policy is to designate capital investments as measured at fair value against Other Comprehensive Income when these investments are held for other purposes that do not generate investment returns, in which case the fair value gains and losses are recognized in Other Comprehensive Income and are not subsequently reclassified to profit or loss, including the sale of the asset. Impairment losses (and the reversal of impairment losses) are not accounted for separately from other changes in fair value. With respect to dividends, when they represent a return on such investments, they continue to be recognized in income as other income when the Bank has the right to receive payments.

Gains and losses on investments measured at fair value through profit or loss are included under "Financial Assets measured at fair value through profit or loss" in the Statement of Income.

Financial Liabilities

The Bank derecognizes a financial liability when its terms are modified and the cash flows of the modified liability are substantially different. In this case, a new financial liability is recognized at fair value based on the modified terms. The difference between the carrying amount of the extinguished financial liability and the new financial liability with modified terms is recognized in the income statement.

Offsetting

Financial assets and liabilities are offset and the net amount presented in the balance sheet when, and only when, the Bank currently has a legally enforceable right to offset the amounts and the intention to liquidate them on a net basis, or realize the asset and settle the liability simultaneously.

Revenues and expenses are presented on a net basis only when permitted by IFRSs or for gains or losses resulting from a group of similar operations, such as in the Bank's trading activity.

Measurement at fair value

"Fair value" corresponds to the price that would be received on the sale of an asset or paid in the transfer of a liability in an organized transaction between market participants at the measurement date in the main market or, in the absence thereof, the most advantageous market to which the Bank has access on that date.

When one is available, the Bank measures the fair value of an instrument based on the price quoted in that market for that instrument. A market is considered active if the transactions for the asset or liability occur with sufficient regularity and volume to provide price information on an ongoing basis.

If there is no quoted price in an active market, the Bank uses valuation techniques to maximize the use of relevant observable information and minimize the use of unobservable information. The chosen valuation technique incorporates all the factors that would be considered by the participants of the active market in the price of an operation.

The best evidence of the fair value of a financial instrument, at initial recognition, usually corresponds to the price of the transaction, that is, the fair value of the consideration paid or received. If the Bank determines that the fair value at initial recognition differs from the price of the transaction and the fair value is not evidenced by a price quoted in an active market for an identical asset or liability or based on an assessment technique for which any non-observable information is considered to be irrelevant to the measurement, the financial instrument will initially be measured at fair value, adjusted to defer the difference between the fair value at the initial recognition and the transaction price. This difference is subsequently recognized in profit or loss appropriately based on the life of the instrument, but until the valuation is fully supported by observable market data or the transaction is terminated.

If an asset or liability measured at fair value has a purchase price and a sale price, the Bank measures the assets and the positions purchased at a purchase price and the liabilities and the positions sold at a sale price.

The fair value of a financial liability with a cash demand (for example, a cash deposit) is not less than the amount payable on demand, discounted from the first date on which payment of the amount could be required.

Impairment

The Bank recognizes adjustments for expected credit losses in respect of the following financial instruments that are not measured at fair value through profit or loss:

- financial assets that are debt instruments;

- lease receivables;

- financial guarantee contracts issued; and

F-19

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

- loan commitments issued.

No impairment loss is recognized in equity instruments.

The Bank measures the impairment adjustments equal to the expected credit losses during the maturity, except for the instruments below, for which they are recorded as expected credit losses in 12 months:

- debt instruments with a low credit risk at the closing date; and

- other financial instruments (other than lease receivables) in which credit risk has not increased substantially since its initial recognition.

Adjustments for losses on lease receivables are always measured at an amount equal to the expected credit losses during the maturity.

Measurement of expected credit losses

Expected credit losses are a probability-weighted estimate of credit losses. They are measured as follows:

- financial assets not subject to impairment at the closing date: as the present value of all cash shortages, ie the difference between the cash flows due to the entity under the contract and the cash flows the Bank expects to receive;

- financial assets subject to impairment at the closing date: as the difference between the gross carrying amount and the present value of the estimated future cash flows;

- loan commitments to be released: as the present value of the difference between the contractual cash flows due to the Bank if the commitment is used in full and the cash flows that the Bank expects to receive; and

- financial guarantee contracts: expected payments to reimburse the holder, less any amounts that the Bank expects to recover.

Modified Assets

If the terms of a financial asset are renegotiated or modified or an existing financial asset is replaced by a new asset due to financial difficulties of the debtor, it is necessary to assess whether the financial asset should be written off and the expected credit losses are measured as follows:

- If the expected restructuring does not result in derecognition of the existing asset, the cash flows expected and arising from the modified financial asset are included in the calculation of the cash deficiencies of the existing asset.

- If the expected restructuring results in a derecognition of the existing asset, the expected fair value of the new asset is treated as the final cash flow of the financial asset existing at the time of its derecognition.

This amount is included in the calculation of the cash insufficiencies arising from the existing financial asset discounted from the estimated date of the derecognition until the closing date, using the original effective interest rate of the existing financial asset.

Determination of significant increases in credit risk

At each balance sheet date, the Bank assesses whether the financial assets carried at amortized cost and the financial instruments at fair value through Other Comprehensive Income are subject to impairment, as well as other financial instruments subject to this assessment.

A financial asset is "subject to impairment" when one or more events that have a negative impact on the estimated future cash flows of the financial asset have occurred.

Evidence that a financial asset is subject to impairment includes the following observable data:

- significant financial difficulty of the debtor or issuer;

- delays in contractual obligations;

- breach of contract, such as defaults or delays;

- the restructuring of a loan or advance by the Bank under conditions which the Bank would not consider as interesting to carry out;

- the likelihood of the debtor going bankrupt or making another financial reorganization; or

- the disappearance of an active market for a security due to financial difficulties.

A financial instrument that has been renegotiated due to deterioration in the condition of the borrower is generally considered to be subject to impairment unless there is evidence that the risk of not receiving the contractual cash flows has been significantly reduced and there is no other indicator of impairment.

Provision for expected credit losses in the balance sheet

Provisions for expected credit losses are presented in the balance sheet as follows:

- financial assets measured at amortized cost: as a deduction from the gross book value of the assets;

- loan commitments and financial guarantee contracts: as a provision; and

- debt instruments measured at fair value through Other Comprehensive Income: no provision for losses is recognized in the balance sheet, since the carrying amount of these assets corresponds to the fair value.

F-20

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

Objective evidence of impairment

At each closing date, the Bank assesses the existence of objective evidence that financial assets not measured at fair value through profit or loss were reduced in their recoverable value. A financial asset or group of financial assets presents a reduction in its recoverable amount when objective evidence shows that a loss event occurred after the initial recognition of the asset (s) and that the loss event had an impact on the cash flows. cash of the asset (s) that could be estimated safely.

Objective evidence that financial assets have had a decline in their recoverable value include:

- significant financial difficulty of a debtor or issuer;

- default or default by a debtor;

- the restructuring of a loan or advance by the Bank under conditions which the Bank would not consider as interesting to carry out;

- indications that a debtor or issuer could go bankrupt;

- the disappearance of an active market for a security; or

- observable data related to a group of assets, such as adverse changes in the payment status of borrowers or issuers in the group, or economic conditions correlated with default in the group.

Loans that have been renegotiated due to deterioration in the debtor's condition are generally considered as reduced to recoverable value unless there is evidence that the risk of not receiving the contractual cash flows has been significantly reduced and there is no other indicator of impairment.

All loans and advances and securities measured at individually significant amortized cost were subject to a specific impairment test. Loans and advances and securities measured at amortized cost not considered as individually significant were collectively tested for impairment by grouping loans and advances and securities at amortized cost with similar credit risk characteristics.

Individual or collective evaluation

An individual measurement of impairment was based on Management's best estimate of the present value of the cash flows expected to be received. In estimating these cash flows, Management has judged the financial position of a debtor and the net realizable value of any underlying collateral. Each asset reduced to its recoverable value was evaluated for its merits, while the test strategy and estimated cash flows considered to be recoverable were approved by the Bank's credit risk managers.

In assessing the need for a collective provision for losses, management considered factors such as credit quality, portfolio size, concentrations and economic factors. To estimate the necessary provision, assumptions were made to define how inherent losses were modeled and to determine the required data parameters, based on historical experience and current economic conditions.

Measurement of impairment

Impairment losses on assets measured at amortized cost were calculated as the difference between the book value and the present value of the estimated future cash flows, discounted at the effective interest rate of the asset. Impairment losses on assets measured at fair value through Other Comprehensive Income were calculated as the difference between book value and fair value.

Reversal of impairment

For assets measured at amortized cost: If an event occurred after the impairment caused a reduction in the value of the impairment loss, the reduction in the impairment loss was reversed through profit or loss.

For debt securities measured at fair value through Other Comprehensive Income: If, in a subsequent period, the fair value of a debt security reduced to recoverable value has increased and this increase could be objectively tied to an event occurring after recognition of the impairment loss, the impairment loss was reversed through profit or loss; otherwise, any increase in fair value was recognized through Other Comprehensive Income.

Any subsequent recovery in the fair value of an equity instrument measured at fair value through Other Comprehensive Income and reduced to recoverable value was recognized at any time in Other Comprehensive Income.

The reconciliation of stockholders' equity resulting from the initial adoption of IFRS 9 is as follows:

Equity reconciliation
Equity before IFRS 9 adjustments - 12/31/201787,087,601
Allowance for loan losses(2,149,051)
Provision for contingent liabilities(674,513)
Re-measurement of assets arising from the new categories17,806
Others237,867
Deferred tax1,026,066
Equity after IFRS 9 adjustments - 01/01/201885,545,776

F-21

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

Designation at fair value through profit or loss

Financial assets

At initial recognition, the Bank designated certain financial assets at fair value through profit or loss, as this designation eliminates or significantly reduces accounting mismatch that may arise.

Values of expected credit losses

Information, assumptions and techniques used in the estimation of impairment

Classification of financial instruments by stages

The portfolio of financial instruments subject to impairment is divided into three levels, based on the stage of each instrument related to its level of credit risk:

- Stage 1: It is understood that a financial instrument at this stage does not have a significant increase in risk since its initial recognition. The provision on this asset represents the expected loss resulting from possible default during the next 12 months;

- Stage 2: If a significant increase in risk has been identified since the initial recognition, without materializing deterioration, the financial instrument will be framed within this stage. In this case, the amount referring to the provision for expected loss for delinquency reflects the estimated loss of the residual life of the financial instrument. For the assessment of the significant increase in credit risk, the quantitative measurement indicators used in the normal management of credit risk will be used, as well as other qualitative variables, such as the indication of being an undeveloped operation if considered as refinanced or included operations in a special agreement; and

- Stage 3: A financial instrument is recorded within this stage when it shows signs of deterioration evident as a result of one or more events that have already occurred and which materialize at a loss. In this case, the amount relating to the provision for losses reflects the expected losses due to credit risk over the expected residual life of the financial instrument.

Impairment estimation methodology

The measurement of the expected loss is made through the following factors:

- Exposure at Default or EAD: is the transaction value exposed to credit risk, including the current available balance balance that could be provided at the time of default. The models developed incorporate assumptions about the changes in the payment schedule of operations.

- Probability of Default (PD): is defined as the probability that the counterparty can meet its obligations to pay the principal and / or interest. For the purposes of IFRS 9, both will be considered: PD - 12 months (Stage 1), which is the probability that the financial instrument will default during the next 12 months as well as PD - life time (Stage 2 and 3), which considers the probability that the transaction between in default between the balance sheet date and the residual maturity date of the transaction. The standard requires that future information relevant to the estimation of these parameters should be considered.

- Losses given default (LGD): is the resulting loss in the event of default, that is, the percentage of exposure that can not be recovered in the event of default. It depends mainly on the guarantees associated with the operation, which are considered as risk mitigation factors associated with each credit financial asset and the expected future cash flows to be recovered. As established in the regulations, future information should be taken into account for its estimation.

- Discount rate: is the rate applied to estimated future cash flows over the expected life of the asset, to bring them to present value.

In order to estimate the aforementioned parameters, the Bank has applied its experience in the development of internal models for the calculation of parameters both for the purposes of the regulatory environment and for internal management.

Definition of default

The Bank considers that a financial asset is in a default situation when:

- it is likely that the debtor will not fully pay its credit obligations to the Bank; or

- the debtor has significant credit obligations to the Bank overdue for more than 90 days as a general rule.

Overdrafts are considered past due if the customer violates a recommended limit or has been granted a lower limit than the current outstanding amount.

When assessing whether a debtor is in default, the Bank considers indicators:

- qualitative - eg breaches of covenants;

- quantitative - for example, the status of past due and non-payment of another obligation of the same issuer to the Bank; and

- based on data collected internally and obtained from external sources.

Allowance for losses

The following tables present the reconciliations of the opening and closing balances of the provision for losses by category of financial instrument. The terms expected credit losses in 12 months, expected credit losses during the maturity and impairment losses recoverable amounts are explained in the accounting practices note. The values for December 31, 2017 represent a provision for loan losses and reflect the measurement basis in accordance with IAS 39.

F-22

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

R$ millionsTotal
Allowance for loan losses - Balance 12/31/201718,261,638
Allowance for guarantees - Balance 12/31/2017312,373
IAS 39 Balance at 12/31/201718,574,011
Initial adoption effect of IFRS 9 (Note 1.2i)2,823,564
IFRS 9 Balance at 01/01/201821,397,575

As of January 1, 2018, the Allowance for Loan Losses balance related to IFRS 9 segregated by stages was represented by: Stage 1 – 20%, Stage 2 – 15% and Stage 3 – 65%. The segregation in stages related December 31, 2019, is in note 9.c.

Financial Assets and Liabilities

A. Classification of Financial Assets and Liabilities at the Initial Adoption of IFRS 9

The table below presents the financial assets classified in accordance with IAS 39 and the new measurement categories in accordance with IFRS 9.

IFRS 9 adoption first adoption effects on the Financial Assets and Liabilities (In R$ Millions)Original classification in accordance with IAS 39Balance 12/31/2017 ReclassificationsRemeasurementBalance
01/01/2018		New classification in accordance with IFRS 9
Financial AssetsIAS 39Loans and receivables355,246,574354,317,416-354,317,416Measured at Amortized cost
492,4295,197497,626Measured Mandatorily Measured At Fair Value Through Profit Or Loss
436,729(7,179)429,550Measured at Fair value through other comprehensive income
Available-for-sale85,823,3844,762,2343,7914,766,025Measured at Amortized cost
79,954,513-79,954,513Measured at Fair value through other comprehensive income
1,106,63715,9971,122,634Measured at Fair value through profit and loss
Held to maturity investments10,214,45410,214,454-10,214,454Measured at Amortized cost
Held for trading86,271,09786,271,097-86,271,097Measured at Fair value through profit and loss Held For Trading
Other financial assets measured at fair value through profit and loss1,692,0571,692,057-1,692,057Measured at Fair value through profit and loss
Total (1)539,247,566539,247,56617,806539,265,372 

(1)Does not include Provision for Losses on contingent liabilities and commitments

F-23

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

IFRS 9 adoption first adoption effects on the Financial Assets and Liabilities (In R$ Millions) Original classification in accordance with IAS 39Balance 12/31/2017ReclassificationsRemeasurement  Balance
  01/01/2018		 New classification in accordance with IFRS 9
Financial liabilitiesIAS 39 Held for trading49,322,546--49,322,546 Measured At Fair Value Through Profit Or Loss Held For Trading
 Amortized cost478,880,704--478,880,704 Measured at Amortized cost
Total 528,203,250--528,203,250  

iv. Provisions for pension funds

Defined benefit plans are recorded based on an actuarial study performed annually by a specialized company at the end of each year, effective for the subsequent period and are recognized in the consolidated statement of income under Interest and similar expenses and Provisions (net).

The present value of the defined benefit obligation is the present value without deduction of any plan assets from the expected future payments required to settle the obligation resulting from the employee's service in current and past periods.

Additional details are in note 2.x of the Consolidated Financial Statements of December 31, 2019.

v. Provisions, assets and contingent liabilities

Provisions for judicial and administrative proceedings are constituted when the risk of loss of the judicial or administrative action is assessed as probable and the amounts involved are measurable with sufficient security, based on the nature, complexity and history of the actions and the opinion of the legal advisors internal and external.

 

Provisions are fully or partially reversed whenExplanatory note 2.r to the obligations cease to exist or are reduced. GivenBank's consolidated financial statements for the uncertainties arising fromyear ended December 31, 2019, features information on provisions and contingent assets and liabilities. There were no significant changes in provisions and contingent assets and liabilities of the proceedings, it is not practicable to determineBank between December 31, 2018 and December 31, 2019, the timingdate of any outflow (cash disbursement).

For more details see note 2.rpreparation of these consolidated financial statements.

 

vi. Goodwill

 

The goodwill recorded is subject to the impairment test, at least annuallyonce a year or in a shortshorter period, if there isin the event of any indication of impairment.impairment of the asset.

 

The recoverable goodwill amounts are determined frombasis used for the recoverability test is the value in use calculations. Forand, for this purpose, it is estimated the cash flow is estimated for a period of 5 years. The cashCash flow was prepared considering several factors, including:such as: (i) macro-economicmacroeconomic projections such asof interest rates, inflation, exchange rate and exchange rates, among other,others; (ii) the performancebehavior and growth estimates of the Braziliannational financial market,system; (iii) increased costs, returns, synergies and investment plans,plan; (iv) the behavior of customers,customer behavior; and (v) the growth rate and long-term adjustments applied to cash flows. Theseflows in perpetuity. The adoption of these estimates rely on assumptions regardinginvolves the likelihoodprobability of future events occurring and changing certainthe alteration of any of these factors could result inhave a different outcomes.result. The estimate of cash flowsflow estimate is based on valuationsa valuation prepared by an independent research companyexpert annually or whenever there is evidence of impairment,a reduction in its recoverable amount, which is reviewed and approved by the Executive Board.Management.

 

For additionalFurther details seeare in note 14.13.

 

c.3) Capital management

Capital management considers the regulatory and economic information. 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 achieve the goals of the classification of rating agencies and investors’ expectations. The capital management includes securitization, assets disposal, raising capital through issue of shares, subordinated debts 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 on financial projections (statement of financial position, 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

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 financial statements are presented in Brazilian Reais, the functional and reporting currency of Banco Santander and its subsidiaries, including its subsidiary and non-foreign subsidiary.subsidiaries.

 

The assets and liabilities and foreign subsidiary are converted to Real 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”.

F-16 

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Brazilian Reais - R$ - unless otherwise stated)

 

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

F-24

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

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 Santander Group’s interest in a subsidiary that do not result in loss of control are registered 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 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 registered (i.e. reclassified to income statement or transferred directly to retained earnings) in the same manner as it 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 got lost is considered 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.

 

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) 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 decisions of the investee) but it does not control or has joint control over the investee.

 

In the consolidated financial statements, interest in joint ventures and investments in associates are registered using the equity method, i.e. at the Bank’s share of net assets of the investee, after taking into consideration the dividends received from capital reductions and other related transactions. Relevant information regarding companies registered under the equity method by the Bank is provided in note 12.11.

 

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 registered 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 follow:

 

• 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 financial statement.

 

• The excess of the acquisition cost over the fair value of the identifiable net assets acquired are recognized as goodwill (note 14)13). The excess of fair value of the identifiable net assets over the acquisition cost is an advantageous purchase gain and it is recorded as income on the date of the acquisition.

 

The notesnote 3 and 4 includes a description of the most significant transaction carried out in 2018, 2017 2016 and 2015.

F-17 

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Brazilian Reais - R$ - unless otherwise stated)

2016.

 

iv. Investment Funds

 

These include investment funds in which the Santander Group companies hold a substantial interest or the entirety of the 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

 

“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.

 

“Equity instrument” is any agreement that evidences a residual interest in the asset of the issuing entity after deducting all of its liabilities.

 

“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 zero or very small compared with other financial instruments with a similar response to changes in market factors, and which is 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 to make part of the cash flow of the hybrid contract vary 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)&11).

F-25

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

 

• Rights and obligations under employee benefit plans (note 23)22).

 

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, cash balances at Central Banks and other deposits on demand, Changes in the fair value of hedged items in portfolio hedges of interest rate risk (asset side), Hedging derivatives and Investments, 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):Assets Measured At Fair Value Through Profit Or Loss Held For Trading: this category includes the financial assets acquired forto generate short-term profit resulting from the purposefluctuation of generating a profit in the near term from fluctuations in theirits prices and financial derivatives that are not designatedclassified as hedging instruments.instruments, whose primary intention of the Bank is to trade them frequently.

 

• Financial Assets Measured At Fair Value Through Profit Or Loss: this category includes the financial assets that did not meet the pre-established criteria when evaluating the SPPI Test (Solely Payment of Principal and Interest).

• Non-Trading Financial Assets Mandatorily Measured At Fair Value Through Profit Or Loss: this category includes the financial assets that at the time of initial designation was made the fair value option.

• Other financial assets at fair value through profit or loss:Financial Assets At Fair Value Through Profit Or Loss (applicable for comparatives): 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 provide more relevant information, either because this eliminates or significantly reduces recognition or measurement inconsistencies (accounting mismatches) that would otherwise 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 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 group is provided on that basis to the Group’sGroup'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 measurement, manage and control of all risks and returns that enables all the financial instruments involved to be identified and monitored and allows the effective reduction of risk checked. Financial assets may only be included in this category on the date they are acquired or originated.

 

Available-for-sale financial assets• Financial Assets Measured At Fair Value Through Profit Or Loss: are stated at fair value. This category includesdoes not include 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

The results rising from changes in fair value are recognized in "Equity"at the Financial Assets Measured At Fair Value Through Other Comprehensive Income line in the line item "Valuation Adjustment" with the exception ofShareholders´ equity except for cumulative impairment losses for non-recovery, which are recognized in statement of profit or loss. When the investment is disposedsold or has evidences of or is determineddecreases on the fair value due to be impaired,impairment, the cumulative gain or loss previously accumulated in "Equity - Valuation Adjustments"recognized result at the same Shareholders´ Equity line, mentioned above is reclassified to the statement of profit or loss.

 

• Loans and receivables:Financial Assets Measured At Amortized Cost: 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).

 

F-18 

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Brazilian Reais - R$ - unless otherwise stated)

• Held-to-maturity investments:investments(applicable for comparatives): 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 headings in the consolidated financial statements:

 

• Cash and balances with the Bacen: cash balances and balances receivable on demand relating to deposits with Bacen and credit institutions.

 

• Loans and receivables:Financial Assets Measured At Amortized Cost: includes the debit balances of all credit and loans granted by the Bank, other than those represented by securities, 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 originating in banking transactions and services, such as the collection of rentals and similar items.items

 

• Loans and other amounts with credit institutions: credit of any nature in the name of financial institutions.

 

• Loans and advances to clients: includes debit balances of all the remaining credit and loans granted by the Bank, including money market operations through centralized 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, other than investments in subsidiaries, joint ventures or associates. Investment fund units 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.

F-26

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

 

• Investments in associates and jointly controlled companies: includes the investments made in the share capital of associates and jointly controlled companies.

 

iv. Classification of financial liabilities for measurement purposes

 

Financial liabilities are classified for measurement purposes into one of the following categories:

 

• Other Financial liabilities held for trading (at fair value through profit or loss):Assets At Fair Value Through Profit Or Loss: this category includes financial liabilities incurred for the purpose of generating a profit in the near term from fluctuations in their prices, financial derivatives not designated as hedging instruments, and financial liabilities arising from the outright sale of financial assets acquired under reverse repurchase agreements ("reverse repos") or borrowed (short positions).

 

• Other financial liabilities at fair value through profit or loss:Financial Assets At Fair Value Through Profit Or Loss: financial liabilities are included in this category when they provide more relevant information, either because this eliminates or significantly reduces recognition or measurement inconsistencies (accounting mismatches) that would otherwise 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 group is provided on that basis to the Group’sGroup's key management personnel.

 

• Financial liabilities at amortized cost: financial liabilities, irrespective of their instrumentation and maturity, not included in any of the above-mentioned categories which arise from the ordinary borrowing 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 financial statements:

 

• Deposits from Bacen: deposits of any nature received from Bacen.

 

• Deposits from credit institutions: deposits of any nature, including credit received and money market operations in the name of credit institutions.

 

• Client deposits: includes deposits of any nature such as demand deposits, saving deposits and time deposits including money market operation received from client.

F-19 

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Brazilian Reais - R$ - unless otherwise stated)

 

• 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 non-performing.

 

• Hedging derivatives: includes the fair value of the Bank’sBank's liability in respect of derivatives, including embedded derivatives separated from hybrid financial instruments, designated as hedging instruments in hedge accounting.

 

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 in specific heading 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 registeredrecognized as expenses for the period, according to the accrual basis.

 

The relevant details of these issued instruments are described in note 21.20.

 

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.

F-27

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

 

The fair value of a financial instrument on a given date is taken to be the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. The most objective and common reference for the fair value of a financial instrument is the price that would be paid for it on an active, transparent and deep market (quoted price or 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.

 

F-20 

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Brazilian Reais - R$ - unless otherwise stated)

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”Financial Assets Measured At Amortized Cost” 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”Assets Measured At Fair Value Through Profit Or Loss” 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 in the heading “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 in thethen heading “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.

 

iv. Hedging transactions

 

The consolidated entities use financial derivatives for the following purposes: i) to provide these instruments to clients 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’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:

 

F-28

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

a. At the date of arrangement the hedge is expected, under normal conditions, to be highly effective (prospective effectiveness).

F-21 

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Brazilian Reais - R$ - unless otherwise stated)

 

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 forecast 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.derivative measured at fair value through profit or loss.

 

When fair value hedge accounting is discontinued (repealed, expired,(expired, sold our no longer meet hedge accounting criteria) 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 at maturity.

 

When cash flow hedges are discontinued, any cumulative gain or loss on the hedging instrument recognized in equity in the heading "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.

For the accounting and disclosure of the hedge accounting structures as of December 31, 2019, the bank used the faculty of IFRS 9, to maintain the practices determined by IAS 39.

 

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.

 

F-22 

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(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.

 

Offsetting Agreements and Obligations Settlement (CMN Resolution 3.263/2005) - The Bank has an agreement for the clearing and settlement of obligations under the National Financial System (SFN), signed with individuals and legal entities, whether or not members

F-29

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

of the SFN, resulting in higher financial settlement guarantee, with the parties that have this modality of agreement. These agreements establish that payment obligations to Banco Santander arising from credit and derivative operations, in the event of default by the counterparty, will be offset against Banco Santander’sSantander's payment obligations with the counterparty.

 

The following table provides details of financial assets and liabilities subject to offsetting at December 31, 2017, 20162019, 2018 and 2015:

Thousand of reais  2017
    
Assets:Financial assets, grossFinancial assets
offset in the balance sheet, gross		Financial assets
offset in the balance sheet, net
Derivatives17,262,888-17,262,888
Repurchase agreements34,505,671-34,505,671
    
    
Liabilities:Financial liabilities, grossFinancial liabilities
offset in the balance sheet, gross		Financial liabilities
offset in the balance sheet, net
Derivatives16,677,486-16,677,486
Repurchase agreements97,421,579-97,421,579
    
Thousand of reais  2016
    
Assets:Financial assets, grossFinancial assets
offset in the balance sheet, gross		Financial assets
offset in the balance sheet, net
Derivatives24,702,973-24,702,973
Repurchase agreements47,528,393-47,528,393
    
    
Liabilities:Financial liabilities, grossFinancial liabilities
offset in the balance sheet, gross		Financial liabilities
offset in the balance sheet, net
Derivatives20,236,615-20,236,615
Repurchase agreements129,817,727-129,817,727
    
Thousand of reais  2015
    
Assets:Financial assets, grossFinancial assets
offset in the balance sheet, gross		Financial assets
offset in the balance sheet, net
Derivatives26,250,362-26,250,362
Repurchase agreements31,987,323-31,987,323
    
    
Liabilities:Financial liabilities, grossFinancial liabilities
offset in the balance sheet, gross		Financial liabilities
offset in the balance sheet, net
Derivatives24,716,959-24,716,959
Repurchase agreements115,003,783-115,003,783

On December 31, 2017, 2016 and 2015, the Bank has no financial instruments that meet the conditions for recognition on a net basis.2017:

 

Thousand of reais2019
Assets: Financial assets, gross Financial assets
offset in the balance sheet, gross		 Financial assets
offset in the balance sheet, net
Derivatives20,904,663(458,929)20,445,734
Repurchase agreements28,717,976-28,717,976

Liabilities: Financial liabilities, gross Financial liabilities
offset in the balance sheet, gross		 Financial liabilities
offset in the balance sheet, net
Derivatives22,888,906(458,929)22,429,977
Repurchase agreements103,124,238-103,124,238

Thousand of reais2018
Assets: Financial assets, gross Financial assets
offset in the balance sheet, gross		 Financial assets
offset in the balance sheet, net
Derivatives18,667,611(304,165)18,363,446
Repurchase agreements44,836,491-44,836,491

Liabilities: Financial liabilities, gross Financial liabilities
offset in the balance sheet, gross		 Financial liabilities
offset in the balance sheet, net
Derivatives18,771,000(304,165)18,466,835
Repurchase agreements101,647,013-101,647,013

Thousand of reais2017
Assets: Financial assets, gross Financial assets
offset in the balance sheet, gross		 Financial assets
offset in the balance sheet, net
Derivatives17,262,888-17,262,888
Repurchase agreements34,505,671-34,505,671

Liabilities: Financial liabilities, gross Financial liabilities
offset in the balance sheet, gross		 Financial liabilities
offset in the balance sheet, net
Derivatives16,677,486-16,677,486
Repurchase agreements97,421,579-97,421,579

h) Regular way of financial assets purchases

 

Regular way of financial assets purchases 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.

F-30

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

 

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);

 

• In the case of equity instruments, mean that their carrying amount may not be fully recovered.

F-23 

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Brazilian Reais - R$ - unless otherwise stated)

 

• Arising from the violation of terms of loans, and

 

• During the Bankruptcy process.

 

As a general rule, the adjustment of the value of the impaired financial instruments is recognized in the consolidated income statement for the period in which the impairment becomes evident, and the reversal, if any, of previously recognized impairment loss is recognized in the consolidated income statement for the period in which the impairment is reversed or reduced.

 

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’sinstrument'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’sobligor'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 from insolvency allocable to counterparties.

 

These policies, methods and procedures are applied in the granting, in the examination and to document 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 reduction of the exposure to credit risk, are based on an individual basis or grouped by similarity.

 

• Clients with individual management: Wholesale clients, financial institutions and certain companies. Risk management is performed through an analysis complemented by tools to support the decision-making based in internal risk assessment.

 

• Clients 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 specialized in this type of risk. The credits related to clients 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 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 are individually significant, and individually or collectively for financial assets 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 his 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 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 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.

 

F-24 

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Brazilian Reais - R$ - unless otherwise stated)

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:

 

F-31

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

Exposure at default (EAD) is the amount of risk exposure at the date of default by the counterparty. The timing of default is considered in the PD measurement.

 

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 default in the coming year. A loan will be defaulted if either the principal or interest become past due by ninety days or more or the loan is active but there are doubts about the solvency of the counterparty (subjective doubtful assets).

 

• LossLosses 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 default.

 

• 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 loans be written-off (which is only done after the Bank have completed all recovery efforts and after about 360 days late), it is registered fully provision of the loan´s remaining balance so this provision (allowance for loan losses) fully covers the losses. Thus, the Bank understandsconcludes that its loan loss allowance methodology has been developed to meet its risk metrics and capture loans that could potentially become impaired.

 

iii. Debt or equity instruments classified as available for salefinancial assets measured at fair value through other comprehensive income

 

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.

 

j) Repurchase agreements

 

Purchases (sales) of financial instruments under a non-optional resale (repurchase) agreement at a fixed price (repos) are recognized in the consolidated financial statements as financing granted (received), based on the nature of the debtor (creditor), under Loans and advances with Bacen, Loans and advances to credit institutions or Loans and advances to clients (Deposits from Bacen, Deposits from credit institutions or Client deposits).

 

Differences between the purchase and sale prices are recognized as interest over the deadlineduration of the contract.

 

k) Accounting for leases

 

i. Financial leases

 

Financial leases, until December 31, 2018, are leases that transfer substantially all the risks and rewards incidental to ownership of the leased asset to the lessee. From January 1, 2019, see note 1.c.1.

 

When the consolidated entities act as the lessors of an asset, the sum of the present value of the lease payments receivable from the lessee, including the exercise price of the lessee’s purchase option at the end of the lease term when such exercise price is sufficiently below fair value at the option date such that it is reasonably certain that the option will be exercised, is recognized as lending to third parties and is therefore included under Loans and receivablesFinancial Assets Measured At Amortized Cost in the consolidated financial statements.

 

The finance income arising from these contracts is credited in the heading “Interest and similar income” in the consolidated income statement in order to achieve a constant rate of return over the deadline of the lease.

F-25 

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Brazilian Reais - R$ - unless otherwise stated)

 

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’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. These 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 in the heading “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 financial statements at 2017, 2016December 31, 2019, 2018 and 2015 year-end2017 is provided in note 45-d.44-d.

 

n) Tangible assets

 

“Tangible assets” includes the amount of buildings, land, furniture, vehicles, computer hardware, right-of-use of assets 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

F-32

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

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 lifematurity of the various assets):

 

 Annual
Rate
Buildings for own use4%
Furniture10%
Fixtures10%
Office and IT equipment20%
Leasehold improvements10% or up to contractual maturity

 

The Bank assesses at end of each reporting period, if there is indication that the items of tangible assets carrying amount may be impaired, that is if there is an asset with its carrying amount bigger than its recoverable amount, either for use or sale.

 

Once an impairment loss of tangible assets is identified, it is adjusted to reach its recoverable amount by recognizing an impairment loss recorded in the heading "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 a recovery of a tangible asset value, the Bank recognizes the reversal of the impairment loss amount recorded in prior years and should adjust the future depreciation expenses according to the lifetime value of the asset. 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.

 

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.

 

F-26 

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Brazilian Reais - R$ - unless otherwise stated)

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’sinvestor'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 only recognized when it has been acquired for consideration and represents, therefore, a payment made by the acquirer in anticipation of future economic benefits from assets of the acquired entity that are not capable of being individually identified and separately recognized.

 

At the end of each annual reporting period or whenever there is any indication of impairment goodwill is reviewed for impairment (i.e. a reduction in its recoverable amount to below its carrying amount) and, if there is any impairment, the goodwill is written down with a charge to Impairment on non financial assets (net) - Intangible assets in the consolidated income statement.

 

The net fair value adjustments of assets, liabilities and contingent liabilities of the investee in relation to their carrying amount are allocated to individual identifiable assets acquired and liabilities assumed that comprise them based on their respective fair values ​​at the date of purchase.

 

In the case of a business combination made in stages, prior interest in the acquired is measured again at fair value at the acquisition date when control of the acquired is obtained.

 

ii. Other intangible assets

 

Other intangible assets are non-monetary assets 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 can have an indefinite useful lifematurity -when, based on an analysis of all the relevant factors, it is concluded that there is no foreseeable limit to the period over which the asset is expected to generate net cash inflows for the consolidated entities- or a finite useful life,maturity, in all other cases.

 

Intangible assets with indefinite useful livesmaturity are not amortized, but rather at the end of each reporting period or whenever there is any indication of impairment the consolidated entities review the remaining useful livesmaturity of the assets in order to determine whether they continue to be indefinite and, if this is not the case, to take the appropriate steps.

 

Intangible assets with finite useful livesmaturity are amortized over those useful livesmaturity using methods similar to those used to depreciate tangible assets. The amortization expense is recognized under "Depreciation and amortization" in the consolidated income statement.

F-33

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

 

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 balances of all prepayments and accrued income (excluding accrued interest), acquired client 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 shall be disclosed in the consolidated financial statements, and the amount of any other assets not included in other items.

 

The Bank uses the value in use of client 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 client 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.

 

F-27 

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Brazilian Reais - R$ - unless otherwise stated)

q) Liabilities for insurance contracts

 

The liabilities for insurance contracts are comprised substantially by mathematicalactuarial 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 later case, the anticipated future investment yield 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 financial statement date an assessment is made in order to verify whether the Mathematicalactuarial provisions are adequate.

 

In the years ended December 31, 2017, 20162019, 2018 and 2015,2017, as determined by IFRS 4 - Contracts classification and subsequent amendments, the adequacy of the technical provisions constituted were evaluated through Liability Adequacy Test (LAP).

 

InAt December 31, 2017,2019, the LAT indicated the need for the additional constitution of technical provisions amounted to R$130,307215,754 (12/31/20162018 - R$85,395130,307 and 12/31/20152017 - R$57,523)85,395) for Indemnity Funds for Benefit (FGB) plans.

 

r) ProvisionProvisions for contingent assetslegal and liabilitiesadministrative proceedings, commitments and other provisions

 

Banco Santander and its subsidiaries are involved in lawsuits and administrative proceedings related to tax, labor and civil, in the normal course of their activities.

 

The provisions include legal obligations, lawsuits 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 financial statement 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 lawsuits and administrative proceedings are recorded when their risk of loss 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 those lawsuits 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 the lawsuits for which the risk of loss is remote, no disclosure is required.

 

Contingent assets are not recognized, except when there are guarantees or favorable lawsuits 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.

 

On the favorable decisions to Santander, the counterparty has the right, in the event of specific legal requirements, to file a rescission lawsuit within a period determined by current legislation. Rescission lawsuits are considered as new events and will be evaluated for contingent liability purposes if and when they are filed.

 

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.

F-34

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

 

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 his 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.

F-28 

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Brazilian Reais - R$ - unless otherwise stated)

 

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 the income statement using criteria that vary according to their nature (note 36)35). 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;

• 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 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.

• Those relating to services provided in a single act are recognized when the single act has been performed.

 

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 the income statement 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 financial statements at fair value, which is generally the present value of the fees, commissions and similar interest receivable from these contracts over their term.

 

F-29 

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Brazilian Reais - R$ - unless otherwise stated)

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 in the heading “Provisions - Provisions for contingent liabilities, commitments and other provisions” in the consolidated financial statements (note 24)23).

F-35

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

 

If a specific provision is required for financial guarantees, the related unearned commissions are recognized in the heading “Financial liabilities at amortized cost – Other financial liabilities” in the consolidated financial statements are reclassified to the appropriate provision.

 

v.2) Guarantees and Credit Risk Mitigation Policy

 

Banco Santander controls the credit risk using the 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 its ability to recover operations subject to credit risk. The guarantees can be fiduciary, real, legal structures with power mitigation and compensation agreements. The Bank periodicallyAnnually the bank reviews its policy guarantees throughpolicies to capture changes in the market, in the caracteristics of the assets given as guarantees and the conditions of the assets, those are examples of technical parameters normative and also its historical basis, to determine whether the guarantee is legally valid and enforceable.reviewed.

 

Credit limits are continually monitored and changed in client 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 financial statements. Management fees are included in “Fee and commission income” in the consolidated income statement. Note 45-b44-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 financial statements 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 in the heading “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 contribution 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 are recognized in the heading "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 23.22. For this type of plan, the sponsoring entity’sentity's obligation is to provide the benefits agreed with the former 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, there is full recognition in liabilities heading of actuarial losses (actuarial deficit) not recognized previously when they occur, which its counterparty is a heading in the stockholders’ equity (Other Comprehensive Income).

 

Main Definitions

 

- The present value of the defined benefit obligation is the present value without any deduction from the plan assets, of expected future payments required to settle the obligation resulting from employee service in the current and past periods.

F-30 

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Brazilian Reais - R$ - unless otherwise stated)

 

- 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 assets in the financial statements when they meet the following characteristics: (i) the fund assets are sufficient to meet all employee benefit plan or the 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 provided in the current period.

 

- The past service cost is the change in present value of defined benefit obligation for employee service provided 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 the headings "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.

 

F-36

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

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’semployee'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)22).

 

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%15% 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 personsbanks of private insurance and capitalizationany kind, was increased from 15% to 20% for the fiscal period between Septembereffective as of March 1, 2015 and December 31, 2018,2020, pursuant to Law 13,169/2015 (a resultarticle 32 of the conversion into law of Provisional Measure 675/2015).Constitutional Amendment 103, published on November 13, 2019.

 

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 as 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.

 

F-31 

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Brazilian Reais - R$ - unless otherwise stated)

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 as temporary differences.

 

The deferred tax assets and liabilities recognized are reassessed at each financial statements 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 is based on the Bank’sBank's projections of future results and on technical study,technical analysis of the realization of the temporary differences, as shown in Note 25.24.

 

PIS (Social Integration Program) and COFINS (Tax for Social Security Financing) 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.

 

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 composition 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 in the headings "Cash and balance with the Brazilian Central Bank" and "Loans and amounts due from credit institutions" in the consolidated financial statements, except restricted resources and long-term transactions.

 

The interest paid and received correspond basically to operating activities of Banco Santander.

 

Bank’s Management began segregating the "Effects

F-37

Table of Exchange Rates on Assets and Liabilities". Consequently, the corresponding figures of the Cash Flow Statements were reclassified for the years ended December 31, 2016 and 2015 with the objective of better presentation of this accounting item.Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

 

3. Basis of consolidation

3.Basis of consolidation

 

Below are highlighted the controlled entities and investment funds included in the consolidated financial statements of Banco Santander. Similar information regarding companies accounted by the equity method by the Bank is provided in Note 12.

Directly and Indirectly controlled by Banco Santander (Brasil) S.A.ActivityDirectParticipation %
Direct and Indirect
Banco Bandepe S.A.Bank100,00%100,00%
Santander Leasing S.A. Arrendamento Mercantil (Santander Leasing)Leasing78,57%99,99%
Aymoré Crédito, Financiamento e Investimento S.A. (Aymoré CFI)Financial100,00%100,00%
Santander Brasil Administradora de Consórcio Ltda. (Santander Brasil Consórcio)Buying club100,00%100,00%
Atual Companhia Securitizadora de Créditos Financeiros (Atual Securitizadora)(13)Securitization100,00%100,00%
Santander Corretora de Câmbio e Valores Mobiliários S.A. (Santander CCVM)Broker99,99%100,00%
Santander Corretora de Seguros, Investimentos e Serviços S.A. (Santander Corretora de Seguros) (Previously named as SantanderParticipações S.A.)(3)(5) (7)(9)(10)(11) (20) (21)(22)Other Activities100,00%100,00%
Getnet Adquirência e Serviços para Meios de Pagamento S.A. (Getnet S.A.)Payment Institution88,50%88,50%
Sancap Investimentos e Participações S.A. (Sancap)Holding100,00%100,00%
Santander Brasil EFCFinancial100,00%100,00%
Santander Holding Imobiliária S.A. (Current Corporate Name of da Webcasas S.A.)(2) (17)Holding100,00%100,00%
Controlled by Atual Securitizadora(13) (18)   
Ipanema Empreendimentos e Participações(18)Credit Management and Recovery Management-70,00%
Controlled by Ipanema Empreendimentos e Participações(18)   
Gestora de Investimentos Ipanema(18)Resource Manager-100,00%

F-32 

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Brazilian Reais - R$ - unless otherwise stated)

11.

 

Participation %
Directly and Indirectly controlled by Banco Santander (Brasil) S.A.ActivityDirectParticipation %Consolidated
Direct and Indirect
Banco Bandepe S.A. (2) Bank100.00%
Santander Leasing S.A. Arrendamento Mercantil (Santander Leasing)Leasing99.99%
Aymoré Crédito, Financiamento e Investimento S.A. (Aymoré CFI) (3) (19) Financial100.00%
Santander Brasil Administradora de Consórcio Ltda. (Santander Brasil Consórcio) (1) Buying club100.00%
Atual Serviços de Recuperação de Créditos e Meios Digitais S.A. (formerly named as Atual Companhia Securitizadora de Créditos Financeiros) (Atual) (7)(17)Credit recovery services100.00%
Santander Corretora de Câmbio e Valores Mobiliários S.A. (Santander CCVM) (4) Broker100.00%
Santander Corretora de Seguros, Investimentos e Serviços S.A. (Santander Corretora de Seguros) Other activities100.00%
Getnet Adquirência e Serviços para Meios de Pagamento S.A. (Getnet) (5)Payment Institution100.00%
Sancap Investimentos e Participações S.A. (Sancap) (6) Holding100.00%
Santander Brasil Establecimiento Financiero de Crédito S.A. (EFC)Financial100.00%
Santander Holding Imobiliária S.A. (formerly named Webcasas S.A.) (8) Holding100.00%
Santander Brasil Tecnologia S.A.Technology100.00%
Super Pagamentos e Administração de Meios Eletrônicos Ltda. (Super Pagamentos) (19)Payment Institution100.00%
Banco Olé Bonsucesso Consignado S.A. (Olé Consignado) (12) (19)Bank60.00%
Rojo Entretenimento S.A. (9) Other Activities94.60%
BEN Benefícios e Serviços S.A (10) Other Activities100.00%
Esfera Fidelidade S.A. (11) Other Activities100.00%

 

Controlled by Atual Serviços de Recuperação de Créditos e Meios Digitais S.A.
Return Capital Serviços de Recuperação de Créditos e Meios Digitais S.A. (formerly named Ipanema Empreendimentos e Participações S.A.) (16) (17) Credit Management and Recovery Management100.00%

Controlled by Return Capital Serviços de Recuperação de Créditos S.A. ( Previously named as Ipanema Empreendimentos e Participações)
Return Gestão de Recursos S.A. (formerly named Gestora de Investimentos Ipanema S.A.) (16)Resource Manager-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)(12)Other Activities-100,00%100.00%
Toque Fale Serviços de Telemarketing Ltda. (Toque Fale)Other Activities-100,00%100.00%
Controlled by Sancap   
Santander Capitalização S.A. (Santander Capitalização)Savings and annuities-100,00%100.00%
Evidence Previdência S.A. (15)Social Securities-100,00%100.00%
Controlled by Aymoré CFI   
Super Pagamentos e Administração de Meios Eletrônicos Ltda. (Super Pagamentos)(1) (19)Controlled by Aymoré CFIPayment Institution-100,00%
Banco Olé Bonsucesso Consignado S.A. (Olé Consignado)(14)Bank-60,00%
Banco PSA Finance Brasil S.A.Bank-50,00%50.00%
Controlled by Olé Consignado(14)Banco Hyundai Capital Brasil S.A. (13)Bank-50.00%
   
Controlled by Olé Consignado
Crediperto Promotora de Vendas e Cobrança Ltda. (current name of da BPV Promotora de Vendas e Cobrança Ltda.)Other Activities-100,00%100.00%
Olé Tecnologia Ltda. ((Current Corporate Name of Bonsucesso Tecnologia Ltda.)(4)Other Activities-100,00%100.00%
Controlled by Santander Leasing   
Controlled by Santander Finance Arrendamento MercantilLeasing
PI Distribuidora de Títulos e Valores Mobiliários S.A. (Current Corporate Name of PSA Finance Arrendamento Mercantil S.A. (Santander Finance Arrendamento Mercantil))(PI DTVM) (14)Leasing-100,00%100.00%

F-38

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Santander FIC FI Contract I Referenciado DI

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

Consolidated Investment FundFundsActivity (a)Participation %
Consolidated
Santander Fundo de Investimento Unix Multimercado Crédito PrivadoInvestment Fund (a)
Santander Fundo de Investimento Diamantina Multimercado Crédito Privado de Investimento no ExteriorInvestment Fund (a)
Santander Fundo de Investimento Amazonas Multimercado Crédito Privado de Investimento no ExteriorInvestment Fund (a)
Santander Fundo de Investimento SBAC Referenciado DI Crédito PrivadoInvestment Fund (a)
Santander Fundo de Investimento Guarujá Multimercado Crédito Privado de Investimento no ExteriorInvestment Fund (a)
Santander Fundo de Investimento Financial Curto PrazoParaty QIF PLCInvestment Fund (a)
Santander Fundo de Investimento Capitalization Renda FixaFI Hedge Strategies Fund (Santander FI Hedge Strategies)Investment Fund (a)
Santander Paraty QIF PLC(6)Investment Fund(a)
Santander FI Hedge Strategies Fund (Santander FI Hedge Strategies)(6)Investment Fund(a)
Prime 16 – Fundo de Investimento Imobiliário (formerly named BRL V - Fundo de Investimento Imobiliário-FII(8)rio - FII)Real Estate Investment Fund (a)
Fundo de Investimento em Direitos Creditórios Multisegmentos NPL Ipanema VI –- Não Padronizado (Fundo Investimento Ipanema NPL VI)(15)Investment Fund (a)
Fundo de Investimento em Direitos Creditórios Multisegmentos NPL Ipanema VI –V - Não Padronizado (Fundo Investimento Ipanema NPL V)(16)Investment Fund(a)
Santander Hermes Multimercado Crédito Privado Infraestrutura Fundo de InvestimentosInvestment Fund(a)
Fundo de Investimento em Direitos Creditórios Atacado - Não Padronizado (FIDC NRA)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, 2017, it was approved by Bacen the authorization process for the Company operates as a payment institution.

(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.

(2)Through the Private Stock Purchase and Sale Agreement held on October 26, 2017, Santander Serviços sold its interest held in Webcasas S.A. to Banco Santander. The full sale occurred at book value.

(3)On December 22, 2017, Santander Corretora de Seguros (current corporate name of Santander Participações SA), Cia de Ferro Ligas da Bahia - Ferbasa SA (Ferbasa) and Brazil Wind SA entered into an agreement for the sale of 100% (one hundred percent) of the shares issued by BW Guirapá I SA (respectively the Agreement and BW Guirapá I SA) held by Santander Corretora de Seguros and Brazil Wind SA to Ferbasa (Operation). Subject to confirmation of certain assumptions, the acquisition price for all the shares held by Santander Corretora de Seguros will be up to R$414 million, and there may be an additional payment of up to R$35 million if future targets have been met stipulated in the Contract. The closing of the Transaction remains conditioned, among other conditions, to: (i) approval of the Operation at the Extraordinary General Meeting of Ferbasa, in accordance with its corporate governance; (ii) obtaining the necessary approvals from the competent authorities; and (iii) maintenance of the ordinary course of business of BW Guirapá SA Considering the current stage of the operation and the expectation of its successful completion, this investment was written off against a credit in the asset, consequently the assets and liabilities of BW Guirapa and subsidiaries are no longer consolidated in the consolidated balance sheet, and the profit or loss is recorded in the income statement until November 30, 2017 (Note 11).

(1) In the EGM held on April 30, 2019, an increase in capital in the amount of R$79,537 was approved, from R$95,349 to R$174,886 divided into 174,885,602 shares, with a nominal value of R$1.00 (one real) each. In the EGM held on August 15, 2019, a capital increase was approved, based on statutory reserves, in the amount of R$64,000, from R$174,886 to R$238,886 divided into 238,885,602 shares, with a nominal value of R$1.00 (one real) each.

(4)According to the contractual change on June 13, 2017, the shareholders agreed to change company´s name from Bonsucesso Tecnologia Ltda. to Olé Tecnologia Ltda.

(5)Banco Santander, through its subsidiaries, holds the risks and benefits of Santander Paraty and the Santander FI Hedge Strategies Subfund, resident in Ireland, and both are fully consolidated in its Consolidated Financial Statements. In the Irish market, an investment fund can not act directly and, for that reason, it was necessary to create another structure (a sub-fund), Santander FI Hedge Strategies. Santander Paraty does not have a financial position, and all position is derived from the financial position of Santander FI Hedge Strategies.

(2) In the EGM held on December 7, 2018, a capital increase in the amount of R$2,000,000 was approved, from R$2,787,689 to R$4,787,689, through the issue of 1,405,667 (one million , four hundred and five thousand, six hundred and sixty-seven) new registered common shares, without par value. The shareholder Banco Santander subscribed all the new shares issued and paid up the shares corresponding to 50% of the capital increase. On September 16, 2019, the remaining 50% was paid.

(6)At the ESM held on September 29, 2017, Santander Corretora de Seguros’ shareholders’ equity increase was approved in the amount of R$12,900, based on the net assets of Santander Brasil Advisory calculated based on its book value at base date of August 31, 2017, of which the amount of R$8,463 was allocated to the share capital account of Santander Corretora de Seguros, increasing the current capital from R$1,717,652 to R$1,726,115, by issuing a total of 37,554 (thirty-seven thousand, five hundred and fifty-four) nominative common shares with no par value that were subscribed and paid-in on that date by Banco Santander, the issue price was set at R$343.50 per share, calculated based on their respective carrying amounts, on the base date of August 31, 2017.

(7)The Banco Santander figured as lender of certain delayed debts (loans) which had real estate as guarantees. The process of credit recovery consists in converting into capital contributions by the Real Estate Fund in conjunction concomitant transfer of the same shares to Banco Santander through the process of payment in kind of the above credit operations payments.

(3) In the EGM held on April 26, 2019, a capital increase in the amount of R$137,880 was approved, from R$726,561 to R$864,441 without the issue of new shares.

(4) In the EGM held on April 26, 2019, a capital increase in the amount of R$1,689 was approved, from R$296,000 to R$297,689 without the issue of new shares. In the EGM held on August 15, 2019, a capital increase in the amount of R$60,000 was approved, from R$297,689 to R$357,689 without the issue of new shares.

(5) On February 25, 2019, Banco Santander acquired all the shares of Getnet SA's Minority Shareholders, corresponding to 11.5% of Getnet SA's share capital, pursuant to the “Share Purchase and Sale Agreement and Other Covenants of Getnet SA, with approval by Bacen on February 18, 2019.

(6) In the EGM held on April 2, 2019, a capital increase in the amount of R$200,000 was approved, from R$347,135 to R$547,135, represented by 17,114,176,389 (seventeen billion, one hundred and fourteen million, one hundred and seventy-six six thousand three hundred and eighty-nine) registered common shares, without par value. In the EGM held on November 11, 2019, a capital increase in the amount of R$300,000 was approved, from R$547,135 to R$847,135, represented by 23,538,159,258 (twenty-three billion, five hundred and thirty-eight million, one hundred and fifty and nine thousand two hundred and fifty-eight) registered common shares, without par value.

(7) At the AGE held on January 31, 2019, a capital increase in the amount of R$100,000 was approved, through the issue of 92,174,394 (ninety-two million, one hundred and seventy-four thousand, three hundred and ninety-four) new common shares, nominative and without par value, increasing the share capital from R$270,000 to R$370,000. The shares issued due to the capital increase were fully subscribed by the shareholder Banco Santander. In the Extraordinary General Meeting held on June 25, 2019, a capital increase in the amount of R$375,000 was approved, from R$370,000 to R$745,000 through the issue of 335,240,479 (three hundred and thirty-five million, two hundred and forty thousand, four hundred and seventy-nine) new common shares, registered and without par value. In the Extraordinary General Meeting held on July 25, 2019, a capital increase in the amount of R$100,000 was approved, from R$745,000 to R$845,000 through the issue of 89,007,566 (eighty-nine million, seven thousand, five hundred and sixty-six) new common shares, registered and without par value. In the EGM held on September 25, 2019, a capital increase in the amount of R$195,000 was approved, from R$845,000 to R$1,040,000 through the issue of 171,775,899 (one hundred and seventy one million, seven hundred and seventy-five thousand, eight hundred and ninety-nine) new common shares, nominative and without par value. In the EGM held on October 23, 2019, a capital increase in the amount of R$257,000 was approved, from R$1,040,000 to R$1,297,000 through the issue of 225,715,791 (two hundred and twenty-five million, seven hundred and fifteen thousand seven hundred and ninety-one) new common shares, nominative and without par value.

(8) On May 14, 2019, Banco Santander and its wholly-owned subsidiary Santander Holding Imobiliária S.A. entered into a binding document with the partners of Summer Empreendimentos Ltda. establishing the terms of the negotiation of purchase and sale of quotas representing the total share capital of Summer Empreendimentos. The conclusion of the transaction is subject to the implementation of conditions precedent usual for this type of transaction, including prior authorization by Bacen. In the EGM held on April 18, 2019, a capital increase in the amount of R$86,000 was approved, from R$24,500 to R$110,500 through the issue of 108,271,434 (one hundred and eight million, two hundred and seventy-one thousand, four hundred and thirty-four) new common shares, registered and without par value. In the EGM held on May 30, 2019, a capital increase in the amount of R$119,162 was approved, from R$110,500 to R$229,662 through the issuance of 151,009,682 (one hundred and fifty-one million, nine thousand, six hundred and eighty and two) new common shares, nominative and without par value, at the issue price of R$0.7891 per share. In the EGM held on September 20, 2019, a capital increase in the amount of R$45,250 was approved, from R$229,662 to R$274,642 through the issuance of 57,894,063 (fifty-seven million, eight hundred and ninety-four thousand and sixty and three) new common shares, registered and without par value. In the EGM held on November 6, 2019, a capital increase in the amount of R$10,000 was approved, from R$274,642 to R$284,642 through the issue of 12,970,169 (twelve million, nine hundred and seventy thousand, one hundred and sixty-nine ) new common shares, registered and without par value.

(9) Investment transferred from non-current assets held for sale in June 2018.

(10) Company incorporated on June 11, 2018. In the EGM held on March 27, 2019, a capital increase in the amount of R$49,999 was approved, from R$45,001 to R$90,000, through the issue of 44,999,000 (forty-four million, nine hundred and ninety-nine thousand) new registered common shares, without par value. The shareholder Banco Santander subscribed all the new shares issued and paid up the shares corresponding to 100% of the capital increase.

(11) Company incorporated on August 14, 2018 and beginning its activities in November 2018.

(12) In the AGE of February 9, 2018, the shareholders of Banco Olé Consignado, approved the capital increase in the amount of R$120,000, from R$400,000 to R$520,000, through the issuance of 57,089,392 (fifty-seven million, eighty-nine thousand, three hundred and ninety-two) common shares, registered and without par value, fully subscribed and paid up by the shareholders on the date of the EGM, in proportion to their respective interest in the share capital. The capital increase was approved by Bacen on March 15, 2018.

(13) The pre-operating company BHJV Assessoria e Consultoria em Gestão Empresarial Ltda., Was incorporated on April 11, 2018 and transformed into Banco Hyundai Capital Brasil S.A. on December 13, 2018. Aymoré CFI, wholly owned subsidiary of Banco Santander , has effective operational control of the company. At the EGM held on February 19, 2019, a capital increase in the amount of R$200,000 was approved, through the issuance of 200,000,000 (two hundred million) new common shares, nominative and without par value, with the capital of R$100,000 to R$300,000. The shares issued due to the capital increase were fully subscribed by the shareholders Aymoré Financiamentos CFI in the amount of R$100,000 and Hyundai Capital Services Inc. in the amount of R$100,000.

(14) In the EGM held on May 3, 2018, the Company's shareholders approved its transformation into a securities distribution company, and the change of its corporate name to SI Distribuidora de Tulos e Valores Mobiliários S.A. The transformation process was approved by Bacen on November 21, 2018. In the EGM held on December 17, 2018, SI Distribuidora de Tulos e Valores Mobiliários S.A. approved the change of its corporate name to PI Distribuidora de Titulos e Valores Mobiliários S.A..The change process was approved by Bacen on January 22, 2019.

(15) In the EGM held on April 2, 2019, a capital increase in the amount of R$200,000 was approved, from R$250,000 to R$450,000 through the issue of 12,987,012,987 (twelve billion, nine hundred and eighty-seven million, twelve thousand, nine hundred and eighty-seven) new common shares, nominative

 

F-33 

F-39

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Brazilian Reais - R$ - unless otherwise stated)

 (8)

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

At the Extraordinary General Meeting (EGM) held on May 8, 2017, it was approved the change

(Thousand of company name from Santander Participações S.A. to Santander Corretora de Seguros, Investimentos e Serviços S.A. At the same EGM, it was approved the company´s purpose change.

Brazilian Reais - R$ - unless otherwise stated) 

(9)At the ESM held on August 31, 2017, a capital increase of R$17,652 was approved, in view of the version of the net assets of Santander Microcrédito, based on its book value at the date - based on June 30, 2017, entirely destined to the share capital account of Santander Corretora de Seguros, transferring the capital stock from the current R$1,700,000 to R$1,717,652, through the issuance of a total of 51,776 (fifty-one thousand, seven hundred and seventy-six) registered common shares with no par value that were subscribed and paid by Banco Santander on that date, the issue price was set at R$340.93 per share, calculated based on their respective book values, on the base date of June 30, 2017.

(10)On August 31, 2017, the merger and the Private Instrument of Protocol and Justification of Santander Microcrédito by Santander Corretora de Seguros (Current Corporate Name of Santander Participações S.A.) were approved, so that Santander Corretora de Seguros received through their book value, based on the balance sheet drawn up on June 30, 2017, all of the assets, rights and obligations of Santander Microcrédito. With the extinction of Santander Microcrédito the Santander Corretora de Seguros became its successor in all its rights and obligations.

(11)On March 9, 2017, under a contractual amendment, they resolved by mutual agreement to increase Integry Tecnologia’s capital stock in the amount of R$75,000, from the current R$1,276 to R$76,276, through the distribution of 75.000.000 (seventy and five million) of new quotas with a par value of R$1.00 each.

(12)At the ESM held on September 11, 2017, a capital increase of R$120,000 was approved, through the issuance of 120,000,000 (one hundred and twenty million) new common shares, nominative and without par value, the capital stock of R$100.00 (one hundred reais) to R$120,000. The shares issued as a result of the capital increase were fully subscribed by the shareholder Banco Santander.

(13)At the ESM held on December 19, 2017, it was approved the increase of the Olé Conignado´s share capital in the amount of R$120.000, increasing it from R$400.000 to R$520.000, through the issuance of 58.071.890 (fifty eight million, seventy one thousand, eight hundred ninety) new ordinary shares without par value. The share capital increase approved by the shareholders is still pending from Bacen´s approval.

(14)This investment fund was formed and started to be consolidated in September of 2017. It refers to a structure where the Bank has sold certain loans agreements which were already written-off (agreements matured over 360 days) and transferred to this fund. The current Companhia Securitizadora de Créditos Financeiros (current Securitization Company) (Note 15), company controlled by the Bank, holds 100% of the fund´s shares.

(15)This fund was consolidated in October 2017 and is indirectly controlled by Atual Securitizadora.

(16)Investment acquired in October 2017.

(17)At the ESM held on July 21, 2017, the capital increase of Super Payments in the amount of R$20,000 was approved, increasing the capital stock from R$49,451 to R$69,451 through the issuance of 50,724,086 (fifty million, seven hundred and twenty-four thousand and eighty-six) new nominative common shares, with no par value, in all identical to those previously existing, at the approximate issue price of R$394.29 per thousand shares at the book value of Super Payments on June 30, 2017. The shares issued were fully subscribed and paid-in on the same date by Aymoré CFI.

(18)On September 29, 2017, the merger and the Private Instrument of Protocol and Justification of Santander Brasil Advisory by Santander Corretora de Seguros (Current Corporate Name of Santander Participações S.A.) were approved, so that Santander Corretora de Seguros received through their book value, based on the balance sheet drawn up on August 31, 2017, all of the assets, rights and obligations of Santander Brasil Advisory. With the extinction of Santander Brasil Advisory the Santander Corretora de Seguros became its successor in all its rights and obligations.

(19)On November 17, 2017, was formalized the acquisition by Banco Santander of the participation by Santusa Holding, S.L. (equivalent to 39.35%) in the share capital of Santander Serviços. Thus, Banco Santander becomes the holder of 99.99% of the shares of Santander Serviços. The amount of R$298,978 relating to goodwill was recorded.

(20)On November 30, 2017, the merger and the Private Instrument of Protocol and Justification of the Merger Santander Serviços by Santander Corretora de Seguros (Current Corporate Name of Santander Participações S.A.). With the extinction of Santander Serviços , Santander Corretora de Seguros became its successor in all its rights and obligations.

 

a) Partnership Formation with HDI Seguros S.A. forand without par value. In the CreationEGM held on November 11, 2019, a capital increase in the amount of R$300,000 was approved, from R$450,000 to R$750,000 through the issue of 17,241,379,310 (seventeen billion, two hundred and forty-one million, three hundred and seventy-six million nine thousand three hundred and ten) new common shares, nominative and without par value.

(16) The AGE held on July 12, 2018, approved the change of the Totally Digital Cars Insurance Company

On December 20, 2017, the Bank signed agreements with HDI Seguros S.A. (HDI), in order to form a partnership for the issuance, offering and commercialization of car insurance 100% digital, through the creation of a new insurance company – the Santander Auto, which is controlled 50% by Sancap, entity fully controlled by Banco Santander, and 50% by HDI. The conclusion of this operation is subjected to the compliance with determined conditions including relevant regulatory authorizations.

b) Opening of the branch in Luxembourg

The Brazilian Central Bank, on June 9, 2017, granted to Banco Santander the authorization for the incorporation of a branch in Luxembourg, with a capital equivalent to US$1 billion (approximately R$3.2 billion) and the purpose of complementing the foreign trade strategy for corporate clients (large Brazilian companies and their operations abroad) and offering products and financial services through an offshore entity that is not established in a jurisdiction with favored taxation and that it allows an increase of the ability to source funds.

The incorporation of the branch is still subject to the authorization to be granted by the Luxembourg financial authority.

c) Market Agreement for indirect purchase of share on equity capitalname of Ipanema Empreendimentos e Participações andS.A. to Return Capital Serviços de Recuperação de Crutos S.A. The AGE held on July 12, 2018, approved the amendment to corporate name of Gestora de Investimentos Ipanema S.A. for Return Gestão de Recursos S.A. In an AGE held on November 11, 2019, the Company's capital increase in the amount of R$300,000 was approved by the issue of 17,241,379,310 (seventeen billion, two hundred and forty-one million, three hundred and seventy-nine thousand and three hundred and ten) new common shares, nominative and without par value.

(17) On July 5, 2017,November 1, 2019, Atual Companhia SecuritizadoraServiços de Créditos Financeiros, a company wholly-ownedRecuperação de Creditos concluded the acquisition of the shares issued by BancoReturn Capital Serviços e Recuperação de Creditos S.A. for the amount of R$17,000, previously held by minority shareholders, equivalent to 30% of the share capital of the company.

(18) In the EGM held on October 31, 2019, the partial spin-off of Integry Tecnologia e Serviços AHU Ltda. Was approved, with version of the spun-off portion of its equity to Getnet. At the EGM of December 16, 2019, the change of the company's name to Santander (Brasil) S.A., signedMerchant Platform Solutions Brasil Ltda was approved. (“SMPS Brasil”). On December 20, 2019, a purchase and sale agreement was signed for the totality of the company's shares for the amount of R$3 million by Santander Merchant Platform Solutions (Spain).

(19) On March 14, 2019, the minority shareholder of Banco Olé Bonsucesso Consignado S.A. formalized its interest in exercising the put option provided for in the Investment Agreement, signed on July 30, 2014, for the sale of its 40% stake in the share capital of Olé Consignado to Banco Santander. On December 20, 2019, the parties entered into a binding agreement for the acquisition, by Banco Santander, of all shares issued by Bosan Participações S.A. (holding company whose only asset is shares representing 40% of Banco Olé's share capital), for the amount total of R$1.6 billion, to be paid on the closing date of the Transaction. The completion of the Transaction will be subject to the signing of the definitive instruments and the implementation of certain suspensive conditions usual in this type of transaction. On October 23, 2019, Aymoré CFI had its share capital reduced, without the cancellation of shares, by transferring the common shares representing its equity interest held in Banco Olé Consignado and Super Payments to Banco Santander. On December 23, 2019, the necessary conditions for the completion of the transaction were fulfilled so that Olé Consignado and Super Payments became directly controlled by Banco Santander.

The events decribed above were implemented in order to reorganize the operations and activities of entities according to the business plan of the Conglomerate Santander, those movements have not affected the segment reporting once the companies are related to the commercial Banking segment and did not lead to a creation of a new segment.

a) Put option of equity interest in Banco Olé Consignado S.A.

On March 14, 2019, the minority shareholder of Banco Olé Bonsucesso Consignado S.A. (Olé Consignado) formalized its interest to exercise the put option right provided in the Investment Agreement, executed on July 30, 2014, to sell its 40% equity interest in the capital stock of Olé Consignado to Banco Santander (Brazil) S.A. (“Banco Santander”).

On December 20, 2019, the parties entered into a binding agreement for the acquisition, by Banco Santander, of the all the shares issued by Bosan Participações S.A. (holding company whose only asset are shares representing 40% of the capital of Banco Olé), for the total amount of R $ 1.6 billion (“Operation”), to be paid on the closing date of the Operation.

b) Incorporation of the spun-off portion of Integry Tecnologia e Serviços A.H.U Ltda.

On October 31, 2019, the partial spin-off operation of Integry Tecnologia e Serviços AHU Ltda. (“Integry”), a wholly owned subsidiary of Getnet Adquirência e Serviços para Meios de Pagamento S.A. (“Getnet”), with version of the spun-off portion of its assets and liabilities, to Getnet was approved. The incorporation of the spun-off portion by Getnet is pending approval by the Central Bank of Brazil.

On December 20, 2019, Getnet and Santander Merchant Platform Solutions, S.L. (“SMPS Global”), company based in Spain and controlled by Banco Santander, S.A. (Santander Spain) executed a Purchase and Sale Agreement of the quotas corresponding to 100% of Integry capital stock. As a consequence, SMPS Global has become the holder of 100% of the shares representatives of the capital stock of Integry. On December 23, 2019, Integry had its corporate name changed to Santander Merchant Platform Solutions Brasil Ltda.

c) Acquisition of residual equity interest in Return Capital Serviços e Recuperação de Crédito S.A.

On November 01,2019, Atual Serviços de Recuperação de Créditos e Meios Digitais S.A. (“Atual”), wholly owned subsidiary by Banco Santander and the minority shareholders of Return Capital Serviços e Recuperação de Crédito S.A. (“Return Capital”) executed the Shares’ Sale and Purchase Agreement and Other Covenants of Return Capital, in which Atual committed to acquire all of the equity portionminority shareholders’ shares, corresponding to 70%30% of Return Capital capital stock. The acquisition was closed on November 01, 2019. As a consequence, Atual has become the holder of 100% of the shares representatives of the capital stock of Return Capital.

d) Acquisition of Residual Interest in Getnet S.A.

On December 19, 2018, Banco Santander and the Getnet S.A. Minority shareholders entered into an amendment to the Getnet S.A. Share Purchase and Sale Agreement, in which Banco Santander committed to acquire all the shares of the Minority Shareholders, corresponding to 11.5% of the share capital of Getnet SA, for the amount of R $ 1,431,000. The acquisition was approved by BACEN on February 18, 2019 and concluded on February 25, 2019, so that Banco Santander now holds 100% of the shares representing the share capital of the companies Ipanema Empreendimentos e Participações Ltda., Gestora de Investimentos Ipanema Ltda. and Fundo Investimento Ipanema NPL V. The transaction was approved by Bacen on September 19, 2017 and, after fulfillment of other conditions precedent, the parties concluded the transaction on October 16, 2017.

F-34 

Table of Contents

 

BANCO SANTANDER (BRASIL)Getnet S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Brazilian Reais - R$ - unless otherwise stated)

d) Incorporation of the Gestora de Inteligência de Crédito – Partnership between Banco Santander and others banks in the Brazilian market

On April 14, 2017, the definitive documents necessary for the creation of a new credit bureau, Gestora de Inteligência de Crédito SA ("Company"), were signed by the shareholders, whose control will be shared among the shareholders who will hold 20% of the its share capital each. The Company will develop a database with the objective of aggregating, reconciling and processing registration and credit information of individuals and legal entities, in accordance with the applicable standards, providing a significant improvement in the processes of granting, pricing and directing credit lines. The Bank estimates that the Company will be fully operational in 2019.

 

e) Partnership Formation with the Hyundai Group in Brazil

On April 28, 2016, the Aymoré CFI and Banco Santander entered into a transaction for the formationTransfer of a partnership with Hyundai Motor Brasil Mondadori de Automóveis Ltda. (Hyundai Motor Brasil) and Hyundai Capital Services, Inc. (Hyundai Capital) for the constitutionControl of Banco Hyundai Capital BrasilOlé Bonsucesso Consignado S.A. and an insurance brokerage company to provide, respectively, auto finance and insurance brokerage services and products to clients and Hyundai dealerships in Brazil. The partnership capital structure will have a shareholding of 50% held by Aymoré CFI, 25% held by Hyundai Capital and 25% held by Hyundai Motor Brasil. Such partnership implementation shall be subject to the applicable regulatory approvals. In September 19, 2017, it was published on the Federal Official Diary the presidential decree recognizing the Brazilian government interest on the foreign participation in the national financial institution to be incorporated by Santander and Hyundai.

4. Change in the scope of consolidation

a) Sale of Santander Securities Services Brasil DTVM S.A.

On August 31, 2015 the sales transaction of the qualified custody business, with the sale of all shares issued by 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 what was informed to the market on June 19, 2014.

The transaction generated a gain of R$750,550 before taxes, recorded in the heading Result on disposal of assets not classified as non-current assets held for sale (Note 43).

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”)S.A.

 

On January 4, 2016,October, 23 2019, Aymoré CFI informedCrédito, Financiamento e Investimento S.A. (“Aymoré”) had its capital stock reduced, without cancellation of shares, through the ownerstransfer of the common shares representing the remaining 50% of Super´s total voting capital its decision to make the call related to the call option for the acquisition of such shares, for the value of approximately R$113 million. The transaction was concluded on March 10, 2016.

Due to the event above, Aymoré, as the parent company, purchased the remaining equity instruments of Super 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.

c) Agreement on the Acquisition of part of the Financial Operation of PSA Group in Brazil and a consequent creation of a Joint Venture Company

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 creation of a financial cooperation with Banque PSA to offer a range of financial and insurance products to clients and dealers of PSA in Brazil.

The main vehicle of financial cooperation is Banco PSA Finance Brasil S.A. which is being held in Banco Olé Bonsucesso Consignado S.A. (“Olé”) and Super Pagamentos e Administração de Meios Eletrônicos S.A. (“Super”) to Banco Santander. On December 23, 2019 all 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) on the closing date (08/01/2016). The operation also included the acquisition by Banco Santander subsidiary, of 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 (equal to the book value) on the closing date, and also the purchase of 50% of PSA Corretora de Seguros e Serviços Ltda., whose price was equal to the book value (proportional) on the closing date.

Banco Santander started to consolidate these companies from August 1, 2016.prior

 

F-35 

F-40

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Thousandsconditions for the capital stock reduction were accomplished: (i) previous authorization by Bacen; and (ii) term of Brazilian Reais - R$ - unless otherwise stated)

opposition of the company creditors established as per art. 174 of Law 6.404/76; and, thus, Olé and Super become directly controlled by Banco Santander.

 

d) Investment Agreement betweenf) Acquisition of Summer Empreendimentos Ltda.

On May 14, 2019, Banco Santander (Brasil) S.A. (“Banco Santander”) and its wholly owned subsidiary Santander Holding Imobiliária S.A. (“SHI”) executed a binding agreement with the partners of Summer Empreendimentos Ltda (“Summer”) defining the negotiation terms for the purchase and sale of shares fully representing the capital of Summer. The acquisition was approved by BACEN on September 16, 2019 and closed on September 20, 2019. As a consequence SHI has become the holder of 99.999% and Banco BonsucessoSantander 0.001% of the shares representing the capital stock of Summer.

g) Formation of Esfera Fidelidade S.A. (current Olé Consignado)

On August 14, 2018, Esfera Fidelidade S.A. was incorporated, with equity fully owned by Banco Santander. Esfera Fidelidade S.A. act in the development and management of customer loyalty programs.. The company started its operation in November 2018.

h) Investment in Loop Gestão de Pátios S.A.

On June 26, 2018, Webmotors S.A., company with 70% interest indirectly owned by Banco Santander, signed an investment agreement with Allpark Empreendimentos, Participações e Serviços S.A. and Celta LA Participações S.A., in order to acquire an equity interest corresponding to 51% of the capital stock of Loop Gestão de Pátios S.A. (“Loop”), through capital increase and issuance of new shares of Loop to be fully subscribed and paid-in by Webmotors S.A.. Loop operates in the segment of commercialization and physical and virtual auction of motor vehicles. On September 25, 2018, the transaction was completed with increase of the capital stock, in the amount of R$23,900, through issuance of shares representing 51% of equity interest in Loop, which were fully subscribed and paid-in by Webmotors S.A.

i) Formation of BEN Benefícios e Serviços S.A.

On June 11, 2018, BEN Benefícios e Serviços S.A. (“Ben”), with equity fully owned by Banco Santander, was incorporated, to act in the supply and administration of meal, food, transportation, cultural and similar vouchers, via printed or electronic and magnetic cards.

j) Partnership with Hyundai Capital Services, Inc.

On April 28, 2016, Aymoré Crédito, Financiamento e Investimento S.A. (“Aymoré”) and Banco Santander executed with Hyundai Capital Services, Inc. (“Hyundai Capital”) the necessary documents for the formation of Banco Hyundai Capital Brasil S.A. (“Banco Hyundai”) and an insurance brokerage company with the purpose to provide, respectively, auto finance and financial and insurance brokerage services to clients and dealers of Hyundai in Brazil.

k.i) Banco Hyundai Capital Brasil S.A.

On April 11, 2018, the parties incorporated, with an equity interest of 50% held by Aymoré and 50% held by Hyundai Capital, a non-operational entity named BHJV Assessoria e Consultoria em Gestão Empresarial Ltda. On May 8, 2018, Aymoré and Hyundai Capital took resolution on the conversion of BHJV Assessoria into the non-operational joint-stock corporation named Banco Hyundai Capital Brasil S.A. On December 13, 2018, the incorporation procedure of Banco Hyundai was concluded.

 

On February 10, 2015, with21, 2019, the approvalauthorization to operate granted by BACEN for the functioning of Banco Hyundai was published in the Federal Official Gazette. Banco Hyundai began operations in April 2019.

k.ii) Hyundai Corretora de Seguros Ltda.

On April 30, 2019, BACEN the transaction was completed andauthorized Banco Santander through Aymoré CFI, becameto hold an indirect interest in a company to be incorporated under the controlling shareholder of Olé Consignado, with 60%name Hyundai Corretora de Seguros Ltda. (“Hyundai Corretora”). Hyundai Corretora was incorporated on July 22, 2019. On September 10, 2019 the company got the registration of the total and voting share capital through an investment of R$460 million. Olé Consignado kept the remaining portion of the share capital (40%).company as insurance brokerage with SUSEP. Hyundai Corretora began operations in November 2019.

 

In December 2015, it has completed the studyl) Creation of the allocation of the purchase price (Purchase Price Allocation - PPA) on the acquisition of Bonsucesso by Aymoré, based on acquisition date as below:PI Distribuidora de Títulos e Valores Mobiliários S.A.

 

 Book valueFair value
Financial assets - available-for-sale121,468121,468
Loans and Receivables508,147508,147
Others Assets374,151374,151
Intangible Assets(1)-62,000
Total assets1,003,7661,065,766
Financial liabilities466,162466,162
Others liabilities397,604397,604
Total liabilities863,766863,766
Capital increase by Aymore CFI460,000460,000
Total of net assets acquired600,000662,000
Non-controlling interest(2) 264,800
Total consideration transferred by Aymore to acquire control 460,000
Goodwill(3) 62,800

On May 3, 2018, Santander Finance Arrendamento Mercantil S.A., an indirectly controlled subsidiary of Banco Santander, was converted into a distribution company of bonds and securities and had its corporate name changed to SI Distribuidora de Títulos e Valores Mobiliários S.A. The conversion process of approved by BACEN on November 21, 2018. On December 17, 2018, SI Distribuidora de Títulos e Valores Mobiliários S.A. had its corporate name changed to PI Distribuidora de Títulos e Valores Mobiliários S.A., being the corporate name change process approved by BACEN on January 22, 2019. The company started its operations on March 14, 2019.

(1)4.Intangible assets identified relate to brandCash and client relationshipbalances with estimated useful lifethe Brazilian Central Bank

Thousand of reais 2019 2018 2017
       
Cash and cash equivalents 20,127,364 19,463,587 20,642,321
of which:      
Cash 4,877,849 4,235,096 4,661,348
Cash and Foreign currency application abroad 15,249,515 15,228,491 15,980,973
Total 20,127,364 19,463,587 20,642,321

F-41

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Thousand of 10 years and 4 years, respectively.Brazilian Reais - R$ - unless otherwise stated) 

 

(2)5.The amount of non-controlling interests were measured at R$240 million as the proportional value of the net assets of the investee.Loans and amounts due from credit institutions

(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 portfolio in Banco Santander and Banco Bonsucesso, in accordance with the terms of the agreement. Banco Santander will continue to originate 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 to acquire), relating to the shares held by Banco Bonsucesso, equivalent to 40% of the share capital of this company. According to IAS 32,a financial liability was recognized, the balance of which on December 31, 2017of R$484 million (2016 and 2015 - R$307 million) by the commitment made in relation to the put option, accounted in Shareholders’ Equity, the amount of R$67 million, non-controlling interests, the amount of R$240 million. In 2017, a tax credit of R$71 million was recognized and an expense in the consolidated statements of income, in the amount of R$177 million.

At the ESM held on March 3, 2016 the change of the corporate name of Banco Bonsucesso Consignado S.A. to Banco Olé Bonsucesso Consignado S.A. was approved, the process was approved by Bacen on June 1, 2016.

5. Cash and balances with the Brazilian Central Bank

Thousand of reais201720162015
Cash and cash equivalents5,242,8694,445,9407,141,137
of which:   
Cash4,569,4433,316,8002,995,112
Money market investments673,4261,129,1404,146,025
Money market investments (1)33,158,09545,242,67427,170,892
Central Bank compulsory deposits (2)62,465,11760,916,29754,831,324
Total100,866,081110,604,91189,143,353
(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 Bacen 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 financial statements is as follows:

 

Thousand of reais201720162015
Classification:   
Loans and receivables32,300,09527,762,47342,422,638
 Of which:   
Loans and amounts due from credit institutions, gross32,369,11027,963,91442,601,397

F-36 

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Brazilian Reais - R$ - unless otherwise stated)

Thousand of reais201720162015

Impairment losses (note 10.c)(69,015)(201,441)(178,759)
Loans and amounts due from credit institutions, net32,300,09527,762,47342,422,638
Loans and amounts due from credit institutions, gross32,369,11027,963,91442,601,397
    
Thousand of reais201720162015
Type:   
Time deposits(2)4,236,9902,070,1513,626,514
Reverse repurchase agreements(1) (2)270,735848,096152,870
Escrow deposits10,136,0799,836,3009,493,169
Cash and Foreign currency investments(2)15,981,47513,194,92324,057,973
Other accounts1,743,8312,014,4445,270,871
Total32,369,11027,963,91442,601,397
Currency:   
Brazilian Real17,004,88425,421,46518,631,226
US dollar15,044,0881,658,98023,607,170
Euro307,633779,314323,053
Pound sterling3,58551,9724,964
Other currencies8,92052,18334,984
Total32,369,11027,963,91442,601,397
    
Thousand of reais201720162015
    
Cash equivalents (2):   
Short-term transactions and low risk of change in its value17,428,03313,683,64125,990,477
Thousand of reais 2019 2018 2017
       
Classification:      
Loans and receivables - - 65,209,902
Financial Assets Measured At Amortized Cost 109,233,128 - -
 Of which:      
     Loans and amounts due from credit institutions, gross 109,246,671 79,620,562 65,278,917
     Impairment losses (note 9.c) (13,543) (13,561) (69,015)
Loans and amounts due from credit institutions, net 109,233,128 79,607,001 65,209,902
Loans and amounts due from credit institutions, gross 109,247,248 79.620.562 65,278,917
       
Thousand of reais 2019 2018 2017
       
Type:      
Time deposits (2) 66,908,232 64,547,525 53,128,272
Reverse repurchase agreements (1) (2) 100,246 3,728,963 270,735
Escrow deposits 11,424,537 10,182,936 10,136,079
Cash and Foreign currency investments(2)(3) - - -
Other accounts (3) 30,814,233 1,161,138 1,743,831
Total 109,247,248 79,620,562 65,278,917

(1) CollateralizedGuaranteed by debt instruments.

(2) Includes R$100,246 of short-term transactions with a low risk of change in value, considered cash equivalents.

(3) In 2019, the balances related to compulsory deposits were reclassified from cash and reserves at the Central Bank of Brazil to the item Loans and other amounts with credit institutions for better presentation and, consequently, the respective comparative balances also have been reclassified.

Thousand of reais 2019 2018 2017
       
Currency:      
Brazilian Real 107,693,973 91,419,015 63,397,123
US dollar 1,401,601 422,247 15,044,088
Euro 151,097 32,058 307,633
Pound sterling - - 3,585
Other currencies - - 8,920
Total 109,246,671 91,873,320 78,761,349

Thousand of reais 2019 2018 2017
       
Cash equivalents:      
Short-term transactions and low risk of change in its value 1,216,192 5,821,573 2,028,581

 

Note 45-d44-d contains a detail of the residual maturity periods of loans and receivables.financial assets measured at amortized cost.

 

7. Debt instruments

F-42

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

6.Debt instruments

 

The breakdown, by classification, type and currency, of the balances of “Debt instruments” is as follows:

 

Thousand of reais201720162015 2019 2018 2017
 
Classification:       
Financial assets held for trading34,879,68159,994,94625,193,598
Financial assets held for trading (1) - - 34,879,681
Financial Assets Measured At Fair Value Through Profit Or Loss 3,735,076 3,171,746 -
Financial Assets Measured At Fair Value Through Profit Or Loss Held For TradingFinancial Assets Measured At Fair Value Through Profit Or Loss Held For Trading34,885,631 50,066,469 -
Other Financial assets designated at fair value through profit or loss1,658,6891,668,7491,506,570 - - 1,658,689
Financial assets - available-for-sale84,716,74755,829,57267,103,274 - - 84,716,747
Financial Assets Measured At Fair Value Through Other Comprehensive Income (1)Financial Assets Measured At Fair Value Through Other Comprehensive Income (1)95,962,927 85,395,691 -
Investments Held-to-Maturity10,214,45410,048,76110,097,836 - - 10,214,454
Loans and receivables17,616,51516,283,25911,812,701 - - 17,616,515
Financial Assets Measured At Amortized Cost 38,748,296 36,799,509 -
Of which:      
Debt Instruments20,400,08217,838,16211,957,161 40,803,323 39,513,460 20,400,082
Impairment losses(2,783,567)(1,554,903)(144,460) (2,055,027) (2,713,951) (2,783,567)
Total149,086,086143,825,287115,713,979 173,331,930 175,433,415 149,086,086
 
Type:   
Government securities - Brazil (1)122,362,389122,971,85493,439,724
Government securities - Brazil (2) 135,848,053 116,531,146 122,362,389
Debentures and Promissory notes12,097,23012,922,76311,967,222 13,874,883 10,555,952 12,097,230
Other debt securities14,626,4677,930,67010,307,033 23,608,994 48,346,317 14,626,467
Total149,086,086143,825,287115,713,979 173,331,930 175,433,415 149,086,086
Currency: 
Brazilian Real137,420,134134,037,665109,836,568
US dollar11,665,9529,107,5135,111,982
Euro-680,109765,429
Total149,086,086143,825,287115,713,979

(1)       Includes, substantially, National Treasury Bills (LTN), Treasury Bills (LFT) National Treasury Notes (NTN-A, NTN-B, NTN-C e NTN-F).

(1)On December 31, 2018, management decided to change the classification of Financial Treasury Bills – LFT, of the securities portfolio of Getnet Adquirência e Serviços para Meios de Pagamento S.A. (Getnet SA), Banco Bandepe SA and Santander Corretora de Cambio e Valores Mobiliários S.A. (Santander CCVM). The securities were transferred from the Trading to Available for Sale category, in the amounts of R$739,430, R$14,099 and R$375,488, respectively. Such transfers did not impact the amounts of Consolidated and also did not generate effect on the result. The change in the category occurred due to the revaluation of the recent trading history of these assets.

(2)Includes, substantially, National Treasury Bills (LTN), Treasury Bills (LFT) e National Treasury Notes (NTN-A, NTN-B, NTN-C e NTN-F).

 

The Debts Instrumentsdebt instruments are composed, mainly, of R$77,781,728 (2016 - R$71,810,310 and 2015 - R$58,958,355) of debt securities relating to repurchase agreements, R$2,305,158 (2016 - R$3,044,896 and 2015 - R$6,216,315) to compulsory deposits in Central Bank, R$6,273,561 (2016 - R$6,221,046 and 2015 - R$10,197,025) to guarantee of B3 S.A. - Brasil, Bolsa, Balcão (B3 S.A.) (Current Company Name of BM&FBovespa - Bolsa de Valores, Mercadorias e Futuros (BM&FBovespa)) transactions and R$4,473,298 (2016 - R$5,358,604 and 2015 - R$4,939,160) to escrow deposits and other guarantee.majority by:

Thousand of reais 2019 2018 2017
       
Currency:      
Brazilian Real 164,447,235 166,743,410 137,420,134
US dollar 8,884,695 8,690,005 11,665,952
Euro - - -
Total 173,331,930 175,433,415 149,086,086

Thousand of reais 2019 2018 2017
       
Debt Instruments linked to:      
Repo Operations 102,849,859 90,909,891 77,781,728
Banco Central Mandatory Deposits - 1,449,207 2,305,158
Operations guarantees in B3 S.A. - Brasil, Bolsa, Balcão (B3 S.A.) 6,618,651 17,985,160 6,273,561
Associated to judiciary deposits and other guarantees 9,573,331 2,078,042 4,743,298
Total 119,041,841 112,422,300 91,103,745

 

Note 45-d44-d contains a detaildetails of the residual maturity periods of available-for-sale financial assets measured at fair value through Other Results Comprehensive and of loans and receivables.corresponding financial assets measured at amortized cost.

 

F-37 

F-43

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Brazilian Reais - R$ - unless otherwise stated)

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

 

8. Equity instruments

7.Equity instruments

 

a) Breakdown

 

The breakdown, by classification and type, of the balances of “Equity instruments” is as follows:

 

Thousand of reais201720162015
Classification:   
Financial assets held for trading489,770398,461404,973
Other Financial assets designated at fair value through profit or loss33,36842,455573,664
Financial assets available-for-sale1,106,6371,985,4731,162,332
Total1,629,7752,426,3892,140,969
Type:   
Shares of Brazilian companies389,1131,185,6531,168,186
Shares of foreign companies5,3473,58811,445
Investment funds(1)1,235,3151,237,148961,338
Total1,629,7752,426,3892,140,969

(1) Composed mainly by investment on fixed income investment funds.

Thousand of reais201920182017
    
Classification:   
Financial assets held for trading--489,770
Financial Assets Measured At Fair Value Through Profit or Loss Held For Trading2,029,470766,333-
Non-Trading Financial Assets Mandatorily Measured At Fair Value Through Profit or Loss171,453298,297-
Other Financial assets designated at fair value through profit or loss--33,368
Financial assets available-for-sale--1,106,637
Financial Assets Measured At Fair Value Through Other Comprehensive Income157,30640,986-
Total2,358,2291,105,6161,629,775
    
Type:   
Shares of Brazilian companies665,027783,475389,113
Shares of foreign companies-1,9335,347
Investment funds (1)1,693,202320,2081,235,315
Total2,358,2291,105,6161,629,775
(1)Composed mainly by investment on fixed income, public and private securities.

 

b) Changes

 

The changes in the balance of “Equity instruments – Financial assets measured at fair value through profit or loss held for trading” were as follows:

 

Thousand of reais201720162015 201920182017
 
Balance at beginning of year398,461404,973391,656 766,333489,770398,461
Net additions (disposals)(4,892)(7,125)26,273 1,267,243277,46290,696
Valuation adjustments96,201613(12,956) (4,106)(899)613
Balance at end of year489,770398,461404,973 2,029,470766,333489,770

 

The changes in the balance of “Equity instruments – Other financial assets at fair value through profit or loss”Non-Trading Financial Assets Mandatorily Measured At Fair Value Through Profit Or Loss” were as follows:

 

Thousand of reais201720162015 201920182017
 
Balance at beginning of year42,455573,664902,794 298,29733,36842,455
Net additions (disposals)(1,586)(531,209)(318,307) (126,893)143,291(1,586)
Valuation adjustments(7,501)-(10,823) 49121,638(7,501)
Balance at end of year33,36842,455573,664 171,453298,29733,368

The changes in the balance of “Equity instruments – Available-for-sale financial assets”Financial Assets Measured At Fair Value Through Other Comprehensive Income” were as follows:

 

Thousand of reais201720162015 201920182017
 
Balance at beginning of year1,985,4731,162,3321,653,644 40,9861,106,6371,985,473
Net additions (disposals)(830,395)852,820(482,406) 238,758(1,034,219)(830,395)
Valuation adjustments(48,441)(29,679)(8,906) (122,438)(31,432)(48,441)
Balance at end of year1,106,6371,985,4731,162,332 157,30640,9861,106,637

 

9. Derivative financial instruments and Short positions

F-44

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

8.Derivative financial instruments and Short positions

 

The main risk factors associated to derivatives contracted are related to exchange rates, interest rates and stocks.equities. To manage these and other market risk factors the Bank uses practices which include the measurement and follow up of the limit´s usage previously defined on internal committees, as well as the daily follow up of the portfolios values in risk, sensitivities and changes in the interest rate and exchange exposure, liquidity gaps, among other practices which allow the control and follow up on the main risk metrics that can affect the Bank´s position in the several markets which it acts. Based on this management model the Bank has accomplished its goal, using operations with derivatives, in optimize the relation risk/benefits even in situation with great volatility.

 

The derivatives fair value is determined through quotation of market prices. The swaps contracts fair value is determined using discounted cash flow modeling techniques, reflecting suitable risk factors. The fair value of NDF and Future contracts are also determined based on the quotation of market prices for derivatives traded in specific chamber (i.e.. stock Exchange for example) or using the same methodology applied for swap contracts. The fair value of options derivatives (call and put) is determined based on the mathematical models, such as Black & Scholes, using yield rates, implied volatilities and the fair value of the corresponding asset. The current market prices are used to price the volatilities. For the derivatives which do not have prices directly disclosed by specific chamber, their fair values are obtained through pricing models which use market information, based on disclosed prices of more liquid assets. Interest rate curves and market volatilities are extracted from thesetheses prices to be used as first input in these models.

F-38 

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Brazilian Reais - R$ - unless otherwise stated)

 

a) Trading and hedging derivatives

 

a.1) Derivatives Recorded in the Balance Sheet and Compensation Accounts

 

Portfolio Summary of Trading Derivative and Used as Hedge

 

  201920182017
201720162015   
Assets    
Swap Differentials Receivable15,781,20715,321,64622,312,106  14,634,86314,640,28915,781,207
Option Premiums to Exercise553,217935,520895,684  1,065,753716,936553,217
Forward Contracts and Others928,4648,445,8073,042,572  4,745,1013,006,221928,464
Total17,262,88824,702,97326,250,362  20,445,71718,363,44617,262,888
   
Liabilities    
Swap Differentials Payable14,643,01612,267,81920,154,760  16,458,39715,952,28314,643,016
Option Premiums Launched385,1831,166,002827,757  1,699,729563,787385,183
Forward Contracts and Others1,649,2876,802,7943,734,442  4,271,8521,950,7651,649,287
Total16,677,48620,236,61524,716,959  22,429,97818,466,83516,677,486

  

Summary by Category

F-45

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

Summary by Category
 
Trading 201920182017
        
  Notional (1)Fair Value (4)Notional (1)Fair Value (4)Notional (1)Fair Value (4)
Swap  (1,823,534) (1,431,110) 1,108,760
Assets 282,164,189147,010,930177,233,86944,487,274202,081,21457,294,179
CDI (Interbank Deposit Rates) 40,550,62716,908,79136,135,01524,267,59133,289,52222,409,496
Fixed Interest Rate - Real 47,140,927-47,968,999-95,700,715-
Indexed to Price and Interest Rates 2,388,118-2,581,215-5,592,892-
Foreign Currency 192,084,517130,102,13990,495,24020,219,68367,493,63534,884,683
Others --53,400-4,450-
Liabilities 279,803,610(148,834,464)176,385,349(45,918,384)199,709,355(56,185,419)
CDI (Interbank Deposit Rates) 24,353,405-11,801,600-16,664,176-
Fixed Interest Rate - Real 67,937,624(24,079,732)88,317,044(23,075,374)114,055,076(21,687,884)
Indexed to Price and Interest Rates 125,829,755(123,445,067)24,308,601(21,775,017)40,146,968(34,107,210)
Foreign Currency 60,394,529-50,748,008-28,420,467-
Others 1,288,297(1,309,665)1,210,096(1,067,993)422,668(390,325)
Options 1,446,536,133(1,222,465)335,073,080153,149190,061,609168,034
Purchased Position 678,089,904381,706149,076,796716,93687,503,833553,217
Call Option - US Dollar 171,871(281)14,518,058239,0799,369,821169,542
Put Option - US Dollar 1,456,9754,3558,893,62090,7365,130,39242,389
Call Option - Other 98,154,363818,6643,118,344131,2971,953,48159,220
Interbank Market 98,154,363819,262639,4884,5371,185,310389
Others(2) -(598)2,478,856126,760768,17158,831
Put Option - Other 578,306,695(441,032)122,546,774255,82471,050,139282,066
Interbank Market 578,306,695(440,959)121,782,816217,72670,295,282257,943
Others(2) -(73)763,95838,098754,85724,123
Sold Position 768,446,229(1,604,171)185,996,284(563,787)102,557,776(385,183)
Call Option - US Dollar 254,945(1,472)7,615,856(101,034)5,595,163(117,059)
Put Option - US Dollar 263,994(2,842)12,160,912(169,431)5,919,598(77,145)
Call Option - Other 174,166,802(440,731)31,679,919(66,002)19,880,180(35,961)
Interbank Market 174,166,802(440,959)29,609,298(13,195)19,151,110(515)
Others(2) -2282,070,621(52,807)729,070(35,446)
Put Option - Other 593,760,488(1,159,126)134,539,597(227,320)71,162,835(155,018)
Interbank Market 593,760,488(1,159,038)133,703,672(179,841)70,494,622(126,743)
Others(2) -(88)835,925(47,479)668,213(28,275)
        
Futures Contracts 433,873,180-289,508,200-161,725,596-
Purchased Position 72,912,029-86,203,734-54,806,022-
Exchange Coupon (DDI) 7,394,951-20,590,068-9,616,936-
Interest Rates (DI1 and DIA) 55,430,519-32,690,685-26,456,303-
Foreign Currency 9,978,419-32,456,813-16,733,437-
Indexes(3) --466,168-1,780,311-
Others 108,140---219,035-
Sold Position 360,961,151-203,304,466-106,919,574-
Exchange Coupon (DDI) 146,032,485-146,948,795-55,016,928-
Interest Rates (DI1 and DIA) 196,170,105-54,160,203-51,135,994-
Foreign Currency 17,305,604-1,992,574-745,849-
Indexes(3) 290,254-202,894-20,803-
Treasury Bonds/Notes 1,162,703-----
Forward Contracts and Others 169,401,317473,24990,910,8411,055,45647,823,561(720,823)
Purchased Commitment 79,970,842426,99138,666,2691,303,56123,506,096647,376
Currencies 79,969,759426,98638,095,6251,250,70621,525,220618,007
Others 1,0835570,64452,8551,980,87629,369
Sold Commitment 89,430,47546,25852,244,572(248,105)24,317,465(1,368,199)
Currencies 89,426,69846,17051,958,529(252,160)22,096,104(1,364,617)
Others 3,77788286,0434,0552,221,361(3,582)

(1) Accrued notional.

(2) Includes options of index, mainly being options involving US treasury, shares and stock indexes.

(3) Includes Bovespa and S&P index.

(4) The balances of Swaps are disclosed netting the receivables and payables differentials per indexes. If the net balance is positive it is being disclosed on the asset side and if is negative on the liability side.

 

Trading201720162015
    
 NotionalFair ValueNotionalFair ValueNotionalFair Value
"Swap" 1,108,760 3,142,125 3,221,966
Assets202,081,21457,294,179196,887,18824,311,485315,466,08538,512,406
CDI (Interbank Deposit Rates)33,289,52222,409,49644,868,68022,759,82238,808,3449,081,792
Fixed Interest Rate - Real95,700,715-126,300,261-200,528,046-
Indexed to Price and Interest Rates5,592,892-9,225,789-15,491,5096,421,310
Foreign Currency67,493,63534,884,68316,492,4581,551,66360,626,54023,009,304
Others4,450---11,646-
Liabilities199,709,355(56,185,419)184,350,947(21,169,360)295,696,266(35,290,440)
CDI (Interbank Deposit Rates)16,664,176-23,178,722-32,000,584-
Fixed Interest Rate - Real114,055,076(21,687,884)133,185,717(17,414,147)218,588,847(35,280,694)
Indexed to Price and Interest Rates40,146,968(34,107,210)12,767,212(3,518,297)6,930,103-
Foreign Currency28,420,467-15,049,776(38,836)38,176,732(9,746)
Others422,668(390,325)169,520(198,080)--
Options190,061,609168,034175,841,405(230,482)91,877,35167,927
Purchased Position87,503,833553,21783,883,966935,52046,024,648895,684
Call Option - US Dollar9,369,821169,54212,693,748181,4635,018,652665,655
Put Option - US Dollar5,130,39242,3893,788,161392,0482,735,62531,520
Call Option - Other1,953,48159,22020,115,93262,51714,106,701113,809
Interbank Market1,185,31038917,391,5007,06213,114,82293,435
Others(1)768,17158,8312,724,43255,455991,87920,374
Put Option - Other71,050,139282,06647,286,125299,49224,163,67084,700
Interbank Market70,295,282257,94346,106,60018,02923,350,9944,558
Others(1)754,85724,1231,179,525281,463812,67680,142
Sold Position102,557,776(385,183)91,957,439(1,166,002)45,852,703(827,757)
Call Option - US Dollar5,595,163(117,059)4,314,988(141,172)3,331,244(596,729)
Put Option - US Dollar5,919,598(77,145)7,390,733(952,407)4,402,202(73,815)
Call Option - Other19,880,180(35,961)30,441,646(46,940)14,567,407(122,683)
Interbank Market19,151,110(515)27,597,764(4,087)13,730,262(112,707)
Others(1)729,070(35,446)2,843,882(42,853)837,145(9,976)
Put Option - Other71,162,835(155,018)49,810,072(25,483)23,551,850(34,530)
Interbank Market70,494,622(126,743)49,245,495(5,793)23,218,228(1,615)
Others(1)668,213(28,275)564,577(19,690)333,622(32,915)
Futures Contracts161,725,596-104,651,180-184,191,204-
Purchased Position54,806,022-40,396,456-41,186,341-
Exchange Coupon (DDI)9,616,936-14,473,180-4,274,352-
Interest Rates (DI1 and DIA)26,456,303-23,756,523-22,760,484-
Foreign Currency16,733,437-1,393,538-11,710,934-
Indexes(2)1,780,311-195,160-577,149-
Others219,035-578,055-1,863,422-
Sold Position106,919,574-64,254,724-143,004,863-
Exchange Coupon (DDI)55,016,928-15,048,490-58,499,504-
Interest Rates (DI1 and DIA)51,135,994-29,047,678-20,836,314-
Foreign Currency745,849-17,384,256-35,463,589-
Indexes(2)20,803-185,506-500,993-
Treasury Bonds/Notes--2,588,794-49,163-
Others----27,655,300-
Forward Contracts and Others47,823,561(720,823)50,853,1541,643,01351,051,014(691,870)
Purchased Commitment23,506,096647,37620,864,1703,386,34721,570,4053,028,038

F-39 F-46

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Brazilian Reais - R$ - unless otherwise stated)

Trading201720162015
    
 NotionalFair ValueNotionalFair ValueNotionalFair Value
Currencies21,525,220618,00719,951,9843,391,27521,570,4052,690,632
Others1,980,87629,369912,186(4,928)-337,406
Sold Commitment24,317,465(1,368,199)29,988,984(1,743,334)29,480,609(3,719,908)
Currencies22,096,104(1,364,617)29,911,406(1,826,965)29,140,219(3,382,384)
Others2,221,361(3,582)77,57883,631340,390(337,524)

(1) Includes index options, mainly, options involving DI and CDI and shares.

(2) Includes Bovespa index and S&P.
 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

 

a.2) Derivatives Financial Instruments by Counterparty

 

Notional   2017
 CustomersRelated PartiesFinancial Institutions(1)Total
"Swap"32,912,72119,599,395149,569,098202,081,214
Options11,263,5131,240,309177,557,787190,061,609
Futures Contracts--161,725,596161,725,596
Forward Contracts and Others25,470,28718,816,9913,536,28347,823,561

 Notional    2019
   RelatedFinancial 
  Customers PartiesInstitutions(1) Total
"Swap" 66,976,26238,784,704176,403,223282,164,189
Options 17,041,979154,9031,429,326,0731,446,522,955
Futures Contracts 1,430,470-432,442,712433,873,182
Forward Contracts and Others 47,199,547118,612,6073,589,163169,401,317

(1) Includes trades with B3 S.A. (Current Company Name of BM&FBovespa) and other securities and commodities exchanges.

 

Notional   20162015
 CustomersRelated PartiesFinancial Institutions(1)TotalTotal
"Swap"43,082,60515,910,871137,893,712196,887,188315,466,085
Options5,916,105839,182169,086,118175,841,40591,877,351
Futures Contracts--104,651,180104,651,180184,191,204
Forward Contracts and Others29,044,67617,563,3194,245,15950,853,15451,051,014

 Notional    2018
   RelatedFinancial 
  Customers PartiesInstitutions(1) Total
"Swap" 34,296,82132,669,900110,267,148177,233,869
Options 14,636,0171,086,323319,350,740335,073,080
Futures Contracts --289,508,200289,508,200
Forward Contracts and Others 39,024,97848,641,8943,243,96990,910,841

(1) Includes trades with B3 S.A. (Current Company Name of BM&FBovespa)and other securities and commodities exchanges.

 Notional    2017
   RelatedFinancial 
  Customers PartiesInstitutions(1) Total
"Swap" 32,912,72119,599,395149,569,098202,081,214
Options 11,263,5131,240,309177,557,787190,061,609
Futures Contracts --161,725,596161,725,596
Forward Contracts and Others 25,470,28718,816,9913,536,28347,823,561

(1) Includes trades with B3 S.A. and other securities and commodities exchanges.

 

a.3) Derivatives Financial Instruments by Maturity

 

Notional   2017
 Up to 3 MonthsFrom 3 to 12 MonthsOver 12 MonthsTotal
"Swap"20,705,24751,021,102130,354,865202,081,214
Options46,139,54589,403,70054,518,364190,061,609
Futures Contracts65,489,47655,490,15940,745,961161,725,596
Forward Contracts and Others25,015,55714,250,4958,557,50947,823,561
Notional    2019
  Up toFrom 3 toOver 
   3 Months12 Months12 MonthsTotal
"Swap" 58,298,876106,268,113117,597,200282,164,189
Options 681,033,183646,187,139119,302,6401,446,522,962
Futures Contracts 140,882,437179,337,860113,652,884433,873,181
Forward Contracts and Others 91,779,01150,070,36627,551,940169,401,317
      
Notional    2018
  Up toFrom 3 toOver 
   3 Months12 Months12 Months Total
"Swap" 12,347,86470,975,477177,233,869260,557,210
Options 63,376,042220,982,952335,073,080619,432,074
Futures Contracts 67,578,07862,708,213159,221,909289,508,200
Forward Contracts and Others 31,255,38419,469,14740,186,31090,910,841

 

Notional   20162015
 Up to 3 MonthsFrom 3 to 12 MonthsOver 12 MonthsTotalTotal
"Swap"17,499,57626,810,380152,577,232196,887,188315,466,085
Options10,785,98210,624,762154,430,661175,841,40591,877,351
Futures Contracts66,298,79916,041,64222,310,739104,651,180184,191,204
Forward Contracts and Others28,235,18617,826,7274,791,24150,853,15451,051,014

F-47

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

Notional    2017
  Up toFrom 3 toOver 
   3 Months12 Months12 Months Total
"Swap" 20,705,24751,021,102130,354,865202,081,214
Options 46,139,54589,403,70054,518,364190,061,609
Futures Contracts 65,489,47655,490,15940,745,961161,725,596
Forward Contracts and Others 25,015,55714,250,4958,557,50947,823,561

 

a.4) Derivatives by Market Trading

 

NotionalStock Exchange(1)Over the Counter2017 Total
"Swap"67,112,505134,968,709202,081,214
Options172,144,70017,916,909190,061,609
Futures Contracts161,725,596-161,725,596
Forward Contracts and Others395,21247,428,34947,823,561

Notional StockOver the2019
  Exchange(1)Counter Total
"Swap" 150,179,790131,984,399282,164,189
Options 1,423,788,84522,734,1171,446,522,962
Futures Contracts 433,873,181-433,873,181
Forward Contracts and Others 42,651,980126,749,337169,401,317

(1) Includes trades with B3 S.A. (Current Company Name of BM&FBovespa) and with Cetip, derived from its incorporation by B3.

 

NotionalStock Exchange(1)Cetip(2)Over the Counter2016 Total2015 Total StockOver the2018
 Exchange(1)Counter Total
"Swap"133,759,44161,856,0981,271,649196,887,188315,466,085 39,880,578137,353,291177,233,869
Options166,899,8688,234,147707,390175,841,40591,877,351 307,644,53027,428,550335,073,080
Futures Contracts104,651,180-104,651,180184,191,204 289,508,200-289,508,200
Forward Contracts and Others-35,427,57315,425,58150,853,15451,051,014 323,41390,587,42890,910,841

(1) Includes trades with B3 S.A. (Current Company Name of BM&FBovespa) and

Notional StockOver the2017
  Exchange(1)Counter Total
"Swap" 67,112,505134,968,709202,081,214
Options 172,144,70017,916,909190,061,609
Futures Contracts 161,725,596-161,725,596
Forward Contracts and Others 395,21247,428,34947,823,561

(1) Includes trades with Cetip, derived from its incorporation by B3.B3 S.A.

 

(2)       Includes amounts tradeda.5) Information on other clearing houses.Credit Derivatives

Banco Santander uses credit derivatives with the objectives of performing counterparty risk management and meeting its customers' demands, performing protection purchase and sale transactions through credit default swaps and total return swaps, primarily related to Brazilian sovereign risk securities.

TotalReturn Swaps – TRS

Credit derivatives are where the exchange of the return of the reference obligation occurs through a cash flow and where, in the event of a credit event, the protection buyer is usually entitled to receive from the protection seller the equivalent of the difference between the and the fair value (market value) of the reference obligation on the settlement date of the contract.

Credit Default Swaps – CDS

These are credit derivatives where, in the event of a credit event, the protection buyer is entitled to receive from the protection seller the equivalent of the difference between the face value of the CDS agreement and the fair value (market value) of the reference obligation on the settlement date of the contract. In return, the seller receives compensation for the sale of the protection.

Below, the composition of the Credit Derivatives portfolio shown by its reference value and effect in the calculation of Required Stockholders' Equity.

 

F-40 

F-48

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

          
     2019   2018
          
          
   Nominal Value Nominal Value Nominal Value Nominal Value
   Retained Risk Transferred Risk - Retained Risk Transferred Risk -
   Total Rate of Return Swap Credit Swap Total Rate of Return Swap Credit Swap
Credit Swaps 2,435,880 - 1,959,128 416,541
Total 2,435,880 - 1,959,128 416,541

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Brazilian Reais - R$ - unless otherwise stated)

(*) In 2017, there was no CDS operations that the Bank was into.

 

a.5)Value referring to the premium paid on CDS for use as collateral (transfer of risks) in the amount of R$602.

The effect in the Required Stockholder’s Equity of the risk received was R$3.286.

During the period, there was no occurrence of credit event related to the events generated by the contracts.

       
   2019  2018
   Over   Over   
Maximum Potential for Future Payments – Gross  12 Months Total 12 Months  Total
Per Instrument      
CDS 2,435,8802,435,8801,959,128 1,959,128
Total 2,435,8802,435,8801,959,128 1,959,128
Per Risk Classification      
Below Investment Grade 2,435,8802,435,8801,959,128 1,959,128
Total 2,435,8802,435,8801,959,128 1,959,128
Per Reference Entity      
Brazilian Government 2,435,8802,435,8801,959,128 1,959,128
Total 2,435,8802,435,8801,959,128 1,959,128

a.6) Hedge Accounting

 

There are three types of hedge accounting: Fair Value Hedge, Cash Flow Hedge and ForeignForeing Currency Investments Hedge.

The derivatives used as hedging instruments are represented as follows:

 

Fair Value Hedge

 

Banco Santander’s fair value hedging strategy consists of hedging the exposure to changes in fair value related to recognized assets and liabilities.liabilities

 

The adopted fair value strategy adopted by 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 the changes of fair value in receivables and interest payments, Santander uses interest rate Swap contracts related to pre-fixed (pre defined interest rate at inception) assets and liabilities.

 

Banco Santander applies fair value hedge as follows:

 

• It buysDesignates Foreign Currency + Coupon against % CDI swaps (sold jointlyversus %CDI and Pre - Real Interest Rate or contracts dollar futures (DOL, DDI/DI) as derivatives instruments in Hedge Accounting structures, with foreign currency loan operations being the object of such transactions.

• The Bank has a portfolio of credit assets denominated in US dollars at the fixed rate in the balance sheet of Santander EFC, whose operations are recorded in Euro. As a way of managing this mismatch, the Bank designates each Euro Floating Foreign Currency swap versus Fixed Dollar as the market risk hedge of the corresponding loan.

• The Bank has a portfolio of assets indexed to the client)Euro and traded at offshore branches. In the transaction, the value of the asset in Euro will be converted to the Dollar by the rate of the exchange contract of the transaction. As from the conversion, the principal amount of the funding, already expressed in US dollars, will be adjusted by a floating or fixed rate. The assets will be covered with Swap Cross Currency in order to cross the risk in Euro for LIBOR + Coupon.

F-49

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

• The Bank has a pre-fixed interest rate risk generated by government securities (NTN-F and LTN) in the Financial Assets portfolio measured through Other Comprehensive Income. To manage this mismatch, the entity contracts DI futures on the Stock Exchange and designates them as a derivative instrument in a hedge accounting framework.

• The Bank has a risk to the IPCA (Broad pricing to consumers index) generated by debentures in the portfolio of securities available for sale. To manage this mismatch, it contracts IPCA (DAP) futures on the Stock Exchange and designates them as a derivative instrument in a Hedge Accounting structure, having foreign currency loans as the hedged item. The operations were designated in January 2016 and its maturity is between January 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” (subsidiary in Spain), which operations are registered in 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 operations were designated in 2013 and the related Swaps will mature between June 2017 and 2020.

• Banco Santander has a portfolio of Euro-indexed Assets traded in Cayman subsidiary. For this portfolio, the value of the asset in Euro will be converted into Dollar at the agreed exchange rate, on the recording date of the transaction. After the conversion, the principal, already denominated in Dollar 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 Dollar to LIBOR + Coupon. The hedging operations were designated in February 2017 and will mature between February 2017 and 2024.

• Banco Santander has a portfolio of Reais-indexed Assets traded in Cayman subsidiary. For this portfolio, the value of the Dollar asset will be converted into Reais at the exchange rate agreed on the recording date 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 operations were designated in January 2016 and will mature between January 2017 and 2021.

Santander Arrendamento Mercantil (Leasing) has a portfolio of public securities indexed by Predefined interest rate Brazilian Treasury Bonds (NTN-F). The Bank designates each CDI versus Pre-defined interest rate swap contract as the fair value hedge of the corresponding asset. The hedging operations were designated in October 2017 and will mature between January 2018 and 2021.

• Banco Santander has a portfolio of public securities indexed by Predefined interest rate Brazilian Treasury Bonds (LTN/NTN-F) and designate them as fair value hedge objects. These assets will be hedged by Future Contracts (derivatives indexed by DI1 – B3/BM&F) with the objective to swap the Predefined interest rate risk to floating CDI risk. The hedge operations were designated in March 2017 and will mature between January 2018 and 2027.structure.

 

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.

 

To assess the effectiveness and measure the ineffectiveness of the strategies, the Bank follows IAS 39, which requires that the effectiveness test be performed at the beginning (prospective test) of the hedge structure, and repeated periodically (prospective and retrospective test) to demonstrate that the hedge relationship remains effective.

a) Prospective test:In accordance with according to the standard, the prospective test must be performeddone on the inceptionstart date (inception) and on a quarterly basis in order to demonstrate that the expectationsexpectation regarding the effectiveness of the hedge ratio arerelationship is high.

 

a.1) InitialThe initial prospective test (at inception): it is restricted to a qualitative review of the critical terms and conditions of the hedge instrument and the hedged item in orderobject, to conclude whethera conclusion that changes in the fairmarket value of both instruments are expected to fully offsetcompletely cancel each other.other out.

 

a.2) PeriodicThe prospective periodic test: the sensitivity of the fairpresent value of the hedged itemobject and the hedging instrument will be periodically computed atto a parallel variation of 10 basis pointsBasis Points in the interest rate curve.curve will be computed periodically. For the purposes of effectiveness, thesethe ratio of the two sensitivity ratios shouldsensitivities must be between 80% and 125%.

 

b) Retrospective test:the retrospective effectiveness test will be performedconducted by comparing the MTM changemarket to market (mtm) variation of the hedge instrument sincefrom the inceptionbeginning date with the MTM changevariation of the hedged object sincehedge object's mtm from the inception date, excluding the transaction’s liquidity and credit spread:

F-41 

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Brazilian Reais - R$ - unless otherwise stated)

beginning.

 

In fair value hedges, gains or losses, both on hedge instruments and hedge objectson hedged items (attributable to the type of risk being hedged)protected) are recognized directly in the consolidated income statement.

 

The linear regression model of the daily results and coefficient of determination for both tests (prospective and regressive) was used to evaluate the effectiveness and to measure the ineffectiveness of the Government Securities Bonds (LTN / NTN-F), demonstrating that the hedge remains effective.

 201720162015
Hedge StructureEffective Portion AccumulatedPortion IneffectiveEffective Portion AccumulatedPortion IneffectiveEffective Portion AccumulatedPortion Ineffective
 Fair Value Hedge      
Debentures----10,502-
Brazilian Treasury Bonds (LTN, NTN-F)(388,446)-----
Eurobonds--13,163-2,051-
Bonds (LEA)(1,200)-----
NCE----53,131-
Resolution 2770304---35,338-
Trade Finance Off(57,386)-20,471-11,046-
Total(446,728)-33,634-112,068-

 201720162015
 Adjustment to MarketFair ValueAdjustment to MarketFair ValueAdjustment to MarketFair Value
Hedge Instruments      
Swap Contracts(95,672)(130,683)(26,703)(136,467)(66,990)86,822
Assets12,9543,005,66611,4861,046,01257,8297,130,753
CDI (Interbank Deposit Rates)(5)(357)1,818,366--4,3761,783,075
Fixed Interest Rate - Real----27,1843,549,659
Indexed to Foreign Currency - Pre Dollar(1)3208,7421,10317,67879094,472
Indexed to Foreign Currency - USD/BRL - Dollar(2)(3) (4)(23,585)691,872(8,957)744,260(10,904)665,025
Indexed to Foreign Currency - Libor - Dollar----1,962612,623
Indexed to Foreign Currency - Swiss Franc------
Indexed to Foreign Currency - Euro(6)(7)36,576486,68619,340284,07434,347390,156
Indexed to Foreign Currency - Pre YEN----7435,743
Liabilities(108,626)(3,136,349)(38,189)(1,182,479)(124,819)(7,043,931)
Indexed to Foreign Currency - US Dollar(6)(20,109)(261,915)(14,958)(323,197)(55,892)(1,082,503)
Indexed Indices of Prices and Interest----(30,982)(831,156)
Indexed to Foreign Currency - Pre Dollar(5)(16,303)(225,857)(1,103)(17,676)--
CDI (Interbank Deposit Rates)(1)(2)(21,380)(474,398)(18,395)(804,059)(12,298)(3,279,438)
Indexed to Foreign Currency - Libor - US Dollar----(61)(41,513)
Fixed Interest Rate - Real(3) (8)22(1,640,708)(3,733)(37,547)(25,586)(1,809,321)
Indexed to Foreign Currency - Colombian Peso(7)(13,863)(219,392)----
Indexed to Foreign Currency - Pre Euro(4)(36,993)(314,079)----
Object of Hedge      
Assets77,6233,126,82823,165693,132110,0033,103,783
Loans and Receivables79,4961,382,32623,165693,13294,1042,218,727
Indexed to Foreign Currency - US Dollar(6)4,319288,4204,809323,78042,3481,295,383
Indexed to Foreign Currency - Pre Dollar(5)16,416224,943----
    2019   2018   2017
 

Hedge Structure

Accumulated Effective Portion

 

Ineffective Portion

 Accumulated Effective Portion Ineffective Portion Accumulated Effective Portion Ineffective Portion
 Fair Value Hedge           
 Government Bonds (LTN, NTN-F)(2,853,807) - (1,381,156) - (388,446) -
 Eurobonds- - - - - -
 LEA Government Bonds(61,761) - (191,472) - (1,200) -
 Resolution 2,770(94) - 689 - 304 -
 Trade Finance Off(4,015) - (58,020) - (57,386) -
 Total(2,919,677) - (1,629,959) - (446,728) -

  

 

        
       12/31/2019
   Hedge Instruments   Hedge Objects
 AccruedAdjustment toAccounting AccruedAdjustment toAccounting

Strategies

CostMarket ValueValue CostMarket ValueValue
Swap Contracts3,249,742101,2643,351,005 3,555,326662,7734,218,099
Credit Operations Hedge1,118,21028,9931,147,202 1,423,80963,2311,487,040
Hedge of Securities2,131,53272,2712,203,802 2,131,517599,5422,731,059
Future Contracts789,631-789,631 45,427,1253,000,49048,427,614
Hedge of Securities789,631-789,631 45,427,1253,000,49048,427,614

        
       12/31/2018
   Hedge Instruments   Hedge Objects
 AccruedAdjustment toAccounting AccruedAdjustment toAccounting
StrategiesCostMarket ValueValue CostMarket ValueValue
Swap Contracts3,908,082140,4474,048,529 3,921,24965,0143,986,263
Credit Operations Hedge1,152,249115,1801,267,429 1,166,38750,6681,217,055
Hedge of Securities2,755,83325,2672,781,100 2,754,86214,3462,769,208
Future Contracts41,286,091-41,286,091 44,130,671(205,941)43,924,730
Hedge of Securities41,286,091-41,286,091 44,130,671(205,941)43,924,730

F-42 

F-50

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Brazilian Reais - R$ - unless otherwise stated)

 201720162015
 Adjustment to MarketFair ValueAdjustment to MarketFair ValueAdjustment to MarketFair Value

Indexed Indices of Prices and Interest(2)----52,984916,765
CDI (Interbank Deposit Rates)16,401352,07113,253331,805--
Fixed Interest Rate - Real(3)3,90021,0775,10337,547(1,228)6,579
Indexed to Foreign Currency - Colombian Peso(7)(2,898)173,990----
Indexed to Foreign Currency - Pre Euro(4)41,358321,825----
Debt instruments(1,873)1,744,502--15,899885,056
CDI (Interbank Deposit
Rates)(1)(2)		354119,892--10,578503,415
Fixed Interest Rate - Real(3)916,082--5,321381,641
National Treasury Notes - NTN F(9)(2,318)1,618,529----
Liabilities--12,830(803,929)(8,383)(3,520,951)
Foreign Borrowings--12,830(803,929)(8,342)(3,485,167)
Indexed to Foreign Currency - US Dollar(2)--12,830(803,929)(8,342)(3,485,167)
Marketable debt securities----(41)(35,784)
Eurobonds---- (41) (35,784)

Hedge Instruments 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

  12/31/2017 Reference Value
Swap Contracts(8)22,206,615
Interest Rate (DI1 and DIA)22,206,615

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

 

      12/31/2017
     Adjustment to MarketFair Value
Object of Hedge      
Assets    364,43424,779,831
Securities - Available for Sale      
Government Securities(8)    364,43424,779,831
National Treasury Bills - LTN    219,61113,893,932
National Treasury Notes - NTN F    144,82310,885,899
(1)Passive instruments whose hedged items are securities represented by promissory notes indexed in Certificates of Interbank Deposits (CDI) with market value of R$109,538 (12/31/2016 - R$108,845).

(2)These are passive instruments whose hedge items are credit operations and securities represented by promissory notes indexed in interbank deposit certificates (CDI), with market value of credit operations of R$352,071 and promissory notes of R$10,354 (12/31/2016 - R$108,844 and 12/31/2015 - 381,641) and on December 31, 2017 assets instruments whose hedged items are foreign currency indexed bonds denominated in foreign currency - US dollar in the market value of R$803,929 (12/31/2016 - 803,929).

(3)These are passive instruments whose hedged items are securities and securities represented by promissory notes indexed to Real interest rates with market value of R$6,082 (12/31/2016 - R$37,547 and 12/31/2015 - R$6,579) and credit operations in the amount of R$21,077.

(4)These are passive instruments whose hedged items are credit operations indexed in foreign currency - euro at the market value of R$321,825.

(5)These are passive instruments whose hedged items are credit operations indexed in foreign currency - US dollar in the market value of R$224,943.

(6)These are passive instruments whose hedge items are credit operations indexed in foreign currency - US dollar with a market value of R$288,420 (12/31/2016 - R$323,782).

(7)These are passive instruments whose hedged items are credit operations indexed in foreign currency - Colombian peso with market value of R$173,990.

(8)These are obligations over instruments whose hedged items are pre-fixed government securities with a market value of R$1,618,529.

(9)Current value of the instruments as of December 31, 2017 is R22,206,615.
        
       12/31/2017
   Hedge Instruments   Hedge Objects
 AccruedAdjustment toAccounting AccruedAdjustment toAccounting
StrategiesCostMarket ValueValue CostMarket ValueValue
Swap Contracts 3,027,723 108,626 3,136,349  3,049,206 77,623 3,126,829
Credit Operations Hedge 1,286,522 109,604 1,396,126  1,302,830 79,496 1,382,326
Hedge of Securities 1,741,201 (978) 1,740,223  1,746,376 (1,873) 1,744,503
Future Contracts 22,206,615 - 22,206,615  24,415,397 364,434 24,779,831
Hedge of Securities 22,206,615 - 22,206,615  24,415,397 364,434 24,779,831

 

(*) The Bank has market risk hedge strategies, the objects of which are assets in its portfolio, which is why we demonstrate the passive edge of the respective instruments. For structures whose instruments are futures, we show the balance of the calculated daily adjustment, recorded in a clearing account.

a.6.I) Cash Flow Hedge

 

Banco Santander’sThe Bank's cash flow hedge strategies consist of hedging exposure to changes in cash flows, interest payments and the exchange rate exposure, which are attributable to changes in the interest rates related toon recognized assets and liabilities and changes in the exchange rate of non-recognizedrates for unrecognized assets and liabilities.

 

F-43 

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Brazilian Reais - R$ - unless otherwise stated)

Banco SantanderThe Bank applies the cash flow hedgeshedge as follows:

 

• Fixed Dollar LiabilitiesEnters into fixed-rate asset swaps and Reais asset swapsforeign currency liabilities and designates them as instrumentsa hedging instrument in a Cash Flow Hedge structure, having loans indexed in Reais with third-parties established at the Cayman Islands as the hedged objects. The hedgingobject of foreign currency loan operations were designated in January 2016negotiated with third parties through offshore agencies and will mature between January 2017 and 2021.securities Brazilian foreign debt held to maturity.

 

• USDIt contracts Dollar futures or DDI + DI Futuresfutures (Synthetic Dollar Futures) and designates them as instruments in a Cash Flow Hedge structure, having part of its dollar Loan portfolio as the hedged objects. The hedging operations were designated in 2007 and will mature between January 2017 and 2025.

• Fixed Dollar Asset and Floating Reais Liability swaps and designates them as instruments in a Cash Flow Hedge structure, having loans indexed in Reais with third-parties established at the Cayman Islands as the hedged objects. The hedging operations were designated in January 2017 and will mature in January 2018.

• It buys Fixed Dollar Asset and Floating Reais Liability swaps and designates them asprotection instrument in a Cash Flow Hedge structure, having loans indexedas object item the Bank's credit portfolio in Reais with an Investment Fund established at the Cayman Islands as the hedged item. The hedging operations were designatedDollars and Promissory Notes in June 2017 and will mature until February 2018.securities portfolio available for sale.

 

• Banco SantanderThe Bank has a portfoliopost-fixed interest rate risk (varies according to an index) arising from the treasury bills of Government Securities indexedcredit classified as available for sale, which present expected cash flows subject to a Post Fixed rate bondsSelic variations over their duration. To manage these fluctuations, the Bank contracts DI futures and designates them as a protection instrument in a Cash Flow Hedge structure. The Assets will be covered by DI1 Futuro (B3 S.A. (Current Company Name of BM&FBovespa)), instruments in order to transpose the Post-Fixed risk to floating CDI. The

• Banco RCI Brasil SA has hedge operations were designated in June 2017whose purpose is to raise funds with bills of exchange (LF), bills of exchange (LC) and the maturities will occur between January 2021certificates of interbank deposits (CDI) indexed to CDI and 2023.uses interest rate swaps to make pre-fixed funding and predicting future cash flows.

 

In order toTo assess the effectiveness and measure the ineffectiveness of these strategies, Banco Santander follows the IAS 39, which recommendsindicates that the hedge effectiveness test must be performed atcarried out in the inception/beginning (prospective test)design / start of the hedge structure (prospective test) and be repeated periodically (prospective and retrospective tests) in order totest) for demonstrate that the expectedexpectation of the hedge ratiorelationship remains effective (between 80%80 and 125%).

 

In this hedge strategy, the effectiveness tests (prospective and/ retrospective) are conducted through creation ofby comparing two hypothetical derivatives,proxies, one for the hedged object and anotherthe other 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.

Any ineffectiveness are recognized in the income statement.

 

a) Prospective Test: in accordance withaccording to the standard,regulations, the prospective test shouldmust be performed on the inceptionstart date and on a quarterly basis in order to demonstrate that the expectationsexpectation regarding the effectiveness of the hedge ratio are high. However,relationship is high, however the tests are carried out on a monthly basis in order to monitor the projections in afor proactive monitoring and more efficient manner,projections, in addition to ensuring better maintenance of test-relatedtesting-related routines.

 

a.1) Periodic Prospective Test: According to the agreed process flow, Market Risk Department performsmakes the projections of three scenarios tofor the tests, such as: 1st)being: 1st 10bps inon the curve; 2nd)2nd 50bps inon the curve and 3rd)3rd 100bps inon the curve. Using the validated estimates, the prospective testtests are performed tests throughby valuing the valuationtwo variable legs of both positions measured at fair value.the transaction to market.

 

a.2) Initial Prospective Test: the methodology of the periodic prospective test should also be applied on the initialstart date of each new strategy.

 

b) Retrospective Test: It shouldtest: it must be madeperformed monthly with historical data to demonstrate cumulatively that the hedge was effective, according to the methodology presented previously.above. Any ineffectiveness areis recognized in the income statement.

 

The Ineffective portion will beis recognized through the prospective hedge test.

 

Effectiveness should rangebe between 80% and 125%.

 

In cash flow hedges, the effective portion of changesthe variation in the value of the hedge instrumentsinstrument is temporarily recognized in equity headingunder the caption “Other comprehensive income - cash flow hedges” (Note 26) until the expectedanticipated transactions occur, when this portion is then recognized in the consolidated income statement. However,statement, except if the expectedanticipated transactions result in the recognition of non-financial assets or liabilities, this portfolioportion will be included in the cost of the financial assetsasset or liabilities.liability. The non-effective portion of the changevariation in the value of foreign exchange hedge derivatives is recognized directly inand the consolidated income statement. The non-effectiveineffective portion of the gains and losses on cash flow hedge instruments in a foreignan operation abroad is recognized directly in “Gains (losses) with (net)on financial assets and liabilities”liabilities (net)” in the consolidated income statement. In 2017 the Bank registered an income in the amount of R$9,266 referred to the non-effective portion, in 2016 and 2015 there were no non-effective portion identified.statements.

 

F-44 F-51

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Brazilian Reais - R$ - unless otherwise stated)

  20172016 2015 
Hedge StructureEffective Portion AccumulatedPortion IneffectiveEffective Portion AccumulatedPortion IneffectiveEffective Portion AccumulatedPortion Ineffective
Cash Flow Hedge      
Eurobonds(25,576)-(20,535)-(29,750)-
Trade Finance Off(94,896)9,266----
Government Securities (LFT)129,995-----
Loans and Receivables--174,956-(575,571)-
Total9,5239,266154,421-(605,321)-

 2017 2016 2015 
 Adjustment to Fair ValueFair ValueAdjustment to Fair ValueFair ValueAdjustment to Fair ValueFair Value
Hedge Instruments      
Swap Contracts(25,142)160,114(27,261)48,169(35,492)(1,151,442)
Asset97,8462,361,070137,6641,952,189151,7937,931,100
Indexed to Foreign Currency - Swiss Franc----6,9981,244,985
Indexed to Foreign Currency - Chile----1,622302,907
Indexed in Reais(3)----(13,690)3,733,095
Indexed to Foreign Currency - Pre Dollar(42,149)992,87984,8121,477,821127,6322,170,572
Indexed to Foreign Currency - Euro134,4351,223,00452,852474,36829,231479,541
Indexed to Foreign Currency - USD/BRL - Dollar5,560145,187----
Liabilities(122,988)(2,200,956)(164,925)(1,904,020)(187,285)(9,082,542)
CDI (Interbank Deposit Rates)(5,735)(147,925)(995)(341,938)--
Indexed to Foreign Currency - Pre Dollar----(17,767)(6,598,073)
Indexed to Foreign Currency - Reais--(1,288)(199,954)-(22,855)
Indexed to Foreign Currency - Pre Euro13,639(895,399)(102,998)(805,326)(133,376)(1,851,822)
Indexed to Foreign Currency - Dollar(130,892)(1,157,632)(59,367)(548,684)(34,379)(544,339)
Indexed to Foreign Currency - Reais--(277)(8,118)(1,763)(65,453)

 2017 Notional2016 Notional2015 Notional
Hedge Instruments   
Future Contracts54,995,33480,149,53072,798,063
Trade Finance Operations(6)54,995,33480,149,53072,798,063
Foreign Currency - Dollar3,362,582450,5712,651,572
Interest Rate (DI1 and DIA)32,344,27646,314,64434,303,028
Interest Rate DDI119,288,47633,384,31535,843,463
Securities-available for sale5,304,261--
Government Securities(6)5,304,261--
Interest rate (DI1 and DIA)5,304,261--

 201720162015
Hedge Item - Cost   
Assets25,697,29127,858,92337,251,860
Lending Operations - Financing and Export Credit and Imports7,632,91524,720,80035,743,885
Loans and Receivables10,989,230496,874641,421
Brazilian Foreign Debt Bonds809,660701,300866,554
Available for sale - Promissory Notes - NP1,194,2661,939,949-
Government Securities -LFT(6)5,071,220--
Liabilities-(1,332,972)(1,995,118)
Foreign Borrowings-(1,332,972)-
Eurobonds--(1,995,118)
 (1)

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Operations due April 1, 2021 (12/31/2016

(Thousand of Brazilian Reais - operations due April 1, 2021 and 12/31/2015R$ - operations due March, 18, 2016 and April 1,2021), which hedge objects are securities operation represented by title Brazilian External Debt Bonds.unless otherwise stated) 

 

    2019   2018   2017
 

Hedge Structure

Accumulated Effective Portion

 

Ineffective Portion

 Accumulated Effective Portion Ineffective Portion Accumulated Effective Portion Ineffective Portion
 Cash Flow Hedge           
 Eurobonds(6,074) - (8,925) - (25,576) -
 Trade Finance Off139,852 - (16,453) (3,981) (94,896) 9,267
 Government Bonds (LFT)503,665 - 331,922 - 129,995 -
 Bancary Deposit Receipt - CDB- - 1,225 - 129,995 -
 Total637,443 - 307,769 (3,981) 139,518 9,267

F-45   

Table

    12/31/2019
     
   Hedge InstrumentsHedge Object
 AccruedAdjustment toMarketAccrued
StrategiesCostMarket ValueValueCost
Swap Contracts1,361,65835,1101,396,7681,324,685
Credit Operations Hedge435,872(3,494)432,378399,831
Hedge of Securities925,78638,604964,390924,854
Future Contracts54,460,972-54,460,9727,726,566
Credit Operations Hedge (1)50,975,253-50,975,2534,506,878
Hedge of Securities3,485,719-3,485,7193,219,688

    12/31/2018
     
   Hedge InstrumentsHedge Object
 AccruedAdjustment toMarketAccrued
StrategiesCostMarket ValueValueCost
Swap Contracts2,227,004(24,206)2,202,7982,423,678
Credit Operations Hedge1,032,28368,7301,101,0121,198,921
Hedge of Securities1,194,721(92,936)1,101,7861,224,757
Future Contracts44,541,939-44,541,93917,224,115
Credit Operations Hedge (1)44,000,952-44,000,95216,910,915
Hedge of Securities540,987-540,987313,200

(*) The Bank has cash flow hedge strategies, the objects of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Thousandswhich are assets in its portfolio, which is why we have shown the liability side of Brazilian Reais - R$ - unless otherwise stated)

the respective instruments. For structures whose instruments are futures, we show the notional's balance, recorded in a memorandum account.

 

(2)Operation maturing on January 5 and April 14, 2018, whose hedged items are securities represented by promissory notes.

(1) Updated value of the instruments on December 31, 2019 is R$8,425,386 (12/31/2018 - R$16,738,641).

(3)Operations maturing between January, 30 2018 and September 30, 2022 (12/31/2016 - operations maturing between January, 2017 to December, 2025 and 12/31/2015 - operations maturing between August 2016 and June 2021), which objects "hedge" contracts are loans from lending institutions.

(4)Operations with maturities between January 2018 and December 2020, whose hedge items are deposits with interbank deposit certificates (CDI), bills of exchange (LC) and financial letters (LF).

(5)Transactions with maturity between February, 2018 and November, 2026 (12/31/2016 - transactions with maturities between January, 2017 to January, 2018 and 12/31/2015 - transactions with maturities between January, 2016 to December, 2024) and restated instrument value of R$16,811,747 (12/31/2016 - R$29,164,917 and 12/31/2015 - R$35,743,844) where operations are denominated futures in US dollars and futures in DI and IDD when used in conjunction with the foreign exchange coupon hedges the trade finance operations, whose hedge is Lending Operation - Financing and Credit to Export and Imports, lending operations, other credits, securities represented by promissory notes and foreign loan obligations.

(6)Operation maturing between March, 2021 and March, 2023 updated value of the instruments of R$5,304,261, whose object of "hedge" are Financial Treasury Bills - LFT, recorded in securities.

 

TheIn Consolidated, the mark-to-market effect of marking to market the swapsswap and future asset contracts corresponds to a credit in the amount of R$116,441 (201611,063 (12/31/2018 - corresponds to a debitR$19,523) and is recorded in the amount of R$69,489 and 2015 - corresponds to a debit in the amount of R$345,373) accounted on Stockholders equity, net ofreduced tax effects, of which R$9,342 (12/31/2016 - R$59,930)6,327 will be realized against revenue in the next twelve months.

 

Hedging of Foreign Investments

Banco Santander reevaluated the investment structure of the wholly-owned subsidiary in Madrid (EFC), as it noted that due to the change in the strategy of the operation in practice, this subsidiary has a business model in which the Bank has a significant influence on driving and decision-making of its activities. According to the concept discussed in IAS 21, Management concluded that the functional currency of this investment is the Real and, therefore, this change becomes effective prospectively as from January 2017. In addition, the Hedge Accounting structure of Foreign investment that Banco Santander had on this investment was discontinued as of the date of change of the functional currency. In this way, the functional currency of Santander EFC and the Cayman agency is Real and the exchange rate differences of operations in foreign currency are recorded in the income statement. In order to hedge the exchange rate exposures, the Bank uses derivatives, and for both investments abroad the Bank does not apply Hedge Accounting. Foreign exchange variations on foreign currency transactions and the effect of derivatives used in economic protection (futures contracts) are recorded in the income statement.

On December 31, 2016, the notional value of this investment hedge was R$2,687,347, maturing between January 2017 and June 2017 and the effect of R$2,552,596 of the exchange variation recorded in stockholders’ equity, net of the tax effects.

a.6) Derivativesa.7) Derivative Financial Instruments - Margins Pledged as Guarantee

 

The margin used asgiven in guarantee of thefor transactions traded on theat B3 S.A. with its own and third party derivative financial instruments from own and third parties portfolios areis composed by governmentof federal public securities.

 

 201720162015
Financial Treasury Bill - LFT708,9601,556,804330,605
National Treasury Bill - LTN4,371,2864,636,6448,757,097
National Treasury Notes - NTN1,193,31527,598757,969
Total6,273,5616,221,0469,845,671
 201920182017
    
Financial Treasury Letters – LFT5,342,9927,552,926708,960
National Treasury Letters – LTN1,086,5563,392,8864,371,286
National Treasury Notes – NTN660,918873,1341,193,315
Total7,090,46611,818,9466,273,561

 

b) Short positionsPositions

 

OnAs of December 31, 20172019, the balance of short positions totaled R$32,808,392 (201623,501,417 (2018 - R$31,694,26932,695,677 and 20152017 - R$20,047,631)32,808,392) which includes the amount of financial liabilities resulting from the direct sale of financial assets purchased throughunder commitments for resale or loan commitments.borrowed.

 

10. Loans and advances to clients

F-52

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

9.Loans and advances to clients

 

a) Breakdown

 

The breakdown, by classification, of the balances of “Loans and advances to clients” in the consolidated financial statements is as follows:

 

Thousand of reais201720162015201920182017
Loans and receivables272,420,157252,002,774252,033,449
 
Classification: 
Non-Trading Financial Assets Mandatorily Measured At Fair Value Through Profit Or Loss-619,180-
Loans and Receivables-272,420,157
Financial Assets Measured At Amortized Cost326,699,480301,072,207-
Of which:  
Loans and receivables at amortized cost287,829,213268,437,556267,266,449347,256,660321,314,010287,829,213
Impairment losses(15,409,056)(16,434,782)(15,233,000)(20,557,180)(20,241,803)(15,409,056)
Loans and advances to customers, net272,420,157252,002,774252,033,449326,699,480301,691,387272,420,157
Loans and advances to customers, gross287,829,213268,437,556267,266,449347,256,660321,933,190287,829,213

  

 

F-46 

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Brazilian Reais - R$ - unless otherwise stated)

Thousand of reais201720162015201920182017
 
Type:  
Loans operations(1)272,561,017257,256,452257,671,667329,910,319308,364,517272,561,017
Lease Portfolio1,888,4442,092,8822,126,2102,111,8421,836,5041,888,444
Repurchase agreements403,415308,483517,53610,500509,147403,415
Other receivables(2)12,976,3378,779,7396,951,03615,223,99911,223,02212,976,337
Total287,829,213268,437,556267,266,449347,256,660321,933,190287,829,213

(1) Includes loans and other loans with credit characteristics.

 

(2) Refers substantially to Foreign Exchange Transactions and Other Receivables with credit granting characteristics.

 

Note 45-d44-d contains a detail of the residual maturity periods of loans and receivables.

 

There are no loans and advances to clients 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 clients, which reflect the Bank’s exposure to credit risk in its core business, gross of impairment losses:

 

Thousand of reais201720162015
Loan borrower sector:   
Commercial, and industrial140,619,110140,992,900150,880,864
Real estate-construction34,808,68136,650,01136,851,879
Installment loans to individuals110,512,97888,701,76377,407,496
Lease financing1,888,4442,092,8822,126,210
Total(1)287,829,213268,437,556267,266,449

(1) It includes commercial credit, secured loans, reverse repurchase agreements, finance leases, other term loans and impaired assets.

Thousand of reais201720162015
Interest rate formula:   
Fixed interest rate202,592,491178,231,509173,018,504
Floating rate85,236,72290,206,04794,247,945
Total287,829,213268,437,556267,266,449

        2017
Debt Sector by MaturityLess than 1 year% of totalBetween 1 and 5 years% of totalMore than 5 years% of totalTotal% of total
Commercial and industrial103,377,57159.33%31,262,49237.89%5,979,04719.25%140,619,11048.85%
Real estate7,791,7534.47%10,970,00413.29%16,046,92451.65%34,808,68112.09%
Installment loans to individuals62,078,22535.63%39,393,69947.74%9,041,05429.10%110,512,97838.40%
Lease financing1,000,4180.57%886,8331.07%1,1930.00%1,888,4440.66%
Loans and advances to customers, gross174,247,967100.00%82,513,02899.99%31,068,218100.00%287,829,213100.00%

        2016
Debt Sector by MaturityLess than 1 year% of totalBetween 1 and 5 years% of totalMore than 5 years% of totalTotal% of total
Commercial and industrial99,657,02461.65%35,789,11845.10%5,546,75820.23%140,992,90052.52%
Real estate8,648,7025.35%11,761,42014.82%16,239,88959.23%36,650,01113.65%
Installment loans to individuals52,205,92732.29%30,867,88038.90%5,627,95620.53%88,701,76333.05%
Lease financing1,152,5790.71%937,9511.18%2,3520.01%2,092,8820.78%
Loans and advances to customers, gross161,664,232100.00%79,356,369100.00%27,416,955100.00%268,437,556100.00%

Thousand of reais201720162015
Maturity   
Less than 1 year174,247,968161,664,232116,555,381
Between 1 and 5 years82,513,03079,356,369104,563,829
More than 5 years31,068,21527,416,95546,147,239
Loans and advances to customers, gross287,829,213268,437,556267,266,449
Internal risk classification   
Low226,098,497207,889,639211,645,464
Medium-low33,635,37832,104,16829,500,791
Medium10,423,29310,940,8798,638,914
Thousand of reais201920182017
Loan borrower sector:   
Commercial, and industrial145,387,439146,293,616140,619,110
Real estate - construction39,720,71336,515,35234,808,681
Installment loans to individuals160,036,668137,287,593110,512,978
Lease financing2,111,8401,836,6291,888,444
Total347,256,660321,933,190287,829,213

  

 

Thousand of reais201920182017
Interest rate formula:   
Fixed interest rate258,760,620240,772,724202,592,491
Floating rate88,496,04081,160,46685,236,722
Total347,256,660321,933,190287,829,213

F-47 

F-53

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

 

2019
Debt Sector by MaturityLess than 1 year     % of totalBetween 1 and 5 years% of totalMore than 5 years% of totalTotal% of total
Commercial and industrial102,083,24954.83%39,408,72733.44%3,895,4639.01%145,387,43941.87%
Real estate3,633,2311.95%8,145,5686.91%27,941,91364.65%39,720,71311.44%
Installment loans to individuals79,624,74442.76%69,034,59658.58%11,377,32826.33%160,036,66846.09%
Lease financing855,6240.46%1,252,6731.06%3,5430.01%2,111,8400.61%
Loans and advances to customers, gross186,196,848100.00%117,841,564100.00%43,218,247100.00%347,256,660100.00%

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Brazilian Reais - R$ - unless otherwise stated)

 

2018
Debt Sector by MaturityLess than 1 year% of totalBetween 1 and 5 years% of totalMore than 5 years% of totalTotal% of total
Commercial and industrial109,802,82858.92%32,538,99932.77%3,951,78910.90%146,293,61645.44%
Real estate4,298,9252.31%7,964,3088.02%24,252,11966.90%36,515,35211.34%
Installment loans to individuals71,433,09938.33%57,808,60058.21%8,045,89422.20%137,287,59342.64%
Lease financing838,6590.45%997,6441.00%3260.00%1,836,6290.57%
Loans and advances to customers, gross186,373,511100.00%99,309,551100.00%36,250,128100.00%321,933,190100.00%

2017
Debt Sector by MaturityLess than 1 year% of totalBetween 1 and 5 years% of totalMore than 5 years% of totalTotal% of total
Commercial and industrial103,377,57161.65%31,262,49237.90%5,979,04719.25%140,619,11048.85%
Real estate7,791,7535.35%10,970,00413.29%16,046,92451.65%34,808,68112.09%
Installment loans to individuals62,078,22532.29%39,393,69947.74%9,041,05429.10%110,512,97838.40%
Lease financing1,000,4180.71%886,8331.07%1,1930.00%1,888,4440.66%
Loans and advances to customers, gross174,247,967100.00%82,513,028100.00%31,068,218100.00%287,829,213100.00%

F-54

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Thousand of reais

201720162015Brazilian Reais - R$ - unless otherwise stated) 

Medium - high8,215,0246,976,9698,552,474
High9,457,02110,525,9018,928,806
Loans and advances to customers, gross287,829,213268,437,556267,266,449

Thousand of reais201920182017
    

Maturity 

   
Less than 1 year186,196,849 186,373,511174,247,968
Between 1 and 5 years117,841,56499,309,55182,513,030
More than 5 years43,218,24736,250,12831,068,215
Loans and advances to customers, gross347,256,660321,933,190287,829,213
    
Internal risk classification   
Low257,133,115240,440,294226,098,497
Medium-low56,549,19650,485,68233,635,378
Medium11,754,80611,967,26210,423,293
Medium - high 8,512,386 7,722,1988,215,024
High3,307,15611,317,7549,457,021
Loans and advances to customers, gross347,256,660321,933,190287,829,213

 

c) Impairment losses

 

The changesfollowing tables show the reconciliation of the initial and final balances of the provision for losses by category of financial instrument. The terms of credit losses expected in 12 months, credit losses expected during the maturity and impairment losses are explained in the allowancesnote on accounting practices. The comparative values ​​referring to 01/01/2018 represent the provision for losses of credit on 12/31/2017 after the impairmentinitial adoption adjustments of IFRS 9 (note 1)

The variations in the provisions for losses ondue to non-recovery in the balances of “Loans and receivables” werethe item “Financial assets measured at amortized cost” are as follows:

 

Thousand of reais201720162015
Balance at beginning of year18,191,12615,411,75913,562,811
Impairment losses charged to income for the year13,492,07214,383,93513,723,179
Of which:   
Commercial and industrial5,499,0186,523,0516,634,110
Real estate-construction471,366369,43191,196
Installment loans to individuals7,460,4587,616,8196,765,541
Lease financing61,230(125,366)232,332
Write-off of impaired balances against recorded impairment allowance(13,421,560)(11,604,568)(11,874,231)
Of which:   
Commercial and industrial(5,715,903)(4,553,166)(4,953,324)
Real estate-construction(341,804)(189,625)(77,412)
Installment loans to individuals(7,312,310)(6,810,997)(6,621,809)
Lease financing(51,543)(50,780)(221,686)
Balance at end of year18,261,63818,191,12615,411,759
Of which:   
Loans and advances to customers15,409,05616,434,78215,233,000
Loans and amounts due from credit institutions (Note 6)69,015201,441178,759
Provision for Debt Instruments (Note 7)2,783,5671,554,903-
    
Recoveries of loans previously charged off1,153,931994,101757,320
Of which:   
Commercial and industrial412,514562,393293,668
Real estate-construction209,940102,82686,360
Installment loans to individuals521,589314,422348,090
Lease financing9,88814,46029,202

Thousand of reais    2019
  Stage 1Stage 2Stage 3 
  Credit losses expected in 12 monthsExpected credit losses over a maturity not subject to impairmentExpected credit losses during the maturity subject to impairmentTotal
      
Balance at beginning of year 3,917,2783,779,11915,272,91822,969,315
Impairment losses charged to income for the year 1,549,095365,19112,447,09614,361,382
Transfers between stages (1,386,769)(784,480)9,478,6987,307,449
Movement of the period 2,935,8641,149,6712,968,3987,053,934
Of which:     
Commercial and industrial (463,647)(77,270)2,917,8272,376,910
Real estate - construction (44,548)29,206110,29994,957
Installment loans to individuals 2,060,043415,8959,390,53711,866,475
Lease financing (2,753)(2,640)28,43323,040
Variation by Stage (1,107,772)(850,621)1,958,393-
Write-off of impaired balances against recorded impairment allowance --(14,704,948)(14,704,948)
Of which:     
Commercial and industrial --(5,713,369)(5,713,369)
Real estate - construction --(108,294)(108,294)
Installment loans to individuals --(8,834,391)(8,834,391)
Lease financing --(48,893)(48,893)
      
Balance at end of year 4,358,6013,293,69014,973,45922,625,750
Of which:     
Loans and advances to customers 4,291,7343,282,25212,983,19420,557,180
Loans and amounts due from credit institutions (Note 5) 13,543--13,543
Provision for Debt Instruments (Note 6) 53,32411,4381,990,2652,055,027
     -
Recoveries of loans previously charged off --991,476991,476
Of which:     
Commercial and industrial --519,594519,594
Real estate - construction --46,63946,639
Installment loans to individuals --417,477417,477
Lease financing --7,7677,767
      

F-55

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

Thousand of reais2018
 Stage 1Stage 2 Stage 3  
Credit losses expected in 12 monthsExpected credit losses over a maturity not subject to impairment Expected credit losses during the maturity subject to impairmentTotal
       
Balance at beginning of year3,833,5533,767,490 13,122,019 20,723,062
Impairment losses charged to income for the year83,725389,100 13,067,280 13,540,105
Transfers between stages(1,096,539)(273,048) 4,502,795 3,133,208
Movement of the period1,180,264662,148 8,564,485 10,406,897
Of which:      
Commercial and industrial(311,546)(161,669) 4,093,507 3,620,292
Real estate - construction(10,173)(28,581) 231,655 192,901
Installment loans to individuals406,011581,068 8,721,164 9,708,243
Lease financing(567)(1,718) 20,954 18,669
Write-off of impaired balances against recorded impairment allowance-(377,471) (10,916,381) (11,293,852)
Of which:      
Commercial and industrial-(132,770) (3,848,644) (3,981,414)
Real estate - construction-(877) (189,783) (190,660)
Installment loans to individuals-(243,824) (6,855,729) (7,099,553)
Lease financing-- (22,225) (22,225)
       
Balance at end of year3,917,2783,779,119 15,272,918 22,969,315
Of which:      
Loans and advances to customers3,831,8123,727,264 12,682,727 20,241,803
Loans and amounts due from credit institutions (Note 5)-13,561 - 13,561
Provision for Debt Instruments (Note 6)85,46538,296 2,590,190 2,713,951
      -
Recoveries of loans previously charged off-- 826,573 826,573
Of which:      
Commercial and industrial-- 345,085 345,085
Real estate - construction-- 103,433 103,433
Installment loans to individuals-- 369,557 369,557
Lease financing-- 8,498 8,498

Thousand of reais

2017
Balance at beginning of year18,191,126
Impairment losses charged to income for the year13,492,072
Of which:
Commercial and industrial5,499,018
Real estate - construction471,366
Installment loans to individuals7,460,458
Lease financing61,230
Write-off of impaired balances against recorded impairment allowance(13,421,560)
Of which:
Commercial and industrial(5,715,903)
Real estate - construction(341,804)
Installment loans to individuals(7,312,310)
Lease financing(51,543)
Balance at end of year18,261,638
Of which:
Loans and advances to customers15,409,056
Loans and amounts due from credit institutions (Note 5)69,015
Provision for Debt Instruments (Note 6)2,783,567
Recoveries of loans previously charged off1,153,931
Of which:
Commercial and industrial412,514
Real estate - construction209,940
Installment loans to individuals521,589
Lease financing9,888

 

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 on December 31, 2017 2019

F-56

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

R$12,338,141 (201613,369,905 (2018 - R$13,389,834 e 201512,713,532 and 2017 - R$12,965,859)12,338,141).

 

The balances of the provision for losses due to non-recovery by debtor sector are as follows:"

 

Thousand of reais201720162015201920182017
 
Commercial and industrial10,338,22510,555,1098,585,2257,455,24310,791,70210,338,225
Real estate - Construction493,422363,859184,053344,782358,119493,422
Installment loans to individuals7,373,9697,225,8226,420,00014,800,20811,768,1247,373,969
Lease financing56,02246,336222,48125,51751,37056,022
Total18,261,63818,191,12615,411,75922,625,75022,969,31518,261,638

 

d) Impaired assets

 

The details of the changes in the balance of the financial assets classified as “Loans and receivables – loans and advances to clients” (as defined at Note 1.i) and considered to be impaired due to credit risk are as follows:

 

Thousand of reais201720162015
Balance at beginning of year18,887,13218,599,37914,011,225
Net additions13,679,42311,892,32116,462,385
Written-off assets(13,421,560)(11,604,568)(11,874,231)
Balance at end of year19,144,99518,887,13218,599,379

F-48 

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Brazilian Reais - R$ - unless otherwise stated)

Thousand of reais201920182017
    
Balance at beginning of year on 01/01/2018 previously to the initial adoption IFRS 9)22,425,80119,144,99518,887,132
IFRS9 initial adoption effects-702,992-
Balance at beginning of year on 01/01/2018 after the initial adoption IFRS 9)22,425,80119,847,98718,887,132
Net additions16,000,73313,871,66613,679,423
Written-off assets(15,000,458)(11,293,852)(13,421,560)
Balance at end of year23,426,07622,425,80119,144,995

 

Following is a detail of the financial assets considered to be impaired classified by age of the oldest past-due amount:

 

Thousand of reais201720162015201920182017
 
With no Past-Due Balances or Less than 3 Months Past Due10,844,83110,550,54810,307,44211,729,92012,000,86710,844,831
With Balances Past Due by  
3 to 6 Months4,123,7962,983,5753,763,4663,961,0423,473,5914,123,796
6 to 12 Months3,791,8054,921,5274,186,3235,721,7624,929,0993,791,805
12 to 18 Months271,965339,596265,407985,4761,144,035271,965
18 to 24 Months20,82553,57820,045523,441325,70120,825
More than 24 Months91,77338,30856,696504,435552,50891,773
Total19,144,99518,887,13218,599,37923,426,07622,425,80119,144,995
 
Debt Sector  
Commercial and industrial11,993,95311,628,65510,748,64410,072,65511,832,30211,993,953
Real estate - Construction781,886718,514828,966826,8631,035,352781,886
Installment loans to individuals6,304,1346,487,7176,970,24112,497,1799,499,1486,304,134
Lease financing65,02252,24651,52829,37958,99965,022
Total19,144,99518,887,13218,599,37923,426,07622,425,80119,144,995

F-57

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

 

e) Loan past due for less than 90 days but not classified as impaired

 

Thousand of reais2017% of total loans past due for less than 90 days2016% of total loans past due for less than 90 days2015% of total loans past due for less than 90 daysThousand of reais2019% of total loans past due for less than 90 days2018% of total loans past due for less than 90 days2017% of total loans past due for less than 90 days
    
Commercial and industrial3,559,34919.90%4,141,34923.79%5,072,19724.27%Commercial and industrial 3,517,08615.42%4,424,14319.77%3,559,34919.90%
Real estate - Construction4,879,56327.29%5,201,70929.88%7,551,58436.13% 5,781,97725.35%4,527,43220.23%4,879,56327.29%
Installment loans to individuals9,266,36651.82%7,957,29445.71%8,235,69939.40%Installment loans to individuals13,489,51359.13%13,255,64659.24%9,266,36651.82%
Financial Leasing176,5280.99%108,6070.62%41,0130.20%Financial Leasing 24,3250.11%167,7410.75%176,5280.99%
Total(1)17,881,806100.00%17,408,959100.00%20,900,493100.00% 22,812,900100.00%22,374,962100.00%17,881,806100.00%

 

f) Lease at present value

 

As at December 31, 2017, 20162019, 2018 and 20152017 there were no materialleasing agreements for lease contracts.or commitments that are considered individually relevant

 

Breakdown by maturity

 

Gross investment in lease transactions

 

Thousand of reais201720162015Thousand of reais201920182017
  
Overdue11,41216,05121,127 3,2334,81711,412
Due to:  
Up to 1 year1,057,0231,207,4731,241,798 978,748975,1831,057,023
From 1 to 5 years1,101,1041,190,8441,184,418 1,442,2441,160,9861,101,104
Over 5 years2,1774,0796,078 4,0141,0712,177
Total2,171,7162,418,4472,453,421 2,428,2392,142,0572,171,716

 

g) Transfer of financial assets with retention of risks and benefits

 

On December 31, 2017,2019, the amount recorded on “Loans and advances to clients” related to loan portfolio assigned is R$431,397 (201676,028 (2018 - R$783,967122,271 and 20152017 - R$202,113),431,397) and R$428,248 (201675,500 (2018 - R$774,673126,906 and 20152017 - R$190,333 )428,248) of “Other financial liabilities - Financial Liabilities Associated with Assets Transfer” (Note 22)21).

 

The foregoing transferassignment operation was conductedcarried out with a recourseco-obligation clause, and the mandatorywith compulsory repurchase is provided for in the following events:situations:

 

- agreements in defaultdefaulted contracts for longera period of more than 90 consecutive days;

 

- agreements undercontracts subject to renegotiation;

 

- agreementscontracts subject to portability, pursuant to Resolution 3,401 of the BrazilianNational Monetary Council (CMN);

 

- agreementscontracts subject to rights of intervention by certain parties to the contract.intervention.

 

10.Non-current assets held for sale

F-49 

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Brazilian Reais - R$ - unless otherwise stated)

11. Non-current assets held for sale

At December 31, 2017, 20162019, 2018 and 2015,2017, 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:follows:

 

Thousand of reais201720162015 201920182017
 
Balance at beginning of year1,418,3081,310,033978,274 1,598,3671,507,5481,418,308
Loan repayments - repossession of assets524,497834,903293,440 735,864785,139524,497
Capital Increase in Companies held for sale-10,462355,538
Capital Increase in Companies held for sale (1) 55,245-
Additions / disposals (net) due to change in the scope of consolidation(2)-(497,847)-Additions / disposals (net) due to change in the scope of consolidation (2)-(130,713)-
Sales(1)(434,553)(239,291)(317,321)
Sales (808,980)(563,607)(434,553)
Others(704)48102 -(704)
Final balance, gross1,507,5481,418,3081,310,033 1,580,4961,598,3671,507,548
Impairment losses(3)(352,092)(80,423)(72,540) (255,161)(218,136)(352,092)
Impairment as a percentage of foreclosed assets23.37%10.52%5.54% 16.14%13.65%23.37%
Balance at end of year1,155,4561,337,8851,237,493 1,325,3351,380,2311,155,456
(1)In 2015, it mainly refers toOn September 20, 2019, Santander Holding Imobiliária completed the sale by Santander Corretora de Seguros (Current corporate nameacquisition of Santander Participações S.A.the company Summer Empreendimentos Ltda. (“Summer”) of its total interest in Santos Energia and its subsidiaries and,, whose main asset is a branch located on Avenida Faria Lima in the Special Purpose Companies Gestamp Eólica Serra 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.city of São Paulo, for the amount of R$ 45,245. At the conclusion of the

F-58

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

transaction, a structured plan for the sale of this company to a third party was formalized in the short term. In December 2019, Santander Holding Imobiliária carried out a capital increase in Summer in the amount of R$ 10,000.

 

(2)On SeptemberJune 30, 2016, as2018, Banco Santander management reevaluated its strategy on investing in Real TJK Empreendimento Imobiliário SA (currently called Rojo Entretenimento SA), a result ofcompany that owns Teatro Santander, and decided to transfer the non-expectation ofnon-assets item -currents held for sale of investment in BW Guirapá and controlled, from a market period, an administrator transferred the total of this balance to the caption offor investments in affiliatedassociates and controlled companies in the country (Note 12)11). In 2017, as described at note 3, this investment was sold.

 

(3)In 2017,2019, it includes the amount of R$271,670 251,945 (2018 – R$159,120, 2017 – R$271,670) of provisions for devaluations on real estateproperties and which were subsequently sold,R$ 3,216 (2018 – R$59,015) of provisions for devaluations on vehicles, constituted from valuationbased on appraisal reports prepared by a specialized external consulting,consultancy, recorded as a provision for impairment losses in 2016, this provision was R$239,291 (Note 44).due to non-recovery – Impairment.

 

Provisions for devaluations on real estate

On December 31, 2017, includes in the caption "Gains (losses) on non-current assets held for sale not classified as discontinued operations" the amount of R$337,686 of provisions for devaluations on real estate, based on appraisal reports prepared by specialized external consulting.

12. Investments in associates and joint ventures

11.Investments in associates and joint ventures

 

Jointly controlled

 

Banco Santander considers investments classified as jointly controlled when they possess a shareholders’shareholders' agreement, which sets that the strategic, financial and operating decisions requires the unanimous consent of all investors.

 

Significant Influence

 

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 decisions of the investee) but it does not control or has joint control over the investee.

 

a) Breakdown

 

     Participation %
Jointly Controlled by Banco SantanderActivityCountry201720162015
Banco RCI Brasil S.A.(2)BankBrazil39.89%39.89%39.89%
Norchem Participações e Consultoria S.A.(1)Other ActivitiesBrazil50.00%50.00%50.00%
Cibrasec - Companhia Brasileira de Securitização(1) (4) (9)SecuritizationBrazil9.72%9.72%13.64%
Estruturadora Brasileira de Projetos S.A. - EBP(1) (9) (11)Other ActivitiesBrazil11.11%11.11%11.11%
Gestora de Inteligência de Crédito(5)(10)Credit BureauBrazil20.00%--
Campo Grande EmpreendimentosOther ActivitiesBrazil25.32%25.32%25.32%
      
Jointly Controlled by Santander Corretora de Seguros (current corporate name of Santander Participações S.A.)     
Webmotors S.A.(7) (8)(12)Other ActivitiesBrazil70.00%70.00%70.00%
Tecnologia Bancária S.A. - TECBAN(1) Other ActivitiesBrazil19.81%19.81%19.81%
PSA Corretora de Seguros e Serviços
Ltda.(6)(13)(14)		 Insurance BrokerBrazil50.00%50.00%0.00%

Participation %
Jointly Controlled by Banco SantanderActivityCountry20192018 2017
Banco RCI Brasil S.A. BankBrazil39.89%39.89% 39.89%
Norchem Participações e Consultoria S.A. (1) Other ActivitiesBrazil50.00%50.00% 50.00%
Cibrasec - Companhia Brasileira de Securitização(1)(4) SecuritizationBrazil0.00%9.72% 9.72%
Estruturadora Brasileira de Projetos S.A. - EBP (1)(4)(6) Other ActivitiesBrazil11.11%11.11% 11.11%
Gestora de Inteligência de Crédito (2) Credit BureauBrazil20.00%20.00% 20.00%
Campo Grande Empreendimentos (10) Other ActivitiesBrazil25.32%25.32% 25.32%
Banco Hyundai Capital Brasil S.A. (11) BankBrazil50.00%50.00% 0.00%
Santander Auto S.A. (12) Other ActivitiesBrazil50.00%50.00% 0.00%
Jointly Controlled by Santander Corretora de Seguros (current corporate name of Santander Participações S.A.)      
Webmotors S.A. (7) Other ActivitiesBrazil70.00%70.00% 70.00%
Tecnologia Bancária S.A. - TECBAN (1) Other ActivitiesBrazil18.98%19.81% 19.81%
Hyundai Corretora de Seguros Insurance BrokerBrazil50.00%50.00% 50.00%
PSA Corretora de Seguros e Serviços Ltda. (8)(9) Insurance BrokerBrazil50.00%50.00% 50.00%
       
Significant Influence of Banco Santander      
Norchem Holding e Negócios S.A. (1)Other ActivitiesBrazil21.75%21.75% 21.75%

 

 

 Investments
 20192018 2017
Jointly Controlled by Banco Santander595,230613,366 495,264
Banco RCI Brasil S.A.509,890458,292 427,801
Norchem Participações e Consultoria S.A.21,07826,105 25,550
Cibrasec - Companhia Brasileira de Securitização-7,298 7,438
Estruturadora Brasileira de Projetos S.A. - EBP3,8893,690 4,707
Gestora de Inteligência de Crédito47,74459,098 29,513
Campo Grande Empreendimentos255255 255
Banco Hyundai Capital Brasil S.A. (anteriormente denomina da BHJV Assessoria e Consultoria Empresarial Ltda.)-51,073 -
Santander Auto S.A.12,3747,555 -
     

Jointly Controlled by Santander Corretora de Seguros (current corporate name of Santander Participações SA)454,280419,016 350,440
Webmotors S.A.296,216273,721 197,930
Tecnologia Bancária S.A. - TECBAN156,589144,090 151,019
Hyundai Corretora de Seguros934- -
PSA Corretora de Seguros e Serviços Ltda.5411,205 1,491
     
Significant Influence of Banco Santander21,25220,933 20,860
Norchem Holding e Negócios S.A.21,25220,933 20,860
Total1,070,7621,053,315 866,564

F-50 

F-59

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Brazilian Reais - R$ - unless otherwise stated)

  Results of Investments
 20192018 2017
Jointly Controlled by Banco Santander92,97641,212 39,904
Banco RCI Brasil S.A.105,25046,244 44,384
Norchem Participações e Consultoria S.A.9751,120 1,333
Cibrasec - Companhia Brasileira de Securitização75193 389
Estruturadora Brasileira de Projetos S.A. - EBP199(1,017) (1,560)
Gestora de Inteligência de Crédito(11,354)(6,466) (4,642)
Banco Hyundai Capital Brasil S.A. (anteriormente denomina da BHJV Assessoria e Consultoria Empresarial Ltda.)-1,083 -
Santander Auto S.A.(2,169)55 -
     
Jointly Controlled by Santander Corretora de Seguros (current corporate name of Santander Participações SA)55,93624,161 30,430
Webmotors S.A.42,84830,626 21,290
Tecnologia Bancária S.A. - TECBAN12,498(6,929) 8,307
Hyundai Corretora de Seguros(66)- -
PSA Corretora de Seguros e Serviços Ltda.656464 833
     
Significant Influence of Banco Santander576585 1,217
Norchem Holding e Negócios S.A.576585 1,217
Total149,48865,958 71,551

 

     Participation %
Jointly Controlled by Banco SantanderActivityCountry201720162015

Jointly Controlled by Getnet S.A.     
iZettle do Brasil Meios de Pagamento S.A. ("iZettle do Brasil”)(3)Other ActivitiesBrazil--50.00%
Significant Influence of Banco Santander     
Norchem Holding e Negócios S.A.(1)Other ActivitiesBrazil21.75%21.75%21.75%

   Investments
 201720162015
Jointly Controlled by Banco Santander(11)495,264578,761567,367
Banco RCI Brasil S.A.(2)427,801538,756526,680
Norchem Participações e Consultoria S.A.(1)25,55026,30223,665
Cibrasec - Companhia Brasileira de Securitização(1) (4) (9)7,4387,43510,325
Estruturadora Brasileira de Projetos S.A. - EBP(1) (9)(11)4,7076,2686,697
Gestora de Inteligência de Crédito(5)(10)29,513--
Gestora de Inteligência de Crédito(5)(10)255--
Jointly Controlled by Santander Corretora de Seguros (current corporate name of Santander Participações SA)350,440390,336476,640
Webmotors S.A.(7) (8)(12)197,930246,965339,899
Tecnologia Bancária S.A. - TECBAN(1)151,019142,713136,741
PSA Corretora de Seguros e Serviços Ltda.(6)(13)(14)1,491658-
Jointly Controlled by Getnet S.A.--(2,768)
iZettle do Brasil Meios de Pagamento S.A.(3)--(2,768)
Significant Influence of Banco Santander20,86020,98019,504
Norchem Holding e Negócios S.A.(1)20,86020,98019,504
Total866,564990,0771,060,743

   Results of Investments
 1/01 to 12/31/20171/01 to 12/31/20161/01 to 12/31/2015
Jointly Controlled by Banco Santander39,90416,74885,993
Banco RCI Brasil S.A.(2)44,38414,17585,221
Norchem Participações e Consultoria S.A.(1)1,3332,6371,976
Cibrasec - Companhia Brasileira de Securitização(1) (4) (9)389366340
Estruturadora Brasileira de Projetos S.A. - EBP(1) (9)(11)(1,560)(430)(1,544)
Gestora de Inteligência de Crédito(5)(10)(4,642)--
Jointly Controlled by Santander Corretora de Seguros (current corporate name of Santander Participações SA)30,43029,53829,309
Webmotors S.A.(7)(8)(12)21,29023,01923,397
Tecnologia Bancária S.A. - TECBAN(1)8,3075,9715,912
PSA Corretora de Seguros e Serviços Ltda.(6)(13)(14)833548-
Jointly Controlled by Getnet S.A.-(225)(491)
iZettle do Brasil Meios de Pagamento S.A.(3)-(225)(491)
Significant Influence of Banco Santander1,2171,4761,501
Norchem Holding e Negócios S.A.(1)1,2171,4761,501
Total71,55147,537116,312

 

    2019
 Total assetsTotal liabilities Total Income(11)
Jointly Controlled by Banco Santander14,121,61812,502,780 206,482
Banco RCI Brasil S.A.13,452,71612,174,504 263,851
Norchem Participações e Consultoria S.A.69,86527,709 1,949
Estruturadora Brasileira de Projetos S.A. - EBP35,314311 1,790
Gestora de Inteligência de Crédito527,362288,643 (56,769)
Santander Auto S.A.36,36111,613 (4,339)
     
Jointly Controlled by Santander Corretora de Seguros (current corporate name of Santander Participações SA)2,873,1401,628,364 125,439
Webmotors S.A.484,45460,734 61,212
Tecnologia Bancária S.A. - TECBAN2,382,9071,564,801 63,046
Hyundai Corretora de Seguros Ltda.1,90941 (132)
PSA Corretora de Seguros e Serviços Ltda.3,8702,788 1,313
     
Significant Influence of Banco Santander126,93729,226 2,650
Norchem Holding e Negócios S.A.126,93729,226 2,650
Total17,121,69514,160,370 334,571

F-51 

F-60

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Brazilian Reais - R$ - unless otherwise stated)

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

 

   2017
 Total assetsTotal liabilitiesTotal profit(11)
Jointly Controlled by Banco Santander9,432,7388,043,60443,866
Banco RCI Brasil S.A.(2)9,057,2617,985,64774,452
Norchem Participações e Consultoria S.A.(1)78,67427,5742,665
Cibrasec - Companhia Brasileira de Securitização(1) (4) (9)86,3789,8844,000
Estruturadora Brasileira de Projetos S.A. - EBP(1) (9)(11)42,627264(14,040)
Gestora de Inteligência de Crédito(5)(10)167,79820,235(23,211)
Jointly Controlled by Santander Corretora de Seguros (current corporate name of Santander Participações SA)1,967,9891,077,78274,861
Webmotors S.A.(7)(8)(12)490,45850,41331,264
Tecnologia Bancária S.A. - TECBAN(1)1,472,7741,025,59341,932
PSA Corretora de Seguros e Serviços Ltda.(6)(13)(14)4,7571,7761,665
Significant Influence of Banco Santander122,17626,2675,597
Norchem Holding e Negócios S.A.(1)122,17626,2675,597
Total11,522,9039,147,653124,324

   2016
 Total assetsTotal liabilitiesTotal profit(11)
Jointly Controlled by Banco Santander8,831,6117,318,65689,544
Banco RCI Brasil S.A.(2)8,603,8447,276,32079,223
Norchem Participações e Consultoria S.A.(1)78,83326,2285,274
Cibrasec - Companhia Brasileira de Securitização(1) (4) (9)91,08314,6597,011
Estruturadora Brasileira de Projetos S.A. - EBP(1) (9) (11)57,8511,449(1,964)
Jointly Controlled by Santander Corretora de Seguros (current corporate name of Santander Participações SA)1,459,826943,02858,595
Webmotors S.A.(7)(8)(12)145,49935,23129,934
Tecnologia Bancária S.A. - TECBAN(1)1,310,945905,73127,568
PSA Corretora de Seguros e Serviços Ltda.(6)(13)(14)3,3822,0661,093
Significant Influence of Banco Santander127,59831,1366,792
Norchem Holding e Negócios S.A.(1)127,59831,1366,792
Total10,419,0358,292,820154,931

   2015
 Total assetsTotal liabilitiesTotal profit(11)
Jointly Controlled by Banco Santander8,702,7277,170,602180,663
Banco RCI Brasil S.A.(2)8,474,4187,125,614174,629
Norchem Participações e Consultoria S.A.(1)73,28825,9583,953
Cibrasec - Companhia Brasileira de Securitização(1) (4) (9)92,49516,7751,932
Estruturadora Brasileira de Projetos S.A. - EBP(1) (9)(11)62,5262,255149
Jointly Controlled by Santander Corretora de Seguros (current corporate name of Santander Participações SA)1,531,883890,02883,902
Webmotors S.A.(7)(8)(12)279,93536,90436,636
Tecnologia Bancária S.A. - TECBAN(1)1,251,948853,12447,266
Jointly Controlled by Getnet S.A.20,21025,747(2,420)
iZettle do Brasil Meios de Pagamento S.A.(3)20,21025,747(2,420)
Significant Influence of Banco Santander119,68730,0176,902
Norchem Holding e Negócios S.A.(1)119,68730,0176,902
Total10,374,5078,116,394269,047

F-52 

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Brazilian Reais - R$ - unless otherwise stated)

          
         2018
      Total assetsTotal liabilities Total Income(11)
Jointly Controlled by Banco Santander     10,500,0558,755,688 80,954
Banco RCI Brasil S.A. 9,849,5088,679,715 115,928
Norchem Participações e Consultoria S.A. 79,63327,423 2,240
Cibrasec - Companhia Brasileira de Securitização 80,3003,893 1,989
Estruturadora Brasileira de Projetos S.A. - EBP 33,389176 (9,151)
Gestora de Inteligência de Crédito   338,38242,894 (32,328)
Banco Hyundai Capital Brasil S.A. (anteriormente denomina da BHJV Assessoria e Consultoria Empresarial Ltda.)   103,7031,557 2,166
Santander Auto S.A.   15,14030 110
          
Jointly Controlled by Santander Corretora de Seguros (current corporate name of Santander Participações SA) 2,463,2621,573,082 9,703
Webmotors S.A.  221,31360,905 43,751
Tecnologia Bancária S.A. - TECBAN  2,238,1561,510,794 (34,976)
PSA Corretora de Seguros e Serviços Ltda.   3,7931,383 928
          
Significant Influence of Banco Santander     123,95927,714 2,690
Norchem Holding e Negócios S.A.   123,95927,714 2,690
Total     13,087,27610,356,484 93,347
          
         2017
      Total assetsTotal liabilities Total Income(11)
Jointly Controlled by Banco Santander     9,432,7388,043,604 43,866
Banco RCI Brasil S.A. 9,057,2617,985,647 74,452
Norchem Participações e Consultoria S.A.  78,67427,574 2,665
Cibrasec - Companhia Brasileira de Securitização86,3789,884 4,000
Estruturadora Brasileira de Projetos S.A. - EBP42,627264 (14,040)
Gestora de Inteligência de Crédito167,79820,235 (23,211)
          
Jointly Controlled by Santander Corretora de Seguros (current corporate name of Santander Participações SA) 1,967,9891,077,782 74,861
Webmotors S.A.  490,45850,413 31,264
Tecnologia Bancária S.A. - TECBAN  1,472,7741,025,593 41,932
 PSA Corretora de Seguros e Serviços Ltda.   4,7571,776 1,665
          
Significant Influence of Banco Santander     122,17626,267 5,597
Norchem Holding e Negócios S.A.   122,17626,267 5,597
Total     11,522,9039,147,653 124,324

 

b) Changes

 

The changes in the balance of this item were as follows:in the years ended December 31, 2019, 2018 and 2017 were:

 

 201720162015
Jointly Controlled by Banco Santander   
Balance at beginning of year969,0971,041,2391,004,045
Additions / disposals (net) due to change in the scope of consolidation-(2,926)-
Additions /disposals(3) (6)34,1543,105(2,768)
Capital reduction(7)-(76,860)-
Share of results of entities accounted for using the equity method70,33446,061114,811
Dividends proposed/received(200,620)(39,424)(74,849)
Others(27,261)(2,098)-
Balance at end of year845,704969,0971,041,239
Significant Influence of Banco Santander   
Balance at beginning of year20,98019,50419,416
Share of results of entities accounted for using the equity method1,2171,4761,501
Dividends proposed/received(1,337)-(1,413)
Balance at end of year20,86020,98019,504

(1)Companies with a delay of one month for the equity calculation. To register the equity income it was used on 12/31/2017 the position of 11/30/2017.

(2)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.

(3)In June 2016 the interest held in iZetlle do Brasil S.A was sold.

(4)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.

(5)Company incorporated in April 2017 and is in the pre-operational phase. Pursuant to the shareholders’ agreement, control is shared between shareholders who hold 20% of their capital stock each. At the Extraordinary General Meeting held on July 6, 2017, the capital increase of Gestora de Crédito was approved in the total amount of R$65,822, so that the capital stock increased from R$1 to R$65,823, through the issue of 6,582,200 (six million, five hundred and eighty-two thousand and two hundred) new shares, of which 3,291,100 (three million, two hundred and ninety-one thousand and one hundred), 1,316,440 (one million, three hundred and sixteen thousand, four hundred and forty) preferred shares Class A and 1,316,440 (one million, three hundred and sixteen thousand, four hundred and forty) preferred shares Class B and 658,220 (six hundred and fifty eight thousand, two hundred and twenty) class C preferred shares, with no par value, at the issue price of R$10.00, corresponding to the equity value of the shares. The shares issued in the capital increase were fully subscribed on the same date by the shareholders in the proportion of 20% of their capital stock each.

(6)In 2017 refers to the incorporation of Gestora de Inteligência de Crédito - partnership between Banco Santander and other banks from Brazilian market (according to note 3.d) and in 2016 refers to the acquisition agreement of part of the financial operations from the Group PSA in Brazil and the consequent creation of a Joint Venture.

(7)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.

(8)On December 30, 2016, at the EGM of Webmotors S.A., the merger and the Private Instrument of Protocol and Justification of Incorporation of Virtual Motors by Webmotors S.A. were approved, so that Webmotors S.A. received, for its accounting value, based on the balance sheet drawn up on November 30, 2016, all of the assets, rights and obligations of Virtual Motors, with the extinction of Virtual Motors that will be succeeded by Webmotors S.A. in all its rights and obligations.

(9)Although the participations was less than 20%, the Bank exercises control over the entity together with other major stockholders’ through a stockholders’ agreement where no business decision can be taken by a single shareholder.

(10)At the EGM held in October 5, 2017, it was approved the share capital increase of the Gestora de Crédito in the amount of R$285.205, that way its share capital increased from R$65,823 to R$351,028, through the issuance of 29,013,700 new shares, being 14,506,850 as ordinary shares, 5,802,740 preferred shares Class A, 5,802,740 preferred shares Class B, and 2,901,370 preferred shares Class C, without par value, at the issuance price of R$9.83 per share. It was also approved by unanimous decision the payment timetable of the new shares issuance made by the Management of Gestora de Crédito. That way, the share capital increase was fully subscribed at the same day by the shareholders in the proportion of 20% of each interest which were partially paid.

(11)According to its Bylaws, EBP was formed in order to carry out projects to contribute for the Brazilian economic and social development for the period of 10 years. After the conclusion of the timetable set EPB closes its activities this year of 2018. The dissolution of its rights and liquidation were approved in the EGM held on January 29, 2018.

(12)Although participation exceeds 50%, in accordance with the shareholders’ agreement, the control is shared by Santander Corretora de Seguros (Current corporate name of Santander Participações S.A.), and Carsales.com. Investments PTY LTD (Carsales), shareholder based in Australia.

(13)Pursuant to the shareholders’ agreement, the control is shared by Santander Corretora de Seguros (current corporate name of Santander Participações SA) and PSA Services LTD.
      20192018 2017
Jointly Controlled by Banco Santander         
Balance at beginning of year   1,032,382845,704 969,097
Additions / disposals (net) due to change in the scope of consolidation  (51,073)- -
Additions /disposals (5)     746119,557 34,154
Capital reduction     -36,051 -
Share of results of entities accounted for using the equity method148,91265,373 70,334
Dividends proposed/received     (69,904)(35,351) (200,620)
Others     (11,553)1,048 (27,261)
Balance at end of year     1,049,5101,032,382 845,704
          
Significant Influence of Banco Santander         
Balance at beginning of year     20,93320,860 20,980
Share of results of entities accounted for using the equity method  576585 1,217
Dividends proposed/received     (257)(512) (1,337)
Balance at end of year     21,25220,933 20,860

 

F-53 

F-61

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Brazilian Reais - R$ - unless otherwise stated)

 (14)

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

In December 2017, according to the contractual change, the PSA Corretora de Seguros shareholders decided to increase its share capital in R$401, that way the share capital increased from R$500 to R$901, through the issuance

(Thousand of 400,532 new shares, which each new share has the value of R$1. The new shares issued were subscribed and paid at the same date, in local currency, according to the proportion of each shareholder equivalent to 50% to the company´s share capital, that is, 200,266 shares.

(15)According to its Bylaws, EBP was formed in order to carry out projects to contribute for the Brazilian economic and social development for the period of 10 years. After the conclusion of the timetable set EPB closes its activities this year of 2018. The dissolution of its rights and liquidation were approved in the EGM held on January 29, 2018.

(*)The Bank does not have collateral with associates and joint ventures.

(**)The Bank does not have contingent liabilities with significant risk of loss as possible related to investments in affiliates with joint control and significant influence.

(***)As of December 31, 2017, 2016 and 2015, the balances of Assets, Liabilities and Profit refer to 100% of the company balance sheet. There is no balance for the caption "Other Comprehensive Income" in these companies, except for the RCI Bank which recorded R$40,671 (2016Reais - R$5,261 and 2015 - R$0).unless otherwise stated) 

 

(1) Companies with a delay of one month for the equity calculation. To register the equity income it was used on 12/31/2019 the position of 11/30/2019.

(2) Company incorporated in April 2017 and is in the pre-operational phase. Pursuant to the shareholders' agreement, control is shared between shareholders who hold 20% of their capital share each. At the Extraordinary General Meeting held on July 6, 2017, the capital increase of Gestora de Crédito was approved in the total amount of R$65,822, so that the capital share increased from R$1 to R$65,823, through the issue of 6,582,200 (six million, five hundred and eighty-two thousand and two hundred) new shares, of which 3,291,100 (three million, two hundred and ninety-one thousand and one hundred), 1,316,440 (one million, three hundred and sixteen thousand, four hundred and forty) preferred shares Class A and 1,316,440 (one million, three hundred and sixteen thousand, four hundred and forty) preferred shares Class B and 658,220 (six hundred and fifty eight thousand, two hundred and twenty) class C preferred shares, with no par value, at the issue price of R$10.00, corresponding to the equity value of the shares. The shares issued in the capital increase were fully subscribed on the same date by the shareholders in the proportion of 20% of their capital share each.  

(3) In 2017 refers to the incorporation of Gestora de Inteligência de Crédito - partnership between Banco Santander and other banks from brazilian market (according to note 3).

(4) Although the participations was less than 20%, the Bank exercises jointly-control over the entity together with other major stockholders' through a stockholders' agreement where no business decision can be taken by a single stockholder.

(5) At the EGM held in October 5, 2017, it was approved the share capital increase of the Gestora de Crédito in the amount of R$285,205, that way its share capital increased from R$65,823 to R$351,028, through the issuance of 29,013,700 new shares, being 14,506,850 as ordinary shares, 5,802,740 preferred shares Class A, 5,802,740 preferred shares Class B, and 2,901,370 preferred shares Class C, without par value, at the issuance price of R$ 9,83 per share. It was also approved by unanimous decision the payment timetable of the new shares issuance made by the Management of Gestora de Crédito. That way, the share capital increase was fully subscribed at the same day by the shareholders in the proportion of 20% of each interest which were partially paid.

(6) According to its Bylaws, EBP was formed in order to carry out projects to contribute for the brazilian economic and social development for the period of 10 years. After the conclusion of the timetable set EPB closes its activities this year of 2018. The dissolution of its rights and liquidation were aproved in the EGM held on january 29, 2018.

(7) Although participation exceeds 50%, in accordance with the shareholders' agreement, the control is shared by Santander Corretora de Seguros (Current corporate name of Santander Participações S.A.), and Carsales.com. Investments PTY LTD (Carsales), shareholder based in Australia.

(8) Pursuant to the shareholders' agreement, the control is shared by Santander Corretora de Seguros (current corporate name of Santander Participações SA) and PSA Services LTD.

(9) In December 2017, according to the contractual change, the PSA Corretora de Seguros shareholders decided to increase its share capital in R$401, that way the share capital increased from R$ 500 to R$901, through the issuance of 400,532 new shares, which each new share has the value of R$1. The new shares issued were subscribed and paid at the same date, in local currency, according to the proportion of each shareholder equivalent to 50% to the company´s share capital, that is, 200.266 shares.
(10) Participation resulting from the credit recovery from the Banco Comercial and Investimentos Sudameris S.A. incorporated in 2009 by Banco ABN AMRO Real S.A., which in the same year was incorporated into the Banco Santander (Brasil) S.A., one of the Company partner. The partners are conducting the procedures for extinction of the company, whose depends on the sale of a property. Once it has been sold, the liquidation of the company and each partner will receive its share of the equity.

(11) Company incorporated on December 13, 2018, upon transformation of BHJV Assessoria e Consultoria em Gestão Empresarial Ltda. Aymoré CFI, a wholly-owned subsidiary of Banco Santander, holds the company's operational control. (Note 3).

In 2019, based on the shareholders' agreement, it was concluded that Banco Santander has the control and, therefore, began to consolidate the Company.

(12) Insurance company incorporated on October 9, 2018, through transformation of the corporate vehicle L.G.J.S.P.E. Empreendimentos e Participações S.A., submitted to Susep to obtain authorization to operate. In accordance with the shareholders' agreement, the control is shared by Sancap and HDI Seguros S.A., (Note 3).

(*) The Bank does not have collateral with associates and joint ventures.

(**) The Bank does not have contingent liabilities with significant risk of loss as possible related to investments in affiliates with joint control and significant influence.

(***) As of December 31, 2019, 2018 and 2017, the balances of Assets, Liabilities and Profit refer to 100% of the company balance sheet. There is no balance for the caption "Other Comprehensive Income" in these companies, except for the RCI Bank which recorded R$57,139 (2018- R$30,357 and 2017 - R$40,671).

c) Impairment losses

 

No impairment losses were recognized on investments in associates and joint ventures in 2017, 20162019, 2018 and 2015.2017.

 

d) Other information

 

Details of the principal jointly controlled entities:

 

Banco RCI Brasil S.A.: A company incorporated in the form of corporation headquartereda joint stock company with headquarters in Parana which is primarily engaged inParaná, aims to the main practice of investment, leasing, credit, operations, financing and investment in orderoperations, with a view to sustain the growth of the automotive brands Renault and Nissan in the Brazilian market, by providing creditwith operations focused on, mainly to financing and leasing operations to the final client.consumer. It is a financial institution that is part of the RCI Group Banque Group and Santander Conglomerate, their operations being conducted in the Santander Group, with operations conducted as partcontext of a set of institutions that operate in the financial market. According to the Shareholders’Shareholders' Agreement, the keymain decisions that impact this partnership arecompany is 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 Bacen 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 was transferred to Banco Santander.controlling shareholders.

 

Webmotors S.A.: A company incorporated in the form of private limiteda privately held company with headquarters in São Paulo which is engaged in the design,and has as its object

development, implementation and / or availability of electronic catalogs, space, products,product, services or means for the sale of marketing products and / or services related to the automotiveautomobile industry, on the Internet through the "website" www.webmotors.com.br (owned by Webmotors) or other means related to e-commerceelectronic commerce activities and other Internet uses or applications of the Internet, as well as the participation in the capital inof other companies and the management of related business.businesses and ventures. It is a companymember of the EconomicSantander Economic-Financial Conglomerate - Financial Santander (Santander Group)(Conglomerado Santander) and Carsales.com Investments PTY LTD (Carsales), whichwith its operations are conducted as partin the context of a groupset of institutions that operate jointly.act in an integrated manner. According to the Shareholders’Shareholders' Agreement, the keymain decisions that impact this partnershipcompany are taken jointly between Banco Santander and other controllers.

 

Thousand of reais 2017 2016 2015
 Banco RCI BrasilWebmotorsBanco RCI BrasilWebmotorsBanco RCI BrasilWebmotors
Current assets4,535,521418,7954,103,86623,0715,038,18185,552
Non-current assets4,521,74071,6634,499,978122,4283,436,237194,383
Current liabilities3,897,01047,1663,629,57532,6013,998,53630,877
Non-current liabilities4,088,6373,2473,646,7452,6303,127,0786,027
Cash and cash equivalents47,7821,98923,6121,66338,217681
Depreciation and amortization(1,600)16,353(911)(12,295)(3,783)(9,883)
Revenue1,315,695127,0641,575,550135,242591,810137,947
Interest income1,294,1197,1781,368,64328,0471,424,21127,854
Interest expense(626,654)-(903,061)-(903,864)(69)
Tax Income / (expense)(122,544)(12,568)(3,326)(13,370)(108,837)(16,086)
Current financial liabilities (excluding trade and other payables and provisions)3,897,01033,3203,629,57531,7073,436,69930,110
Non-current financial liabilities (excluding trade and other payables and provisions)4,058,9863,2473,646,7451,7362,565,2415,260

F-62

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

    2019 2018  2017
   Banco RCI BrasilWebmotorsBanco RCI BrasilWebmotorsBanco RCI Brasil Webmotors
 Current assets 12,052,008241,9199,849,508221,3139,057,261 490,458
Current liabilities 10,781,92161,2908,679,71560,9057,985,647 50,413
Cash and cash equivalents 489,4001,66737,1151,03447,782 1,989
Depreciation and amortization (1,666)(9,234)(977)(7,423)(1,600) 16,353
Revenue 661,215165,0491,316,687167,8811,315,695 127,064
Interest income 1,401,1545,0791,290,7034,1341,294,119 7,178
Interest expense (547,546)-(575,944)-(626,654) -
Tax Income / (expense) (83,455)(26,863)(147,266)(16,013)(122,544) (12,568)
Current financial liabilities (excluding trade and other payables and provisions) 4,178,76153,8073,130,90849,7093,897,010 33,320
Non-current financial liabilities (excluding trade and other payables and provisions) 6,470,0811,0064,813,9095,4584,058,986 3,247

 

13. Tangible assets

12.Tangible assets

 

Tangible assets of the Bank relate to property, plant and equipment for the its 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, 2017, 20162019, 2018 and 2015.

F-54 

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Brazilian Reais - R$ - unless otherwise stated)

2017.

 

a) Breakdown

 

The detail, by class of asset, of the tangible assets in the consolidated balance sheets is as follows:

 

Thousand of reais       
CostLand and buildingsIT equipment and fixturesFurniture and vehiclesWorks in progress and othersTotal Land and buildingsIT equipment and fixturesFurniture and vehiclesRight-of-use of Assets Others Total
Balance at December 31, 20142,773,5482,688,9906,967,3024,46512,434,305
Additions15,997120,378933,913-1,070,288
Additions resulting mergers-2,7234,739-7,462
Write-off(19,991)(12,233)(228,324)-(260,548)
Transfers(44,695)350,889(314,139)(706)(8,651)
Balance at December 31, 20152,724,8593,150,7477,363,4913,75913,242,856
Additions3,024154,852715,264-873,140
Additions resulting mergers-2,0213,961-5,982
Write-off(29,174)(15,011)(141,442)-(185,627)
Additions / disposals (net) due to change in the scope of consolidation-45257-302
Transfers12,48474,361(82,650)-4,195
Balance at December 31, 20162,711,1933,367,0157,858,8813,75913,940,848 2,711,1933,367,0157,858,881- 3,759 13,940,848
Additions-382,571723,835-1,106,406 -382,571723,835- - 1,106,406
Write-off(52,102)(180,036)(31,053)-(263,191) (52,102)(180,036)(31,053)- - (263,191)
Transfers(9,779)718,666(721,520)-(12,633) (9,779)718,666(721,520)- - (12,633)
Balance at December 31, 20172,649,3124,288,2167,830,1433,75914,771,430 2,649,3124,288,2167,830,143- 3,759 14,771,430
Accumulated depreciation 
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) 2,534450,857942,358- 381 1,396,130
Additions resulting mergers-(831)(3,357)-(4,188)
Write-off (18,230)(162,497)(199,877)- - (380,604)
Change in the scope of consolidation 99,75919,51717,749- 1,302 138,327
Transfers 45,66332,232640,758- (3,759) 714,894
Balance at December 31, 2018 2,779,0384,628,3259,231,131- 1,683 16,640,177
 
Initial adoption IFRS 16 -2,465,750 - -
Additions 85,333826,6851,012,395689,982 370 2,614,765
Cancellation of lease agreements -(72,951) (72,951)
Write-off17,35310,531207,420-235,304 (17,041)(122,926)(122,279)- - (262,246)
Transfers(624)(19,143)(76,827)-(96,594) (7,160)13,23651,445- - 57,521
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-off13,99913,092121,338-148,429
Additions / disposals (net) due to change in the scope of consolidation-(26)(76)-(102)
Transfers6,300(39,836)(5,761)-(39,297)
Balance at December 31, 2019 2,840,1705,345,32010,172,6923,082,781 2,053 21,443,016
 
Accumulated depreciationAccumulated depreciation Land and buildingsIT equipment and fixturesFurniture and vehiclesRight-of-use of Assets Others Total
Balance at December 31, 2016(594,210)(2,509,099)(4,172,234)-(7,275,543) (594,210)(2,509,099)(4,172,234)- - (7,275,543)
Additions(81,910)(499,542)(609,515)-(1,190,967) (81,910)(499,542)(609,515)- - (1,190,967)
Write-off37,136154,47122,196-213,803 37,136154,47122,196- - 213,803
Transfers9,734(437,527)427,506-(287) 9,734(437,527)427,506- - (287)
Balance at December 31, 2017(629,250)(3,291,697)(4,332,047)-(8,252,994) (629,250)(3,291,697)(4,332,047)- - (8,252,994)
 
Additions (82,714)(485,607)(649,557)- - (1,217,878)
Write-off 8,816140,332109,447- - 258,595
Change in scope of consolidation (5,602)(1,448)(7,136)- - (14,186)
Transfers (52,094)(76,292)(631,965)- - (760,351)
Balance at December 31, 2018 (760,844)(3,714,712)(5,511,258)- - (9,986,814)
 
Additions (93,455)(482,256)(730,993)(564,132) - (1,870,836)
Write-off 10,517148,48665,0168,316 - 232,335
Transfers 15,09110,272(9,183)- - 16,180
Balance at December 31, 2019 (828,691)(4,038,210)(6,186,417)(555,816) - (11,609,134)
 
Losses from non-recovery (impairment) Losses from non-recovery (impairment) 
Balance at December 31, 2014(31,296)-(31,296)
Impacts on results(2,077)-(2,077)
Write-off23,588-23,588
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) (13,031)-(5,841)- - (18,872)
Impacts on results9,784-1,047-10,831 9,784-1,047- - 10,831
Transfers-(512)-(512) -(512)- - (512)
Balance at December 31, 2017(3,247)-(5,306)-(8,553) (3,247)-(5,306)- - (8,553)
 
Impacts on results (10,607)-(49,556)- - (60,163)
Transfers (5)-4,333- - 4,328
Balance at December 31, 2018 (13,859)-(50,529)- - (64,388)
 
Impacts on results (587)-13,050- - 12,463
Transfers - - -
Balance at December 31, 2019 (14,446)-(37,479)- - (51,925)
 
Carrying amount  
Balance at December 31, 20152,183,5281,057,8673,760,7603,7597,005,914
Balance at December 31, 20162,103,952857,9163,680,8063,7596,646,433
Balance at December 31, 20172,016,815996,5193,492,7903,7596,509,883 2,016,815996,5193,492,790- 3,759 6,509,883
Balance at December 31, 2018 2,004,335913,6133,669,344- 1,683 6,588,975
Balance at December 31, 2019 1,997,0331,307,1103,948,7962,526,965 2,053 9,781,957

F-63

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

 

The depreciation expenses has been included in the heading “Depreciation and amortization” in the income statement.

 

F-55 

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Brazilian Reais - R$ - unless otherwise stated)

b) Tangible asset purchase commitments

 

On December 31, 20172019 the Bank has no contractual commitments for the acquisition of tangible assets amount of(2018 - R$3.2 million and 2017 R$75.0 (2016 - R$9.1 million and 2015 R$0)million).

 

14. Intangible assets - Goodwill

13.Intangible assets - Goodwill

 

Goodwill is the difference between the acquisition cost and the Bank’sBank's participation in the net fair value of assets, liabilities and contingent liabilities of the acquired company. When the difference is negative (negative goodwill), it is recognized immediately through income statement. 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)45).

 

Based on the assumptions described above,bellow, no impairment loss was recognized for goodwill at December 31, 2017, 20162019, 2018 and 2015.2017.

 

Thousand of reais201720162015
Breakdown   
Banco ABN Amro Real S.A. (Banco Real)27,217,56527,217,56527,217,565
Olé Consignado (Current Company name of Banco Bonsucesso Consignado)62,80062,80062,800
Super Pagamentos e Administração de Meios Eletrônicos Ltda. (Super)13,05013,05013,050
Banco PSA Finance Brasil S.A.1,557--
Getnet Adquirência e Serviços para Meios de Pagamento S.A. (Santander Getnet)1,039,3041,039,3041,039,304
BW Guirapá I S.A.-22,320-
Ipanema Empreendimentos e Participações Ltda.28,120--
Others1,860--
Total28,364,25628,355,03928,332,719

 

 Commercial Banking
 201720162015
Main assumptions:   
Basis of determining recoverable amounts Value in use: cash flows
Period of the projections of cash flows(1)5 years5 years5 years
Growth rate perpetual8.3%8.0%7.5%
Discount rate(2)14.6%15.2%15.2%
(1)The projections of cash flow are prepared using Management´s growth plans and internal budget, based on historical data, market expectations and conditions such as industry growth, interest rate and inflation.
Thousand of reais    201920182017
        
Breakdown       
Banco ABN Amro Real S.A. (Banco Real)    27,217,56527,217,56527,217,565
Olé Consignado (Current Company name of Banco Bonsucesso Consignado)  62,80062,80062,800
Super Pagamentos e Administração de Meios Eletrônicos Ltda. (Super)    13,05013,05013,050
Banco PSA Finance Brasil S.A.    1,5571,5571,557
Getnet Adquirência e Serviços para Meios de Pagamento S.A. (Santander Getnet)    1,039,3041,039,3041,039,304
Return Capital Serviços de Recuperação de Créditos S.A. (Current Company name of Ipanema Empreendimentos e Participações S.A.)  24,34627,63028,120
Santander Brasil Tecnologia S.A.    16,38216,382-
Others    --1,860
Total    28,375,00428,378,28828,364,256

 

 

       
        
     Commercial Banking
     201920182017
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 (1)    4.8%5.1%8.3%
Discount rate(2)    12.5%13.6%14.6%

(1) The projections of cash flow are prepared using Management´s growth plans and internal budget, 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 20.42% (2016 - 20.23% and 2015 - 20.11%).

(2) The discount rate is calculated based on the capital asset pricing model (CAPM). The discount rate before tax is 17,78% (2018 - 19.33% and 2017 - 20.42%).

 

The

Thousand of reais    201920182017
        
Balance at beginning of the year    28,378,28828,364,25628,355,039
Additions (loss):       
BW Guirapá (Note 3.c) --(22,320)
Banco PSA Finance Brasil S.A.    --1,557
Return Capital Serviços de Recuperação de Créditos S.A. (current name of Ipanema Empreendimentos e Participações S.A.)(3,284)(490)28,120
Produban Serviços de Informática S.A.    -16,382-
Others    -(1,860)1,860
Balance at end of the year    28,375,00428,378,28828,364,256

Goodwill is tested for impairment test was performed during the second half of 2017, since at the end of each reportable periodyear or whenever there is any indication of impairment. Over the twelve-month period ended December 31, 2019, there was no evidence of impairment goodwill is tested for impairment.that would have led to the need to update the test performed in 2018 before its regular performance.

 

F-64

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

In the goodwill impairment test, discount rates and perpetuity growth are the most sensitive assumptions for calculating the calculation of present value (value in use) of discounted future cash flows discounted to present value.flows. With thea variation of + 0.25%+0.25% or -0.25% in these rates, the value of future cash flows discounted to present value remains higher than Banco Santander’s shareholders’ equity.continues to indicate the absence of impairment.Right-of-use of Assets

 

The changes of goodwill in December, 31 2017, 2016 and 2015 were as follows:

Thousand of reais201720162015
Balance at beginning of the year28,355,03928,332,71928,270,955
Additions (loss):
Olé Consignado (Note 4.c)		--62,800
Super (Note 4.c)--(1,036)
BW Guirapá (Note 4.c)(22,320)22,320-
Banco PSA Finance Brasil S.A.1,557--
Others1,860--
Balance at end of the year28,336,13628,355,03928,332,719
(1)14.In 2016 refers to goodwill of BW Guirapá. In 2015, the Banco Santander, through Aymoré CFI, became the controlling shareholder of Banco Bonsucesso Consignado, with 60% of capital.Intangible assets - Other intangible assets

F-56 

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Brazilian Reais - R$ - unless otherwise stated)

15. Intangible assets - Other intangible assets

 

The details, by asset category, of the "otherother intangible assets" ofassets in the consolidated financial statementsbalance sheets are as follow:follows:

 

CostIT developmentsOther assetsTotal
Balance at December 31, 20144,577,074356,8684,933,942
Additions607,6423,647611,289
Additions resulting mergers7591760
Write-off(11,282)-(11,282)
Transfers28,30737,20065,507
Balance at December 31, 20155,202,500397,7165,600,216
Additions652,49018,395670,885
Additions resulting mergers25089339
Write-off(450)(10,202)(10,652)
Additions / disposals (net) due to change in the scope of consolidation4-4
Transfers12,150-12,150
Balance at December 31, 20165,866,944405,9986,272,942
Additions824,41112,072836,483
Write-off(125,307)(7,096)(132,403)
Transfers4,633-4,633
Balance at December 31, 20176,570,681410,9746,981,655
Accumulated amortization   
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-off10,169-10,169
Transfers18,67513,61432,289
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-off14110,20210,343
Additions / disposals (net) due to change in the scope of consolidation(1)-(1)
Transfers32,1673,42735,594
Balance at December 31, 2016(3,120,982)(277,155)(3,398,137)
Additions(449,709)(21,571)(471,280)
Write-off8545,5006,354
Transfers17,40246417,866
Balance at December 31, 2017(3,552,435)(292,762)(3,845,197)
Losses from non-recovery (Impairment) - IT   
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 profit898(6,736)(5,838)
Transfers16,19314316,336
Balance at December 31, 2016(977,711)(15,291)(993,002)
Impact on net profit(2)(306,110)-(306,110)
Write-off441-441
Balance at December 31, 2017(1,283,380)(15,291)(1,298,671)
Carrying amount   
Balance at December 31, 20151,358,704122,2391,480,943
Balance at December 31, 20161,768,251113,5521,881,803
Balance at December 31, 20171,734,866102,9211,837,787
(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.
Cost  IT developments Other assets Total
Balance at December 31, 2016  5,866,944 405,998 6,272,942
Additions  824,411 12,072 836,483
Write-off  (125,307) (7,096) (132,403)
Transfers  4,633 - 4,633
Balance at December 31, 2017  6,570,681 410,974 6,981,655
        
Additions  804,782 137 804,919
Write-off  (477,434) (40) (477,474)
Transfers  11,567 - 11,567
Additions by Acquisitions of Subsidiaries 590 - 590
Corporate Restructuring  87 - 87
Balance at December 31, 2018  6,910,273 411,071 7,321,344
        
Additions  1,290,686 15,757 1,306,443
Write-off  (2,544,403) (130,622) (2,675,025)
Transfers  (26,758) (2,481) (29,239)
Balance at December 31, 2019  5,629,798 293,725 5,923,523
        

Accumulated amortization
Balance at December 31, 2016  (3,120,982) (277,155) (3,398,137)
Additions  (449,709) (21,571) (471,280)
Write-off  854 5,500 6,354
Transfers  17,402 464 17,866
Balance at December 31, 2017  (3,552,435) (292,762) (3,845,197)
        
Additions  (504,009) (19,246) (523,255)
Write-off  25,242 - 25,242
Transfers  (1,000,893) 58 (1,000,835)
Additions by Acquisitions of Subsidiaries(583) - (583)
Corporate Restructuring  (15) - (15)
Balance at December 31, 2018  (5,032,693) (311,950) (5,344,643)
        
Additions  (501,682) (19,339) (521,021)
Write-off  2,326,982 79,945 2,406,927
Transfers  (241,395) (288) (241,683)
Balance at December 31, 2019  (3,448,788) (251,632) (3,700,420)
        
Losses from non-recovery (Impairment) – IT  IT developments Other assets Total
Balance at December 31, 2016  (977,711) (15,291) (993,002)
Impact on net profit (1)  (306,110) - (306,110)
Write-off  441 - 441
Balance at December 31, 2017  (1,283,380) (15,291) (1,298,671)
        
Impact on net profit (1)  (300,865)-- (300,865)
Transfers  1,263,535 - 1,263,535
Balance at December 31, 2018  (320,710) (15,291) (336,001)
        
Impact on net profit (1)  (103,924) - (103,924)
Write-off  422,315 15,291 437,606
Balance at December 31, 2019  (2,319) - (2,319)
        
Carrying amount       
Balance at December 31, 2017  1,734,866 102,921 1,837,787
Balance at December 31, 2018  1,556,870 83,830 1,640,700
Balance at December 31, 2019  2,178,691 42,093 2,220,784

(1) It refers to impairment loss of assets in the acquisition and development of software. 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 heading “Depreciation and amortization” in the income statement.

 

F-57 

F-65

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Brazilian Reais - R$ - unless otherwise stated)

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

 

16. Other assets

15.Other assets

 

The breakdown of the balance of “Other assets” is as follows:

 

Thousand of reais201720162015
Customer relationships(1)1,679,3051,197,278221,478
Prepayments and accrued income784,456690,8141,383,476
Contractual guarantees of former controlling stockholders (Note 24.c.5)707,130814,925789,974
Actuarial asset (Note 23)198,188153,661-
Amounts receivable of covenants--8
Other receivables(2)1,209,1912,247,3341,407,182
Total4,578,2705,104,0123,802,118
Thousand of reais 20192018 2017
      
Contracts costs 1,926,5361,674,187 1,679,305
Prepayments and accrued income 1,059,223685,755 784,456
Contractual guarantees of former controlling stockholders (Note 23.c.5)102,903605,638 707,130
Actuarial asset (Note 22) 346,422273,281 198,189
Other receivables(1) 1,626,2531,561,606 1,209,190
Total 5,061,3374,800,467 4,578,270

(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.

 

17. Deposits from the Brazilian Central Bank and Deposits from credit institutions

16.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:

 

Thousand of reais201720162015
Classification:   
Financial liabilities at amortized cost79,374,68578,634,07269,451,498
Total79,374,68578,634,07269,451,498
Type:   
Deposits on demand(1)306,081314,112144,596
Time deposits(2)52,739,16349,548,85855,795,205
Repurchase agreements26,329,44128,771,10213,511,697
 Of which:
Backed operations with Private Securities(3)		-446,42984,573
Backed operations with Government Securities26,329,44128,324,67313,427,124
Total79,374,68578,634,07269,451,498
Currency:   
Reais56,562,95051,339,83033,056,128
Euro407,814576,994528,465
US dollar22,156,05426,546,40435,612,670
Other currencies247,867170,844254,235
Total79,374,68578,634,07269,451,498
(1)Non-interest bearing accounts.
Thousand of reais 20192018 2017
      
Classification:     
Financial liabilities at amortized cost 99,271,41599,022,806 79,374,685
Total 99,271,41599,022,806 79,374,685
      
Type:     
Deposits on demand(1) 685,026709,605 306,081
Time deposits(2) 56,602,47047,227,456 52,739,163
Repurchase agreements 41,983,91951,085,745 26,329,441
Of which:     
Backed operations with Private Securities(3) 9,506,2556,977,766 -
Backed operations with Government Securities 32,477,66344,107,979 26,329,441
Total 99,271,41599,022,806 79,374,685

(1) Non-interest bearing accounts.

(2) Includes operations with credit institutions resulting from export and import financing lines, transfers from the country (BNDES and Finame) and abroad, and other credit lines abroad.

(3) Refers primarily to repurchase agreements backed by own-issued debentures.

 

(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.
Thousand of reais 20192018 2017
      
Currency:     
Reais 58,282,79374,159,613 56,562,950
Euro 39,522105,119 407,814
US dollar 40,949,10024,758,074 22,156,054
Other currencies -- 247,867
Total 99,271,41599,022,806 79,374,685

 

(3)Refers primarily to repurchase agreements backed by own-issued debentures.

Note 45-d contains a detail of the remaining maturity of financial liabilities at amortized cost.

 

F-58 

F-66

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Brazilian Reais - R$ - unless otherwise stated)

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

 

18. Client deposits

17.Client deposits

 

The breakdown, by classification and type, of the balance of “Customer deposits” is as follows:

 

Thousand of reais201720162015
Classification:   
Financial liabilities at amortized cost276,042,141247,445,177243,042,872
Total276,042,141247,445,177243,042,872
Type:   
Deposits on demand
 Current accounts(1)		17,559,98515,868,20115,579,923
 Savings accounts40,572,36936,051,47635,984,838
Time deposits146,817,65094,478,87589,986,025
Repurchase agreements71,092,137101,046,625101,492,086
 Of which:
Backed operations with Private Securities(2)		33,902,89059,460,21061,173,979
Backed operations with Government Securities37,189,24741,586,41540,318,107
Total276,042,141247,445,177243,042,872
(1)Non-interest bearing accounts.
Thousand of reais 2019                    2018    2017
       
Classification:      
Financial liabilities at amortized cost 336,514,597 304,197,800 276,042,141
Total 336,514,597 304,197,800 276,042,141
       
Type:      
Demand deposits      
Current accounts(1) 28,231,479 18,853,519 17,559,985
Savings accounts 49,039,857 46,068,346 40,572,369
Time deposits 200,739,544 190,982,541 146,817,650
Repurchase agréments 58,503,717 48,293,394 71,092,137
Of which:      
Backed operations with Private Securities(2) 9,506,255 6,977,766 33,902,890
Backed operations with Government Securities 48,997,462 41,315,628 37,189,247
Total 336,514,597 304,197,800 276,042,141

(1) Non-interest bearing accounts.

(2)Refers primarily to repurchase agreements backed by own-issued debentures.

(2) Refers primarily to repurchase agreements backed by own-issued debentures.

 

Note 45-d44-d contains a detail of the residual maturity periods of financial liabilities at amortized cost.

 

19. Marketable debt securities

F-67

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

18.Marketable debt securities

 

The breakdown, by classification and type, of the balance of “Marketable debt securities” is as follows:

 

Thousand of reais201720162015 201920182017
 
Classification:  
Financial liabilities at amortized cost70,247,01299,842,95594,658,300 73,702,47474,626,23270,247,012
Total70,247,01299,842,95594,658,300 73,702,47474,626,23270,247,012
 
Type:  
Real estate credit notes - LCI(1)27,713,87323,983,42923,795,322 21,266,07927,159,98227,713,873
Eurobonds1,992,8287,721,64613,465,373 8,715,3824,516,6471,992,828
Treasury Bills(2)31,686,25961,157,03755,300,989 27,587,34030,721,20631,686,259
Agribusiness credit notes - LCA(3)8,854,0526,980,8432,096,616
Agribusiness credit notes - LCA 14,776,87711,925,0188,854,052
Guaranteed Real Estate Credit Notes (3) 1,356,796303,379-
Total70,247,01299,842,95594,658,300 73,702,47474,626,23270,247,012

 

Indexers:DomesticAbroad
Treasury Bills97% to 108%105.25% of CDI -
 100% of IGPM -
 100% of IPCA -
 Pre fixed: 10.05%5.06% to 17.74%17.29% -
 104% to 105% 100% of SELIC -
Real estate credit notes -– LCI70% 80% to 97%100% of CDI -
 Pre fixed: 8.27%3.9% of 14.91%10.33% -
 100% of IPCA -
 100% of TR -
Agribusiness credit notes -– LCA87% 80% to 98.6% of CDI -
Guaranteed Real Estate Credit Notes – LIG94% to 98% of CDI -
Eurobonds0.7%- 0.0% to 3%10%
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, 2017, have maturities between 2018 to 2026 (2016 - there are maturities between 2017 to 2026 and 2015 - there are maturities between 2016 to 2020). CDI+6.4%

(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, 2017, have a maturity between 2018 to 2025 (2016 - have a maturity between 2016 to 2017 to 2025 and 2015 - there are maturities between 2016 to 2025).

(3)Agribusiness credit notes are fixed income securities in which resources are allocated to the promotion of agribusiness indexed between 86.0% to 94.0% of CDI. On December 31, 2017, its maturities dates are between 2018 to 2019 (12/31/2016 - there are maturities between 2017 to 2018 and 2015 - there are maturities between 2016 to 2018).

F-59 

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.(1) Real Estate Credit Notes are fixed income securities pegged by mortgages and mortgage-backed securities or liens on property. On December 31, 2019, have maturities between 2020 and 2026 (2018 - there are maturities between 2019 to 2026 and 2017 - there are maturities between 2018 to 2026).

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Thousands(2) The main features of Brazilian Reaisthe Treasury Bills are the minimum period of two years, minimum notional of R$300 and permission for early redemption of only 5% of the issued amount. On December 31, 2019, have a maturity between 2020 to 2025 (2018 - R$have a maturity between 2019 to 2025 and 2017 - unless otherwise stated)there are maturities between 2018 to 2025).

(3) Guaranteed Real Estate Letters are real estate investment securities guaranteed by the issuer and by a pool of real estate credits separated from the other assets of the issuer. As of December 31, 2019 maturity until 2020 and 2021 (2018 - have a maturity until 2021).

 

The breakdown, by currency, of the balance of this account is as follows:

 

Thousand of reais
Currency:		201720162015
Real68,335,10392,132,19582,506,826
US dollar1,911,9097,645,54211,180,678
Swiss Francs--603,889
Peso/Chile--135,388
Yen--35,743
Euro-65,218195,776
Total70,247,01299,842,95594,658,300
Thousand of reais  
   
Currency: 201920182017
     
Real 64,987,09270,109,58568,335,103
US dollar 8,715,3824,516,6471,911,909
Total 73,702,47474,626,23270,247,012
     
  Average interest (%)
Currency: 201920182017
     
Real 5.0%5.5%5.5%
US dollar 4.1%5.9%6.8%
Total 4.5%5.6%5.7%

 

 Average interest (%)
Currency:201720162015
Real5.5%11.7%12.1%
US dollar6.8%3.7%1.0%
Yen-0.0%3.1%
Total5.7%11.3%9.6%

F-68

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

 

The changesvariations in the balance of Marketable debt instruments“Obligations for bonds and securities” were as follows:

 

Thousand of reais201720162015
Balance at beginning of the year99,842,95594,658,30070,355,249
Issuances59,663,42050,313,46972,936,057
Payments(97,009,957)(56,164,769)(63,516,234)
Interest (Note 34)7,901,19912,212,92210,047,874
Exchange differences and Others(150,605)(1,305,204)4,835,354
Additions arising from acquisitions of companies-128,237-
Balance at end of the year70,247,01299,842,95594,658,300

Thousand of reais 201920182017
     
Balance at beginning of the year 74,626,23270,247,01299,842,955
Issuances     53,017,03973,765,08159,663,420
Payments   (61,914,716)(78,903,009)(97,009,957)
Interest (Note 33) 5,138,3064,606,9497,901,199
Exchange differences and Others       2,835,6134,910,199(150,605)
Balance at end of the year 73,702,47474,626,23270,247,012

On December 31, 2017, 20162019, 2018 and 2015,2017, 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-d44-d contains a detail of the residual maturity periods of financial liabilities at amortized cost in each year.

 

The breakdown of "Bonds and other securities" is as follows:

 

 IssuanceMaturityCurrencyInterest rate (p.y)201720162015
Eurobonds20112016USD4.2%--3,268,431
Eurobonds(1)20122016CHF3.3%--603,889
Eurobonds(1)20132016BRL8.0%--1,255,841
Eurobonds(1)20122016CLP4.6%--135,388
Eurobonds20142016USD1.5% to 2.0%--192,583
Eurobonds(1)20142016JPY1.8%--35,743
Eurobonds20142017USD2.1% to 2.4%--27,473
Eurobonds20152016USD0.4% to 3.0%--2,614,244
Eurobonds20152018USD2.2%40,33339,72747,598
Eurobonds20152020USD2.9%10,65610,20611,877
Eurobonds20072017BRLFIDC-1,9307,122
Eurobonds20152016BRL1.6%--3,543
Eurobonds20152016EUR0.8% to 1.0%--195,603
Eurobonds20162017USD0.7% to 2.5%-3,408,932-
Eurobonds20172018USDZero Coupon to 2.4%1,195,668--
Eurobonds20172019USDLibor 3M + 1.0%165,677--
Eurobonds20172024USD6.9% to 10.0%541,487--
Eurobonds20122017USD4.6%-4,116,3095,025,982
Others    39,007144,54240,056
Total    1,992,8287,721,64613,465,373

         
 IssuanceMaturity CurrencyInterest rate (p.y)201920182017
         
Eurobonds20152018 USD2.2%--40,333
Eurobonds20172018 USDZero Coupon to 2.4%--1,195,668
Eurobonds20172019 USDLIBOR 3M + 1.00%-194,243165,677
Eurobonds20182021 BRL4.4%63,181855,035-
Eurobonds20182024 USD2.4% a 10.0%664,99619,386-
Eurobonds20182019 USDZero Coupon to 9%-197,055-
Eurobonds20182019 USDLIBOR 3M + 0.95%-34,776-
Eurobonds20182020 USDUp to 3.5%37,4761,211,361-
Eurobonds20182019 USDLIBOR 1M + 1.5%-1,287,821-
Eurobonds20172020 BRL4.4%929,042639,275541,487
Eurobonds20182020 USDAbove 3.5%35,438  
Eurobonds20182024 USD6.6% to 6.7%1,260,099  
Eurobonds20182025 USDUp to 9%1,427,601  
Eurobonds20192020 USD0% to 4.4%3,556,724  
Eurobonds20192027 USDCDI + 6.4%727,118  
Other     13,70777,69549,663
Total     8,715,3824,516,6471,992,828

(1)19.On December 31, 2015 includes R$1,995,118 in cash flow hedge operations, being R$1,255,841 indexed in Reais, R$603,889 indexed on foreign currency - Swiss Franc, R$R$135,388 in Chilean Peso and R$35,743 for market risk hedge operations, being R$35,743 (R$24,480) indexed to foreign currency - YEN.Subordinated liabilities

F-60 

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Brazilian Reais - R$ - unless otherwise stated)

20. Subordinated liabilities

 

The detail of the balance of “Subordinated liabilities” is as follows:

 

 IssuanceMaturity(1)Amount (millions)Interest rate201720162015
Subordinated LiabilitiesJun-06Jul-16R$1,500105.0% CDI--4,196,347
Subordinated LiabilitiesOct-06Sep-16R$850104.5% CDI--2,266,789
Subordinated LiabilitiesJul-06 to Out-06Jul-16R$447104.5% CDI--1,230,505
Subordinated LiabilitiesMay-08May-15 to May-18R$283CDI(2)109,57298,378114,467
Subordinated LiabilitiesMay-08 to Jun-08May-15 to Jun-18R$268IPCA(3)409,658367,868289,196
Total    519,230466,2468,097,304
(1)Subordinated time deposits issued by Banco Santander S.A. with yield paid at the end of the term together with the principal.
Thousand of reais           
  Issuance Maturity(1)Amount (millions)Interest rate2019 2018 2017
            
Subordinated Liabilities May-08 May-15 to May-18R$283CDI (2)- - 109,572
Subordinated Liabilities May-08 to June-08 May-15 to June-18R$268IPCA (3)- - 409,658
Notes (4) January-14 PerpetualR$3.0007.375%- 4,906,880 -
Notes (4) January-14 January-24R$3.0006.000%- 4,978,727 -
Total      - 9,885,607 519,230

(1) Subordinated time deposits issued by Banco Santander S.A. with yield paid at the end of the term together with the principal.

(2)Indexed by 100% and 112% of the CDI.

(3)Indexed

(2) Between December 2017 and May 2018, indexed by 100% and 112% of the CDI.

(3) Between December 2017 and June 2018, indexed by the IPCA (extended consumer price index) plus interest of 8.3% p.a. to 8.4% p.a.

(4) On December 18, 2018, the Bank Central of Brazil issued approval for the repurchase of the notes issued on January 29, 2014, this approval led to the reclassification of these instruments from the Debt Instruments Eligible to Compose Capital to Subordinated Debt (Note 20).

F-69

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

 

The detail by currency, of the balance of “Subordinated liabilities” is as follows:

 

Thousand of reais Average interest (%)
 Thousand of reaisAverage Interest Rate (%)
Currency:201720162015201720162015  20192018201720192018 2017
 
Real519,230466,2468,097,3047.5%9.6%14.6% -9,885,607519,2300.0%4.9% 7.5%
Total519,230466,2468,097,3047.5%9.6%14.6% -9,885,607519,2300.0%4.9% 7.5%

 

Changes in the balance of "Subordinated liabilities" in twelve-months period ended December 31, 2017, 20162019, 2018 and 20152017 were as follows:

 

 2019 2018 2017
201720162015 
Balance at beginning of year466,2468,097,3047,294,077 9,885,607 519,230 466,246
Payments-(8,362,652)(216,075) (9,885,607) (544,566) -
Interest (Note 34)52,984731,5941,019,302
Interest (Note 33) - 25,336 52,984
Transfers (Note 20) - 9,885,607 -
Balance at end of year519,230466,2468,097,304 - 9,885,607 519,230

 

Note 45-d44-d contains a detail of the residual maturity periods of subordinated liabilities at each year-end in each year.year-end.

 

21. Debt Instruments Eligible to Compose Capital

20.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)28.e), are as follows:

 

 IssuanceMaturityIssuance ValueInterest Rate (p.a.)(3)201720162015
Tier I(1)Jan-14no maturity (perpetual) R$3,0007.4%4,187,5314,125,5574,943,194
Tier II(2)Jan-14Jan-24 R$3,0006.0%4,249,3704,186,3615,015,843
Total    8,436,9018,311,9189,959,037

      201920182017
  IssuanceMaturityIssuance ValueInterest Rate (p.a.)(3)   
Tier I (1)(5) Jan-14no maturity (perpetual) R$3,0007.375%--4,187,531
Tier II (2) (5) Jan-14jan-24 R$3,0006.000%--4,249,370
Tier I(4) Nov-18no maturity (perpetual) US$1,2507.250%5,092,1534,893,668-
Tier II (4) Nov-18nov/18 US$1,2506.125%5,083,8084,886,276-
Total     10,175,9619,779,9448,436,901

(1)Interest quarterly paid from April 29, 2014.Notes repurchased in 2019; As authorized by Bacen on December 17, 2018, as of the date of their issuance, Level I and II of RC must be excluded.

(2)Interest semiannually paid from July 29, 2014.Notes repurchased in 2019; As authorized by Bacen on December 17, 2018, as of the date of their issuance, Level I and II of RC must be excluded.

(3)The effective interest rate, considering the income taxdebts of January 2014 were made by Banco Santander in Brazil, therefore, as Income Tax at source assumed by the issuer, in the form of a corresponding exchange rate, is 8.676% and 7.059% for the instruments TierLevel I and TierLevel II, respectively. The emissions generated from November 2018 were made through the Cayman Agency and, consequently, there is no incidence of Income Tax at Source.

(4)Interest paid semiannually, as of May 8, 2019.

(5)On December 18, 2018, the Bank issued the approval for the repurchase of the notes issued on January 29, 2014, this approval led to the reclassification of these instruments from the Debt Instruments Eligible to Compose Capital to Subordinated Debt (Note 19).

 

     201920182017
Balance at beginning of the year    9,779,9448,436,9018,311,918
Issuance - Tier I-4,673,875-
Issuance - Tier II-4,673,875-
Interest payment Tier I (1)272,947331,677273,123
Interest payment Tier II (1)230,594272,539222,065
Exchange differences / Others    221,3681,960,467252,941
Payments of interest - Tier I    (178,278)(381,008)(344,867)
Payments of interest - Tier II    (150,614)(302,775)(278,279)
Repurchase    -(9,885,607)-
Balance at end of the year    10,175,9619,779,9448,436,901

(1) The remuneration of interest relating to the Debt Instruments Eligible to Compose Capital Tier I and II was recorded against income for the period as "Interest expense and similar charges" (Note 33).

On November 5, 2018, the Board of Directors approved the issuance of the equity instruments, which was held on November 8, 2018. Such issuance was in the form of Notes issued in US dollars, US$2.5 billion, for payment in Tier I and Tier II of Reference Equity. The offer of these notes was made outside Brazil and the United States of America, for non-US Persons, based on Regulation S under the Securities Act, and was fully paid in by Santander España, controlling shareholder of Banco Santander Brasil. On the same date, the Board of Directors approved the redemption of the Tier I and Tier II notes issued on January 29, 2014, in the total amount of U$2.5 billion (Note 26.e).

The specific characteristics of Notes issued to make up Tier I are: (a) Principal: US$1.250 billion (b) Interest Rate: 7.25% p.a; (c) no

F-61 

F-70

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Thousandsmaturity (perpetual); (d) Periodicity of Brazilian Reais - R$ - unless otherwise stated)

payment of interest: semiannually from May 8, 2019.

 

ChangesThe specific characteristics of Notes issued to make up Tier II are: (a) Principal: US$1.250 billion; (b) Interest Rate: 6.125% p.a.; (c) Maturity Term: on November 8, 2028; and (d) Periodicity of payment of interest: semiannually, as of May 8, 2019.

Notes have the following common characteristics:

(a) Unit value of at least US$150 thousand and in integral multiples of US$1 thousand in excess of such minimum value;

(b) The Notes may be repurchased or redeemed by Banco Santander after the fifth anniversary as of the date of issue of the Notes, at the sole discretion of the Bank or as a result of changes in the tax legislation applicable to the Notes; or at any time, due to the occurrence of certain regulatory events.

On December 18, 2018, the Bank issued approval for the Notes to comprise Tier I and Tier II of Banco Santander's Reference Equity as of such date, as well as the repurchase of the notes issued on January 29, 2014. As a result, the balance of "Debtrelating to the notes issued on January 29, 2014 were reclassified from Debt Instruments Eligible to Compose Capital" in twelve-months period ended December 31, 2017, 2016 and 2015 were as follows:Capital to Subordinated Debts (Note 19).

 

 201720162015
Balance at beginning of year8,311,9189,959,0376,773,312
Interest payment Tier I(1)273,123276,587277,024
Interest payment Tier II(1)222,065225,161226,266
Exchange differences / Others252,941(1,447,196)3,291,470
Payments of interest - Tier I(344,867)(379,039)(347,201)
Payments of interest - Tier II(278,279)(322,632)(261,834)
Balance at end of the year8,436,9018,311,9189,959,037
(1)21.The remuneration of interest relating to the Debt Instruments Eligible to Compose Capital Tier I and II was recorded against income for the period as "Interest expense and similar charges". (Note 34)Other financial liabilities

22. Other financial liabilities

 

The breakdown of the balances of these items is as follows:

 

Thousand of reais201720162015
Credit card obligations32,049,71225,420,23720,611,690
Unsettled financial transactions(2)3,905,2363,829,3745,814,199
Dividends payable4,553,9144,346,1282,846,433
Tax collection accounts - Tax payables1,077,8601,157,386879,834
Liability associated with the transfer of assets (Note 10.g)428,248774,673190,333
Other financial liabilities(1)2,245,7651,351,3011,730,156
Total44,260,73536,879,09932,072,645
(1)On December 31, 2017, includes the financial liabilities in the amount of R$484 million (2016 and 2015 - R$307 million) related to the put option’s commitment of the shares held by Banco Bonsucesso and R$1,223 million (2016 and 2015 - R$950 million) related to the put option having as object the shares held by non-controlling of Getnet SA.
Thousand of reais 2019 2018 2017
       
Credit card obligations 38,531,519 39,761,739 32,049,712
Unsettled financial transactions(2) 7,239,785 3,356,871 3,905,236
Dividends and Interest on Capital payable 7,826,247 4,508,569 4,553,914
Tax collection accounts - Tax payables 883,768 1,205,746 1,077,860
Liability associated with the transfer of assets (Note 9.g)75,500 126,906 428,248
Other financial liabilities(1) 6,328,551 2,769,005 2,245,765
Total 60,885,370 51,728,836 44,260,735

(1) As of December 31, 2019, it includes the financial liability in the total amount of R$1,600 million (2018 - R$519 million and 2017 - R$484 million), related to the commitment of the put option of the shares held by Banco Bonsucesso (Note 3.a ) and R$0 (2018 - R$1,427 million and 2017 - R$1,223 million), referring to the put option for the shares issued by Getnet SA, which was authorized by BACEN on February 18, 2019 and settled on February 25, 2019.

(2) Includes operations to settle with B3 S.A. (Current Company Name of BM&FBovespa) and payment orders in foreign currency.

 

(2)22.Includes operations to settle with B3 S.A. (Current Company Name of BM&FBovespa)Provisions for pensions and payment orders in foreign currency.similar obligations

Note 45-d contains a detail of the residual maturity periods of other financial assets and liabilities at each year-end.

23. Provisions for pensions and similar obligations

 

On December 31, 20172019 the balance of provisions for pension funds and similar obligations totaled R$3.923.457 (20164,956,851 (2018 - R$2,710,6273,357,654 and 20152017 - R$2,696,653)3,923,457).

 

ia.i. Supplemental Pension Plan

 

Banco Santander and its subsidiaries sponsor the closed pension entities for the purpose of granting pensions and supplementary pensions over those granted by the Social Security, as defined in the basic regulations of each plan.

 

I) Banesprev - Fundo Banespa de Seguridade Social (Banesprev)

·Banesprev - Fundo Banespa de Seguridade Social (Banesprev)

 

- Plan I: defined benefit plan fully sponsored by Banco Santander, it 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. This plan is closed to new entrants 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 to deficit in the plan. This plan is closed to new entrants since June 3, 2005.

 

- Plan V: defined benefit plan fully sponsored by Banco Santander, it covers employees hired until May 22, 1975, closed and paid off.

 

- Supplemental Pension Plan Pré 75: 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, which its effective date is January 1, 2000. This 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. This plan receives contributions from the sponsor and the participants. The benefits are in the form of 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.

 

F-62 

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Brazilian Reais - R$ - unless otherwise stated)

- Plan IV: variable contribution plan, designed for employees hired as of November 27, 2000, in which the sponsor only contributes to the risk benefits and administrative expenses. 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. The risk benefits of the plan are in defined benefit. This 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 arewere closed to new participants.participants prior to the acquisition of Grupo Bozano Simonsen by Banco Santander in November 1999.

 

F-71

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

- Plan Sanprev I: defined benefit plan, established on September 27, 1979, covering employees enrolled in the plan sponsor and it is in process of extinction since June 30, 1996.

 

- Plan Sanprev 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. This plan is closed to new entrants since March 10, 2010.

 

- Plan Sanprev III: variable contribution plan covering employees of the sponsors who made ​​the choice to contribute, by contribution freely chosen by participants from 2% of their salary. 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. This plan is closed to new entrants since March 10, 2010.

 

II) Sanprev – Santander Associação de Previdência (Sanprev)

·Sanprev – Santander Associação de Previdência (Sanprev)

 

Closed-End Private Pension Entity (EFPC) that used to manage three benefit plans, 2 in the Defined Benefit modality and 1 in the modality of Variable Contribution, whose process of management transfer of these plans to Banesprev occurred in January 2017. AtAccording to Portaria 389 of PREVIC, of May 8, 2018, it was approved the stage of requesting the process of closure of the operating permit with PREVIC.authorization of operation of Sanprev.

 

III) Bandeprev - Bandepe Previdência Social (Bandeprev)

·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.

 

IV) Other Plan

·Other Plans

 

SantanderPrevi - Sociedade de Previdência Privada (SantanderPrevi): it´s a closed-end private pension entity with the purpose of constitution and implementation of social security pension plans, complementary to the social security contribution, in the form of actual legislation.

 

The Retirement Plan of SantanderPrevi is the only structured as Defined Contribution and openclosed to new members since July 2018 as approved by PREVIC, with contributions shared between sponsors and plan participants. The appropriate values by the sponsors in the year of 20172019 was R$86,449 (2016 -110,325 (2018 – R$87,603)89,959 e 2017 – R$86,449).

 

It has 10 cases of lifetime income with benefits arising from the previous plan.

SBPREV - Santander Brasil Open Pension Plan:As from January 2, 2018, Santander started to offer this new optional supplementary pension plan for new employees hired and for employees who are not enrolled in any other pension plan managed by the Closed Entities Complementary Pension Plan of the Group. This new program includes the PGBL- Free Benefit Generation Plan and VGBL-Free Benefit Generator Life managed by Icatu Seguros, the Open Entity of Complementary Pension Plan, which are open for new accessions, with similar characteristics to SantanderPrevi's plan. the instituting / stipulating companies and the participants in the plans.The appropriated values by the sponsors in the year of 2019 were R R$8,917 (2018 – R$ $1,597).

 

ii. 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’sentity's bylaws.

 

• HolandaPrevi’s Retirees (current corporate name of SantanderPrevi):

 

For the health care plan Retirement has lifetime nature and is a closed group. In his termination the employee should have completed 10 years of employment with Banco Real and 55 years of age. In this case it was offered the continuity of health care plan where the employee pays 70% and the Bank pays 30% of the monthly payment. This rule lasted until December, 2002 and after this period that the employee got terminated with the status Retired Holandaprevi, he pays 100% of the health plan monthly payment.

 

• Former employees of Banco Real S.A. (retiree(Retiree by Circulars):

 

It grants entitlement to healthcare to former employees of Banco Real, with lifetime benefit it was granted in the same condition as the active employee, in this case, with the same coverage and plan design.

 

Eligible only for basic plans and premium apartment, if the beneficiary chooses for the apartment plan he pays the difference between the plans plus the co-participation in the basic plan. Not allowed new additions of dependents. It is subsidized in 90% of the plan.

 

F-63 

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Brazilian Reais - R$ - unless otherwise stated)

• Bandeprev’s retireesretirees:

 

Health care plan granted to Bandeprev’s retirees as a lifetime benefit, for which Banco Santander is responsible for subsidizing 50% of the benefits of employees retired until November 27, 1998. For whom retired after this date, the subsidy is 30%.

 

• Directors with Lifetime Benefits (Lifetime Directors):

 

Lifetime health care benefit granted to a small closed group of former directors coming from Banco Sudameris, being 100% subsidized by the Bank.

 

• Health Directors:

Directors, Executive Directors, Vice-President Directors and Chief Executive Officer, may, by choice, choose to remain medical assistance, in case of termination of the link with Banco Santander or companies in its conglomerate without cause; as long as they comply the following requirements: have contributed for at least 3 (three) years to the health plan; having served as a director at Banco Santander or companies its conglomerate for at least 3 (three) years; be 55 years of age. The plan will be maintained in the same way as the DIRECTOR enjoyed at the time of his dismissal, including the payment of his share, which must be paid by bank slip. The

F-72

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

dependents active at the time of termination will be kept on the same plan as the director, and the inclusion of new dependents in no chance.

• Free ClinicClinic:

 

Health care plan (free clinic) is offered for a lifetime 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 infirmary where the cost is 100% of the Foundation Sudameris.

 

• Life insurance for Banco Real’s retirees (Life Insurance):

 

For Retirees from Circulars: indemnity in case of Natural Death, Disease Disability, Accidental Death. The subsidy is 45.28%45% of the value. This benefit is also granted to retirees Fundação Sudameris where cost is 100% of the retired. It is a closed group.

• Life Insurance Assistance Boxes (Life Insurance):

Included in the bulk of the life insurance in December 2018 the insurance of the retirees of the DCA, DAB and CACIBAN plans. This insurance was granted to retirees of the former Southern Bank, coverage was according to the choice of retiree at the time of joining the benefit. The Bank's allowance is 50% of the premium amount for the holder and some retirees have the spouse clause bearing 100% of the cost. The plan is closed for new participants.

 

Additionally, it is assured to retired employees, since they meet to certain legal requirements and fully pay 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 calculated using actuarial based in the present value of the current cost.

 

iii. 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 uses 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 -– 7.1% (2018 – 9.1% e 2017 – 9.53% (2016 - 10.9% and 2015 - 12.3%).

 

- Cabesp, Law 9,656 and others obligations -– 7.2% (2018 – 9.3% e 2017 – 9.65% (2014 - 10.8% and 2014 - 12.03%).

 

• Estimated long-term inflation rate:

 

- Banesprev, Sanprev, SantanderPrevi, Bandeprev and Other Plans -– 3.5% (2018 – 4.0% (2016 - 4.5% and 2015 - 4.5%e 2017 – 4.0%).

 

• Estimate salary increase rate:

 

- Banesprev, Sanprev, SantanderPrevi, Bandeprev Básico and Other Plans -– 4.0% (2018 – 5.0% (2016 - 5.0% and 2015 -e 2017 – 5.0%).

 

The funding status of the defined benefit obligations in 20172019 and in the last 2 years are as follows:

 

Thousand of reais201720162015
Present value of the obligations - Post-employment plans:   
To current employees796,243770,423753,697
Vested obligations to retired employees21,205,36619,998,70316,772,102
 22,001,60920,769,12617,525,799
Less:   
Fair value of plan assets20,689,63720,116,91616,275,269
Unrecognized assets (1)(1,090,682)(969,161)(963,031)
Provisions – Post-employment plans, net2,402,6541,621,3712,213,561
Present value of the obligations - Other similar obligations:   
To current employees228,107200,009315,474
Vested obligations to retired employees4,815,6544,046,4805,719,260

F-64 

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Brazilian Reais - R$ - unless otherwise stated)

Thousand of reais201720162015
 201920182017
 
Present value of the obligations - Post-employment plans:Present value of the obligations - Post-employment plans:  
To current employees 687,786716,492796,243
Vested obligations to retired employees 27,369,69623,296,71521,205,366
 28,057,48224,013,20722,001,609
 
Less: 
Fair value of plan assets 25,822,89022,708,99020,689,637
Unrecognized assets(1) (1,346,547)(1,079,808)(1,090,682)
Provisions – Post-employment plans, netProvisions – Post-employment plans, net3,581,1392,384,0252,402,654
Present value of the obligations - Other similar obligations:Present value of the obligations - Other similar obligations:  
To current employees 204,439184,606228,107
Vested obligations to retired employees 6,047,3684,604,4664,815,654
 6,251,8074,789,0725,043,761
5,043,7614,246,4896,034,734 
Less:  
Fair value of plan assets3,721,1473,310,8955,673,071 5,222,5174,157,2513,721,147
Unrecognized assets(1)-(121,429) -(68,527)-
Provisions – Other similar obligations, net1,322,614935,594483,092Provisions – Other similar obligations, net1,029,290700,3481,322,614
Total provisions for pension plans, net3,725,2682,556,9652,696,653 4,610,4293,084,3733,725,268
Of which:  
Actuarial provisions3,923,4572,710,6272,696,653 4,960,6203,357,6543,923,457
Actuarial assets (note 16)198,189153,662-
Actuarial assets (note 15) 350,191273,281198,189
(1)Refers to fully funded surplus plans Banesprev I and III, Sanprev I,II and III and Bandeprev.Bandeprev (asset ceiling).

F-73

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

On the fourth quarter of 2018, the Management settled the actuarial deficit of Banesprev V and DAB in 2017 in the amount of R$ 295,529 and R$ 1,246, respectively, and the contribution in the estimated amount of R$ 152,329 to cover the actuarial deficit from 2018 to Banesprev Pré 75.

In the first half of 2018, there was an increase in the cost contribution established for a post-employment benefit plan, which is calculated as a percentage of the total monthly compensation of members. The increase in the contribution resulted in a decrease in the past service cost due to changes in the plan. The envisaged changes implied a reduction in the present value of the obligations of the defined benefit plan, which is supported by actuarial valuations.

 

The amounts recognized in the consolidated income statement in relation to the aforementioned defined benefit obligations are as follows:

 

Thousand of reaisPost-Employment Plans
 201720162015
Staff costs - Current service costs (note 41)14,60515,41620,560
Interest and similar income and expenses - Interest cost (net) (notes 33 and 34)70,429120,524187,650
Interest and similar income and expenses - Interest on unrecognized assets (notes 33 and 34)105,832117,98195,652
 Other movements5,3234,355(2,607)
Total196,189258,276301,255

Thousand of reaisOther Similar Obligations
 201720162015
Staff costs - Current service costs (note 41)5,4769,06410,740
Interest and similar income and expenses - Interest cost (net) (notes 33 and 34)99,57538,064124,469
Interest and similar income and expenses - Interest on unrecognized assets (notes 33 and 34)-14,608-
 Other movements-55,94327
Total105,051117,679135,236
  Post-Employment Plans
  201920182017
     
Staff costs - Current service costs (note 40)2,7743,14214,605
Interest and similar income and expenses - Interest cost (net) (notes 32 and 33)149,232124,75470,429
Interest and similar income and expenses - Interest on unrecognized assets (notes 32 and 33)100,346104,160105,832
Other movements (1) (1,101)12,4325,323
Total 251,251244,488196,189
     
  Other Similar Obligations
  201920182017
     
Staff costs - Current service costs (note 40)8,1425,7975,476
Interest and similar income and expenses - Interest cost (net) (notes 32 and 33)61,84576,12499,575
Interest and similar income and expenses - Interest on unrecognized assets (notes 32 and 33)3,17315,521-
Other movements (1) 22,624(816,230)-
Total 95,784(718,788)105,051

 

The changes in the present value of the accrued defined benefit obligations were as follows:

 

Thousand of reaisPost-Employment Plans
 Post-Employment Plans
 201920182017
201720162015 
Present value of the obligations at beginning of year20,769,12617,525,79917,891,352Present value of the obligations at beginning of year24,013,20722,001,60920,769,126
Current service cost (Note 41)14,60515,41620,560
Current service cost (Note 40) 2,7743,14214,605
Interest cost2,170,6392,046,9491,877,942 2,087,4842,029,0992,170,639
Benefits paid(1,834,681)(1,679,794)(1,530,082) (1,960,103)(1,876,014)(1,834,681)
Actuarial (gains)/losses871,3082,844,733(753,155) 3,908,3501,674,908871,308
Others10,61216,02319,182 5,770180,46310,612
Present value of the obligations at end of year22,001,60920,769,12617,525,799Present value of the obligations at end of year28,057,48224,013,20722,001,609
 
 Other Similar Obligations
 201920182017
 
Present value of the obligations at beginning of yearPresent value of the obligations at beginning of year4,789,0725,043,7614,246,489
Current service cost (Note 40) 8,1425,7975,476
Interest cost 443,837438,567447,653
Benefits paid (378,782)(346,185)(339,538)
Actuarial (gains)/losses 1,366,837455,193683,681
Other (1) 22,701(808,061)-
Present value of the obligations at end of yearPresent value of the obligations at end of year6,251,8074,789,0725,043,761

(1)           In the year ended December 31, 2018 there was an increase in the cost contribution established for a postemployment benefit plan, which is calculated as a percentage of the total monthly compensation of associates. The increase in the contribution resulted in a decrease in the past service cost, due to changes in the plan. The envisaged changes implied a reduction in the present value of the obligations of the defined benefit plan, which is supported by actuarial valuations. In the Consolidated Statements of Income, this amount was recorded under Provision (Net).

 

Thousand of reaisOther Similar Obligations
 201720162015
Present value of the obligations at beginning of year4,246,4896,034,7346,077,521
Current service cost (Note 41)5,4769,06410,740
Interest cost447,653703,874653,206
Benefits paid(339,538)(465,029)(421,429)
Actuarial (gains)/losses683,6811,330,371(285,304)
Others(1)-(3,366,525)-
Present value of the obligations at end of year5,043,7614,246,4896,034,734

F-74

Table of Contents

 (1)

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

In the fourth quarter

(Thousand 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.Brazilian Reais - R$ - unless otherwise stated) 

 

The changes in the fair value of the plan assets were as follows:

F-65 

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Brazilian Reais - R$ - unless otherwise stated)

Thousand of reaisPost-Employment Plans
 201720162015
Fair value of plan assets at beginning of year20,116,91616,275,26916,067,029
Interest (Expense) Income2,100,2111,926,4241,690,293
"Remeasurement - Actual return (loss) on plan assets excluding the amounts included in net interest expense"268,3091,589,517(297,461)
Contributions/(surrenders)38,8832,001,806298,198
Of which:   
By the Bank27,4391,985,722279,111
By plan participants11,44416,08419,087
Benefits paid(1,834,682)(1,676,116)(1,482,914)
Exchange differences and other items-16124
Fair value of plan assets at end of year20,689,63720,116,91616,275,269

Thousand of reaisOther Similar Obligations
 Post-Employment Plans
 201920182017
201720162015 
Fair value of plan assets at beginning of year3,310,8955,673,0714,906,977Fair value of plan assets at beginning of year22,708,99020,689,63720,116,916
Interest (Expense) Income348,078665,811528,737 1,938,2521,904,3452,100,211
"Remeasurement - Actual return (loss) on plan assets excluding the amounts included in net interest expense"303,504718,628581,755
Remeasurement - Actual return (loss) on plan assets excluding the amounts included in net
interest expense		Remeasurement - Actual return (loss) on plan assets excluding the amounts included in net
interest expense		3,087,5441,347,689268,309
Contributions/(surrenders) 51,807481,95938,883
Of which: 
By the Bank 44,752472,72327,439
By plan participants 7,0559,23611,444
Benefits paid (1,960,103)(1,876,014)(1,834,682)
Exchange differences and other items (3,600)161,374-
Fair value of plan assets at end of year 25,822,89022,708,99020,689,637
 
 Other Similar Obligations
 201920182017
 
Fair value of plan assets at beginning of yearFair value of plan assets at beginning of year4,157,2513,721,1473,310,895
Interest (Expense) Income 381,992362,444348,078
Remeasurement - Actual return (loss) on plan assets excluding the amounts included in net interest expenseRemeasurement - Actual return (loss) on plan assets excluding the amounts included in net interest expense915,626304,632303,504
Contributions/(surrenders)61,803-52,894 107,03772,54861,803
Of which:-  
By the Bank61,803-52,894 107,03772,54861,803
Benefits paid(303,133)(3,746,615)(397,292) (339,389)(310,458)(303,133)
Exchange differences and other items -6,938-
Fair value of plan assets at end of year3,721,1473,310,8955,673,071 5,222,5174,157,2513,721,147

 

OpeningBreakdown of gains (losses) Actuarial fromactuarial by experience, financial assumptions and demographic hypotheses:

 

Thousand of reaisPost-Employment Plans
 201720162015
Experience Plan686,204(696,910)(1,299,660)
Changes in Financial Assumptions(1,557,689)(2,135,189)2,049,061
Changes in Financial Demographic146(12,773)-
Gain (Loss) Actuarial - Obligation(871,339)(2,844,872)749,401
Return on Investment, Return Unlike Implied Discount Rate270,1581,589,446(297,271)
Gain (Loss) Actuarial - Asset270,1581,589,446(297,271)
Changes in Surplus Uncollectible(15,690)--

Thousand of reaisOther Similar Obligations
   Post-Employment Plans
201720162015 201920182017
Experience Plan(303,396)(1,116,845)(433,550) (446,444)(803,717)686,204
Changes in Financial Assumptions(380,285)(537,952)718,854 (2,615,119)(871,176)(1,557,689)
Changes in Financial Demographic-(379)- 1,228-146
Gain (Loss) Actuarial - Obligation(683,681)(1,655,176)285,304 (3,060,335)(1,674,893)(871,339)
Return on Investment, Return Unlike Implied Discount Rate303,504718,628581,755Return on Investment, Return Unlike Implied Discount Rate2,624,9601,344,089270,158
Gain (Loss) Actuarial - Asset303,504718,628581,755 2,624,9601,344,089270,158
Changes in Surplus / Deficit UncollectibleChanges in Surplus / Deficit Uncollectible(164,428)117,320(15,690)
 
  Other Similar Obligations
 201920182017
Experience Plan (209,175)(79,810)(303,396)
Changes in Financial Assumptions (1,157,662)(376,949)(380,285)
Changes in Financial Demographic -
Gain (Loss) Actuarial - Obligation (1,366,837)(456,759)(683,681)
Return on Investment, Return Unlike Implied Discount RateReturn on Investment, Return Unlike Implied Discount Rate915,626307,048303,504
Gain (Loss) Actuarial - Asset 915,626307,048303,504
Changes in Surplus Uncollectible 71,698(52,604)-

F-66 

F-75

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Brazilian Reais - R$ - unless otherwise stated)

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

 

The experience adjustments arising from plan assets and liabilities are shown below:bellow:

 

Thousand of reaisPost-Employment Plans
 201720162015
Experience in Net Assets Adjustments268,3091,589,517(297,461)

Thousand of reaisOther Similar Obligations
 Post - Employment Plans
    201920182017
201720162015 
Experience in Net Assets Adjustments303,504718,628581,755Experience in Net Assets Adjustments 3,087,5441,347,689268,309
 
 Other Similar Obligations
 201920182017
 
Experience in Net Assets AdjustmentsExperience in Net Assets Adjustments 915,626304,632303,504

 

The amounts of actuarial obligation of defined benefit plans uninsurednot covered and defined benefit plans partially or totally covered are shown below:

 

Thousand of reais201720162015
Defined benefit plans uninsured701,551826,963878,550
Defined benefit plans partially or totally covered26,343,81822,734,01723,090,769

In 2018 the Bank expects to make contributions to fund these obligations for amounts similar to those made in 2017.

      201920182017
         
         
      815,929700,347701,551
      33,493,36028,101,93226,343,818

 

The main categories of plan assets as a percentage of total plan assets are as follows:

 

 201720162015
Equity instruments4.60%1.00%0.48%
Debt instruments94.70%98.16%98.54%
Properties0.35%0.30%0.28%
Other0.35%0.54%0.70%
       201920182017
          
 Equity instruments     0.00%4.81%4.60%
 Debt instruments     92.92%94.59%94.70%
 Properties     0.26%0.28%0.35%
 Other     6.82%0.32%0.35%

 

The expected return on plan assets was determined based on the basis of the market expectations for returns over the duration of the related obligations.

 

The actual return on plan assets was R$3,021,950 (20166,301,111 (2018 - R$4,900,380 and 20153,823,004 e 2017 - R$2,503,610)3,021,950).

 

The following table shows the estimated benefits payable on December 31, 2017 for the next ten years:10 years from December 31, 2019:

 

Thousand of reais 
20182,003,227
20192,076,856
  
 
20202,149,325 2,195,627
20212,221,682 2,232,813
20222,291,726 2,292,622
2023 to 202712,431,279
2023 2,350,054
2024 2,406,310
2025 to 2029 12,762,480
Total23,174,095 24,239,906

F-76

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

 

Assumptions about the rates related to medical care costs have a significant impact on the amounts recognized in income. AThe change of one percentage point in the medical care cost rates would have the effects as follows:

 

Thousand of reais  
 (+) 1.0%(-) 1.0%
Effect on current service cost and interest on actuarial liabilities57,001(63,510)
Effects on present value of obligation597,410(665,700)

F-67 

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Brazilian Reais - R$ - unless otherwise stated)

         Sensitivity
     2019 2018 2017
     Current Service Cost and InterestPresent Value of Obligations Current Service Cost and InterestPresent Value of Obligations Current Service Cost and InterestPresent Value of Obligations
Discount RateDiscount Rate        
 (+)0,5%  (31,672)(440,072)(29,066)(307,980)(28,742)(301,237)
 (-)0,5%  35,572494,25732,403343,34031,876334,085
 Boards of Mortality        
 Applied (+) 2 years  (51,720)(718,632)(45,937)(486,742)(43,310)(453,912)
 Applied (-) 2 years  56,687787,63649,355522,95845,808480,101
 Cost of Medical Care        
 (+)0,5%  38,388533,38035,949380,90631,758332,850
 (-)0,5%  (35,060)(487,146)(32,100)(340,122)(28,501)(298,705)

 

The following table shows the duration of the actuarial liabilities of the plans sponsored by Banco Santander:

 

PlansPost-Employment Post - Employment Plans
 
Duration (in years)
Banesprev Plans I11.2612.31
Banesprev Plans II11.5112.83
Banesprev Plans III9.0310.52
Banesprev Plans IV13.8615.47
Banesprev Plans V8.829.53
Banesprev Pre-759.5710.38
Sanprev I6.466.81
Sanprev II10.9411.70
Sanprev III9.4610.59
Bandeprev Basic9.4610.48
Bandeprev Special I6.757.04
Bandeprev Special II6.616.77
SantanderPrevi7.207.78
CACIBAN / DAB / DCA6,87 / 5,82 / 6,41 7.33/6.03/6.67

PlansOther Similar Obligations
Cabesp13.02
Law 9656Cabesp-15.45
Bandepe14.4716.48
Free Clinic10.8811.91
Lifetime officers8.499.17
Health officers27.53
Circulars(1)12,4e10,1512.15 e 11.93
Life Insurance7.648.39
(1)The duration 12.91 refers to the plan of Former Employees of Banco ABN Amro and 10.05

(1) The duration 11.15 refers to the plan of Former Employees of Banco ABN Amro and 11.93 to the plan of Former Employees of Banco Real.

F-77

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

 

Actuarial Assumptions Adopted in Calculations

 

 Pension2017 HealthPension2016 HealthPension2015 Health
Nominal Discount Rate for Actuarial Obligation9.5%9.7%10.9%10.8%12.3%12.0%
Rate Calculation of Interest Under Assets to the Next Year9.5%9.7%10.9%10.8%12.3%12.0%
Estimated Long-term Inflation Rate4.0%4.0%4.5%4.5%4.5%4.5%
Estimated Salary Increase Rate5.0%5.0%5.0%5.0%5.0%5.0%
Mortality tablesAT2000AT2000AT2000AT2000AT2000AT2000
(1)For Banesprev II, V and Pré 75 plans.
     2019 2018 2017
    PensionHealthPensionHealthPensionHealth
Nominal Discount Rate for Actuarial Obligation 7.1%7.2%9.1%9.3%9.5%9.7%
Rate Calculation of Interest Under Assets to the Next Year 7.1%7.2%9.1%9.3%9.5%9.7%
Estimated Long-term Inflation Rate  3.5%3.5%4.0%4.0%4.0%4.0%
Estimated Salary Increase Rate  4.0%4.0%5.0%5.0%5.0%5.0%
Mortality tables  AT2000AT2000AT2000AT2000AT2000AT2000

 

(2)23.For Cabesp plans.Provisions for judicial and administrative proceedings, commitments and other provisions

24. Provisions for judicial and administrative proceedings, commitments and other provisions

 

a) Breakdown

 

The breakdown of the balance of “Provisions” is as follows:

 

Thousand of reais201720162015      2019 2018 2017
Judicial and administrative proceedings under the responsibility of former controlling stockholders (Note 16)707,131814,925789,974
 
Pension fund provisions and similar requirements (2)Pension fund provisions and similar requirements (2)4,960,620 3,357,654 3,923,457
Provisions for lawsuits and administrative proceedings, commitments and other provisions 11,371,205 11,338,244 10,063,459
Judicial and administrative proceedings under the responsibility of former controlling stockholders (Note 15) Judicial and administrative proceedings under the responsibility of former controlling stockholders (Note 15)103,272 605,638 707,131
Judicial and administrative proceedings8,365,3207,470,3447,000,680 9,226,735 9,507,240 8,365,320
Of which:  
Civil2,522,0051,842,5491,986,602 3,201,061 3,377,338 2,522,005
Labor3,448,3883,138,6452,501,426 3,504,296 3,819,107 3,448,388
Tax and Social Security2,394,9272,489,1502,512,652 2,521,378 2,310,795 2,394,927
Provisions for contingent commitments (Note 23.b) 683,918 626,267 -
Others provisions(1)991,008780,595922,370 1,357,280 599,099 991,008
Total10,063,4599,065,8648,713,024 16,331,825 14,695,898 13,986,916
(1)In 2017,2019, includes R$287,446 (2016700,000 (2018 - R$450,284126.561 and 20152017 - R$301,447)287,446) relating to the expenses of projects aimed at improving operational productivity and efficiency.

(2)In the year ended December 31, 2018, there was an increase in the costing contribution established for a certain post-employment benefit plan, which is calculated as a percentage of the total monthly remuneration of members. This increase in contribution resulted in a decrease in the cost of past service, due to the change in the plan. The envisaged changes implied a reduction in the present value of the defined benefit plan obligations, which is supported by an actuarial assessment. In the Consolidated Statements of Income, this amount was recorded in the caption Provisions (Net).

F-68 

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Brazilian Reais - R$ - unless otherwise stated)

b) Changes

 

The changes in “Provisions” were as follows:

 

Thousand of reais  2017
 Provisions(2)Other Provisions(1)Total
Balance at beginning of year2,710,6269,065,86411,776,490
Additions charged to income:   
Interest expense and similar charges (Note 33 & 34)275,836-275,836
Personnel Expenses (Note 41)20,081-20,081
Additions to provisions1,7233,112,6843,114,407
Other Comprehensive Income1,028,090-1,028,090
Payments to external funds(127,357)-(127,357)
Amount used-(2,123,483)(2,123,483)
Transfer to other assets - actuarial assets (Note 16)14,457-14,457
Transfers, exchange differences and other changes-8,3948,394
Balance at end of year3,923,45610,063,45913,986,915
(1)Refers substantially to provisions for tax risks and legal obligations and judicial and administrative proceedings for labor and civil actions.

(2)For further information, see note 23. Provisions for pension funds and similar obligations.

Thousand of reais  2016
 Provisions(2)Other Provisions(1)Total
Balance at beginning of year2,696,6538,713,02411,409,677
Additions charged to income:   
Interest expense and similar charges (Note 34)287,576-287,576
Personnel Expenses (Note 41)24,480-24,480
Additions to provisions60,3092,645,7642,706,073
Other Comprehensive Income1,876,888-1,876,888
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)37,35930,547
Balance at end of year2,710,6269,065,86411,776,490
(1)Refers substantially to provisions for tax risks and legal obligations and judicial and administrative proceedings for labor and civil actions.

(2)For further information, see note 23. Provisions for pension funds and similar obligations.

Thousand of reais  2015
 Provisions(2)Other Provisions(1)Total
Balance at beginning of year3,869,7287,257,71611,127,444
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)3,997,4633,993,551
Payments to pensioners and early retirees with a change 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(1,202,450)-(1,202,450)
Transfers, exchange differences and other changes-(315,646)(315,646)
Sale of companies(1)-(868)(868)
Balance at end of year2,696,6538,713,02411,409,677
(1)Refers substantially to provisions for tax risks and legal obligations and judicial and administrative proceedings for labor and civil actions.

(2)For further information, see note 23. Provisions for pension funds and similar obligations.
Thousand of reais  2019
    
     Pensions (1) Other Provisions Total
Balance at beginning of year  3,357,654 11,338,244 14,695,898
Additions charged to income:       
Interest expense and similar charges 314,596 - 314,596
Personnel Expenses (Note 40) 10,917 - 10,917
Constitutions / Reversals and Adjustment of provisions21,523 2,936,187 2,957,710
Other Comprehensive Income    1,416,815 - 1,416,815
Additions to provisions for contingent commitments    - (57,651) (57,651)
Payments to external funds  (187,667) - (187,667)
Amount paid    - (2,870,703) (2,870,703)
Transfer to other assets - actuarial assets (Note 15)23,014 - 23,014
Transfers, exchange differences and other changes- 19,512 19,512
Balance at end of year    4,956,852 11,365,589 16,322,441

 

F-69 

F-78

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

Thousand of reais  2018
    
     Pensions (1) Other Provisions Total
Balance at beginning of year  3,923,456 10,063,459 13,986,915
Additions charged to income:       
Interest expense and similar charges 320,559 - 320,559
Personnel Expenses (Note 40) 8,939 - 8,939
Constitutions / Reversals and Adjustment of provisions(801,332) 3,556,512 2,755,180
Other Comprehensive Income    483,058 - 483,058
Additions to provisions for contingent commitments    - (48,246) (48,246)
Payments to external funds  (594,024) - (594,024)
Amount paid    - (2,247,172) (2,247,172)
Transfer to other assets - actuarial assets (Note 15)16,998 - 16,998
Transfers, exchange differences and other changes- 13,691 13,691
Balance at end of year    3,357,654 11,338,244 14,695,898

 

BANCO SANTANDER (BRASIL) S.A.

Thousand of reais  2017
    
     Pensions (1) Other Provisions Total
Balance at beginning of year  2,710,626 9,065,864 11,776,490
Additions charged to income:       
Interest expense and similar charges 275,836 - 275,836
Personnel Expenses (Note 40) 20,081 - 20,081
Constitutions / Reversals and Adjustment of provisions    1,723 3,112,684 3,114,407
Other Comprehensive Income    1,028,090 - 1,028,090
Payments to external funds  (127,357) - (127,357)
Amount paid    - (2,123,483) (2,123,483)
Transfer to other assets - actuarial assets (Note 15)14,457 - 14,457
Transfers, exchange differences and other changes- 8,3948,394
Balance at end of year    3,923,456 10,063,459 13,986,915

(1) For further information, see note 15. Provisions for pension funds and similar obligations.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Thousandsb.1) Provisions for contingent payments

According to note 2.iii.ix, IFRS 9 requires that the provision for expected credit losses be recorded for contracts of Brazilian Reais - R$ - unless otherwise stated)financial guarantees rendered, which have not yet been honored. Provision expense reflecting credit risk should be measured and accounted for when the honor of these guarantees occurs and the client accused does not comply with its contractual obligations. The movement of these provisions in 2019 and 2018 is as follows:

Thousand of reais 2019 2018
     
Balance at beginning of year (in 1/01/2018 after the initial adoption of the IFRS 9) 626,267 674,513
 Creation of provision for contingent commitments 57,651 (48,246)
Balance at end of year 683,918 626,267

 

c) Provisions for civil, labor, taxCivil, Labor, Tax and social security contingenciesSocial Security Contingencies

 

Banco Santander and its subsidiaries are involved in lawsuits and administrative proceedings related to tax, labor, social security and civil proceedings arising in the normal course of its activities.

 

The provisions were constituted based on the nature, complexity, lawsuits historic and company´s assessment of lawsuit losses based on the opinions of internal and external legal advisors. The Santander has the policy to constitute provision of full amount of lawsuits whosewho’s the result of loss assessment is probable. The legal obligation of 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 -– related to Tax and Social Security

 

In October 2017,The main legal obligations and administrative proceedings, recorded at the Bank also joined the Incentive Paymentline of “Tax Liabilities – Current”, recorded integrality as an obligation are described as follows:

Main lawsuits and Installment Programs of the municipalities of São Paulo and Rio de Janeiro. Adhesions to the programs included payment of administrative and legal proceedings related to the ISS, related to the periods 2005 to 2016, in the total of R$292,562. As a consequence, provisions were reversed in the amount of R$435,454. In the Statement of Income, a reversal of provisions was recorded, net of tax effects, in the total of R$96,129.

In August, 2017, The Bank and its affiliates joined a federal amnesty program established by MP (Law) 783/2017 and reissues.

The adherence to the program included judicial and administrative tax cases related to Income Tax, Social Contribution and Social Security Contributions from 1999 to 2005 tax periods, in the total of R$534,001, after the benefits of the amnesty program, of which R$191,897 payment was due in August 2017 and R$342,104 can be done until January 2018. As a consequence of joining the program, it was recognized in the P&L expenses on the total amount of R$333,996, after tax effects.

The main lawsuits related to tax legal obligations, recorded in the heading "Tax Liabilities - Current", fully registered as obligation, are described below:tax and social security

 

• PIS and Cofins - R$3,755,556 (2018 - R$3,501,464 (20163,632.467 and 2017 - R$3,290,900 and 2015 - R$3,015,147)3,501,464): Banco Santander and its subsidiaries filed lawsuits aimingseeking to eliminate the application of Law 9,718/1998, which modified the calculation basis offor PIS and Cofins applied to cover all revenues of legal entities and not only to those arising from the provision of services rendered and sale of goods. Regarding the Banco Santander lawsuit,Process, on April 23, 2015, it was published thea STF decision was issued admitting the Extra commonExtraordinary Appeal filed by the Federal Government regarding PIS and denying

F-79

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

the move forward offollow-up to the Extra commonExtraordinary Appeal of the Federal Public Prosecutor regarding Cofins. Both appealed this decision, without any success, so that the lawsuitsuit relating to Cofins is defined, prevailingruling the judgment of the Federal Regional Court of the 4th Region of August 2007, favorable to Banco Santander. The eligibility ofPursuant to the STF, Banco Santander’s PIS by Banco Santander and the eligibility of PIS and Cofins by theof other controlled companiessubsidiaries are pending of 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).judgment.

 

• Increase in CSLL tax rate - R$905,113 (2016 - R$851,744Main lawsuits and 2015 - R$795,859) – the Bank Santander and its subsidiaries are discussing the increase in the CSLL tax rate, from 9% to 15%, established by Executive Act 413/2008, subsequently converted into Law 11,727/2008, as from April 2008. The lawsuits are still pending of judgment.administrative proceedings with probable loss risk

 

Banco Santander and its subsidiaries are parties in lawsuits and administrative proceedings related to tax and social security matters, which their risk of loss are classified as probable, based on the opinion of legal counsel.

The Those are the main topics discussed in these lawsuits are:

• Tax on Services for Financial Institutions (ISS) - R$237,960 (2016 - R$621,437 and 2015 - R$755,211): The Banco Santander and its subsidiaries filed lawsuits and administrative proceedings to challenge some municipalities collectionthemes of ISS on certain revenues derived from transactions not usually classified as services.

• Social Security Contribution (INSS) - R$265,022 (2016 - R$266,391 and 2015 - R$527,111): Banco Santander and its subsidiaries got into lawsuits and administrative proceedings to challenge 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.proceedings:

 

• Provisional Contribution on Financial Transactions (CPMF) on Customer Operations - R$906,355 (2018 - R$714,604 (2016 –729,919 and 2017 - R$689,987 and 2015 – R$657,750)714,604): Inin 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 Banco Santander Brasil S.A. The tax assessments refer to the collection of CPMF tax on transactions conducted by Santander DTVM in the cash management of its customers’ funds and clearing services provided by Banco to Santander DTVM in 2000, 2001 and 2002. Based on the first two monthsrisk assessment of 2002.legal counsel, the tax treatment was accurate. Santander DTVM had a favorable decision at the Board of Tax Appeals (CARF). Banco Santander had a unfavorable decision and was considered responsible for the collection of the CPMF tax. Both decisions were appealed by the respective losing party to the highest jurisdiction of CARF. In June 2015, , Bank and DTVM had obtained a non favorable decision at the Board of Tax Appeals (CARF).CARF. On July 3rd ,3, 2015, BankBanco and Santander Brasil Tecnologia S.A. (current name of Produban Serviços de Informática S.A. (actualand Santander DTVM company name)DTVM) filed a lawsuit aimingseeking to cancel both tax chargesdebts. This lawsuit was ruled groundless and is currently awaiting judgment by the Regional Federal Court (TRF 3). Based on the period ended December 31,legal advisors' assessment, a provision was set up to cover the loss considered probable in the lawsuit.

• Social Security Contribution (INSS) - R$282,053 (2018 - R$273,233 and 2017 totaled- R$1,431,761 million. Based265.022): Banco Santander 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, it was constituted provision to lawsuits with riskdo not have nature of loss as probable.salary.

 

F-70 

Table• Tax on Services (ISS) - Financial Institutions - R$224,631 (2018 - R$228.403 and 2017 - R$228.403):Banco Santander and its subsidiaries discuss administrative and legal requirements, by several municipalities, of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Thousandsthe payment of Brazilian Reais - R$ - unless otherwise stated)

ISS on various revenues arising from operations that are usually not classified as services (Note 23.c.4 – Possible Risk Loss).

 

c.2) Lawsuits and Administrative Proceedings -of Labor

 

These are lawsuits filed 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 payments and successes historic. Claims that do not fit the previous criteria have their provisions constituted according to individual assessment performed, and provisions being constituted based on the risk of loss as probable, the law and jurisprudence according to the assessment of loss made by legal counsel.

 

FormerBanespa employees. Action distributed in 1998 by the Banespa Retired Association (AFABESP) requiring the payment of a semiannual bonus provided for in the Banespa regulations, according to which the payment will be made in the event that the Bank makes a profit and the distribution of this profit is approved by the board of directors. management or, alternatively, PLR, to retired employees of the extinct Banco do Estado de São Paulo SA - Banespa, hired until May 22, 1975. The bonus was not paid in 1994 and 1995 because the bank did not make a profit during these years. Partial payments were made between 1996 and 2000 as approved by the board of directors. The aforementioned clause was excluded from the regulation in 2001. The lawsuit was upheld by the Superior Labor Court. The Bank filed the appropriate funds with the STF, which, due to a monocratic decision, rejected the appeal. A rescissory action was brought to dismiss the decision of the main action and suspend execution. There is a preliminary injunction in force that authorizes the execution of necessary enforcement acts to proceed with the execution until the attachment, however, any acts of seizure of assets or blocking of cash are prohibited until the judgment of the rescission action. As of December 31, 2019, the case is classified as a probable loss and the provision was recorded based on the estimated loss.

c.3) Lawsuits and Administrative Proceedings -of Civil

 

These contingencies are generally caused by: (1) Lawsuits 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) lawsuits deriving of financing agreements, (3) lawsuits of execution; and (4) lawsuits of indemnity by loss and damage. For civil lawsuits 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 provisioned according to individual assessment performed, and provisions are based on the risk of loss as probable, the law and jurisprudence according to the assessment of loss made by legal counsel.

 

The main lawsuitsprocesses with the classification of risk of loss as probable are described below:

 

• Lawsuits for indemnityIndemnity - - seeking indemnity for material and emotional damage, 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 criteria are provisioned according to the individual assessment made, being the provisions recognized based on the risk of loss as probable, the law and jurisprudence according to the assessment of loss made by legal counsel.

 

• Economic Plans – – they referred to lawsuits filed by savings accountholders, related to supposed inflation purge arising from the Economic Plans (Bresser, Verão, Collor I and II), based on the understanding that such plans violated acquired rights relating to the application of inflation indexes on Saving Accounts, Lawsuits Deposits and Time Deposits (CDB). Provisions arising from such lawsuits are recorded based on the individual evaluation of loss made by external legal consultants.

F-80

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

 

The Banco Santander is also party in public class lawsuits on the same matter filed by consumer rights organizations, Public Prosecutor’s Offices and Public Defender’s Offices. The provision is made for the lawsuits with the classification of risk as probable, based on the individual execution orders. 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 courts or in phase of definitive execution. There are decisions favorable to banks at the STF with regard to the economic phenomenon similar to the savings accounts, as in the case of monetary restatement of time deposits - CDB and agreements (present value table).

 

However, the Supreme Court´s jurisprudence has not come to a conclusion regarding the constitutionality of the norms that changed Brazil’s monetary standard. On April 14, 2010, the STJ was recently decided that the deadline for the filing of civil lawsuits that argue the government’sgovernment's purge is five years, but this decision has not been handed down on the lawsuits yet. Thus, with this decision, a majority lawsuits, as they were filed after the period of five years is likely to be rejected, reducing the values involved. Still, the STF decided that the deadline for individual savers to become party on the public civil litigations, is also five years, counted from the final unappealable sentence. Banco Santander believes in the success of the arguments defended in these courts based on their content and the legal basis.

 

At the end of 2017, the General Union Law (AGU), Bacen, Institute of Consumer Protection (Idec), the Brazilian Front of the MoneysaversMoney savers (Febrapo), the Brazilian Banks Federation (Febraban) have signed an agreement with the purpose to close all lawsuits related to Economic Plans.

 

The discussions focused on the definition of the amount that would be paid to each person according to the outstanding balance in the saving account. The total amount of the payments will depend on the number of the additional clients, and also on the number of moneysaversmoney savers that approved in the courts the existenceexistance of their account and balance in the birthday date of the indexes changes. The term of the agreement signed bynegotiated between the parties was submitted to the STF, which is responsible to decide about its viability.approved the terms of the agreement.

Recently, the STF ordered the suspension of all economic plan (in the country), for two years considering the judicial homologation.

 

The Management considers that the provision madeaccrued provisions are enoughdue to covercharge interest in accordance with the risks involved in the economic plans, including considering the possible agreement which awaitsapproved by the Supreme Court decision.STF.

 

c.4) Civil, Labor, Tax, and Security Social Liabilities Contingent Classified with Loss Risk as Possible:

 

Refer to lawsuits and administrative proceedings involving tax, labor and civil matters classified by legal counsels with loss risk as possible, which they were not recorded.

 

The tax lawsuits classification with loss risk as possible totaled R$18,72025,380 million, being the main lawsuits as follow:

 

F-71 

Table• INSS on Profits or Results (PLR) - Bank and the subsidiaries have several lawsuits and administrative proceedings arising from questioning tax authorities in connection with the taxation for social security purposes of Contents

 certain items which are not considered to be employee remuneration. As of December 31, 2018, the amounts related to these proceedings totaled approximately R$5,052 million.

BANCO SANTANDER (BRASIL) S.A.

• Tax on Services (ISS) - Financial Institutions - Banco Santander and its subsidiaries discuss administrative and legal requirements, by several municipalities, of the payment of ISS on various revenues arising from operations that are usually not classified as services. On December 31, 2019, the amounts related to these proceedings totaled approximately R$3,139 million.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Thousands

• Unapproved Compensation - The Bank and its affiliates discuss administrative and legal proceedings with the Federal Revenue, Office to grant tax relief with credits arising from overpayments. On December 31, 2019, the amounts related to these proceedings totaled approximately R$4,835 million.

• Goodwill Amortization of Brazilian ReaisBanco Real - the Federal Tax Office of Brazil issued infraction notices against the Bank to require the income tax and social payments, including late charges, for the period of 2009. The Tax Authorities considered that the goodwill related to acquisition of Banco Real, amortized for accounting purposes prior to the merger, could not be deduced by Banco Santander for tax purposes. The infraction notice was contested. On July 14, 2015, the Police Judging RFB decided favorably to Banco Santander, fully canceling the tax debt. On November 10, 2016, the appeal was filed, prompting the Bank to lodge an appeal with CARF, which is awaiting judgment. On December 31, 2019, the balance was approximately R$ - unless otherwise stated)

1,419 million.

 

• Credit Losses - - Bank and its subsidiaries challenged the tax assessments issued by the Federal Revenue Services claiming the deduction for credit losses because they fail to meet the relevant requirements under applicable law. As of December 31, 20172019 the amount related to this challengeclaim is approximately R$436607 million.

 

• INSS on Profit Sharing Payments – BankUse of CSLL Tax and Negative Tax Loss -Tax assessments issued by the subsidiaries are involvedFederal Revenue Service in several lawsuits2009 for alleged undue compensation of tax loss carryforwards and negative basis of CSLL, as a consequence of tax assessments drawn up in previous periods. Judgment is pending at the 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.level. As of December 31, 20172019, the amount was R$1,055 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 to the period of 2007 to 2012. Banco Santander timely presented its appeals, which are pending. On December 31, 2019, the amounts related to these proceedings totaled approximately R$3,929635 million.

F-81

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

 

• IRPJ and CSLL - Capital Gain - - the Federal Tax Office of Brazil issued infraction notices against Santander Seguros, successor company of ABN AMRO Brasil Dois Participações S.A. (AAB Dois Par), charging income Tax and Social Contribution to related base year 2005. The Federal Tax Office of Brazil claims that capital gain in sales of shares from Real Seguros S.A and Real Vida Previdência S.A. by AAB Dois Par should be taxed by the rate of 34% instead 15%. The assessment was contested administratively based on understanding that tax treatment adopted at the transaction was in compliance with tax laws and capital gain was taxed properly. The administrative lawsuit is awaiting trial. The Banco Santander is responsible for any adverse outcome in this lawsuit as former Zurich Santander Brasil Seguros e Previdência S.A. stockholder. As of December 31, 20172019, the amount related to this proceedinglawsuit is approximately R$292 million.

• ‘Goodwill Amortization of Banco Real - the Federal Tax Office of Brazil issued infraction notices against the Bank to require the income tax and social payments, including late charges, for the period of 2009. The Tax Authorities considered that the goodwill related to acquisition of Banco Real, amortized for accounting purposes prior to the merger, could not be deduced by Banco Santander for tax purposes. The infraction notice was contested. On July 14, 2015, the Police Judging RFB decided favorably to Banco Santander, fully canceling the tax debt. This decision will craft appealed before the CARF. As of December 31, 2017,the balance was approximately R$1,332 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 to the period of 2007 to 2012. Banco Santander timely presented its appeals, which are pending. On December 31, 2017, the balance was approximately R$609 million.

• Unrecognized Compensation – The Bank and its affiliates discuss administrative and legal proceedings with the Brazilian Federal Revenue, the not ratification of tax offsets with credits due to overpayment or undue payment. On December 31, 2017, the figure was R$2,230400 million.

 

The labor claims with classification of loss risk as possible totaled R$28.71 134 million, excluding the lawsuits below:

Semiannual Bonus or PLR - a labor lawsuit relating to the payment of a semiannual bonus or, alternatively, profit sharing, to retired employees from Banco do Estado de São Paulo S.A. - Banespa, that had been hired up to May 22, 1975, filed by Banespa’s Retirees Association. This lawsuit was dismissed against the Bank by the Superior Labor Court. The STF rejected the extra common appeal of the Bank by a monocratic decision maintaining the earlier condemnation. Santander filed a Regimental Appeal which holds STF´s decision. The Regimental Appeal is an internal appeal filed in the STF, in order to refer the monocratic decision to a group of five ministers. The 1st Class of the Supreme Court upheld the appeal by the Bank and denied the Afabesp. The subjects of the extra common appeal of the Bank will move forward to the Supreme Court 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 such disclosure may impact 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 Banco do Estado de São Paulo S.A. - Banespa, requesting the readjustment of the retirement supplementation by the IGPDI for Banespa retirees who have been admitted until May 22, 1975. The judgment granted the correction but only in the periods in which no other form of adjustment could be applied. The Bank and Banesprev have appealed this decision and although the appeals have not yet been judged, the Bank’sBank's success rate in this matter 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 lawsuits or have already had some type of adjustment. The amount related to this claim is not disclosed due to the current stage of the lawsuit and such disclosure may impact the progress of the claim.

 

The liabilities related to civil lawsuits with classification of loss risk as possible totaled R$1,3562,058 million, being the main processeslawsuits as follows:follow:

 

Indemnity lawsuit arisingLawsuit Arising of the Banco Bandepe - - related to mutual agreement on appeal to the Justice Superior Court (STJ - Superior Tribunal de Justiça).

 

Indemnity lawsuit relatedLawsuit Related to custody servicesCustody Services - - provided by Banco Santander (Brasil) S.A. at an early stage which was not handed down yet;yet.

 

Lawsuit arising out ofArising from a contractual disputeContractual 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).

 

F-72 

Tablec.5) Other Lawsuits Under the Responsibility of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Brazilian Reais - R$ - unless otherwise stated)

c.5) Judicial and administrative proceedings under the responsibility of former controlling stockholdersFormer Controlling Stockholders

 

Refer to tax, labor and civil lawsuits in the amounts of R$698,141,102.482, R$2,607213 and R$6,381 (2016 -R$810,383,578 (2018 - R$712598,544, R$327 and R$3,830 and 2015 - R$785,837, R$890 and R$3,247)6,767), with responsibility ofrespectively, which the responsible people were the former controlling stockholders of the bankBank and acquired entities.companies. Based on the agreementsagreement signed, these lawsuits have guaranteesguaranteed reimbursement from part of full reimbursement by the former controlling stockholders, and amounts reimbursablecontrollers, whose respective duties were recorded underin other assets.receivables – others.

 

25. Tax assets and liabilitiesIn the year ended December 31, 2019, the Bank signed a contract with a former controller, in which the registered obligations became the Bank's responsibility.

F-82

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

24.Tax assets and liabilities

 

a) Income and Social Contribution Taxes

 

The total charge for the year can be reconciled to accounting profit as follows:

 

Thousand of reais201720162015
Operating Profit Before Tax14,513,68416,383,902(3,215,718)
Interest on capital(1)(3,800,000)(3,850,000)(1,400,000)
Operating Profit Before Tax10,713,68412,533,902(4,615,718)
Rates (25% income tax and 20% social contribution tax in 2015)(4,821,158)(5,640,256)2,077,073
PIS and COFINS (net of income and social contribution taxes)(2) (8)(1,427,960)(1,641,181)1,861,767
Non-taxable/Non-deductible:   
Equity in affiliates32,19821,39252,340
Goodwill(3)(669,963)(734,952)(1,252,578)
Exchange variation - foreign branches(4)440,857(3,561,133)5,913,741
Net Indeductible Expenses of Non-Taxable Income(8)194,737--
Adjustments:   
Constitution of income and social contribution taxes on temporary differences(5)1,138,005605,0581,266,588
Effects of change in rate of social contribution taxes(6)(7)(1,427,667)(613,202)52,145
Other adjustments(7)1,165,3152,645,2903,078,468
Income taxes(5,375,636)(8,918,984)13,049,544
Of which:   
 Current tax(8)(4,969,241)(3,575,099)3,631,631
 Deferred taxes(406,395)(5,343,885)9,417,913
Taxes paid in the year(3,280,230)(4,240,115)(1,170,020)
(1)Amount distributed to shareholders as interest attributable to shareholders’ equity. For accounting purposes, although the interest should be reflected in the income statement for tax deduction, the charge is reversed before the calculation of the net income in the financial statements and deducted from the shareholders’ equity since it is considered as dividend.
Thousand of reais201920182017
    
Operating Profit Before Tax22,273,14915,909,77114,513,684
Interest on capital(1)-(4,080,000)(3,800,000)
Operating Profit Before Tax22,273,14911,829,77110,713,684
Rates (25% income tax and 15% social contribution tax)(8,909,260)(5,323,397)(4,821,158)
PIS and COFINS (net of income and social contribution taxes) (2) (6)(1,983,839)(1,490,190)(1,427,960)
Non-taxable/Non-deductible:   
Equity in affiliates59,79529,68132,198
Goodwill(3)(137,175)(101,305)(669,963)
Exchange variation - foreign branches (4)715,4242,792,995440,857
Net Indeductible Expenses of Non-Taxable Income (6)214,242384,554194,737
Adjustments:   
Constitution of income and social contribution taxes on temporary differences70,223136,3531,138,005
Interest on capital(1)1,064,000                       -                         -
Effects of change in rate of social contribution taxes (5)2,796,493(90,013)(1,427,667)
Other adjustments(71,602)551,4691,165,315
Income taxes(5,641,699)(3,109,853)(5,375,636)
Of which:   
  Current tax (6)(6,692,328)(4,704,293)(4,969,241)
  Deferred taxes1,050,6291,594,440(406,395)
Taxes paid in the year(5,301,184)(3,668,571)(3,280,230)

(1) Amount distributed to shareholders as interest attributable to shareholders’ equity. For accounting purposes, although the interest should be reflected in the income statement for tax deduction, the charge is reversed before the calculation of the net income in the financial statements and deducted from the shareholders’ equity since it 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 they are recorded as income taxes.

(3)The difference between the tax basis and accounting basis of goodwill on acquisition of Banco ABN Amro Real S.A. is a permanent and definitive difference. Administration in this case the possibility of loss on impairment or disposal is remote and only applies to the entity as a whole and according to the characteristics of the business combination performed, it is not possible to segregate and identify the business originally acquired. Therefore deferred tax liability is not record.

(2) PIS and COFINS are considered a profit-base component (net basis of certain revenues and expenses), therefore and accordingly to IAS 12 they are recorded as income taxes.

(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

(3) The difference between the tax basis and accounting basis of goodwill on acquisition of Banco ABN Amro Real S.A. is a permanent and definitive difference. Administration in this case the possibility of loss on impairment or disposal is remote and only applies to the entity as a whole and according to the characteristics of the business combination performed, it is not possible to segregate and identify the business originally acquired. Therefore deferred tax liability is not record.

(6)Effect of the rate differential for other non-financial corporations, with a social contribution rate of 9%, as well as the effect of the additional 5% applicable to financial institutions, valid until the end of 2018.

(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.

(4) Permanent difference related of foreign currency exchange variation on investments abroad nontaxable/ deductible (see details below).

(8)

(5) Effect of the rate differential for other non-financial corporations, with a social contribution rate of 9%, as well as the effect of the additional 5% applicable to financial institutions, valid until the end of 2018.

(6) Includes mainly the tax effect on expenses with donations, revenues from judicial deposit updates and other income and other income and expenses that do not qualify as temporary differences.

Cofins(8)

 

In June 2015, Banco Santander recorded the reversal of legal liabilities (recorded in the heading of tax liabilities - current) amounted to R$7,950 million related to Cofins. On the Consolidated Income Statements the registration occurred in the heading "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 the heading "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, in the heading Income taxes of R$381,597 and 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.

F-73 

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Brazilian Reais - R$ - unless otherwise stated)

TaxExchange Hedge of Grand Cayman, branch in Luxembourg and of Santander Brasil EFC

 

Banco Santander operates an agency in the Cayman Islands, a branch in Luxembourg, and a subsidiary called Santander Brasil Establecimiento Financiero de Credito, EFC, or "Santander Brasil EFC" (an independent subsidiary in Spain), which are used primarily to raise funds in the capital and financial markets to provide the Bank with credit lines that are extended to its clients for foreign trade and working capital financing.

 

To hedge the exposure to exchange rate variations, the Bank uses derivatives and funding.funding (economic hedge). In accordance with 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 the gains or losses of the derivatives used as hedges are taxable.taxable or deductible. The purpose of these derivatives is to protect net income after taxes.

 

F-83

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

Tax distinct treatment distinct from such exchange rate differences results in volatility in "Operating Income Before Tax" and "Income taxes". The foreign exchange variations recorded as a result of foreign investments in the exerciseyear ended on December 31, 2017 resulted in gain of R$893 million (2016 - loss R$7,408 million2019, 2018 and 2015 - gain R$14,779). On the other hand, derivative contracts contracted to cover these positions generated a loss recorded on "Gains (losses) on financial assets and liabilities" of R$1,703 million (2016 - gain R$14,123 million and 2015 - loss R$26,311 million). The tax effect of these derivatives impacted the line of "income tax", generating a gain of R$810 million (2016 - loss R$6,140 million and 2015 - gain R$11,532), composed of R$80 million (2016 - R$657 million and 2015 - R$1,223 million) of PIS / Cofins and R$730 million (2016 - R$6,058 million and 2015 R$10,308 million) of IR / CSLL.2017.

   201920182017
Exchange differences (net)    
Result generated by the exchange rate variations on the Bank's investment in the Cayman, Luxemburg and EFC Branch 1,512,3226,673,535892,863
Gains (losses) on financial assets and liabilities (net)    
Result generated by derivative contracts used as hedge (2,776,601)(12,540,855)(1,702,557)
Income Taxes    
Tax effect of derivative contracts used as hedge - PIS / COFINS (106,497)255,48180,170
Tax effect of derivative contracts used as hedge - IR / CS 1,370,7765,611,839729,524

 

b) Effective tax rate calculation

 

The effective tax rate is as follows:

 

Thousand of reais201720162015
Operating Profit Before Tax14,513,68416,383,902(3,215,718)
Income tax5,375,6368,918,984(13,049,544)
Effective tax rate(1)37.04%54.44%405.80%
(1)In 2017, 2016 and 2015, 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) the effective tax rate would have been 40.4%, 27.1% and -18.3%, respectively. In 2015 there were the gain on the Cofins lawsuit (see disclosure above), which excluding the effects the effective tax rate would be 19.1%.
Thousand of reais 201920182017
     
Operating Profit Before Tax22,273,14915,909,77114,513,684
Income tax 5,641,6993,109,8535,375,636
Effective tax rate 25.33%19.55%37.04%

 

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:

 

Thousand of reais201720162015 201920182017
 
Tax credited to equity3,373,9842,955,5524,943,957 3,517,5902,785,3303,373,984
Measurement of available-for-sale securities1,016,121963,9902,743,797 -1,016,121
Measurement at fair value through other comprehensive incomeMeasurement at fair value through other comprehensive income416,748369,805-
Measurement of cash flow hedges1,0634,145267,511 1862,0811,063
Measurement of investment hedges562,3531,137,484 562,353
Defined benefit plan1,794,4471,425,064795,165 2,538,3031,851,0911,794,447
Tax charged to equity(2,541,177)(1,795,115)(1,255,867) (3,952,457)(2,168,758)(2,541,177)
Measurement of available-for-sale securities(2,426,459)(1,701,732)(1,251,773) -(2,426,459)
Measurement at fair value through other comprehensive incomeMeasurement at fair value through other comprehensive income(3,618,126)(1,997,600)-
Measurement of cash flow hedges(111,134)(87,929)(2,250) (322,080)(163,038)(111,134)
Defined benefit plan(3,584)(5,454)(1,844) (12,251)(8,120)(3,584)
Total832,8071,160,4373,688,090 (434,867)616,572832,807

Relates to deferred taxes recognized in equity due to temporary differences accounted for in equity.

 

d) Deferred taxes

 

The detail of the balances of “Tax assets – Deferred” and “Tax liabilities – Deferred” is as follows:

 

Thousand of reais201720162015
Tax assets:24,778,07824,437,11230,575,504
 Of which:   
 Temporary differences(1)23,375,60023,398,88629,538,257
 Tax loss carry forwards866,579382,867381,888
Social contribution taxes 18%535,899655,359655,359
 Total deferred tax assets24,778,07824,437,11230,575,504
Tax liabilities:2,496,5311,268,037817,125
 Of which:   
 Excess depreciation of leased assets124,909144,623185,531
 Adjustment to fair value of trading securities and derivatives2,371,6221,123,414631,594
Total deferred tax liabilities2,496,5311,268,037817,125
(1)Temporary differences relate mainly to impairment losses on loans and receivables and provisions for lawsuits and administrative proceedings, and the effect of the fair value of financial instruments.
Thousand of reais201920182017
    
Tax assets:30,295,06227,680,57824,778,078
 Of which:   
Temporary differences (1)29,565,70226,416,52723,375,600
Tax loss carry forwards367,120846,587866,579
Social contribution taxes 18%362,240417,464535,899
 Total deferred tax assets30,295,06227,680,57824,778,078
    
Tax liabilities:5,540,8733,031,3892,496,531
 Of which:   
Excess depreciation of leased assets148,839123,257124,909
Adjustment to fair value of trading securities and derivatives5,392,0342,908,1322,371,622
 Total deferred tax liabilities5,540,8733,031,3892,496,531

(1) Temporary differences relate mainly to impairment losses on loans and receivables and provisions for lawsuits and administrative proceedings, and the effect of the fair value of financial instruments.

 

F-74 

F-84

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Brazilian Reais - R$ - unless otherwise stated)

Based on a technical study for the realization of deferred tax assets and liabilities drawn up by Banco Santander´s Management, these tax credits should be accounted to the extent that it becomes probable that future taxable profit will allow their recovery. In the case of Tax Loss it was considered the limit of 30% to be used of the taxable profit of each period. The controlled companies has not presented any deferred tax liabilities not accounted on 2017, 2016 and 2015.
 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

 

The changes in the balances of “Tax Assets – Deferred” and “Tax Liabilities – Deferred” in the last three years were as follows:

 

Thousand of reaisBalances at December 31, 2016Adjustment to IncomeValuation adjustments(1)Other(2)Acquisition / MergerBalances at December 31, 2017 Balances at December 31, 2018 Adjustment to
Income		 Valuation adjustments(1) Other(2)Acquisition / MergerBalance at December 31, 2019
 
Tax assets:24,437,112668,483254,733(620,401)38,15124,778,078 27,680,578 3,693,727 471,499 (1,550,742)-30,295,062
Temporary differences23,398,886304,231254,733(620,401)38,15123,375,600 Temporary differences26,416,527 4,240,405 471,499 (1,562,729)-29,565,702
Tax loss carry forwards382,867483,712-866,579 Tax loss carry forwards846,587 (491,454) - 11,987-367,120
Social contribution taxes 18%655,359(119,460)-535,899 Social contribution taxes 18%417,464 (55,224) - -362,240
Tax liabilities:1,268,037262,088582,363378,6935,3502,496,531 3,031,389 781,448 1,773,065 (45,029)-5,540,873
Temporary differences1,268,037262,088582,363378,6935,3502,496,531 Temporary differences3,031,389 781,448 1,773,065 (45,029)-5,540,873
Total23,169,075406,395(327,630)(999,094)32,80122,281,547 24,649,189 2,912,279 (1,301,566) (1,505,713)-24,754,189
 
Thousand of reais Balances at December 31, 2017 Adjustment to
Income		 Valuation adjustments(1) Other(2)Acquisition / MergerBalance at December 31, 2018
 
Tax assets: 24,778,078 1,674,317 (186,260) 1,369,93444,50927,680,578
Temporary differences Temporary differences23,375,600 1,812,744 (186,260) 1,369,93444,50926,416,527
Tax loss carry forwards Tax loss carry forwards866,579 (19,992) - -846,587
Social contribution taxes 18% Social contribution taxes 18%535,899 (118,435) - -417,464
Tax liabilities: 2,496,531 79,877 607,773 (153,623)8313,031,389
Temporary differences Temporary differences2,496,531 79,877 607,773 (153,623)8313,031,389
Total 22,281,547 1,594,440 (794,033) 1,523,55743,67824,649,189
 
Thousand of reais Balances at December 31, 2016 Adjustment to
Income		 Valuation adjustments(1) Other(2)Acquisition / MergerBalance at December 31, 2017
 
Tax assets: 24,437,112 668,483 254,733 (620,401)38,15124,778,078
Temporary differences Temporary differences23,398,886 304,231 254,733 (620,401)38,15123,375,600
Tax loss carry forwards Tax loss carry forwards382,867 483,712 - -866,579
Social contribution taxes 18% Social contribution taxes 18%655,359 (119,460) - -535,899
 1,268,037 262,088 582,363 378,6935,3502,496,531
Temporary differences Temporary differences1,268,037 262,088 582,363 378,6935,3502,496,531
Total 23,169,075 406,395 (327,630) (999,094)32,80122,281,547

(1) It relates to deferred taxes recognized in equity due to temporary differences accounted in equity.

Thousand of reaisBalances at December 31, 2015Adjustment to IncomeValuation adjustments(1)Other(2)Acquisition / MergerBalances at December 31, 2016
Tax assets:30,575,504(5,318,219)(1,580,025)652,599107,25324,437,112
Temporary differences29,538,257(5,319,198)(1,580,025)652,599107,25323,398,886
Tax loss carry forwards381,888979---382,867
Social contribution taxes 18%655,359----655,359
Tax liabilities:817,12525,666947,628(523,182)8001,268,037
Temporary differences817,12525,666947,628(523,182)8001,268,037
Total29,758,379(5,343,885)(2,527,653)1,175,781106,45323,169,075

Thousand of reaisBalances at December 31, 2014Adjustment to IncomeValuation adjustments(1)Other(2)Acquisition / MergerBalances at December 31, 2015
Tax assets:20,038,0008,866,2211,575,89193,9911,40130,575,504
Temporary differences18,333,3159,535,9941,575,89193,991(934)29,538,257
Tax loss carry forwards1,049,326(669,773)--2,335381,888
Social contribution taxes 18%655,359----655,359
Tax liabilities:312,420(551,692)962,40693,991-817,125
Temporary differences312,420(551,692)962,40693,991-817,125
Total19,725,5809,417,913613,485-1,40129,758,379
(1)It relates to tax recognized in equity.

(2) In 2019, it mainly refers to net of deferred taxes amounted to R$1,595,773 (2018 - R$1,216,311 and 2017 - R$241,708), which have the same counterparty and realization period.

(2)In 2017, it mainly refers to net of deferred taxes amounted to R$(241,708) (2016 - R$129,147 and 2015 - R$93,991), which have the same counterparty and realization period.

 

e) Expected realization of deferred tax assets

 

YearTemporary differences Tax loss carry forwardsSocial contribution taxes 18%
20182,061,152650,509535,899
20193,995,86888,249-
20204,807,49159,473-
20214,522,57536,269-
2022 to 20244,939,0117,471-
2025 to 20262,486,24619,112-
2026 to 2027563,2575,496-
Total23,375,600866,579535,899

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."

   Tax assets  Tax liabilities
Year  Temporary differences  Tax loss carry forwards Social contribution taxes 18% TotalTemporary differencesTotal
            
2020  8,945,648 74,742 362,240 9,382,6301,838,8741,838,874
2021  8,275,410 43,711 - 8,319,1211,834,7811,834,781
2022  7,562,496 22,820 - 7,585,3161,760,1671,760,167
2023  819,647 23,194 - 842,84115,95415,954
2024  2,682,021 39,116 - 2,721,13715,95415,954
2025 a 2027  662,021 163,172 - 825,19345,30145,301
2028 a 2029  618,459 365 - 618,82429,84229,842
Total  29,565,702 367,120 362,240 30,295,0625,540,8735,540,873

 

F-75 

F-85

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Brazilian Reais - R$ - unless otherwise stated)

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

 

f) Current Taxes

The current tax assets refers to the balance of Income, Social Contribution Taxes, PIS/COFINS Offset.

26. Other liabilities

25.Other liabilities

 

The breakdown of the balance of “Other Liabilities” is as follows:

 

Thousand of reais201720162015
Accrued expenses and deferred income(1)3,036,3742,925,5982,480,666
Transactions in transit980,501916,844900,089
Provision for share-based payment270,626212,384186,526
Liabilities for insurance contracts1,587,6031,584,3031,365,793
Other(2)2,138,8172,559,9701,917,122
Total8,013,9218,199,0996,850,196
(1)Corresponds, mainly, to payments to be made - personnel expenses.
Thousand of reais      2019 2018 2017
            
Accrued expenses and deferred income (1)   5,038,011 3,193,291 3,036,374
Transactions in transit (3)      785,418 925,336 980,501
Provision for payment of variable remuneration   317,539 260,739 270,626
Liabilities for insurance contracts   1,901,801 1,797,167 1,587,603
Other(2)      2,878,175 2,918,615 2,138,817
Total      10,920,944 9,095,148 8,013,921

(1) Corresponds, mainly, to payments to be made - personnel expenses.

(2) Includes credits for funds to be released, such as Administratives expenses, amounts due to associates and suppliers.

(3) Includes mainly the amounts to transfer to the credit card companies (resources in transit) and amount to release referred to the real estate credits.

 

(2)26.Includes credits for funds to be released, such as Administrative expenses, amounts due to associates and suppliers.Other Comprehensive Income

(3)Includes mainly the amounts to transfer to the credit card companies (resources in transit) and amount to release referred to the real estate credits.

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 heading, 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 heading.

 

- 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 objects: 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 heading, except in the case of entities accounted for using the equity method, the amounts for which are presented net of the tax effect.

 

a) Financial assets - available-for-salemeasured at fair value through other comprehensive income

a.1) Financial assets measured at fair value through other comprehensive income

 

Other Comprehensive Income - Available-for-sale financial– Financial assets measured at fair value through other comprehensive income includes the net amount of unrealized changes in the fair value of assets classified as available-for-sale financial assets (see Notes 76 and 8)7), net of taxes.

 

The breakdown, by type of instrument and geographical origin of the issuer, of Other Comprehensive Income Available-for-sale financialFinancial assets measured at fair value through other comprehensive income (IFRS 9) on December 31, 2017, 2016 and 20152019 is as follows:

 

Thousand of reais    2019
     Revaluation gains Revaluation losses Net revaluation gains (losses) Fair value
Debt Instruments           
Government debt securities  7,251,721 (3,952,558) 3,299,163 95,961,823
Private-sector debt securities 824,294 (778,175) 46,119 1,104
Total    8,076,015 (4,730,733) 3,345,282 95,962,927
            
            
Thousand of reais    2018
     Revaluation gains Revaluation losses Net revaluation gains (losses) Fair value
Debt Instruments           
Government debt securities  3,917,451 (1,608,673) 2,308,778 85,395,136
Private-sector debt securities 1,546,895 (1,863,092) (316,197) 555
Total    5,464,346 (3,471,765) 1,992,581 85,395,691

F-76 

F-86

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Brazilian Reaisa.2) Financial assets - R$ - unless otherwise stated)

available-for-sale

 

Thousand of reais   2017
 Revaluation gainsRevaluation lossesNet revaluation gains/ (losses)Fair value
Debt Instruments    
Government debt securities1,616,486(6,942)1,609,54479,462,303
Private-sector debt securities10,694(2,227)8,4675,254,444
Equity instruments    
Domestic230,722(35,159)195,5631,106,637
Of which:    
Listed156,236(5,322)150,914965,547
Unlisted74,486(29,837)44,649141,090
Total1,857,902(44,328)1,813,57485,823,384

Other Comprehensive Income – Financial assets measured at fair value through other comprehensive income includes the net amount of unrealized changes in the fair value of assets classified as available-for-sale financial assets (see Notes 6 and 7), net of taxes.

 

Thousand of reais   2016
 Revaluation gainsRevaluation lossesNet revaluation gains/ (losses)Fair value
Debt Instruments    
Government debt securities454,609(31,288)423,32150,384,382
Private-sector debt securities101,593(6,501)95,0925,445,190
Equity instruments    
Domestic220,535(72,758)147,7771,985,473
Of which:    
Listed147,844(50,269)97,5751,024,505
Unlisted72,691(22,489)50,202960,968
Total776,737(110,547)666,19057,815,045

The breakdown, by type of instrument and geographical origin of the issuer, of Other Comprehensive Income – available-for-sale (IAS 39) on December, 31, 2017 is as follows:

 

Thousand of reais   2015
 Revaluation gainsRevaluation lossesNet revaluation gains/ (losses)Fair value
Debt Instruments    
Government debt securities2,110(2,692,507)(2,690,397)57,720,858
Private-sector debt securities10,585(67,277)(56,692)9,382,416
Equity instruments    
Domestic213,299(111,627)101,6721,162,332
Of which:    
Listed119,436(99,357)20,07977,299
Unlisted93,863(12,270)81,5931,085,033
Total225,994(2,871,411)(2,645,417)68,265,606

Thousand of reais    2017
     Revaluation gains Revaluation losses Net revaluation gains (losses) Fair value
Debt Instruments           
Government debt securities  1,616,486 (6,942) 1,609,544 79,462,303
Private-sector debt securities 10,694 (2,227) 8,467 5,254,444
            
Equity instruments           
Domestic    230,722 (35,159) 195,563 1,106,637
 Of which:           
Listed    156,236 (5,322) 150,914 965,547
Unlisted    74,486 (29,837) 44,649 141,090
Total    1,857,902 (44,328) 1,813,574 85,823,384
            

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 subject to analysis 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.

F-77 

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Brazilian Reais - R$ - unless otherwise stated)

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-off through its fair value.

 

b) Cash flow hedges

 

Other Comprehensive Income—Cash flow hedges includes the gains or losses attributable to hedge 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 them (see Note 9)8).

Accordingly, amounts representing valuation losses will be offset in the future by gains generated by the hedged objects.

 

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. In 2017 this hedge was discontinued (Note 9.a5). In 2016 and 2105, no ineffective portion was identified (Note 9.a5)8.a5).

 

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).

 

28. Non-controlling interests

27.Non-controlling interests

 

“"Non-controlling interests” includeinterests" refer to the net amount of the equity of subsidiariesvalue attributable to equity instruments that do not belong, directly or indirectly, to the Bank, including the portion of the annual profit attributed to them of profit for the year.subsidiaries.

 

a) Breakdown

 

The detail, by company, of the balance of “Equity - Non-controlling interests” is as follows:

 

Thousand of reais201720162015 2019 2018 2017
 
Santander Leasing S.A. Arrendamento Mercantil395441421Santander Leasing S.A. Arrendamento Mercantil447 447 395
Santander Brasil Advisory Services S.A-529516
Super Pagamentos e Administração de Meios Eletrônicos S.A.-14,664
Getnet S.A.206,105168,863176,278 - 249,007 206,105
Olé Consignado S.A.82,43230,4255,014Olé Consignado S.A.271,078 116,967 82,432
Santander Serviços Técnicos, Administrativos e de Corretagem de Seguros-318,498238,169
BW Guirapá S.A.-68,691-
Banco PSA Finance Brasil S.A.147,295138,057-Banco PSA Finance Brasil S.A.131,222 155,399 147,295
Ipanema Empreendimentos e Participações Ltda.667-
Banco Hyundai Capital 7,245 7,015 -
Rojo Entretenimento S.A. 148,589 - -
Return Capital Serviços de Recuperação de Créditos S.A. (Current name of Ipanema Empreendimentos e Participações Ltda.)Return Capital Serviços de Recuperação de Créditos S.A. (Current name of Ipanema Empreendimentos e Participações Ltda.)- 1,155 667
Total436,894725,504435,062 558,581 529,990 436,894

 

Thousand of reais201720162015
Profit attributable to non-controlling interests213,984130,35550,086
Of which:   
Santander Leasing S.A. Arrendamento Mercantil484138
Santander Brasil Advisory Services S.A-3449
Super Pagamentos e Administração de Meios Eletrônicos S.A.--(2,379)
Getnet S.A.48,84227,20935,932
Olé Consignado S.A.53,2865,4324,996
Santander Serviços Técnicos, Administrativos e de Corretagem de Seguros92,36598,71710,859
BW Guirapá S.A.(776)(2,957)-
Banco PSA Finance Brasil S.A.19,8841,879-
Ipanema Empreendimentos e Participações Ltda.335--
Other companies--591

F-78 

F-87

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Brazilian Reais - R$ - unless otherwise stated)

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

 

       
Thousand of reais 2019 2018 2017
       
Profit attributable to non-controlling interests224,518 213,300 213,984
Of which:      
      Santander Leasing S.A. Arrendamento Mercantil3 25 48
      Getnet S.A. 3,962 55,518 48,842
      Olé Consignado S.A.199,332 138,527 53,286
      Santander Serviços Técnicos, Administrativos e de Corretagem de Seguros- - 92,365
     BW Guirapá S.A.- - (776)
     Banco PSA Finance Brasil S.A.15,887 17,914 19,884
      Rojo Entretenimento S.A. 230 166 -
      Banco Hyundai Capital 2,520 - -
      Return Capital Serviços de Recuperação de Créditos S.A. (Current name of Ipanema Empreendimentos e Participações Ltda.)2,584 1,150 335

b) Changes

 

The changes in the balance of “Non-controlling interests” are summarized as follows:

 

Thousand of reais201720162015 2019 2018 2017
 
Balance at beginning of year725,504435,062380,173Balance at beginning of year529,990436,894725,504
Additions / disposals (net) due to change in the scope of consolidation(1) (2)(660,230)159,46916,608Additions / disposals (net) due to change in the scope of consolidation (1) (2)51,073 6,849 (660,230)
Incorporation / Acquisition296,184-
Incorporation / Acquisition (4)Incorporation / Acquisition (4)- - 296,184
Dividends paid / Interest on Capital(133,641)(18,140)(2,754)Dividends paid / Interest on Capital(92,734) (60,936) (133,641)
Capital increase(3)-20,000- 100,000 48,000 -
Profit attributable to non-controlling interests213,984130,35550,086Profit attributable to non-controlling interests224,518 213,300 213,984
Transition Adjustments to the amendments to the IAS 19(1,790)(1,604)5,916Transition Adjustments to the amendments to the IAS 19- - (1,790)

Update PUT Olé Consignado S.A.		 (240,000) (106,440) -
Others(3,117)362(14,967) (14,266) (7,677) (3,117)
Balance at end of year436,894725,504435,062 558,581 529,990 436,894
(1)In 2017, it mainly refers mainly to the participation of non-controlling shareholders of BW Guirapá, in 2016. In 2019, it refers mainly to BW Guirapá and Banco PSA Finance Brasil, in 2015 refers to Super.Hyundai Capital, which was consolidated using the equity method.

(2)IncludesIn 2017, it mainly refers to the acquisitionbalance of the shares representing the remaining 50%non-controlling interests of the voting capital of Super by Aymoré CFI (note 4.b).

(3)IncreaseSantander Corretora de Seguros.Increase in the share capital of Olé Consignado.

(3)In 2019 and 2018, it refers to the capital increase of Olé Consignado.

29. Shareholders’ equity

(4)In 2017, it mainly refers to the balance of non-controlling interests of Santander Corretora de Seguros, before the merger events (Note 3).

28.Stockholders’ equity

 

a) Capital

 

According to the by-laws, Banco Santander’s shareSantander'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`stockholders' approval.

 

The capital stock, fully subscribed and paid, is divided into registered book-entry shares with no par value.

 

 Thousand of shares
Thousand of shares 2019 2018
CommonPreferred2017 TotalCommonPreferred2016 Total CommonPreferredTotal Common Preferred Total
Brazilian residents66,20791,779157,98667,49892,949160,447 90,069115,785205,854 82,043 107,699 189,742
Foreign residents3,752,4883,588,0577,340,5453,783,4733,619,1637,402,636 3,728,6263,564,0517,292,677 3,736,652 3,572,137 7,308,789
Total shares3,818,6953,679,8367,498,5313,850,9713,712,1127,563,083 3,818,6953,679,8367,498,531 3,818,695 3,679,836 7,498,531
(-) Treasury shares(5,845)(11,690)(25,786)(51,572) (16,702)(33,404) (13,317) (13,317) (26,634)
Total outstanding3,812,8503,673,9917,486,8413,825,1853,686,3267,511,511 3,801,9933,663,1347,465,127 3,805,378 3,666,519 7,471,897

 

 Thousand of shares
    CommonPreferred2015 Total
Brazilian residents   56,30681,280137,586
Foreign residents   3,794,6663,630,8337,425,499
Total shares   3,850,9723,712,1137,563,085
(-) Treasury shares   (20,218)(20,218)(40,436)
Total outstanding   3,830,7543,691,8957,522,649

F-88

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

 

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.

           
  Thousand of shares
    2017
      Common Preferred Total
Brazilian residents     66,207 91,779 157,986
Foreign residents     3,752,488 3,588,057 7,340,545
Total shares     3,818,695 3,679,836 7,498,531
(-) Treasury shares     (5,845) (5,845) (11,690)
Total outstanding     3,812,850 3,673,991 7,486,841

 

b) Dividends and Interest on Capital

 

According to the Bank’s by-laws, shareholdersbylaws, stockholders 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 payments have been calculated and paid in accordance with Brazilian Corporate Law.

Prior to the annual shareholders meeting,Annual Stockholders Meeting, the Board of Directors may resolve on the declaration and payment of dividends on earnings based onon: (i) financial statementsbalance sheets or earning reserves shownshowed in the last financial statement;balance sheet; or (ii) financial statementsbalance sheets issued in the period shorter than 6 months, since the total of dividends paid in each half of the fiscal year shall do not exceed the amount of capital reserves. These dividends are fully attributed to the mandatory dividend. The amount of R $ 7,800,000 in dividends and interest on own capital paid in February 2020, is recorded under the caption of other obligations - social and statutory (R $ 4,800,000 in 2018);

 

F-79 

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Brazilian Reais - R$ - unless otherwise stated)

    2017
 Real per Thousand Shares / Units
 Thousand of reaisCommonPreferredUnits
Interest on Capital(1) (6)500,00063,378069,7158133,0938
Interest on Capital(2) (6)500,00063,528069,8808133,4088
Interest on Capital(3) (6)500,00063,591769,9509133,5427
Intercalary Dividends(4) (6)2,500,000318,2994350,1293668,4287
Interest on Capital(5) (6)2,300,000292,8354322,1190614,9544
Total6,300,000   
   2019
   Thousand of reais Real per Thousand Shares / Units
    Common Preferred Units
          
Interest on Capital (1) (6)  1,000,000 127.5853 140.3438 267.9291
Interest on Capital (2) (6)  1,000,000 127.6399 140.4039 268.0438
Interest on Capital (3) (6)  1,000,000 127.6610 140.4271 268.0881
Interest on Capital (4) (6)  1,010,000 128.9673 141.8641 270.8314
Interim Dividends (5) (6)  6,790,000 867.0180 953.7197 1,820.7377
Total  10,800,000      

(1) Established by the Board of Directors in April 2017,March 29, 2019, Common Shares - R$53,8713,108.4475, preferred - R$59,2584 and119.2922 e Units - R$113,1297227.7397 net of taxes and was paid fromin May 26, 201728, 2019, without any compensation asremuneration for monetary correction.indexation.

(2) Established by the Board of Directors in July 2017,June 28, 2019, Common Shares - R$53,9988,108.4939, preferred - R$59,3987 and119.3433 e Units - R$113,3975227.8373 net of taxes and was paid from August 25, 2017in July 31, 2019, without any remuneration for monetary indexation.

(3) Deliberated by the Board of Directors on September 30, 2019, common - R$108.5119, preferred - R$119.3631 and Units - R$227.8749 net of taxes and were paid on October 30, 2019, without any remuneration monetary indexation.

(4) Deliberated by the Board of Directors on December 27, 2019, common - R$109.6222, preferred - R$120.5844 and Units - R$230.2067 net of taxes that will be paid in February 2020, without any monetary indexation.

(5) Deliberated by the Board of Directors on December 27, 2019, that was paid in February 21, 2020, without any monetary indexation. 

(6) The amount of dividends and interest on equity will be fully charged to the minimum mandatory dividends to be distributed by the Bank for the year 2019.

   2018
   Thousand of reais Real per Thousand Shares / Units
    Common Preferred Units
          
Interest on Capital (1) (6)  600,000 76.3304 83.9634 160.2938
Interim Dividends (2) (6)  600,000 76.4956 84.1451 160.6407
Interest on Capital (3) (6)  600,000 76.4985 84.1484 160.6469
Interest on Capital (4) (6)  2,880,000 367.4149 404.1564 771.5713
Interim Dividends (5) (6)  1,920,000 244.9433 269.4376 514.3809
Total  6,600,000      

(1) Established by the Board of Directors in March 27, 2018, Common Shares - R$ 64.8808, preferred - R$71.3689 and Units - R$ 136.2497 net of taxes, and was paid on April 26, 2018 without any compensation as monetary correction.indexation.

(2) Established by the Board of Directors in June 26, 2018, was paid on July 27, 2018 without any compensation as monetary indexation.

(3) Established by the Board of Directors in July 2017, Common SharesSeptember 28, 2018, common - R$54,0530, 65.0237, preferred - R$59,4583 71.5261 and Units - R$113,5113 136.5498 net of taxes and was paid fromon October 26, 20172018, without any compensation as monetary correction.

indexation. 

(4) Established by the Board of Directors in December 2017,28, 2018, common - R$ 312.3027, preferred - R$ 343.5329 and will beUnits - R$ 655.8356 net of taxes and paid fromon February 26, 20182019, without any compensation as monetary correction.indexation.

(5) EstablishedDeliberated by the Board of Directors inon December 2017, Common Shares - R$248,9101, preferred - R$273,801128, 2018 and Units - R$522,7112 netpaid as of taxes,February 26, 2019, without any monetary indexation.

(6) The amount of dividends and interest on shareholders' equity will be paid from February 26, 2018 without any compensation as monetary correction.fully charged to the minimum mandatory dividends to be distributed by the Bank for the financial year 2018.

 

F-89

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

      2017
      Thousand of reais Reais per Thousand Shares / Units
       Common Preferred Units
             
Interest on Capital (1) (6)     500,000 63.3780 69.7158 133.0938
Interest on Capital (2) (6)     500,000 63.5280 69.8808 133.4088
Interest on Capital (3) (6)     500,000 63.5917 69.9509 133.5426
Interim Dividends (4) (6)     2,500,000 318.2994 350.1293 668.4287
Interest on Capital (3) (5)     2,300,000 292.8354 322.1190 614.9544
Total     6,300,000      
(1) Established by the Board of Directors in April 2017, common - R$ 53.8713, preferred - R$ 59.2584 and Units - R$ 113.1297 net of taxes. They were paid as of May 26, 2017, without any monetary restatement.
(2) Established by the Board of Directors in July 2017, common - R$ 53.9988, preferred - R$ 59.3987 and Units - R$ 113.3975 net of taxes. They were paid as of August 25, 2017, without any monetary restatement.
(3) Established by the Board of Directors in September 2017, common - R$ 54.0530, preferred - R$ 59.4583 and Units - R$ 113.5113 net of taxes. They were paid as of October 26, 2017, without any monetary indexation.
(4) Deliberated by the Board of Directors in December 2017. They were paid on February 26, 2018, without any monetary indexation.
(5) Deliberated by the Board of Directors in December 2017, common - R $ 248.9101, preferred - R$ 273.8011 and Units - R$ 522.7112 net of taxes. They were paid on February 26, 2018, without any monetary indexation.

(6) The amount of interest on shareholders’ equityown capital and interim dividends will be fully charged to the mandatory dividends for the year 2017.

    2016
 Real per Thousand Shares / Units
 Thousand of reaisCommonPreferredUnits
Interest on Capital(1) (4)500,00063,429069,7719133,2009
Intermediate Dividends(2) (5)700,00088,830997,7140186,5448
Intercalary Dividends(2) (5)700,00088,830997,7140186,5448
Interest on Capital(3) (5)3,350,000425,1192467,6311892,7503
Total5,250,000   

(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 were 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
 Real per Thousand Shares / Units
 Thousand of reaisCommonPreferredUnits
Intercalary Dividends(1) (3)150,00018,947420,842139,7895
Intermediary Dividends(2) (4)3,050,000385,8116424,3927810,2043
Intercalary Dividends(3) (7)1,600,000202,7412223,0153425,7564
Interest on Capital(4) (7)1,400,000177,3985195,1384372,5369
Total6,200,000   
(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 as monetary update.

(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 as monetary update.

(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 update.

F-80 

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Brazilian Reais - R$ - unless otherwise stated)

financial year.

 

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: goodwill reserve for subscription of shares and other capital reserves, and can only be used to absorb losses that exceed retained earnings and profit reserves, redemption, reimbursement or acquisition of shares for the Bank´s own issue; capital increase, or payment of dividends to preferred shares under certain circumstances.

 

Reserve for equalization dividend

 

After the allocation of dividends, the remaining balance if any, may, upon proposal of the Executive Board and approved by the Board of Directors, be allocated to reserve for equalization of dividends, which will be limited to 50% of the capital. This reserve aims to ensure funds for the payment of dividends, including as interest on own capital, or any interim payment to maintain the flow of shareholders remuneration.

 

d) Treasury shares

 

In the meeting held on November 01, 2017,1, 2019, the Bank’s Board of Directors approved, in continuation of the buyback program that expired on November 3, 2017,5, 2019, 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 38,717,20437,256,072 Units, representing 38,717,20437,256,072 common shares and 38,717,20437,256,072 preferred shares, or the ADRs, which, on September 30, 2017,December 31, 2019, corresponded to approximately 1.03%1% of the Bank’s share capital. On September 30, 2017,December 31, 2019, the Bank held 373,269,82815,843,587 common shares and 401,074,24215,843,587 preferred shares being traded.

 

The Buyback has the purpose to (1) maximize the value creation to shareholdersstockholders 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 days12 months counted from November 6, 2017,5, 2019, and will expire on November 5, 2018.4, 2020.

 

 201720162015
 

Quantity

Quantity

Quantity

 UnitsUnitsADRsUnitsADRs
Treasury shares at beginning of the period25,7867,08013,13816,53113,081
Shares Acquisitions12,76814,284-13,87357
Cancellation of Shares(1)(2)(3)(32,276)13,13813,138(18,879)-
Payment - Share-based compensation(4,505)(8,716)-(4,446)-
Treasury shares at end of the period1,77325,786-7,08013,138
Balance of Treasury Shares in thousand of reais (2)R$148,246R$513,889R$0R$106,764R$317,094
Emission Costs in thousands of ReaisR$194R$145R$0R$95R$0
Balance of Treasury Shares in thousands of reaisR$148,440R$514,034R$0R$106,859R$317,094
Cost/Market Value     
Minimum costR$7.55R$7.55US$4,37R$11.01US$4,37
Weighted average costR$24.41R$19.93US$6,17R$14.28US$6,17
Maximum costR$32.29R$26.81US$10,21R$18.51US$10,21
Market valueR$27.64R$28.32US$8,58R$16.04US$3,89

F-90

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

  2019 2018 2017
  Quantity Quantity Quantity
  Units Units Units
Treasury shares at beginning of the period 13,317 1,773 25,786
Shares Acquisitions 6,465 15,816 12,768
Cancellation of Shares (2) - - (32,276)
Payment - Share-based compensation (3,080) (4,272) (4,505)
Treasury shares at end of the period 16,702 13,317 1,773
Balance of Treasury Shares in thousand of reais R$ 679,364 R$ 460,550 R$ 148,246

Emission Costs in thousands of Reais		 R$ 1,771 R$ 882 R$ 194
Balance of Treasury Shares in thousands of reais R$ 681,135 R$ 461,432 R$ 148,440
       
Cost/Share Price Units Units Units
Minimum cost (1) R$7.55 R$7.55 R$7.55
Weighted average cost (1) R$32.10 R$28.59 R$24.41
Maximum cost (1) R$49.55 R$43.84 R$32.29
Share Price R$42.60 R$42.70 R$31.88
(1)In January 2016 wasConsidering since the transformationbeginning of all ADRs that were held in treasury for UNIT’s.operations on the stock exchange.

 

(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)At the EGM held on September, 18, 2017, it was approved the cancellation of 64,551,366 treasury shares (equivalent to 32,276 thousand Units) with the counterparty headings Capital Reserves and Profit Reserves, which represent the total of treasury shares registered in the book of common shares at that date, without reduction of the capital and consequent change in the clause 5th from the Bylaws in order to reflect the new quantities of common and preferred shares, nominatives and without value which represent the Banco Santander´s capital.

 

Additionally, in the year ended December 31, 2017,2019, treasury shares were sold, that resulted in a gain of R$5,796 (2018 - loss of R$2,498 (201615,868 and 2017 - loss of R$11,574 and 2015 - R$3,918)2.498) recorded directly in equity in capital reserves.

F-81 

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Brazilian Reais - R$ - unless otherwise stated)

 

30. Earnings per share

29.Earnings per share

 

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.

 

2019 2018 2017
201720162015   
Profit attributable to the Parent 16,406,932 12,582,477 8,924,064
 
Earnings per share (Brazilian Reais)8,924,0647,334,5639,783,740 
Basic earnings per 1,000 shares (Brazilian Reais)  
Common shares1,133,43929,931,236,962,094.83 1,604.34 1,133.43
Preferred shares1,246,771,022,921,360,662,304.32 1,764.78 1,246.77
Net Profit attributable - Basic (Brazilian Reais)  
Common shares4,332,0263,560,2884,748,8967,965,194 6,108,349 4,332,026
Preferred shares4,592,0383,774,2755,034,8448,441,738 6,474,128 4,592,038
 
Weighted average shares outstanding - Basic  
Common shares3,822,0573,828,5553,839,1593,802,303 3,807,386 3,822,057
Preferred shares3,683,1453,689,6963,700,2993,663,444 3,668,527 3,683,145

F-91

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

 

b) Diluted earningsearning 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.

 

2019 2018 2017
201720162015   
Profit attributable to the Parent 16,406,932 12,582,477 8,924,064
 
Earnings per share (Brazilian Reais)8,924,0647,334,5639,783,740 
Diluted earnings per 1,000 shares (Brazilian Reais)  
Common shares1,132,44929,031,235,792,094.83 1,604.34 1,132.44
Preferred shares1,245,691,021,931,359,362,304.32 1,764.78 1,245.69
Net Profit attributable - Basic (Brazilian Reais)  
Common shares4,331,9553,560,2224,748,8107,965,194 6,108,349 4,331,955
Preferred shares4,592,1093,774,3415,034,9308,441,738 6,474,128 4,592,109
 
Weighted average shares outstanding (in thousand) - Diluted  
Common shares3,825,3133,832,2113,842,7443,802,303 3,807,386 3,686,401
Incremental shares from stock options granted under Stock Option Plan - Units3,2573,6563,585
Incremental shares from stock options granted under Stock Option Plan - Units (1)- - 3,257
  
Preferred shares3,686,4013,693,3523,703,8843,663,444 3,668,527 3,686,401
Incremental shares from stock options granted under Stock Option Plan - Units3,2573,6563,585
Incremental shares from stock options granted under Stock Option Plan - Units (1)- - 3,257

(1) The exercise period of the SOP 2013 Long Term Incentive Plan purchase option ended in June 2018. The Bank does not have stock-based compensation plans in force (Note 40) and consequently has no anti-dilution items.

 

31. Fair value of financial assets and liabilities

30.Fair value of financial assets and liabilities

 

Under IFRS 13, the fair value measurement uses a fair value hierarchy that reflects the model used in the measurement process which should be in accordance with the following hierarchical levels:

 

Level 1: Determined on the basis of public (unadjusted) quoted prices in highly active markets for identical assets and liabilities, these include public debt securities, stocks, derivatives listed.

 

Level 2: They 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: They 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, Other financial assets at fair value on through income statement, Available-for-sale financial assets and Financial liabilities held for tradingtrading.

 

Level 1: The securities with high liquidity and quoted prices in active market are classified as level 1. At this level there were classified most of the Brazilian Government Securities (mainly LTN, LFT, NTN-B, NTN-C and NTN-F), shares in stock exchange and other securities traded in the active market.

F-82 

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Brazilian Reais - R$ - unless otherwise stated)

 

Level 2: When quoted price cannot be observed, the Management, using its own internal models, make its 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 Levelat level 2 of the fair valueand compound securities hierarchy, and are composed mainly by Private Securities (highlighting the Debenture portfolio)Government Bonds (mainly NTN-A), committed and Cancelable LCI and in a market with less liquidityliquid market than those classified at Levellevel 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.

 

Derivatives

 

Level 1: Derivatives traded on stock exchanges are classified in Level 1 of the hierarchy.

F-92

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

 

Level 2: For derivatives traded over the counter, the valuation (primarily swaps and options) usually uses observable market data, such as: exchange rates, interest rates, volatility, correlation between indexes and market liquidity.

 

When pricing the financial instruments aforementioned, it is used the Black-Scholes Model (exchange rate options, interest rate options; caps and floors) and the present value method (discount of future values by market curves).

 

Level 3: Derivatives not traded in the stock exchange and that do not have an observable data in aan active market were classified as Level 3. These are composed by exotic derivatives.

Below are the valuation carachteristics considered for the main financial instruments classified as Level 3.

CategoryType Asset/LiabilityValuation techniqueMain unobservable inputs
Linear derivativesCoupon FraBMF Closing PricesCurrency Coupon rate - long term
Inflation SwapDiscounted cash flowIGPM Coupon rate
Interest Rate SwapDiscounted cash flowPre-fixed rates – long term
Non linear derivativesEquities OptionsBlack&ScholesImplicit volatility- long term
Inflation OptionsBlack&ScholesIPCA Implicit volatility- long term
Interest Rate OptionsBlack&ScholesIDI Implicit volatility- long term
Currency OptionsBlack&ScholesUSD/BRL Implicit volatility- long term
CashPension Plan LiabilityActuarial ModelIGPM Coupon rate
Private BondsDiscounted cash flowDiscount rate ("Yields")
Public BondsDiscounted cash flowNTN-C and TDA Discount rate ("Yields")
Put optionsPut OptionsDiscounted cash flowGrowth and Discount rates

The new Banco Santander´s policy related to instrument classification in the fair value hierarchy existing since September/2018, introduced detailed procedures about the instrument classification process. Definitions were included related to instruments, risk factors and deadlines as well as observability degree of market prices and its importance in the fair value measurement model. The application of such definitions since December 2019 resulted in reclassifications of certain financial instruments, as shown in the section “Changes of Fair Value Level 3”.

 

The following table shows a summary of the fair values ​​of financial assets and liabilities for the period ended December 31, 2017, 20162019, 2018 and 2015,2017, classified based on several measurement methods adopted by the Bank to determine their fair value:

 

Thousand of Reais2017
Thousand of reais 2019
Level 1(1)Level 2(1)Level 3Total Level 1 (1) Level 2 Level 3 Total
Financial assets held for trading34,380,54218,059,034-52,439,576
 
Financial Assets Measured At Fair Value Through Profit Or LossFinancial Assets Measured At Fair Value Through Profit Or Loss975,393 28,739,507 2,627,405 32,342,305
Debt instruments 975,393 132,277 2,627,405 3,735,075
Equity instruments - 28,607,230 - 28,607,230
Financial Assets Measured At Fair Value Through Profit Or Loss Held For Trading 35,057,803 21,247,552 715,548 57,020,903
Debt instruments33,891,360988,321-34,879,681 33,028,333 1,726,441 130,857 34,885,631
Equity instruments489,182588-489,770 2,029,470 - - 2,029,470
Derivatives-17,070,125-17,070,125 - 19,521,111 584,691 20,105,802
Financial assets designated at fair value through profit or loss1,593,95164,73833,3681,692,057
Non-Trading Financial Assets Mandatorily Measured At Fair Value Through Profit Or Loss 143,077 627 27,749 171,453
Loans and advances to customersLoans and advances to customers- - - -
Equity instruments 143,077 627 27,749 171,453
Other Financial Assets At Fair Value Through Profit Or LossOther Financial Assets At Fair Value Through Profit Or Loss- - - -
Debt instruments1,593,95164,738-1,658,689 - - - -
Equity instruments-33,368
Financial assets - available-for-sale79,301,0166,382,225140,14385,823,384
Financial Assets Measured At Fair Value Through Other Comprehensive IncomeFinancial Assets Measured At Fair Value Through Other Comprehensive Income93,555,527 1,612,741 951,966 96,120,234
Debt instruments78,335,6296,381,118-84,716,747 93,531,617 1,612,741 818,569 95,962,927
Equity instruments965,3871,107140,1431,106,637 23,910 - 133,397 157,307
Hedging derivatives (assets)-192,763-192,763Hedging derivatives (assets)- 339,932 - 339,932
Financial liabilities held for trading32,808,39216,514,154-49,322,546
Financial Liabilities Measured At Fair Value Through Profit Or LossFinancial Liabilities Measured At Fair Value Through Profit Or Loss- 45,499,913 564,757 46,064,670
Derivatives-16,514,154-16,514,154 - 21,664,260 564,757 22,229,017
Short positions32,808,392-32,808,392 - 23,835,653 - 23,835,653
Financial Liabilities Measured At Fair Value Through Profit Or LossFinancial Liabilities Measured At Fair Value Through Profit Or Loss- 3,719,416 1,600,000 5,319,416
Other Financial Liabilities - 3,719,416 1,600,000 5,319,416
Hedging derivatives (liabilities) 163,332-163,332Hedging derivatives (liabilities)- 200,961 - 200,961

(1) There was no transfer between levels 1 and 2.F-93

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

 

Thousand of Reais2016
Thousand of reais 2018
 
Level 1		 Level 2 Level 3 Total
 
Financial Assets Measured At Fair Value Through Profit Or LossFinancial Assets Measured At Fair Value Through Profit Or Loss2,660,859 40,540,054 510,887 43,711,800
Debt instruments 2,660,859 - 510,887 3,171,746
Equity instruments - 40,540,054 - 40,540,054
Financial Assets Measured At Fair Value Through Profit Or Loss Held For Trading 49,855,112 17,626,932 1,370,270 68,852,314
Debt instruments 49,094,924 432,910 538,635 50,066,469
Equity instruments 757,843 8,490 - 766,333
Derivatives 2,345 17,185,532 831,635 18,019,512
Non-Trading Financial Assets Mandatorily Measured At Fair Value Through Profit Or Loss 142,732 619,798 154,947 917,477
Loans and advances to customersLoans and advances to customers- 619,180 - 619,180
Equity instruments 142,732 618 154,947 298,297
Other Financial Assets At Fair Value Through Profit Or LossOther Financial Assets At Fair Value Through Profit Or Loss- - - -
Debt instruments --- -
Financial Assets Measured At Fair Value Through Other Comprehensive IncomeFinancial Assets Measured At Fair Value Through Other Comprehensive Income83,283,924 1,442,797 709,956 85,436,677
Debt instruments 83,253,117 1,442,797 699,777 85,395,691
Equity instruments 30,807 - 10,179 40,986
Hedging derivatives (assets)Hedging derivatives (assets)- 343,934 - 343,934
Financial Liabilities Measured At Fair Value Through Profit Or LossFinancial Liabilities Measured At Fair Value Through Profit Or Loss32,697,510 17,600,024 641,458 50,938,992
Derivatives 1,833 17,600,024 641,458 18,243,315
Short positions 32,695,677 - - 32,695,677
Hedging derivatives (liabilities)Hedging derivatives (liabilities)- 223,520 - 223,520
 
 
Thousand of reais 2017
 
Level 1		 Level 2 Level 3 Total
Level 1Level 2Level 3Total 
Financial assets held for trading59,410,90825,462,755-84,873,663Financial assets held for trading34,380,542 18,059,034 - 52,439,576
Debt instruments59,034,363960,583-59,994,946 33,891,360 988,321 - 34,879,681
Equity instruments376,54521,916-398,461 489,182 588 - 489,770
Derivatives-24,480,256-24,480,256 - 17,070,125 - 17,070,125
Financial assets designated at fair value through profit or loss1,597,66076,03537,5091,711,204Financial assets designated at fair value through profit or loss1,593,951 64,738 33,368 1,692,057
Debt instruments1,592,71476,035-1,668,749 1,593,951 64,738 - 1,658,689
Equity instruments4,946-37,50942,455 - - 33,368 33,368
Financial assets - available-for-sale51,160,0445,703,389951,61257,815,045Financial assets - available-for-sale79,301,016 6,382,225 140,143 85,823,384
Debt instruments50,172,6095,656,963-55,829,572 78,335,629 6,381,118 - 84,716,747
Equity instruments987,43546,426951,6121,985,473 965,387 1,107 140,143 1,106,637
Hedging derivatives (assets)-222,717-222,717Hedging derivatives (assets)- 192,763 - 192,763
Financial liabilities held for trading31,694,26919,925,600-51,619,869Financial liabilities held for trading32,808,392 16,514,154 - 49,322,546
Derivatives-19,925,600-19,925,600 - 16,514,154 - 16,514,154
Short positions31,694,269-31,694,269 32,808,392 - - 32,808,392
Hedging derivatives (liabilities)-311,015-311,015Hedging derivatives (liabilities)- 163,332 - 163,332

 

F-83 F-94

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Brazilian Reais - R$ - unless otherwise stated)

Thousand of Reais2015
 Level 1Level 2Level 3Total
Financial assets held for trading24,952,74425,583,987-50,536,731
Debt instruments24,579,100614,498-25,193,598
Equity instruments373,64431,329-404,973
Derivatives-24,938,160-24,938,160
Financial assets designated at fair value through profit or loss1,420,33286,238573,6642,080,234
Debt instruments1,420,33286,238-1,506,570
Equity instruments--573,664573,664
Financial assets - available-for-sale56,497,32010,910,469857,81768,265,606
Debt instruments56,250,01310,853,261-67,103,274
Equity instruments247,30757,208857,8171,162,332
Hedging derivatives (assets)-1,312,202-1,312,202
Financial liabilities held for trading20,047,63122,340,137-42,387,768
Derivatives-22,340,137-22,340,137
Short positions20,047,631--20,047,631
Hedging derivatives (liabilities)-2,376,822-2,376,822
 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

 

Movements in fair value of Level 3

 

The following tables demonstrate the movements during 2017, 20162019, 2018 and 20152017 for the financial assets and liabilities classified as Level 3 in the fair value hierarchy:

 

Thousand of ReaisFair Value
2016		Gains/losses
(Realized Not
Realized)		Transfers in and/ or out of Level 3AdditionsSettledFair value
2017
Thousand of reais Fair value 2018 Gains/ losses (Realized-Not Realized) Transfers in and/ or out of Level 3 Additions / Settled Impact of IFRS 9 Fair value 2019
 
Financial Assets Measured At Fair Value Through Profit Or LossFinancial Assets Measured At Fair Value Through Profit Or Loss510,887 290,773 1,700,499 125,246 - 2,627,405
Financial Assets Measured At Fair Value Through Profit Or Loss Held For Trading 1,370,270 238,632 (1,031,076) 137,722 - 715,548
Non-Trading Financial Assets Mandatorily Measured At Fair Value Through Profit Or Loss 154,947 (101,541) - (25,657) - 27,749
Financial Assets Measured At Fair Value Through Other Comprehensive Income 709,956 253,803 291 (12,084) - 951,966
Financial Liabilities Measured At Fair Value Through Profit Or LossFinancial Liabilities Measured At Fair Value Through Profit Or Loss641,458 190,813 (586,346) 318,832 - 564,757
 
 
Thousand of reais Fair value 2017 Gains/ losses (Realized-Not Realized) Transfers in and/ or out of Level 3 Additions / Settled Impact of IFRS 9 Fair value 2018
 
Financial Assets Measured At Fair Value Through Profit Or LossFinancial Assets Measured At Fair Value Through Profit Or Loss33,368 60,887 - 445,991 (29,359) 510,887
Financial Assets Measured At Fair Value Through Profit Or Loss Held For Trading - (181,355) 1,264,576 246,051 40,998 1,370,270
Non-Trading Financial Assets Mandatorily Measured At Fair Value Through Profit Or Loss - (7,280) - - 162,227 154,947
Financial Assets Measured At Fair Value Through Other Comprehensive Income 140,143 47,773 645,708 - (123,668) 709,956
Financial Liabilities Measured At Fair Value Through Profit Or LossFinancial Liabilities Measured At Fair Value Through Profit Or Loss- 115,212 710,219 (183,973) - 641,458
 
Thousand of reais Fair value 2016 Gains/ losses (Realized-Not Realized) Transfers in and/ or out of Level 3 Additions / Settled Fair value 2017
    
Financial assets designated at fair value through profit or loss37,509(2,555)-(1,586)33,368Financial assets designated at fair value through profit or loss 37,509 (2,555) - (1,586) 33,368
Financial assets - available-for-sale951,61218,474-(829,943)140,143Financial assets - available-for-sale 951,612 18,474 - (829,943) 140,143
 

 

Thousand of ReaisFair Value
2016		Gains/losses
(Realized Not
Realized)		Transfers in and/ or out of Level 3AdditionsSettledFair value
2017
       
Financial assets designated at fair value through profit or loss573,6642,806(14,345)111(524,727)37,509
Financial assets - available-for-sale857,817(60,934)(3,085)461,185(303,371)951,612

Fair value movements linked to credit risk

 

Thousand of ReaisFair Value
2016		Gains/losses
(Realized Not
Realized)		Transfers in and/ or out of Level 3AdditionsSettledFair value
2017
       
Financial assets held for trading3,329---(3,329)-
Financial assets designated at fair value through profit or loss902,794(329,130)---573,664
Financial assets - available-for-sale897,956(58,008)-54,785(36,916)857,817

Changes in fair value attributable to changes in credit risk are determined on the basis of changes in the prices of credit default swaps compared to similar obligations of the same obligor when such prices are observable, since these credit swaps better reflect the market risk assessment for a specific financial asset. When such prices are not observable, changes in fair value attributable to changes in credit risk are determined as the total value of changes in fair value not attributable to changes in the underlying interest rate or other observed market rates. In the absence of specific observable data, this approach provides a reasonable approximation of changes attributable to

F-95

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

credit risk, as it estimates the margin change above the reference value that the market may require for the financial asset. In 2018, there were no significant changes between the fair value categories due to changes in credit risk.

 

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.

 

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

 

Below is a comparison of the carrying amounts of financial assets of the Bank measured by a value other than the fair value and their respective fair values on December 31, 2017, 20162019, 2018 and 2015:2017:

 

 Thousand of reais     2019
    Carrying Amount Fair Value Level 1 Level 2 Level 3
 Assets      
             
 Money market investments - Brazilian Central Bank (note 4)15,249,515 15,249,515 - 15,249,515 -
 Financial Assets Measured At Amortized Cost:           
 Loans and amounts due from credit institutions (note 5)109,233,128 109,233,128 - 109,233,128 -
 Loans and advances to customers (note 9)326,699,480 327,278,243 - - 327,278,243
 Financial Assets Measured At Amortized Cost - Debt instruments (note 6)38,748,296 39,678,192 5,378,791 7,858,612 26,440,789
 Total  489,930,419 491,439,078 5,378,791 132,341,255 353,719,032

             
 Thousand of reais     2018
    Carrying Amount Fair Value Level 1 Level 2 Level 3
 Assets      
             
 Money market investments - Brazilian Central Bank (note 4)15,228,491 15,269,809 - 15,269,809 -
 Financial Assets Measured At Amortized Cost:        
 Loans and amounts due from credit institutions (note 5)79,607,001 79,607,197 - 79,607,197 -
 Loans and advances to customers (note 9)301,702,207 303,495,240 - - 303,495,240
 Financial Assets Measured At Amortized Cost - Debt instruments (note 6)36,799,509 38,927,356 9,766,162 29,161,194 -
 Total  433,337,208 437,299,602 9,766,162 124,038,200 303,495,240

             
 Thousand of reais     2017
    Carrying Amount Fair Value Level 1 Level 2 Level 3
 Assets      
             
 Money market investments - Brazilian Central Bank (note 4)33,831,521 33,914,021 - 33,914,021 -
 Investments Held-to-Maturity (note 6)10,214,454 10,587,117 7,251,246 3,335,871 -
 Loans and receivables:           
 Loans and amounts due from credit institutions (note 5) 65,209,902 65,209,902 - 65,209,902 -
 Loans and advances to customers (note 9) 272,420,157 275,647,324 - - 275,647,324
 Loans and receivables - Debt instruments (note 6) 17,616,515 17,127,511 - 17,127,511 -
 Total  399,292,549 402,485,875 7,251,246 119,587,305 275,647,324

F-84 

F-96

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Brazilian Reais - R$ - unless otherwise stated)

Thousand of Reais2017
Assets
Carrying Amount		Fair ValueLevel 1Level 2Level 3
      
Money market investments - Brazilian Central Bank (note 5)33,831,52133,914,021-33,914,021-
Investments Held-to-Maturity (note 7)10,214,45410,587,1177,251,2463,335,871-
Loans and receivables:
Loans and amounts due from credit institutions (note 6)		32,300,09532,300,095-32,300,095-
Loans and advances to customers (note 10)272,420,157275,647,324--275,647,324
Loans and receivables - Debt instruments (note 7)17,616,51517,127,511-17,127,511-
Total366,382,742369,576,0687,251,24686,677,498275,647,324

Thousand of Reais2016
Assets
Carrying Amount		Fair ValueLevel 1Level 2Level 3
      
Money market investments - Brazilian Central Bank (note 5)46,371,81446,341,971-46,341,971-
Investments Held-to-Maturity (note 7)10,048,76110,555,4376,942,1733,613,264-
Loans and receivables:
Loans and amounts due from credit institutions (note 6)		27,762,47327,757,607-27,757,607-
Loans and advances to customers (note 10)252,002,774253,860,027--253,860,027
Loans and receivables - Debt instruments (note 7)16,283,25916,003,885-16,003,885-
Total352,469,081354,518,9276,942,17393,716,727253,860,027

Thousand of Reais2015
Assets
Carrying Amount		Fair ValueLevel 1Level 2Level 3
      
Money market investments - Brazilian Central Bank (note 5)31,316,91731,310,136-31,310,136-
Investments Held-to-Maturity (note 7)10,097,8369,257,5195,698,2113,559,308-
Loans and receivables:
Loans and amounts due from credit institutions (note 6)		42,422,63842,381,130-42,381,130-
Loans and advances to customers (note 10)252,033,449251,319,173--251,319,173
Loans and receivables - Debt instruments (note 7)11,812,70111,457,378-11,457,378-
Total347,683,541345,725,3365,698,21188,707,952251,319,173
 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

 

ii) Financial liabilities measured at other than fair value

 

Following is a comparison of the carrying amounts of Bank´s financial liabilities measured by a value other than fair value and their respective fair values on December 31 , 2017, 20162019, 2018 and 2015:2017:

 

Thousand of Reais2017
Liabilities
Carrying Amount		Fair ValueLevel 1Level 2Level 3
      
Financial liabilities at amortized cost:     
Deposits from Bacen and credit institutions (note 17)79,068,60479,068,564--79,068,564
Customer deposits (note 18)258,482,156258,576,177--258,576,177
Marketable debt securities (note 19)70,247,01270,245,820-2,000,55268,245,268
Subordinated liabilities (note 20)519,230528,799--528,799
Debt Instruments Eligible to Compose Capital (note 21)8,436,9018,436,901-8,436,901-
Other financial liabilities (note 22)44,260,73543,003,735--43,003,735
Total461,014,638459,859,996-10,437,453449,422,543
       

F-85 

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Brazilian Reais - R$ - unless otherwise stated)

Thousand of reais     2019
   Carrying Amount Fair Value Level 1 Level 2 Level 3
Liabilities      
            
Financial liabilities at amortized cost:         
Deposits from Bacen and credit institutions (note 16)98,586,389 98,605,373 - 98,605,373 -
Customer deposits (note 17)336,514,597 336,593,455 - 336,593,455 -
Marketable debt securities (note 18)73,702,474 73,889,348 - 10,205,065 63,684,284
Subordinated liabilities (note 19)10,175,961 10,175,961 - 10,175,961 -
Other financial liabilities (note 21)60,885,370 60,885,370 - - 60,885,370
Total  579,864,790 580,149,506 - 455,579,853 124,569,654

 

Thousand of Reais2016
Liabilities
Carrying Amount		Fair ValueLevel 1Level 2Level 3
      
Financial liabilities at amortized cost:     
Deposits from Bacen and credit institutions (note 17)78,319,96078,323,271--78,323,271
Customer deposits (note 18)231,079,303231,125,526--231,125,526
Marketable debt securities (note 19)99,842,95599,671,288-7,321,87092,349,418
Subordinated liabilities (note 20)466,246452,439--452,439
Debt Instruments Eligible to Compose Capital (note 21)8,311,9188,311,918-8,311,918-
Other financial liabilities (note 22)36,879,09935,622,099--35,622,099
Total454,899,481453,506,541-15,633,788437,872,753
       
            
Thousand of reais     2018
   Carrying Amount Fair Value Level 1 Level 2 Level 3
Liabilities      
            
Financial liabilities at amortized cost:         
Centrals banks (note 16)  98,716,735 98,713,988 - 98,713,988 -
Customers (note 17)  285,344,281 285,417,696 - 285,417,696 -
Marketable debt securities (note 18)74,626,232 74,783,289 - 4,599,204 70,184,085
Subordinated liabilities (note 19)9,885,607 9,853,157 - 9,853,157 -
Debt Instruments Eligible to Compose Capital (note 20)9,779,944 9,782,373 - 9,782,373 -
Other financial liabilities (note 21)49,782,780 49,782,780 - - 49,782,780
Total  528,135,579 528,333,283 - 408,366,418 119,966,865

 

Thousand of Reais2015
Liabilities
Carrying Amount		Fair ValueLevel 1Level 2Level 3
      
Financial liabilities at amortized cost:     
Deposits from Bacen and credit institutions (note 17)69,306,90269,307,617--69,307,617
Customer deposits (note 18)227,462,949227,422,985--227,422,985
Marketable debt securities (note 19)94,658,30095,486,114-13,712,05781,774,057
Subordinated liabilities (note 20)8,097,3048,142,296--8,142,296
Debt Instruments Eligible to Compose Capital (note 21)9,959,0379,959,037-9,959,037-
Other financial liabilities (note 22)32,072,64530,815,646--30,815,646
Total441,557,137441,133,695-23,671,094417,462,601
       

            
Thousand of reais     2017
   Carrying Amount Fair Value Level 1 Level 2 Level 3
Liabilities      
            
Financial liabilities at amortized cost:         
Centrals banks (note 16)  79,068,604 79,068,564 - - 79,068,564
Customers (note 17)  258,482,156 258,576,177��- - 258,576,177
Marketable debt securities (note 18)70,247,012 70,245,820 - 2,000,552 68,245,268
Subordinated liabilities (note 19)519,230 528,799 - - 528,799
Debt Instruments Eligible to Compose Capital (note 20)8,436,901 8,436,901 - 8,436,901 -
Other financial liabilities (note 21)44,260,735 43,003,735 - - 43,003,735
Total  461,014,638 459,859,996 - 10,437,453 449,422,543

The methods and assumptions used to estimate the fair values summarized in the tables above are set forth below:

 

- Loans and amounts due from credit institutions and from clients – Fair value are estimated for groups of loans with similar characteristics. The fair value was measured by discounting estimated cash flow using the average 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

F-97

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

important to highlight 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 Client 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.

 

- Debt and Subordinated Securities 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.

 

32. Operational Ratios

Financial institutions are required to maintain Regulatory Capital (PR), Tier I and Principal Capital consistent with their risk activities, higher than the minimum requirement of the Regulatory Capital Requirement, represented by the sum of the partial credit, market 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.

31.Operational Ratios

 

In July 2008 the regulations governing the measurement of regulatory capital came into force underthe rules on regulatory capital measurement by the Standardized Approach of Basel II. On 2013 was issued a set of Resolutions and Circulars, aligned with the recommendations of the Basel II Standardized Approach.Committee on Banking Supervision. These regulationsrules were revokedrepealed by CMN Resolution 4,192/nº 4,192 and 4,193 which took effect from October 2013, and Resolution 4,278/2013, which came into effect in October 2013. Also, Resolutions 4,193 and 4,281 of 2013, which establishestablishing the model for calculating the minimum Regulatory Capital requirements, for Reference Equity (PR), of LevelTier I and Principal Capital.Common Equity Tier I. These Resolutions determinestates that the composition of the Referential Equity be madeRegulatory Capital is done through equity, subordinated debt and hybrid capital instruments.

As required by CMN Resolution nº 4,193/2013, the requirement for PR in 2018 was 11.0%, composed of 8.625% of Reference Equity Minimum plus 1.875% of Capital Conservation Additional. Considering this additional, PR Level I increased to 8.375% and Minimum Principal Capital to 6.875%.

For the base year 2019, the PR requirement remains at 10.5%, including 8.0% of Minimum of Reference Equity and a further 2.5% of Capital Conservation Additional. The PR Level I reaches 8.5% and the Principal Capital Minimum 7.0%.

As a continuation the adoption of the rules established by CMN Resolution nº 4,192/2013, as of January 2015, came into force the Prudential Conglomerate, defined by CMN Resolution nº 4,280/2013.The index is calculated on a consolidated basis based on the information of Consolidated Prudential, as shown below:

 

F-86 

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Brazilian Reais - R$ - unless otherwise stated)

 Financial Conglomerate Financial Conglomerate
Thousand of Reais2017(1)2016(1)2015(2)
Thousand of reais 2019 (1) 2018 (1) 2017 (1)
Tier I Regulatory Capital56,386,00156,264,02152,785,049 66,481,661 61,476,715 56,386,001
Principal Capital52,196,89352,136,83747,840,179 61,389,509 56,581,518 52,196,893
Supplementary capital4,189,1084,127,1844,944,870 5,092,153 4,895,197 4,189,108
Tier II Regulatory Capital4,250,4474,280,8645,182,065 5,083,808 4,887,175 4,250,447
Regulatory Capital (Tier I and II)60,636,44860,544,88557,967,114Regulatory Capital (Tier I and II)71,565,469 66,363,890 60,636,448
Required Regulatory Capital383,132,69336,669,57040,531,194
Portion of Credit Risk(3)324,696,45831,309,94436,355,897
Market Risk Portions(4)25,857,1092,388,6262,300,969
Operational Risk Portion32,579,1262,971,0001,874,328
Credit Risk (1) 407,786,238 358,955,592 324,696,458
Market Risk (2) 20,235,208 39,231,773 25,857,109
Operational Risk 47,965,481 42,375,554 32,579,126
Total RWA (3) 475,986,927 440,562,919 383,132,693
Basel I Ratio14.715.214.3 13.97 13.95 14.72
Basel Principal Capital13.614.013.0 12.90 12.84 13.62
Basel15.8%16.3%18.2%
Basel Regulatory Capital 15.04 15.06 15.83
(1)Amounts calculatedExposures to credit risk subject to the calculation of the capital requirement using a standardized approach (RWACPAD) are based on the consolidated information providedprocedures established by Circular Bacen 3,644, dated March 4, 2013 and its subsequent complements through the Consolidated Prudential.

(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 inclusionswording of Circular Bacen Circular 3,7143,174 of August 20, 2014 and Bacen Circular 3,770 of October 29,2015, which amending Circular 3,644 of March 4, 2013.29, 2015.

(4)(2)Includes portions for market risk exposures subject to variations in rates of foreign currency coupons (PJUR2)(RWAjur2), price indexes (PJUR3)(RWAjur3) and interest rate (PJUR1/PJUR4)(RWAjur1/RWAjur4), the price of commodities (PCOM)(RWAcom), the price of shares classified as trading portfolios (PACS)(RWAacs), and portions for gold exposure and foreign currency transactions subject to foreign exchange (PCAM)(RWAcam).

The risk activity is ruled 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;

• 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 ruling 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 of committees that act according to pre-defined levels of authority. The CER - Executive Risk Committee is the local decision forum with representatives of Bank Management, including the CEO, the risk vice president and the other members of the executive committee. The main attributions of this Committee are:

• Follow the evolution of credit and market portfolios;

• Decide on credit proposals;

F-87 

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Brazilian Reais - R$ - unless otherwise stated)

• 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 rule 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.

(3)Risk Weighted Assets.

 

Banco Santander, quarterly disclosediscloses Pillar III information relating to risk management, and Required Regulatory Capital (PRE) which is not an extension of the Financial Statements and it isn’t audited.Risk Weighted Assets. A report with further details of the structure and methodology will be disclosed aton the website www.santander.com.br/www.ri.santander.com.br/ri.

 

Financial institutions are required to maintain investments in tangiblepermanent assets compatible with adjusted regulatory capital. Funds invested in tangiblepermanent assets, calculated on a consolidated basis, are limited to 50% of adjusted regulatory capital, as per prevailing regulation. On December 31, 2017, 2016 and 2015 Banco Santander classifies for said index. The Bank is in compliance with the requirements aforementioned.

 

33. Interest and similar income

F-98

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

32.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, regardless the fair value measurement; and the rectifications of income as a result of hedge accounting. Interest is recognized through its gross value, without deducting any tax withheld at source.

 

The breakdown of the main items of interest and similar charges accrued in 2017, 20162019, 2018 and 20152017 is as follows:

 

Thousand of reais201720162015   2019 2018 2017
  
Cash and balances with the Brazilian Central Bank5,953,7657,315,5704,625,467Cash and balances with the Brazilian Central Bank 3,827,648 5,095,828 5,953,765
Loans and advances - Credit institutions5,107,3557,472,7295,075,636Loans and advances - Credit institutions 3,843,798 2,977,670 5,107,355
Loans and advances - Customers44,507,21743,977,98141,844,940Loans and advances - Customers 50,406,078 46,471,507 44,507,217
Debt instruments13,456,80214,783,16414,872,834 13,528,096 13,629,167 13,456,802
Pension Plans (Note 22.b) 27,353 - -
Other interest2,393,2103,596,6333,451,323 1,208,087 2,304,221 2,393,210
Total71,418,34977,146,07769,870,200 72,841,060 70,478,393 71,418,349

 

34. Interest expense and similar charges

33.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, regardless the fair value measurement; 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 2017, 20162019, 2018 and 20152017 is as follows:

 

F-88 

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Brazilian Reais - R$ - unless otherwise stated)

Thousand of reais201720162015   2019 2018 2017
  
Credit institutions deposits3,782,7813,369,9314,584,244 4,866,357 5,367,471 3,782,781
Debt securities issued19,490,80725,693,23620,666,382
Customer deposits 14,965,958 13,576,866 19,490,807
Marketable debt securities and subordinated liabilities: Marketable debt securities and subordinated liabilities:    
Marketable debt securities (note 19)7,901,19912,212,92210,047,874
Subordinated liabilities (note 20)52,984731,5941,019,302
Debt Instruments Eligible to Compose Capital (note 21)495,188501,748503,290
Provisions for pensions (note 24.b)292,628290,920404,171
Marketable debt securities (note 18)Marketable debt securities (note 18) 5,138,306 4,606,949 7,901,199
Subordinated liabilities (note 19)Subordinated liabilities (note 19) - 25,336 52,984
Debt Instruments Eligible to Compose Capital (note 20)Debt Instruments Eligible to Compose Capital (note 20) 659,715 604,216 495,188
Pension Plans (note 22.b) 342,068 343,137 292,628
Other interest(1)4,456,2733,759,2331,307,826 2,547,549 4,033,076 4,456,273
Total36,471,86046,559,58438,533,089 28,519,953 28,557,051 36,471,860
(1)In December 31 2015, includes R$2,057 million related to the reversalIt is mainly composed of legal obligations.Expenses with Interest on Repo Agreements

 

35. Income from equity instruments

34.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:

 

Thousand of reais201720162015   2019 2018 2017
  
Equity instruments classified as: Equity instruments classified as:    
Financial assets held for trading18,45821,48944,312Financial assets held for trading - - 18,458
Financial Assets Measured At Fair Value Through Profit Or LossFinancial Assets Measured At Fair Value Through Profit Or Loss 13,398 27,047 -
Financial assets - available-for-sale64,662237,05685,703Financial assets - available-for-sale - - 64,662
Other financial instruments at fair value through profit or loss 12,866
Financial Assets Measured At Fair Value Through Other Comprehensive IncomeFinancial Assets Measured At Fair Value Through Other Comprehensive Income5,535 5,576 -
Total83,120258,545142,881 18,933 32,623 83,120

F-99

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

35.Fee and commission income

 

36. Fee and commission income

“FeeThe heading “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:

 

Thousand of reais201720162015   2019 2018 2017
  
Collection and payment services: Collection and payment services:    
Bills970,293789,996654,340 1,143,229 1,070,258 970,293
Demand accounts2,156,3841,786,1751,496,535 2,554,559 2,311,925 2,156,384
Cards (Credit and Debit) and Acquiring Services4,985,3064,090,7663,479,361Cards (Credit and Debit) and Acquiring Services 6,620,708 5,854,503 4,985,306
Checks and other172,718169,100154,400 188,249 169,872 172,718
Orders471,763364,102318,322 720,521 622,405 471,763
Total8,756,4647,200,1396,102,958 11,227,266 10,028,962 8,756,464
 
Marketing of non-Banking financial products: Marketing of non-Banking financial products:    
Investment funds819,7481,014,401982,533 725,494 717,924 819,748
Insurance2,414,4782,114,3162,156,230 3,120,471 2,975,661 2,414,478
Capitalization363,516325,53115,765
Capitalization plans 829,852 402,859 363,516
Total3,597,7423,454,2483,154,528 4,675,817 4,096,444 3,597,742
 
Securities services:     
Securities underwriting and placement513,727357,513280,471Securities underwriting and placement 721,793 448,914 513,727
Securities trading114,015115,334105,979 186,847 137,617 114,015
Administration and custody191,98765,66781,154Administration and custody 401,310 41,794 191,987
Asset management2,3531,8631,705 2,291 2,173 2,353
Total822,082540,377469,309 1,312,241 630,497 822,082
Other: 
Foreign exchange742,676722,912597,620
Financial guarantees672,801634,375507,921
Other fees and commissions1,223,778996,430964,855
Total2,639,2552,353,7172,070,396
Total15,815,54313,548,48111,797,191

            
Other:           
Foreign exchange      968,270 934,801 742,676
Financial guarantees      650,241 708,819 672,801
Other fees and commissions    1,558,623 1,328,928 1,223,778
Total      3,177,134 2,972,549 2,639,255
            
Total      20,392,458 17,728,452 15,815,543

F-89 

F-100

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Brazilian Reais - R$ - unless otherwise stated)

36.Fee and commission expense

 

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.

 

The breakdown of the balance of this item is as follows:

 

Thousand of reais201720162015   2019 2018 2017
  
Commissions assigned to third parties(1)1,975,3791,620,8121,520,480Commissions assigned to third parties(1) 3,639,239 2,364,119 1,975,379
Other fees and commissions1,118,296950,073793,202Other fees and commissions 1,040,066 1,232,174 1,118,296
Total3,093,6752,570,8852,313,682 4,679,306 3,596,293 3,093,675
(1) Composed, principally, by Credit cards. 

(1) Composed, mainly, by credit cards.

 

38. Gains or losses on financial assets and liabilities

37.Gains or losses on financial assets and liabilities

 

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:

 

Thousand of reais201720162015
    
Gains or losses on financial assets and liabilities held for trading, net(1)1,174,1113,166,399(19,936,801)
Gains or losses on financial assets and liabilities measured at fair value through profit or loss, net(2)30,69482,63846,859
Gains or losses on financial assets and liabilities not measured at fair value through profit or loss, net(122,115)(115,202)(120,523)
Financial assets - available-for-sale   
Debt instruments(156,802)(108,318)385,605
Equity instruments34,687(6,884)(506,128)
Gains or losses from hedge accounting, net(113,600)(117,679)7,606
Total969,0903,016,156(20,002,859)
(1)Includes the fiscal hedge of the Bank’s interest in Cayman, which is a non-autonomous subsidiary (note 25).
Thousand of reais      2019 2018 2017
            
Financial Assets Held For Trading (1)   - -1,174,111
Financial Assets Measured At Fair Value Through Profit Or Loss 252,253 (138,673) -
Financial Assets Measured At Fair Value Through Profit Or Loss Held For Trading (1)2,391,080 (2,764,859) -
Non-Tranding Financial Assets Mandatorily Measured At Fair Value Through Profit Or Loss11,501 61,239 -
Other Financial Assets At Fair Value Through Profit Or Loss (2) - - 30,694
Financial Assets Not Measured At Fair Value Through Profit Or Loss (57,522) (138,104) (122,115)
Financial Assets available-for-sale        
  Debt instruments      (46,136) (111,750) (156,802)
  Equity instruments      (11,386) (26,354) 34,687
Financial Assets Measured At Fair Value Through Other Comprehensive Income    
Gains or losses from hedge accounting, net   (134,767) 197,595 (113,600)
Total      2,462,545 (2,782,802) 969,090

(1) Includes the exchange hedge of the Bank’s interest in Cayman (note 24).

(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.

 

(2)38.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.Exchange differences (net)

 

39. “Exchange differences (net)

"Exchange differences"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.

 

Thousand of reais201720162015
Thousand of Reais   2019 2018 2017
  
Revenue with Exchange variations24,008,38216,634,80952,013,425Revenue with Exchange variations 23,622,963 12,752,765 24,008,382
Expenses with Exchange Variations(23,403,326)(12,059,995)(41,929,005)Expenses with Exchange Variations (26,411,500) (15,559,237) (23,403,326)
Total605,0564,574,81410,084,420 (2,788,537) (2,806,471) 605,056

 

40. Other operating income and expenses

F-101

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

39.Other operating income and expenses

 

The breakdown of "Other operating income (expense)" is as follows:

 

Thousand of reais201720162015
    
Other operating income896,279690,310566,006
Other operating expense(1,259,338)(1,067,560)(668,444)
Contributions to fund guarantee of credit - FGC(308,954)(247,321)(244,685)
Total(672,013)(624,571)(347,123)

F-90 

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Brazilian Reais - R$ - unless otherwise stated)

Thousand of reais      2019 2018 2017
            
Other operating income      591,125 556,715 896,279
Other operating expense      (1,351,568) (1,281,764) (1,259,338)
Contributions to fund guarantee of credit - FGC   (347,276) (330,801) (308,954)
Total      (1,107,719) (1,055,850) (672,013)

 

41. Personnel expenses

40.Personnel expenses

 

a) Breakdown

 

The breakdown of “Personnel expenses” is as follows:

 

Thousand of reais201720162015   2019 2018 2017
 
Wages and salaries5,713,7025,377,2844,655,400 5,876,328 5,812,688 5,713,702
Social security costs1,381,2291,273,4861,316,282 1,276,620 1,404,537 1,381,229
Benefits1,309,3141,277,7811,183,902 1,491,485 1,387,078 1,309,314
Defined benefit pension plans (note 24)20,08124,48031,332
Defined benefit pension plans (note 22)Defined benefit pension plans (note 22) 10,917 8,939 20,081
Contributions to defined contribution pension plans87,09986,57678,785Contributions to defined contribution pension plans 131,885 131,388 87,099
Share-based compensation87,29386,963175,976Share-based compensation 88,248 58,050 87,293
Training58,33862,51892,883 66,215 62,756 58,338
Other personnel expenses280,222188,177264,232 386,016 340,571 280,222
Total8,937,2788,377,2657,798,792 9,327,714 9,206,007 8,937,278

 

b) Share-Based Compensation

 

Banco Santander has long-terms compensation plans linked to the market price of the shares. The members of the Executive Board of Banco Santander are eligible for these plans, as well as other members selected by the Board of Directors, and informed to the Human Resources, whose selection will take into account seniority of the group. For the Board of Directors members in order to be eligible, it is necessary to exercise Executive Board functions. These amounts are recorded under Other liabilities (note 26)(Note 25) and personnel expenses (Note 41)40.a).

 

b.1) Local Program

 

TheThose are the compensation long-term incentive plans SOP 2014, PSP 2013programs and SOP 2013 were closed in the year 2016. In 2017, the only stock purchase plan of the Bank that remains open for the year is the Deposit Certificate Purchase Option Plan of Units (SOP 2013), as approved at the EGM of April 29, 2013. In 2017, a new plan for the Private area called the Private Ultra High Long Term Incentive Plan was set up.

(i) Share purchase plans

Long-Term Incentive Plan – SOP 2013: It is a call option plan with 3 years of duration. The period for the exercise comprises 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%.

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, 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 exercise.

Total Shareholder Return (TSR) rankSOP 2013(1)
% of Exercisable Shares
1st
2nd100%
3rd75%
Total50%

(1) The percentage of shares determined at the position of TSR is subject to a penalty according to the implementation of the RoRWA.

For fair value measurement the following premises was used:characteristics.

 

SOP 2013
Method of AssessmentProgramBlack & Scholes
Volatility40.00%
Rate of Dividends3.00%
Vesting Period3 years
Average Exercise Time5 years
  

F-91 

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Brazilian Reais - R$ - unless otherwise stated)

PlanLiquidity TypeSOP 2013Vesting PeriodPeriod of Exercise/Settlement
Risk-Free RateLocal11.80%
Probability of Occurrence60.27%
Fair Value of the Option SharesR$5.96
  Long-Term Incentive Plan - Private Ultra High (1)MoneyApr/2017 to Dec/19In March/2020 and March/2021
GlobalGlobal Long-Term – ILP CRDIV - Granted 2015 (2) (3)Santander Global Group Shares2015 to 2018In 2019/2020
LocalLong-Term Incentive Plan – TechnologySantander Brasil Bank SharesJul/2019 to Jun/2022In July/2022
LocalLong-Term Incentive Plan – Pi InvestmentsSantander Brasil Bank SharesJan/2019 to Dec/2021In March/2022 and March/2023
LocalLong-Term Incentive Plan – Ben'Santander Brasil Bank SharesJan/2019 to Dec/2021In March/2022 and March/2023

 

The average value of shares SANB11(Shares of the Bank in B3 S.A.) (Current Company Name of BM&FBovespa) in the exercise ended on December 31, 2017 is R$28.47 (2016 - R$19.94 and 2015 - R$14.96 ).

On 2017, no pro rata expenses were recorded (2016 - R$15,789), related to the Stock Option Certificate (SOP). In the same period 2017, there were no expenses related to the Long Term Incentive Plan - Investment in Certificate of Deposit of Shares - Units (2016 - R$9,798).

 Number of UnitsExercise
Price in Reais		Year GrantedEmployeesDate of Commencement of Exercise PeriodExpiration Date of Exercise Period
       
Final Balance on December 31, 201512,663,604     
Cancelled options (SOP - 2013)(1,346,779)17.922013Executives06/30/1606/30/18
Exercised options (SOP - 2013)(6,377,786)17.922013Executives06/30/1606/30/18
Granted options (SOP - 2013)220,60614.312013Executives06/30/1606/30/18
Cancelled options (PSP - 2013)(298,446)12.722013Executives08/13/1306/30/16
Granted options (PSP - 2013)(2,147,515)-2013Executives08/13/1306/30/16
Cancelled options (SOP - 2014)(34,196)12.842011Executives06/30/1406/30/16
Exercised options (SOP - 2014)(693,230)-2011Executives06/30/1406/30/16
Final Balance on December 31, 20161,986,258     
Exercised options (SOP - 2013)(869,247)12.842013Executives06/30/1606/30/18
Final Balance on December 31, 20171,117,011     

(ii) Local Long-Term Incentive Plan - Cash

Long-Term Incentive Plan - Private Ultra High:(1) It aims to align the interests of Banco Santander and the Participant with views, on the one hand, toat the growth and profitability of the Private business and on the other hand, recognition of the Participant’sParticipant's contribution. The Plan has as its objective the payment by the Bank

(2) Subject to the Participants as Variable Remuneration.achievement of the Santander Group's RTA performance indicator, comparing the Group's evolution in this indicator with that of the main global competitors.

(3) The Plans do not cause dilution of the Bank's share capital, since they are paid in shares of Banco Santander Spain. In April 2019, the type of settlement of the Global grant programs 2015 was changed to cash.

Fair Value and Parameters for Performance for Actuality Plans

 

Each participant has a target reference in Reais ifand the indicators are reached,exact amount of the targetbonus will be applied ondetermined by the reference value,measurement of the following performance indicators, with payments made in two installments: the first paid in March 2020 and the second in March 2021.

 

Indicators - Phase 1 (Reference Value)

 

• BAI of 2017.

 

Indicators - Phase 2 (Calculation of Cash Incentive)

F-102

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

 

• BAI - 50% (Benefit Indicator before Private Ultra High Segment Taxes);

 

• MOL - 25% (Private Ultra High Segment Net Margin Indicator); and

 

• AUM - 25% (Assets Under Management Indicator of Private Ultra High Segment).

 

In 2017, expenses inDecember 2018, the amount of R$2,935, related toprovision recorded for the local long-term incentive plan - Private Ultra High were registered.was reversed due to the probability of non-compliance with the acquisition condition related to the performance target. Management followed the performance parameter of the plan until December 2019. The amount of the expense with the provision related to this plan recorded in 2017 was R $ 2,935.

 

b.2) Global Program

i.Long-Term Incentive Plan – Technology

 

Long-Term Incentive Policy

In 2014,This is a share deliveryretention plan called Long Term Incentive Global CRDIV - Grant 2014 was released. This plan is subject to achievement of performance indicator Total Shareholder Return (TSR) offor key positions where 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, a stock delivery plan called Plan 2nd Global Long -Term Incentive CRDIV - Grant 2015 was launched.

F-92 

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Brazilian Reais - R$ - unless otherwise stated)

Global Plan Fair Value

1st Long-Term Incentive Global Plan Grant 2014 - ILP CRDIV

It is assumed that the grantee will not leave the Bank’s employmentparticipant must remain active during the term of each plan. The fair value of the 50% linkedplan in order 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 simulationsbe entitled 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 RTA and LPA, it can be considered (in a high percentage of cases) feasible to extrapolate that the RTA value is also valid for LPA. Therefore, it was initially determined that the fair value of the portion of the plans linked to the Bank’s relative LPA position, of the remaining 50% of the options granted, was the same as that of the 50% corresponding to the TSR. This valuation is reviewed and adjusted on a yearly basis, since its refers to a non-market condition.

Long Term Incentive Global CRDIV - Grant 2014

 2 years3 years4 years
Future income Dividend11.1%0.0%9.50%
Expected Volatility32.7%0.0%36.90%
Volatility comparator12% - 52%0.0%16% - 52%
Risk-free interest rate1.7%0.0%2.50%
Correlation0.550.550.55

The indicator that 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).receive it.

 

Each executive hashad a target in reais thatReais, which was converted to Santander Brasil shares of Santander Group, by(SANB11) at the price of R$19.2893. These shares 44,66, which will be delivered in the years 2016, 2017 and 2018,July/2022, with sale restrictionlockup of one year after each delivery.1 year.

 

2nd Long-Term Incentive Global Plan CRDIV - Grant 2015.Payment is subject to the application of the Malus/Clawback clauses, which may reduce or cancel the shares to be delivered in the event of non-compliance with internal regulations and exposure to excessive risk.

 
 Number of Shares Granted Year Employees Date of Commencement of the PeriodDate of Expiry of Period
ILP Technology123,158 2019 Executives Jul-19Jun-22
Delivered shares- 2019 Executives Jul-19Jun-22
Canceled shares- 2019 Executives Jul-19Jun-22
Balance Plans on December 31, 2019123,158       

ii.Long-Term Incentive Plan – Pi Investments

 

The agreed ILP values ​​of the ILP for each participant will be obtained from the verificationbased on determination of the achievement of indicators in two moments: 2020 and 2021.

Indicators 2020Indicators 2021
Active Clients - Clients with average monthly balanceActive Clients - Clients with average monthly balance
Clients Base (AuM) - Distributed volume including balance accountClients Base (AuM) - Distributed volume including balance account
Revenue 2020Revenue 2021
BAI (Indicador de Lucro antes do Imposto)

This is a retention plan for key positions where the first time to determineparticipant must remain active until the eligibility (2015-2016) and a second time to calculate the number of actions due (2016, 2017 and 2018)."payment date.

 

Indicators - First time

• RTA versus Competitors;Payment will be made in SANB11 shares, 50% in March / 2022 and

• ROTE Bank versus Budget.

Indicators - Second time

• RTA versus Competitors;

• ROTE Bank versus Budget;

• Employee satisfaction;

• Customer satisfaction; 50% in March / 2023, with lockup of 1 year after each payment and

• Corporate main bank costumer indicator versus Budget.

Each executive has a target in reais that was converted subject to the application of the Malus / Clawback clauses, which may reduce or cancel the shares of Santander Bank Spain by the price of R$17.473. These shares willto be delivered in 2019,case of non-compliance with sale restriction internal regulations and exposure to excessive risks.

iii.ILP Ben

The agreed values ​​of one (1)the ILP for each participant will be obtained based on determination of the achievement of indicators in two moments: 2020 and 2021.

Indicators
Number of Corporate Clients
Number of Personal Clients
Number of Accredited Establishments
Revenue
BAI (Earnings before Tax indicator)

This is a retention plan for key positions where the participant must remain active until the payment date.

Payment will be made in SANB11 shares, 50% in March / 2022 and 50% in March / 2023, with lockup of 1 year after each payment and subject to the delivery.application of the Malus / Clawback clauses, which may reduce or cancel the shares to be delivered in case of non-compliance with internal regulations and exposure to excessive risks.

 

F-93 F-103

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

 

BANCO SANTANDER (BRASIL) S.A.b.2) Global Program

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Brazilian Reais - R$ - unless otherwise stated)

Thousand of Reais2015
 Number of SharesGranted YearEmployeesCommencement of the PeriodDate of Expiry of Period
      
1st Long-Term Incentive Global CRDIV – Grant 20141,613,0572014ExecutivesJan – 2014Dec - 2017
2nd Long-Term Incentive Global Plan CRDIV – Grant 20151,775,0492016ExecutivesJan – 2015Dec - 2017
Balance Plans on December 31, 20173,388,106    

 

In 2017,2019, were not recognized daily pro-rata expenses amounted to(2018 - R$4,797 (2016 - no expenses registered)5,726 e 2017 – R$4,797), 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

 

Banco Santander Spain’s General Shareholders Meeting, held on June 11, 2010, approvedIn the new policy relating to executive compensation through the payment referenced in variable compensation shares to the Group companies, including Banco Santander. This new policy, with adjustments applicable to Banco Santander, was approved by the Compensation Committee and the Board of Directors 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 compensation in shares is within the limits of the overall management compensation approved by Banco Santander’s Annual Stockholders’ Meeting.

The total number of shares in 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 March 18, 2015, the Board of Directors approved the proposed new incentive plan (deferred)(deferral), the requirements for payment of the variable compensationfuture deferred installments of directors and certain employees, which was approved in EGM (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 compensation of directors and certain employees, which was approved in EGM (Extraordinary General Meeting) of December 14, 2015.

On March 18, 2015, the Board of Directors approved the proposed new incentive plan (deferred) for payment of the variable remuneration are determined, considering the long-term sustainable financial bases, including the possibility of directors and certain employees, which was approved in AGE (Extraordinary General Meeting) of April 30, 2015.

On October 25, 2016, the Board of Directors approved the proposed new incentive plan (deferred) for payment of the variable compensation of directors and certain employees, which was approved in EGM (Extraordinary General Meeting) of December 21, 2016.

In the fourth quarter of 2017, the Board of Directors approved the proposal for a new Incentive Plan (deferral) to pay the variable remuneration of administrators and certain employees.

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 toapplying reductions or cancellations depending on the risks assumed and fluctuations inof the cost of capital.

 

The Banco Santander´sSantander variable compensationremuneration plan has been assessed and becameis divided into two2 programs: (i) Identified Collective Identified and (ii) Collective unidentified.Unidentified Collective.

 

a) Collective Identified - Participants of the Executive Committee, Statutory Directors and other executives who take significant risks in the Bank and are responsible for the control areas. The deferral will be half in cash, 50% indexed by 100% of CDI and half50% in shares (SANB11). On the exercise ended on December 31, 2017,2019, was recorded loss amounted to R$81,838 (201698,441 (2018 - R$52,50050,896 and 20152016 - R$89,961)81,838), 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 by 100% of CDI. On the year ended on December 31, 2017,2019, there were expense of R$124,926 (2016104,068 (2018 - R$79,79474,871 and 20152016 - R$59,797)124,926).

 

F-94 

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Brazilian Reais - R$ - unless otherwise stated)

42. Other general administrative expenses

41.Other general administrative expenses

 

a) Breakdown

 

The detail of Otherother general administrative expenses is as follows:

 

Thousand of reais201720162015
Property, fixtures and supplies1,284,4901,278,5561,268,498
Technology and systems1,364,7201,246,8091,192,533
Advertising617,563486,772523,343
Communications593,272488,799481,217
Per diems and travel expenses106,956133,123160,135
Taxes other than income tax122,57084,932128,022
Surveillance and cash courier services630,466622,362614,596
Insurance premiums27,28921,30820,975
Specialized and technical services1,901,0561,744,7261,820,657
Technical reports370,546437,683406,755
Others specialized and technical services1,530,5101,307,0431,413,902
Other administrative expenses534,935435,758506,364
Total7,183,3176,543,1456,716,340
 Thousand of reais 2019 2018 2017
        
 General maintenance expenses748,196 1,330,549 1,284,490
 Technology maintenance expenses2,058,619 1,786,416 1,364,720
 Advertising 712,855 621,645 617,563
 Communications 472,873 457,323 593,272
 Per diems and travel expenses140,016 127,277 106,956
 Taxes other than income tax112,012 88,977 122,570
 Surveillance and cash courier services630,585 617,129 630,466
 Insurance premiums 34,778 29,434 27,289
 Specialized and technical services2,172,566 2,089,614 1,901,056
 Technical reports 360,990 359,468 370,546
 Others specialized and technical services1,811,577 1,730,146 1,530,510
 Other administrative expenses (1)531,312 437,767 534,935
 Total 7,613,812 7,586,131 7,183,317

(1) In December 31, 2019, includes mainly Data Processing Expenses in the balance of R$2.392 (2018 – R$67.724 and 2017 - R$73.664), Service Expenses in the balance of R$2.172 (2018 - revenue of R$26.852 and 2017 - R$87.199), Expenses with Benefit Guarantor Fund - FGB R$53.548 (2018 – R$34.996 and 2017 - R$5.334), Interest on Own Capital R$0 (2018 – R$38.006 and 2017 - R$20.826) and Recovery of Charges and Expenses R$97.426 (2018 – R$92.408 and 2017 – R$89.409).

 

b) Other information

 

The balance of “Technical reports” includes the fees paid by the consolidated companies to their respective auditors, the detail are as follows:

 

Millions of reais201720162015
Audit of the annual financial statements of the companies audited by external audit(1)(2) (constant scope of consolidation)17.59.212.0
Audit Related3.90.11.5
Others1.30.71.7
Total22.710.015.2
(1)On March 18, 2016, the Banco Santander contracted PricewaterhouseCoopers Auditores Independentes (PWC), to act as an independent auditor of the Bank and the companies that compose the Conglomerate Santander in Brazil, to replace Deloitte Touche Tohmatsu Auditores Independentes (Deloitte), which provided an independent audit service for the financial statements related to the year ended December 31, 2015.

(2)In 2017, includes R$2.3 million referring to auditing work for the 2016 fiscal year.
Millions of Reais 2019 2018 2017
       
Audit of the annual financial statements of the companies audited by external audit(1)(2) (constant scope of consolidation) 25.2 19.9 17.5
Audit Related 0.1 0.5 3.9
Others 0.3 0.1 1.3
Total 25.6 20.5 22.7

(1) In 2019, it includes R$ 1.9 million and R$ 1.8 million referring to the audit work for the 2017 and 2018 fiscal year. In 2017, includes R$2.3 million, referred to the audit work of 2016 fiscal year.

 

The approximate value of taxes according to law 12,741/12.741/2012 totaled R$3.73.6 million (2016(2018 - R$1.8 million)2.9 million e 2017 - R$3.7million).

 

Services provided by other audit firms totaled R$13.21.2 million (2016(2018 - R$4.91.3 million and 2015e 2017 - R$4.913.2 million).

 

43. Gains or losses on non financial assets and investments, net

F-104

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

42.Gains or losses on non financial assets and investments, net

 

The breakdown of the balance of this item is as follows:

 

Thousands of reais201720162015
Thousand of reais     2019 2018 2017
 
Gains1,79812,584787,628 55,709 11,627 1,798
Tangible and intangible assets1,79812,57530,478Tangible and intangible assets 55,709 11,627 1,798
Investments(1)-9757,150
Losses(66,100)(8,768)(7,013) (45,063) (37,103) (66,100)
Tangible and intangible assets(13,719)(7,547)(502)Tangible and intangible assets (45,063) (37,103) (13,719)
Investments(1)(52,381)(1,221)(6,511) - - (52,381)
Total(64,302)3,816780,615 10,646 (25,476) (64,302)

(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).

(2) In 2017, includes the amount of R$41,999 related to the sale of BW Guirapá I S.A.

 

44. Gains (losses) on disposal and expenses of non-current assets held for sale not classified as discontinued operations

43.Gains (losses) on disposal and expenses of non-current assets held for sale not classified as discontinued operations

 

AsOn December 31, 2019, revenue of R$10 million is mainly comprised of an expense of R$16 million with the constitution of a provision for losses on other values ​​and assets, net of the reversal of the provision for loss of recoverable value of properties, constitution of a provision for losses on other values ​​and assets and revenue of R$34 million resulting from the sale of assets received in the credit recovery processes with customers, and on December 31, 2018, mainly includes R$104 million in revenue from the reversal of provision for loss of recoverable value of properties, constitution of provision for losses on other values ​​and assets and a R$78 million result on the sale of assets received in the credit recovery processes with customers and on December 31, 2017 it mainly includes R $ R$272 million of provisions for devaluations on real estate, constituted from valuationproperties, based on appraisal reports prepared by specialized external consulting and at December 31, 2016, basically refers toconsultants the result on disposal of assets received in the processes of recovery of loans with customers and the provision for the recoverable amount of these assets.specialized.

 

F-95 

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Brazilian Reais - R$ - unless otherwise stated)

45. Other disclosures

44.Other disclosures

 

a) Guarantees and commitments

 

The Bank provides a variety of guarantees to its clients to improve their credit standing and allow them to compete The following table summarizes at December 31, 2017, 20162019, 2018 and 20152017 all of the guarantees.

 

As required, the “maximum potential amount of future payments” represents the notional amounts that could be considered as a loss 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

Maximum potential amount of future payments

Contingent liabilities

201720162015
Thousand of reais     2019 2018 2017
 
Maximum potential amount of future paymentsMaximum potential amount of future payments 
      
Contingent liabilities      
Guarantees and other sureties40,729,54432,629,97542,836,334Guarantees and other sureties 41,870,332 39,081,803 40,729,544
Financial guarantees37,007,05724,475,50741,183,159 29,397,344 27,216,418 37,007,057
Performance guarantees486,091532,232521,373 1,009,367 907,856 486,091
Financial letters of credit3,110,9187,462,761874,661 11,387,788 10,860,425 3,110,918
Other125,478159,475257,141 75,833 97,104 125,478
Other contingent exposures1,915,492635,055774,383Other contingent exposures 2,442,235 3,178,671 1,915,492
Documentary Credits1,915,492635,055774,383 2,442,235 3,178,671 1,915,492
Total Contingent Liabilities42,645,03633,265,03043,610,717 44,312,567 42,260,474 42,645,036
 
Commitments  
Loan commitments drawable by third parties(1)106,913,21991,251,19891,960,299Loan commitments drawable by third parties(1) 125,876,671 122,652,229 106,913,219
Total Commitments106,913,21991,251,19891,960,299 125,876,671 122,652,229 106,913,219
 
Total149,558,255124,516,228135,571,016 170,189,238 164,912,704 149,558,255

(1) Includes the approved limits and unused overdraft, credit card and others.

 

Financial guarantees are provided to Bank´s clients in respect of their obligations to third parties. The Bank has the right to seek reimbursement from the clients for any amount it shall have to pay under such guarantee. Additionally, the Bank 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.

 

The Bank´s expectation is that many of these guarantees to expire without the need of cash disbursement in advance. Therefore, in the ordinary course of business, the Bank expects that these guarantees will have virtually no impact on its liquidity.

 

Performance guarantees are issued to guaranteed clients 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

F-105

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

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 Banks´s clients.

 

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 Bank´s clients 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 clients is checked as well as the probability of those guarantees to be executed. In case that any doubt on the client’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)9.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$446,143 (2016285,218 (2018 - R$476,564 and 2015330,018 e 2017 - R$385,169).

F-96 

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Brazilian Reais - R$ - unless otherwise stated)

446,143)

 

b) Off-balance funds under management

 

Banco Santander has under its management investment funds for which it does not hold any substantial participation interests and does not act as principal over the funds, and it does not own any shares of 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 Santander Brasil 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 funds managed by Banco Santander not recorded in the balance sheet are as follows:

 

Thousands of reais201720162015
Thousand of reais     2019 2018 2017
 
Funds under management1,747,6231,533,6202,542,286 2,034,999 1,896,689 1,747,623
Managed Funds 230,199,261 200,366,261 188,728,634
Total1,747,6231,533,6202,542,286 232,234,260 202,262,950 190,476,257

 

c) Third-party securities held in custody

 

On December 31, 2017,2019, the Bank held in custody debt securities and equity instruments totaling R$40,459,429 (201627,283,548 (2018 - R$27,772,714 and 201534,040,742 e 2017 - R$38,412,152)40,459,429) entrusted to it by third parties.

 

d) Residual maturity

 

The breakdown, by maturity, of the balances of certain items in the consolidated balance sheets is as follows:

 

      2017
Thousands of reais
AssetsOn DemandUp to 3 Months3 to 12 Months1 to 3 Years3 to 5 YearsAfter 5 YearsTotal
Cash and balances with the Brazilian Central Bank67,033,45215,071,09518,761,534---100,866,081
Debt instruments(2)609,2201,887,27821,978,39431,669,85019,379,30845,731,067121,255,117
Equity instruments66,187124,304305,073842,090-292,1211,629,775
Loans and amounts due from credit institutions18,709,9691,753,197182,72110,382,06118,1661,253,98132,300,095
Loans and advances to customer31,065,82470,301,53061,286,53963,375,20317,796,36428,594,697272,420,157
Loans and Receivables - Debt instruments933,175476,1583,520,4017,444,9433,911,7761,330,06217,616,515
Investments Held-to-Maturity---474,1931,169,4508,570,81110,214,454
Derivatives-426,5771,034,2489,470,0734,357,6361,974,35417,262,888
Total118,417,82790,040,139107,068,910123,658,41346,632,70087,747,093573,565,082
Liabilities:       
Financial liabilities at amortized cost:       
Deposits from credit institutions(1)394,39621,636,39244,696,6806,797,8382,717,9413,131,43879,374,685
Customer deposits(1)64,512,105103,511,03148,339,76142,494,42117,176,0098,814276,042,141
Marketable debt securities(1)-14,315,30535,636,54917,923,3721,491,866879,92070,247,012
Subordinated liabilities--519,230---519,230
Debt Instruments Eligible to Compose Capital-114,104---8,322,7978,436,901
Other financial liabilities11,710,94330,985,4651,537,68926,638--44,260,735
Financial liabilities held for trading:       
Short positions--466,0008,960,8067,476,07915,905,50732,808,392
Derivatives-769,619975,9458,244,1934,239,1982,448,53116,677,486
Total76,617,444171,331,916132,171,85484,447,26833,101,09330,697,007528,366,582
Difference (assets less liabilities)41,800,383(81,291,777)(25,102,944)39,211,14513,531,60757,050,08645,198,500
             2019
             Thousand of reais
 On
Demand		 Up to
3 Months		 3 to
12 Months		 1 to
3 Years		 3 to
5 Years		 After 5
Years		 Total
Assets:             
Cash and balances with the Brazilian Central Bank6,549,535 13,577,829 - - - - 20,127,364
Debt instruments7,747,516 1,174,094 22,926,088 45,058,398 35,118,355 61,307,480 173,331,930
Equity instruments- - - - - 2,358,229 2,358,229
Loans and amounts due from credit institutions69,135,371 1,943,291 21,064,571 14,525,161 2,411,265 153,469 109,233,128
Loans and advances to customer9,451,762 84,839,695 43,180,508 89,624,089 34,092,967 65,510,459 326,699,480
Derivatives6,806,370 1,893,308 2,649,730 3,546,082 1,950,678 3,599,566 20,445,734
Total99,690,554 103,428,217 89,820,897 152,753,730 73,573,265 132,929,202 652,195,865

 

F-97 F-106

Table of Contents

 

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

BANCO SANTANDER (BRASIL) S.A.

             2019
             Thousand of reais
 On
Demand		 Up to
3 Months		 3 to
12 Months		 1 to
3 Years		 3 to
5 Years		 After 5
Years		 Total
Liabilities:             
Financial liabilities at amortized cost:             
Deposits from credit institutions(1)390,626 16,584,181 49,097,816 25,655,631 4,877,076 2,666,086 99,271,415
Customer deposits(1)69,048,756 130,872,214 76,244,908 43,395,748 16,923,318 29,654 336,514,597
Marketable debt securities(1)- 10,675,356 695,071 37,268,809 3,900,484 21,162,755 73,702,474
Debt Instruments Eligible to Compose Capital- 170,939 - 10,005,022 - - 10,175,961
Other financial liabilities10,334 24,360,724 14,509,911 16,678,725 4,717 1,542 55,565,954
Short positions- 4,748,545 1,554,274 1,256,416 3,747,700 12,528,718 23,835,653
Derivatives6,776,746 4,345,286 406,383 4,696,823 2,502,040 3,702,699 22,429,977
Total76,226,461 191,757,244 142,508,363 138,957,174 31,955,334 40,091,454 621,496,030
 Difference (assets less liabilities)23,464,093 (88,329,027) (52,687,466) 13,796,556 41,617,931 92,837,748 30,699,835
              
             2018
             Thousand of reais
 On
Demand		 Up to
3 Months		 3 to
12 Months		 1 to
3 Years		 3 to
5 Years		 After 5
Years		 Total
Assets:             
Cash and balances with the Brazilian Central Bank31,323,554 392,791 - - - - 31,716,345
Debt instruments27,402 51,255,820 25,903,428 13,186,253 26,367,903 58,692,609 175,433,415
Equity instruments839,620 34,420 231,576 - - - 1,105,616
Loans and amounts due from credit institutions57,528,022 8,449,138 844,658 12,739,730 11,371 34,082 79,607,001
Loans and advances to customer- 111,595,396 75,100,836 63,043,973 21,397,689 29,934,313 301,072,207
Derivatives- 13,815,791 1,240,161 1,114,446 1,074,875 1,118,173 18,363,446
Total89,718,598 185,543,356 103,320,659 90,084,402 48,851,838 89,779,177 607,298,030
              
Liabilities:             
Financial liabilities at amortized cost:             
Deposits from credit institutions(1)1,139 55,872,675 18,564,342 19,850,530 2,598,172 2,135,948 99,022,806
Customer deposits(1)65,241,618 102,942,180 76,987,570 42,399,934 16,624,469 2,029 304,197,800
Marketable debt securities(1)- 11,104,594 26,741,036 22,479,019 5,854,091 8,447,492 74,626,232
Subordinated liabilities9,885,607 - - - - - 9,885,607
Debt Instruments Eligible to Compose Capital- - - - - 9,779,944 9,779,944
Other financial liabilities66,265 31,566,995 35,648 18,086,272 - 27,600 49,782,780
Financial liabilities held for trading:             
Short positions206,423 - 1,139,847 31,349,407 - - 32,695,677
Derivatives- 7,639,956 7,723,730 1,069,718 604,593 1,428,838 18,466,835
Total75,401,052 209,126,400 131,192,173 135,234,880 25,681,325 21,821,851 598,457,681
Difference (assets less liabilities)14,317,546 (23,583,044) (27,871,514) (45,150,478) 23,170,513 67,957,326 8,840,349
              

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(ThousandsF-107

Table of Brazilian Reais - R$ - unless otherwise stated)Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

             2017
             Thousand of reais
 On
Demand		 Up to
3 Months		 3 to
12 Months		 1 to
3 Years		 3 to
5 Years		 After 5
Years		 Total
Assets:             
Cash and balances with the Brazilian Central Bank20,642,321 13,482,432 - - - - 34,124,753
Debt instruments609,220 1,887,278 21,978,394 31,669,850 19,379,308 45,731,067 121,255,117
Equity instruments66,187 124,304 305,073 842,090 - 292,121 1,629,775
Loans and amounts due from credit institutions38,137,344 15,235,629 182,721 10,382,061 18,166 1,253,981 65,209,902
Loans and advances to customer31,065,824 70,301,530 61,286,539 63,375,203 17,796,364 28,594,697 272,420,157
Derivatives- 426,577 1,034,248 9,470,073 4,357,636 1,974,354 17,262,888
Total90,520,896 101,457,750 84,786,975 115,739,277 41,551,474 77,846,220 511,902,592
              
Liabilities:             
Financial liabilities at amortized cost:             
Deposits from credit institutions(1)394,396 21,636,392 44,696,680 6,797,838 2,717,941 3,131,438 79,374,685
Customer deposits(1)64,512,105 103,511,031 48,339,761 42,494,421 17,176,009 8,814 276,042,141
Marketable debt securities(1)- 14,315,305 35,636,549 17,923,372 1,491,866 879,920 70,247,012
Subordinated liabilities- - 519,230 - - - 519,230
Debt Instruments Eligible to Compose Capital- 114,104 - - - 8,322,797 8,436,901
Other financial liabilities11,710,943 30,985,465 1,537,689 26,638 - - 44,260,735
Financial liabilities held for trading:             
Short positions- - 466,000 8,960,806 7,476,079 15,905,507 32,808,392
Derivatives- 769,619 975,945 8,244,193 4,239,198 2,448,531 16,677,486
Total76,617,444 171,331,916 132,171,854 84,447,268 33,101,093 30,697,007 528,366,582
Difference (assets less liabilities)13,903,452 (69,874,166) (47,384,879) 31,292,009 8,450,381 47,149,213 (16,463,990)

(1) Includes obligations which may be subject to early payment, being: demand and time deposits, repurchase agreements with clients, LCI and LCA.

 

      2016
Thousands of reais
AssetsOn DemandUp to 3 Months3 to 12 Months1 to 3 Years3 to 5 YearsAfter 5 YearsTotal
Cash and balances with the Brazilian Central Bank14,917,63442,538,3833,833,431--49,315,463110,604,911
Debt instruments-21,709,35010,136,13326,674,21528,135,29530,838,274117,493,267
Equity instruments593,59448,054252,087486,40821,3131,024,9332,426,389
Loans and amounts due from credit institutions13,614,1982,849,696923,308532,39934,4589,808,41427,762,473
Loans and advances to customer30,408,85168,218,47460,047,44254,558,38117,357,24421,412,382252,002,774
Loans and Receivables - Debt instruments822,8741,287,3722,960,0995,044,8034,472,7581,695,35316,283,259
Investments Held-to-Maturity--12,378371,6211,173,3608,491,40210,048,761
Derivatives620,4229,209,4213,571,1263,813,6875,481,2102,007,10724,702,973
Total60,977,573145,860,75081,736,00491,481,51456,675,638124,593,328561,324,807
Liabilities:       
Financial liabilities at amortized cost:       
Deposits from credit institutions(1)770,46740,581,02523,315,0068,215,3782,818,0952,934,10178,634,072
Customer deposits(1)60,919,03264,154,47568,505,80839,630,27414,003,821231,767247,445,177
Marketable debt securities(1)-21,833,92756,637,88020,620,077312,143438,92899,842,955
Subordinated liabilities---466,246--466,246
Debt Instruments Eligible to Compose Capital-113,995---8,197,9238,311,918
Other financial liabilities3,004,04133,559,7103567,992-307,00036,879,099
Financial liabilities held for trading:       
Short positions-7432,887,7238,333,5843,344,08317,128,13631,694,269
Derivatives333,2878,052,3492,506,1312,523,5065,376,1801,445,16220,236,615
Total65,026,827168,296,224153,852,90479,797,05725,854,32230,683,017523,510,351
Difference (assets less liabilities)(4,049,254)(22,435,474)(72,116,900)11,684,45730,821,31693,910,31137,814,456

      2015
Thousands of reais
AssetsOn DemandUp to 3 Months3 to 12 Months1 to 3 Years3 to 5 YearsAfter 5 YearsTotal
Cash and balances with the Brazilian Central Bank57,826,43626,530,4594,786,458---89,143,353
Debt instruments109,8085,094,08811,456,64320,707,95714,821,11053,426,537105,616,143
Equity instruments2,140,969-----2,140,969
Loans and amounts due from credit institutions29,064,151781,3401,298,6092,448,123133,2998,697,11642,422,638
Loans and advances to customer22,662,55973,674,32659,527,02154,371,60318,227,45123,570,489252,033,449
Total111,803,923106,080,21377,068,73177,527,68333,181,86085,694,142491,356,552
Liabilities:       
Financial liabilities at amortized cost:-------
Deposits from credit institutions(1)943,53929,303,60624,374,9678,819,6503,346,2502,663,48669,451,498
Customer deposits(1)52,009,23274,456,46239,245,96862,868,72114,305,045157,444243,042,872
Marketable debt securities(1)-16,639,66926,833,96750,815,528298,17870,95894,658,300
Subordinated liabilities--7,685,328411,976--8,097,304
Debt Instruments Eligible to Compose Capital-----9,959,0379,959,037

F-98 F-108

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Brazilian Reais - R$ - unless otherwise stated)

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

  
2015
Thousands

(Thousand of reais

AssetsOn DemandUp to 3 Months3 to 12 Months1 to 3 Years3 to 5 YearsAfter 5 YearsTotal
Other financial liabilities199,80530,095,5921,438,38631,862-307,00032,072,645
Financial liabilities held for trading:-      
Short positions---2,865,8137,915,9329,265,88620,047,631
Derivatives5,6002,666,7881,863,2212,953,6822,122,43712,728,40922,340,137
Total53,158,176153,162,117101,441,837128,767,23227,987,84235,152,220499,669,424
Difference (assets less liabilities)58,645,747(47,081,904)(24,373,106)(51,239,549)5,194,01850,541,922(8,312,872)
(1)Includes obligations which may be subject to early payment, being: demand and time deposits, repurchase agreements with clients, LCI and LCA.

Brazilian Reais - R$ - unless otherwise stated) 

(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 financial statements, based on the nature of the related items, are as follows:

 

Equivalent Value in Thousand of Reais201720162015
 AssetsLiabilitiesAssetsLiabilitiesAssetsLiabilities
Cash and balances with the Brazilian Central Bank126,022-174,605-230,881-
Financial assets/liabilities held for trading626,1012,982,336402,186371,1002,109,6652,276,540
Financial assets - available-for-sale11,665,952-9,787,622-4,142,821-
Loans and receivables18,703,454-28,061,831-36,418,917-
Financial liabilities at amortized cost-36,306,000-39,465,409-58,294,796
Total31,121,52939,288,33638,426,24439,836,50942,902,28460,571,336
Equivalent Value in Thousand of Reais2019 2018 2017
  Assets Liabilities Assets Liabilities Assets Liabilities
             
Cash and reserves at the Central Bank of Brazil15,359,225 - 6,947,282 - 126,022 -
Financial asset/liabilities for trading- - - - 626,101 2,982,336
Financial ssets/liabilities measured at fair value through profit or loss held for trading3,349,879 3,210,360 1,211,296 101,833 - -
Available-for-sale financial assets- - - - 11,665,952 -
Financial assets measured at fair value through other comprehensive income20,386,034 - 7,049,727 - - -
Loans and receivables - - - - 18,703,454 -
Financial assets/liabilities measured at amortized cost68,996,884 44,140,284 17,912,203 35,567,194 - 36,306,000
Total 108,092,022 47,350,644 33,120,508 35,669,027 31,121,529 39,288,336

F-109

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

 

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.

 

The total of the future minimum payments of non-cancellable operating leases is shown below:

 

 2019 2018 2017
201720162015 
Up to 1 Year624,424646,804640,132 651.207 670.553 624.424
Between 1 to 5 Years1,545,1011,789,6701,873,889
Between1 to 5 Years 1.492.289 1.435.970 1.545.101
More than 5 Years288,420496,802685,090 147.125 167.868 288.420
Total2,457,9452,933,2763,199,111
 2.290.621 2.274.391 2.457.945

 

Additionally, Banco Santander has contracts for a matures indeterminate,without maturity dates, totaling R$934 (2016918 (2018 - R$1,013 and 2015 - R$696)674) monthly rent corresponding to the contracts with this feature. Payment of operating leases recognized as expenses in 20172019 fiscal year were R$655,949 (2016700,958 (2018 - R$663,801 and 2015 - R$659,332)683,011).

 

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.

 

g) Contingent assets

 

On December 31, 2017, 20162019, 2018 and 20152017 no contingent assets were recorded.

 

46. Business segment reporting

45.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),

F-99 

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Brazilian Reais - R$ - unless otherwise stated)

 

(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 different financial information are available.

 

Based on these guidelines, the Bank has identified the following reportable operating segments:

 

• Commercial Banking,

 

• Global Wholesale Banking,

 

The Bank has two segments, the commercial (except for the Corporate Banking business managed globally using the Global Relationship Model) and the Global Wholesale Banking segment includes the Investment Banking and Markets operations, including departments cash and stock trades.

 

The Bank operates in Brazil and abroad, through the Cayman branch, Luxembourg branch and its subsidiary in Spain, with Brazilian clients and therefore has no geographical segments.

 

F-110

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

The income statements and other significant data are as follows:

 

Thousand of Reais 2017
(Condensed) Income StatementCommercial BankingGlobal Wholesale BankingTotal
NET INTEREST INCOME32,392,2392,554,25034,946,489
Income from equity instruments83,120-83,120
Income from companies accounted for by the equity method71,551-71,551
Net fee and commission income11,261,9521,459,91612,721,868
Gains (losses) on financial assets and liabilities (net) and Exchange differences (net)(1)(25,628)1,599,7731,574,145
Other operating expense (net)(640,522)(31,491)(672,013)
TOTAL INCOME43,142,7135,582,44748,725,160
Personnel expenses(8,166,562)(770,716)(8,937,278)
Other administrative expenses(7,011,740)(171,577)(7,183,317)
Depreciation and amortization(1,560,465)(101,782)(1,662,247)
Provisions (net)(3,190,388)(118,851)(3,309,239)
Impairment losses on financial assets (net)(11,232,902)(1,105,398)(12,338,300)
Impairment losses on non-financial assets (net)(435,960)(20,752)(456,712)
Other non-financial gains (losses)(324,385)-(324,385)
OPERATING PROFIT BEFORE TAX(1)11,220,3113,293,37114,513,683
Fiscal Hedge(1)810,304-810,304
ADJUSTED OPERATING INCOME BEFORE TAX(1)12,030,6153,293,37115,323,987

Thousand of Reais 2016
(Condensed) Income StatementCommercial BankingGlobal Wholesale BankingTotal
Thousand of reais 2019
  
Income StatementIncome Statement Commercial Banking Global Wholesale Banking Total
      
NET INTEREST INCOME27,365,8573,220,63630,586,493 42,043,774 2,277,333 44,321,107
Income from equity instruments258,545-258,545Income from equity instruments 4,864 14,069 18,933
Income from companies accounted for by the equity method47,537-47,537Income from companies accounted for by the equity method 149,488 - 149,488
Net fee and commission income9,580,3321,397,26410,977,596Net fee and commission income 13,923,272 1,789,880 15,713,152
Gains (losses) on financial assets and liabilities (net) and Exchange differences (net)(1)5,619,3561,971,6147,590,970Gains (losses) on financial assets and liabilities (net) and Exchange differences (net)(1) (1,541,343) 1,215,351 (325,992)
Other operating expense (net)(611,051)(13,520)(624,571)Other operating expense (net) (1,069,052) (38,668) (1,107,720)
TOTAL INCOME42,260,5766,575,99448,836,570 53,511,003 5,257,965 58,768,968
Personnel expenses(7,638,124)(739,141)(8,377,265) (8,554,254) (773,460) (9,327,714)
Other administrative expenses(6,272,987)(270,158)(6,543,145)Other administrative expenses (7,139,828) (473,984) (7,613,812)
Depreciation and amortization(1,381,742)(100,897)(1,482,639)Depreciation and amortization (2,297,010) (94,847) (2,391,857)
Provisions (net)(2,685,278)(39,464)(2,724,742) (3,668,709) (12,877) (3,681,586)
Impairment losses on financial assets (net)(11,607,468)(1,693,977)(13,301,445)Impairment losses on financial assets (net) (13,423,361) 53,455 (13,369,906)
Impairment losses on non-financial assets (net)(114,154)(167)(114,321)Impairment losses on non-financial assets (net) (73,216) (58,219) (131,435)
Other non-financial gains (losses)90,889-90,889Other non-financial gains (losses) 20,489 - 20,489
OPERATING PROFIT BEFORE TAX(1)12,651,7123,732,19016,383,902OPERATING PROFIT BEFORE TAX(1) 18,375,114 3,898,033 22,273,147
Fiscal Hedge(1)(6,139,714)-(6,139,714)

Currency Hedge(1)		 1,264,279 - 1,264,279
ADJUSTED OPERATING INCOME BEFORE TAX(1)6,511,9983,732,19010,244,188ADJUSTED OPERATING INCOME BEFORE TAX(1) 19,639,393 3,898,033 23,537,426
 

  

F-100 

F-111

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

 

Thousand of reais    2018
      
Income Statement   Commercial Banking Global Wholesale Banking Total
            
NET INTEREST INCOME      39,390,512 2,530,830 41,921,342
Income from equity instruments   9,974 22,649 32,623
Income from companies accounted for by the equity method 65,958 - 65,958
Net fee and commission income   12,537,112 1,595,047 14,132,159
Gains (losses) on financial assets and liabilities (net) and Exchange differences (net)(1) (6,752,093) 1,162,820 (5,589,273)
Other operating expense (net)   (965,466) (90,384) (1,055,850)
TOTAL INCOME      44,285,998 5,220,961 49,506,959
Personnel expenses      (8,404,198) (801,809) (9,206,007)
Other administrative expenses   (7,186,035) (400,096) (7,586,131)
Depreciation and amortization   (1,637,484) (102,475) (1,739,959)
Provisions (net)      (1,947,578) (52,026) (1,999,604)
Impairment losses on financial assets (net)   (12,419,979) (293,456) (12,713,435)
Impairment losses on non-financial assets (net)   (450,201) (58,109) (508,310)
Other non-financial gains (losses)   156,258 - 156,258
OPERATING PROFIT BEFORE TAX(1)   12,396,779 3,512,992 15,909,771
Currency Hedge(1)      5,867,320 - 5,867,320
ADJUSTED OPERATING INCOME BEFORE TAX(1) 18,264,099 3,512,992 21,777,091
            

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Brazilian Reais - R$ - unless otherwise stated)

 

Thousand of reais  2015
(Condensed) Income StatementCommercial BankingGlobal Wholesale BankingTotal
NET INTEREST INCOME27,040,5074,296,60431,337,111
Income from equity instruments142,881-142,881
Income from companies accounted for by the equity method116,312-116,312
Net fee and commission income8,240,8681,242,6419,483,509
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 INCOME26,136,2654,677,98630,814,251
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)
    
Fiscal Hedge(1)11,531,844-11,531,844
ADJUSTED OPERATING INCOME BEFORE TAX(1)5,966,6452,349,4818,316,126

F-112

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

Thousand of reais    2017
      
Income Statement   Commercial Banking Global Wholesale Banking Total
            
NET INTEREST INCOME      32,392,239 2,554,250 34,946,489
Income from equity instruments   83,120 - 83,120
Income from companies accounted for by the equity method 71,551 - 71,551
Net fee and commission income   11,261,952 1,459,916 12,721,868
Gains (losses) on financial assets and liabilities (net) and Exchange differences (net)(1) (25,628) 1,599,774 1,574,146
Other operating expense (net)   (640,522) (31,491) (672,013)
TOTAL INCOME      43,142,712 5,582,449 48,725,161
Personnel expenses      (8,166,562) (770,716) (8,937,278)
Other administrative expenses   (7,011,740) (171,577) (7,183,317)
Depreciation and amortization   (1,560,465) (101,782) (1,662,247)
Provisions (net)      (3,190,388) (118,851) (3,309,239)
Impairment losses on financial assets (net)   (11,232,902) (1,105,398) (12,338,300)
Impairment losses on non-financial assets (net)   (435,960) (20,751) (456,711)
Other non-financial gains (losses)   (324,385) - (324,385)
OPERATING PROFIT BEFORE TAX(1)   11,220,310 3,293,374 14,513,684

Currency Hedge(1)		      809,694 - 809,694
ADJUSTED OPERATING INCOME BEFORE TAX(1) 12,030,004 3,293,374 15,323,378

(1) Includes, in the Commercial Bank, the currency hedge of the investment in dollars (a strategy to mitigate the tax effects and the variation of the exchange rate of offshore investments on net income), the result of which is recorded under “on financial assets and liabilities "fully offset in the line of Taxes.

     2019
Other aggregates:      Commercial Banking Global Wholesale Banking Total
Total assets      677,139,468 85,097,984 762,237,452
Loans and advances to customers   259,644,994 67,054,486 326,699,480
Customer deposits      253,313,187 83,201,410 336,514,597
            
     2018
Other aggregates:      Commercial Banking Global Wholesale Banking Total
Total assets      646,128,672 77,736,335 723,865,007
Loans and advances to customers   236,792,060 64,280,147 301,072,207
Customer deposits      227,689,079 76,508,721 304,197,800
            

F-113

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

     2017
Other aggregates:      Commercial Banking Global Wholesale Banking Total
Total assets      580,090,402 65,612,637 645,703,039
Loans and advances to customers   217,539,344 54,880,813 272,420,157
Customer deposits      225,926,433 50,115,708 276,042,141

(1)46.Includes, in the Commercial Bank, the tax hedge of the investment in dollars (a strategy to mitigate the tax effects and the variation of the exchange rate of offshore investments on net income), the result of which is recorded under "on financial assets and liabilities" fully offset in the line of Taxes.Related party transactions

   2017
Other aggregates:Commercial BankingGlobal Wholesale BankingTotal
Total assets580,090,40265,612,638645,703,039
Loans and advances to customers217,539,34454,880,812272,420,157
Customer deposits225,926,43350,115,708276,042,141

   2016
Other aggregates:Commercial BankingGlobal Wholesale BankingTotal
Total assets557,624,38576,768,855634,393,240
Loans and advances to customers191,433,20960,569,565252,002,774
Customer deposits228,923,94718,521,230247,445,177

   2015
Other aggregates:Commercial BankingGlobal Wholesale BankingTotal
Total assets524,192,04681,202,482605,394,528
Loans and advances to customers185,371,65166,661,798252,033,449
Customer deposits223,165,97619,876,896243,042,872

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 ofBanco Santander has the business transactions performedPolicy on Related Party Transactions approved by the BankBoard 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.

The transactions and remuneration of services with its related parties on December 31, 2017, 2016are carried out in the ordinary course of business and 2015:under commutative conditions, including interest rates, terms and guarantees, and do not involve risks greater than normal collection or present other disadvantages.

 

a) Key-person management compensation

 

The Board of Directors’Directors' meeting, held on March 28, 201727, 2019 approved, in accordance with the Compensation Committee the maximum global compensation proposal for the directors (Board of Directors and Executive Officers) overall amounting to R$300,000400,000 for the 20172019 financial year, covering fixed remuneration, variable and equity-based and other benefits. The proposal was approved by the extraordinary stockholders’stockholders' meeting (ESM) held on April 28, 2017.26, 2019.

 

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’sshare's performance, based on the achievement of goals.

F-101 

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Brazilian Reais - R$ - unless otherwise stated)

 

ii) Short-term benefits

 

The following table shows the Board of Directors’ and Executive Board’s:

 

Thousand of reais201720162015
Fixed compensation83,63390,16969,779
Variable compensation139,822120,443108,087
Other11,91914,57915,246
Total Short-term benefits235,374225,191193,112
Share-based payment3,18749,48811,777
Total Long-term benefits3,18749,48811,777
Total(1)238,561274,679204,889
Thousand of reais       2019 2018 2017
             
Fixed Compensation       89,518 90,580 83,633
Variable Compensation - in cash     70,816 48,526 42,718
Variable Compensation - in shares     80,832 34,155 34,567
Others (1)       46,937 54,494 11,919
Total Short-Term Benefits     288,103 227,755 172,837
Variable Compensation - in cash     92,704 31,797 31,268
Variable Compensation - in shares     102,046 30,060 34,455
Total Long-Term Benefits      194,750 61,857 65,723
Total (2)       482,853 289,612 238,560

(1) RefersIn the first half of 2018, the Management of Banco Santander decided to carry out an early initiative, which was practiced by the Bank's liberality.

(2) R$310,688 refers to the amount paidrecognized as an expense for the year ended December 31, 2019 (2018 – R$114,588) and R$172,165 refers to deferred expense from previous years approved on each respective year (2018 – R$175,024), by Banco Santander and its subsidiaries to its executives officerstheir Directors for the positions which they hold in the Bankat Banco Santander and other companies of the conglomerate.Santander Conglomerate. The amounts related to the Variable and Share-Based Compensation will be paid in the subsequent periods.

 

Additionally, in the exercise ended on December 31, 2017,2019, withholding taxes were collected on management compensation in the amount of R$30,713 (201633,912 (2018 - R$30,31236,356 and 20152017 - R$28,044)30,713).

 

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;

F-114

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

 

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; and

 

IV - legal entities in which any of the officers, members of the Board of Directors and Audit Committee, as well as their spouses or relatives up to the second degree, hold more than 10% of the share capital.

 

c) Ownership Interest

 

The table below shows the direct interest (common shares and preferred shares) as of December 31, 2017, 20162019, 2018 and 2015:2017:

 

 2017 2019
Stockholders’Common Shares (thousand)Common Shares (%)Preferred Shares (thousand)Preferred Shares (%)Total Shares (thousand)Total
Shares (%)
 Common   Preferred   Total  
 Shares Common Shares Preferred Shares Total
Stockholders' (thousand) Shares (%) (thousand) Shares (%) (thousand) Shares (%)
Grupo Empresarial Santander, S.L.(1)1,107,67329.0%1,019,64527.7%2,127,31828.4%Grupo Empresarial Santander, S.L.(1)1,107,673 29.0% 1,019,645 27.7% 2,127,318 28.4%
Sterrebeeck B.V.(1)1,809,58347.4%1,733,64447.1%3,543,22747.2% 1,809,583 47.4% 1,733,644 47.1% 3,543,227 47.3%
Banco Santander, S.A.(1)521,96413.6%519,26814.1%1,041,23213.9%Banco Santander, S.A.(1)521,964 13.7% 519,268 14.1% 1,041,232 13.9%
Employees3,5510.1%3,5560.1%7,1070.1% 2,526 0.1% 2,533 0.1% 5,059 0.1%
Directors (*)4,0160.1%4,0160.1%8,0320.1% 4,525 0.1% 4,524 0.1% 9,049 0.1%
Other366,0639.6%393,86210.7%759,92510.1%
Others 355,722 9.3% 383,519 10.4% 739,241 9.9%
Total3,812,85099.8%3,673,99199.8%7,486,84199.8% 3,801,993 99.6% 3,663,133 99.5% 7,465,126 99.6%
Treasury shares5,8450.2%5,8450.2%11,6900.2% 16,702 0.4% 16,702 0.5% 33,404 0.4%
Total3,818,695199.8%3,679,836199.8%7,498,531199.8% 3,818,695 100.0% 3,679,835 100.0% 7,498,530 100.0%
Free Float(2)369,6149.7%397,41810.8%767,03210.2%Free Float(2)358,248 9.4% 386,053 10.5% 744,301 9.9%
  
 2016 2018
Stockholders’Common Shares (thousand)Common Shares (%)Preferred Shares (thousand)Preferred Shares (%)Total Shares (thousand)Total
Shares (%)
 Common Preferred Total 
 Shares Common Shares Preferred Shares Total
Stockholders' (thousand) Shares (%) (thousand) Shares (%) (thousand) Shares (%)
Grupo Empresarial Santander, S.L.(1)1,107,67328.8%1,019,64527.5%2,127,31828.1%Grupo Empresarial Santander, S.L.(1)1,107,673 29.0% 1,019,645 27.7% 2,127,318 28.4%
Sterrebeeck B.V.(1)1,809,58347.0%1,733,64446.7%3,543,22746.9% 1,809,583 47.4% 1,733,644 47.1% 3,543,227 47.2%
Banco Santander, S.A.(1)521,96513.6%519,26814.0%1,041,23313.8% 521,964 13.7% 519,268 14.1% 1,041,232 13.9%
Qatar Holding, LLC207,8125.4%207,8125.6%415,6245.5%
Employees3,9140.1%3,9290.1%7,8430.1% 2,986 0.1% 2,987 0.1% 5,973 0.1%
Members of the Board of Directors(*)
Members of the Executive Board(*)
Other174,2384.5%202,0285.5%376,2665.0%
Directors (*) 3,930 0.1% 3,930 0.1% 7,860 0.1%
Others 359,242 9.4% 387,045 10.5% 746,287 9.9%
Total3,825,18599.4%3,686,32699.4%7,511,51199.4% 3,805,378 99.7% 3,666,519 99.6% 7,471,897 99.6%
Treasury shares25,7860.6%25,7860.6%51,5720.6% 13,317 0.3% 13,317 0.4% 26,634 0.4%
Total 3,818,695 100.0% 3,679,836 100.0% 7,498,531 100.0%
Free Float(2)Free Float(2)362,228 9.5% 390,032 10.6% 752,260 10.0%
 
 2017
 Common Preferred Total 
 Shares Common Shares Preferred Shares Total
Stockholders' (thousand) Shares (%) (thousand) Shares (%) (thousand) Shares (%)
Grupo Empresarial Santander, S.L.(1)Grupo Empresarial Santander, S.L.(1)1,107,673 29.0% 1,019,645 27.7% 2,127,318 28.4%
Sterrebeeck B.V.(1) 1,809,583 47.4% 1,733,644 47.1% 3,543,227 47.2%
Banco Santander, S.A.(1)Banco Santander, S.A.(1)521,964 13.6% 519,268 14.1% 1,041,232 13.9%
Employees 3,551 0.1% 3,556 0.1% 7,107 0.1%
Administrators (*) 4,016 0.1% 4,016 0.1% 8,032 0.1%
Others 366,063 9.6% 393,862 10.7% 759,925 10.1%
Total 3,812,850 99.8% 3,673,991 99.8% 7,486,841 99.8%
Treasury shares 5,845 0.2% 5,845 0.2% 11,690 0.2%
Total 3,818,695 100.0% 3,679,836 100.0% 7,498,531 100.0%
Free Float(2)Free Float(2)369,614 9.7% 397,418 10.8% 767,032 10.2%

(1) Companies of the Santander Spain Group.

(2) Composed by Employees, Qatar Holding and other.

 

F-102 

Table(*) None of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Thousandsthe members of Brazilian Reais - R$ - unless otherwise stated)the Board of Directors and the Executive Board holds 1.0% or more of any class of shares.

Total3,850,971199.4%3,712,112199.4%7,563,083199.4%
Free Float(2)385,96410.0%413,76911.1%799,73310.6%

      2015
Stockholders’Common Shares (thousand)Common Shares (%)Preferred Shares (thousand)Preferred Shares (%)Total Shares (thousand)Total
Shares (%)
Grupo Empresarial Santander, S.L.(1)1,107,67328.8%1,019,64527.5%2,127,31828.1%
Sterrebeeck B.V.(1)1,809,58347.0%1,733,64446.7%3,543,22746.9%
Banco Santander, S.A.(1)518,20713.5%519,08914.0%1,037,29613.7%
Santander Insurance Holding(1)3,7580.1%1790.0%3,9370.1%
Qatar Holding, LLC207,8125.4%207,8125.6%415,6245.5%
Employees3,0660.1%3,0880.1%6,1540.1%
Members of the Board of Directors(*)(*)(*)(*)(*)(*)
Members of the Executive Board(*)(*)(*)(*)(*)(*)
Other180,6554.7%208,4385.6%389,0935.1%
Total3,830,75499.5%3,691,89599.5%7,522,64999.5%
Treasury shares20,2180.5%20,2180.5%40,4360.5%
Total3,850,972199.5%3,712,113199.4%7,563,085199.5%
Free Float(2)391,53310.2%419,33811.3%810,87110.7%
(1)Companies of the Santander Spain Group.

(2)Composed by 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.

 

c.1) Qatar Holding LLC’sLLC's Public Offering

 

On April 11, 2017, Banco Santander in Brazil informed its shareholders and the market in general, in furtherance of the material facts disclosed on March 28, 2017 and April 6, 2017, the settlement of the secondary public offering for the distribution of 80,000,000 units issued by Banco Santander in Brazil and held by Qatar Holding LLC (Selling Shareholder), including in the form of American Depositary Shares (ADSs), having been allocated 22,000,000 Units for the Brazilian offering and 58,000,000 ADSs for the international offering.

F-115

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

The price per Unit was set at R$25, resulting on a total amount of R$2 billion. Additionally, the amount of Units of the international offering initially offered was increased by an additional batch of 12,000,000 Units, exclusively in the form of ADSs also held by the Selling Shareholder.

 

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 under commutatively condition.

Santander has a Policy for Related Party Transactions approved by the Board of Directors, which aims to ensure that all transactions typified by the policy to take effect  facingin view of the interests of Banco Santander and its shareholders.stockholders. The policy defines the power to approve certain transactions by the Board of Directors. The planned rules are also appliedapply to all employees and officers of Banco Santander and its subsidiaries.

 

Operations and charges for services with related parties are carried out in the ordinary course of business and under reciprocal conditions, including interest rates, terms and guarantees, and do not entail greater risk than the normal collection or have other disadvantages.             

Beginning in 2018, transactions and balances with key management personnel are shown. The main transactions and balance are as follows:

Thousand of reais 2019
  Parent(1) Joint-controlled
companies		 Other Related-Party(2)
    
Assets 5,294,152 4,387,013 874,668
Financial assets for trading(763,547) - (113,931)
Banco Santander, S.A. – Espanha (763,547) - -
Real Fundo de Investimento Multimercado Santillana Credito Privado (2) - - (113,931)
Loans and other values with credit institutions - Cash and overnight operations in foreign currency5,896,120 - 70,261
Banco Santander Espanha (3) (4) 5,896,120 - -
Banco Santander Totta, S.A. (2) - - 7,921
Bank Zachodni (2) - - 94
Santander UK plc - - 16,701
Banco Santander, S.A. – México (2) - - 45,545
Loans and advances to customers912 20,367 884,696
Zurich Santander Brasil Seguros e Previdência S.A. (5) - - 814,320
Zurich Santander Brasil Seguros S.A. (5) - - 58,778
Webmotors S.A. - 20,367 -
Banco Santander Espanha (1) 912 - -
Isban Mexico, S.A. de C.V. - - 122
Gesban Servicios Administrativos Globales, S.L. - - 23
Santander Brasil Gestão de Recursos Ltda - - 169
Key Management Personnel (8)- - 11,284
Loans and other values with credit institutions(1)86,638 4,365,518 192
Banco Santander – Espanha 86,638 - -
Banco RCI Brasil S.A. - 4,365,518 -
Santander Global Technology, S.L., SOCI - - 192
Other Assets 74,029 1,128 28,476
Banco Santander – Espanha 74,029 - -
Banco RCI Brasil S.A. - 1,128 -
Zurich Santander Brasil Seguros e Previdência S.A. - - 28,476
Guarantees and Limits - - 4,974
Key Management Personnel (8)- - 4,974
       
Liabilities (17,105,753) (169,103) (1,529,828)
Deposits of Brazil Central Bank and deposits of credit institutions(42,060) (167,017) (20,571)
Banco Santander, S.A. – Espanha (42,060) - -
Real Fundo de Investimento Multimercado Santillana Credito Privado (2) - - (20,571)
Banco RCI Brasil S.A. - (167,017) -
Securities - - (89,074)
Key Management Personnel- - (89,074)
Customer deposits - (2,086) (1,008,416)
Zurich Santander Brasil Seguros e Previdência S.A. (5) - - (199,934)
Santander Brasil Gestão de Recursos Ltda - - (332,916)
Webmotors S.A. - (2,082) -
Santander Securities Services Brasil DTVM S.A. - - (404,427)
Santander Brasil Asset (2) - - (16,762)
Key Management Personnel- - (36,104)
Others - (4) (18,273)
Other financial liabilities - Dividends and interest on capital Payable(6,874,602) - (12,226)
Banco Santander Espanha (1,067,623) - -
Grupo Empresarial Santander, S.L. (1) (2,177,207) - -
Sterrebeeck B.V. (1) (3,629,772) - -
Banco Madesant - - (1,948)
Key Management Personnel (7) - - (10,278)
Other Payables (13,130) - (399,541)
Banco Santander Espanha (13,130) - -
Santander Brasil Asset (2) - - (7,203)
Santander Securities Services Brasil DTVM S.A. - - (5,066)
Zurich Santander Brasil Seguros e Previdência S.A. (5) - - (21,219)
Key Management Personnel- - (357,249)
Others- - (8,804)
Debt Instruments Eligible to Compose Capital(10,175,961) - -
Banco Santander Espanha(10,175,961) - -

F-103 

F-116

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Brazilian Reais - R$ - unless otherwise stated)

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

 

The principal transactions and balances are as follows:

Thousand of reais  2017
 Parent(1)Joint-controlled companiesOther Related-Party(2)
Assets8,214,7391,214,312926,994
Financial assets for trading(173,065)-(74,873)
Banco Santander, S.A. – Spain(173,065)--
Abbey National Treasury Services Plc(2)--(71,672)
Real Fundo de Investimento Multimercado Santillana Credito Privado(2)--(3,201)
Loans and other values with credit institutions - Cash and overnight operations in foreign currency8,363,038-76,009
Banco Santander, S.A. – Spain(3) (5)8,363,038--
Banco Santander Totta, S.A.(2)--2,733
Abbey National Treasury Services Plc(2)--71,751
Bank Zachodni(2)--177
Banco Santander, S.A. – Mexico(2)--1,348
Loans and advances to customers1329,661925,858
Zurich Santander Brasil Seguros e Previdência S.A.--925,835
Abbey National Treasury Services Plc(2)--23
Banco Santander Espanha(1)132--
Webmotors S.A.-9,661-
Loans and other values with credit institutions(1)23,8961,203,032-
Banco Santander – Spain23,896--
Banco RCI Brasil S.A.-1,203,032-
Other Assets7381,619-
Banco Santander – Spain738--
Banco RCI Brasil S.A.-1,619-
Liabilities(12,360,383)(57,221)(2,107,677)
Deposits of Brazil Central Bank and deposits of credit institutions(387,937)(47,423)(1,862,058)
Banco Santander, S.A. – Spain(4)(387,937)--
Santander Securities Services Brasil DTVM S.A.--(300,074)
Santander Brasil Asset(2)--(16,766)
Real Fundo de Investimento Multimercado Santillana Credito Privado(2)--(1,543,752)
Banco Santander, S.A. – Uruguay(2)--(1,466)
Banco RCI Brasil S.A.-(47,423)-
Customer deposits-(9,798)(222,473)
ISBAN Brasil S.A.--(20,893)
Santander Securities Services Brasil Participações S.A.(2)--(71,947)
Produban Serviços de Informática S.A.(2)--(34,410)
Zurich Santander Brasil Seguros e Previdência S.A.(1)--(55,935)
Santander Brasil Gestão de Recursos Ltda.--(32,334)
Webmotors S.A.-(9,798)-
Others--(6,954)
Other financial liabilities - Dividends and interest on capital Payable(3,992,820)-(1,132)
Banco Santander – Spain(620,264)--
Grupo Empresarial Santander, S.L.(1)(1,264,470)--
Sterrebeeck B.V.(1)(2,108,086)--
Banco Madesant--(1,132)
Other Payables(2,050)-(22,014)
Banco Santander, S.A. – Spain(2,050)--
Santander Brasil Asset(2)--(69)
ISBAN Brasil S.A.(2)--237
Produban Servicios Informáticos Generales, S.L. (Produban Espanha)(2)--(905)
Santander Securities Services Brasil DTVM S.A.--6,762
Zurich Santander Brasil Seguros e Previdência S.A.--(27,748)
Others--(291)
Debt Instruments Eligible to Compose Capital(7)(7,977,576)--
Banco Santander – Spain(7,977,576)--
       
Thousand of Reais 2018
  Parent(1) Joint-controlled
companies		 Other Related-Party(2)
    
Assets 8,169,537 3,112,734 1,381,770
Financial assets for trading - Derivatives net(72,815) 205,337 266,027
Banco Santander, S.A. – Espanha (72,815) - -
Real Fundo de Investimento Multimercado Santillana Credito Privado (2) - - 266,027
Banco RCI Brasil S.A. - 205,337 -
Loans and other values with credit institutions - Cash and overnight operations in foreign currency8,194,590 - 146,988
Banco Santander Espanha (3) (5) 8,194,590 - -
Banco Santander Totta, S.A. (2) - - 7,883
Abbey National Treasury Services Plc (2) - - 87,260
Bank Zachodni (2) - - 193
Santander UK plc - - 46,615
Banco Santander, S.A. – México (2) - - 5,037
Loans and advances to customers347 - 966,462
Zurich Santander Brasil Seguros e Previdência S.A. - - 913,875
Zurich Santander Brasil Seguros S.A. - - 45,851
Banco Santander Espanha (1) 347 - -
Isban Mexico, S.A. de C.V. - - 122
Gesban Servicios Administrativos Globales, S.L. - - 23
Santander Brasil Gestão de Recursos Ltda - - 169
Santander Securities Services Brasil Participações S.A. (2) - - 927
Key Management Personnel- - 5,495
Loans and other values with credit institutions(1)15,143 2,905,947 2,293
Banco Santander – Espanha 15,143 - -
Banco RCI Brasil S.A. - 2,905,947 -
BHJV Assessoria e Consultoria em Gestão Empresarial LTDA - - 10
Produban Brasil Tecnologia - - 2,091
Santander Global Technology, S.L., SOCI - - 192
Other Assets 32,272 1,450 -
Banco Santander Espanha 32,272 - -
Banco RCI Brasil S.A.  - 1,450 -
       
Liabilities (23,166,005) (38,380)-(2,975,342)
Deposits of Brazil Central Bank and deposits of credit institutions(107,084) (36,871) (1,410,619)
Banco Santander Espanha (4) (107,084) - -
Real Fundo de Investimento Multimercado Santillana Credito Privado (2) - - (1,151,399)
Banco Santander Río S.A. (2) - - (259,220)
Banco RCI Brasil S.A. - (36,871) -
Securities obligations - - (96,133)
Key Management Personnel- - (96,133)
Customer deposits - (1,509) (1,134,675)
Santander Securities Services Brasil Participações S.A. (2) - - (58,968)
Zurich Santander Brasil Seguros e Previdência S.A. - - (234,249)
Gestora de Inteligência de Crédito - - (190,674)
Santander Brasil Gestão de Recursos Ltda - - (126,988)
Webmotors S.A. - (1,509) -
Santander Securities Services Brasil DTVM S.A. - - (427,209)
Santander Brasil Asset (2) - - (18,639)
Key Management Personnel- - (37,889)
Others- - (40,059)
Other financial liabilities - Dividends and interest on capital Payable(3,922,473) - (5,544)
Banco Santander Espanha (609,159) - -
Grupo Empresarial Santander, S.L. (1) (2) (1,242,259) - -
Sterrebeeck B.V. (1) (2) (2,071,055) - -
Banco Madesant (2) - - (1,112)
Key Management Personnel- - (4,432)
Other Payables (9,603) - (424,504)
Banco Santander – Espanha (9,603) - -
Santander Brasil Asset - - (14,476)
Santander Securities Services Brasil DTVM S.A. - - (4,291)
Zurich Santander Brasil Seguros e Previdência S.A. - - (16,924)
Key Management Personnel- - (381,292)
Others - - (7,521)
Debt Instruments Eligible to Compose Capital(19,126,845) - -
Banco Santander Espanha(19,126,845) - -

  

 

F-104 

F-117

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

       
Thousand of Reais 2017
  Parent(1) Joint-controlled
companies		 Other Related-Party(2)
    
Assets 8,214,739 1,214,312 926,994
Financial assets for trading - Derivatives net(173,065) - (74,873)
Banco Santander Espanha (173,065) - -
Abbey National Treasury Services Plc (2) - - (71,672)
Real Fundo de Investimento Multimercado Santillana Credito Privado (2) - - (3,201)
Loans and other values with credit institutions - Cash and overnight operations in foreign currency8,363,038 - 76,009
Banco Santander Espanha (3) (5) 8,363,038 - -
Banco Santander Totta, S.A. (2) - - 2,733
Abbey National Treasury Services Plc (2) - - 71,751
Bank Zachodni (2) - - 177
Banco Santander, S.A. – México (2) - - 1,348
Loans and advances to customers132 9,661 925,858
Zurich Santander Brasil Seguros e Previdência S.A. - - 925,835
Abbey National Treasury Services Plc (2) - - 23
Banco Santander Espanha (1) 132 - -
Webmotors S.A. - 9,661 -
Loans and other values with credit institutions(1)23,896 1,203,032 -
Banco Santander Espanha 23,896 - -
Banco RCI Brasil S.A. - 1,203,032 -
Other Assets 738 1,619 -
Banco Santander Espanha 738 - -
Banco RCI Brasil S.A.  - 1,619 -
       
Liabilities (12,360,383) (57,221) (2,107,677)
Deposits of Brazil Central Bank and deposits of credit institutions(387,937) (47,423) (1,862,058)
Banco Santander Espanha (4) (387,937) - -
Santander Securities Services Brasil DTVM S.A. - - (300,074)
Santander Brasil Asset - - (16,766)
Real Fundo de Investimento Multimercado Santillana Credito Privado (2) - - (1,543,752)
Banco Santander, S.A. – Uruguay (2) - - (1,466)
Banco RCI Brasil S.A. - (47,423) -
Customer deposits - (9,798) (222,473)
ISBAN Brasil S.A. (2) - - (20,893)
Santander Securities Services Brasil Participações S.A. (2) - - (71,947)
Santander Brasil Tecnologia S.A. (atual denominação da Produban Serviços de Informática S.A.) (2) - - (34,410)
Zurich Santander Brasil Seguros e Previdência S.A. - - (55,935)
Santander Brasil Gestão de Recursos Ltda - - (32,334)
Webmotors S.A. - (9,798) -
Others - - (6,954)
Other financial liabilities - Dividends and interest on capital Payable(3,992,820) - (1,132)
Banco Santander Espanha (620,264) - -
Grupo Empresarial Santander, S.L. (1) (2) (1,264,470) - -
Sterrebeeck B.V. (1) (2) (2,108,086) - -
Banco Madesant (2) - - (1,132)
Other Payables (2,050) - (22,014)
Banco Santander – Espanha (2,050) - -
Santander Brasil Asset - - (69)
ISBAN Brasil S.A. (2) - - 237
Produban Servicios Informáticos Generales, S.L. (Produban Espanha) (2) - - (905)
Santander Securities Services Brasil DTVM S.A. - - 6,762
Zurich Santander Brasil Seguros e Previdência S.A. - - (27,748)
Others - - (291)
Debt Instruments Eligible to Compose Capital(7,977,576) - -
Banco Santander Espanha (7,977,576) - -

 

BANCO SANTANDER (BRASIL) S.A.(*) All loans and other amounts with related parties were made in the 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.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Thousands(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, 2019, refers to the cash of Brazilian ReaisR$1,089,578 (2018 - R$1,515,437 e 2017 - unless otherwise stated)

R$587,531). 

(4) On December 31, 2019, include foreign currency investments (overnight applications) due on January 2, 2019 in the amount of R$4,111,489 (2018 - R$6,583,716 e 2017 - R$7,384,335) and interest of 1.53% p.a held at Santander Brasil EFC, Banco Santander Brasil and its Grand Cayman Branch. 

    
Thousand of reais  2016
 Parent(1)Joint-controlled companiesOther Related-Party(2)
Assets10,919,116794,800556,778
Financial assets for trading - Derivatives net(184,304)-(400,570)
Banco Santander, S.A. – Spain(184,304)--
Abbey National Treasury Services Plc(2)--(91,828)
Real Fundo de Investimento Multimercado Santillana Credito Privado(2)--(308,742)
Loans and other values with credit institutions - Cash and overnight operations in foreign currency10,900,941-94,530
Banco Santander, S.A. – Spain(3) (5)10,900,941--
Banco Santander Totta, S.A.(2)--1,261
Abbey National Treasury Services Plc(2)--92,118
Bank Zachodni(2)--117
Banco Santander, S.A. – Mexico(2)--1,034
Loans and advances to customers-136,354862,818
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)25,546656,806-
Banco Santander – Spain25,546--
Banco RCI Brasil S.A.-656,806-
Other Assets176,9331,640-
Banco Santander – Spain176,933--
Banco RCI Brasil S.A.-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 Services Brasil DTVM S.A.--(208,059)
Santander Brasil Asset--(12,079)
Real Fundo de Investimento Multimercado Santillana Credito Privado(2)--(757,874)
Banco Santander, S.A. – Uruguay(2)--(2,158)
Banco RCI Brasil S.A.-(40,202)-
Others--(532)
Customer deposits-(66,325)(189,794)
ISBAN Brasil S.A.(2)--(22,232)
Santander Securities Services Brasil Participações S.A.(2)--(52,484)
Produban Serviços de Informática S.A.(2)--(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)(2)(1,201,612)--
Sterrebeeck B.V.(1)(2,003,291)--
Banco Madesant--(1,075)
Santusa Holding, S.L.(2)--(15,419)
Other Payables(2,954)-(35,566)
Banco Santander – Spain(2,954)--
Santander Brasil Asset--(70)
ISBAN Brasil S.A.(2)--(339)
Santander Securities Services Brasil Participações S.A.(2)--(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(7,859,649)--

(5) Significant influence of Banco Santander Espanha. 

(6) Of the total dividends resolved in 2019, R$13,553 is allocated to the Key Management Personnel, remaining to pay the provisioned amount. 

(7) The balance with key management personnel refers to operations contracted before the term of the mandates.

 

F-105 

F-118

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Brazilian Reais - R$ - unless otherwise stated)

Thousand of reais  2015
 Parent(1)Joint-controlled companiesOther Related-Party(2)
Assets23,245,276954,190805,572
Financial assets for trading - Derivatives net(265,491)-(536,215)
Banco Santander, S.A. – Spain(265,491)--
Abbey National Treasury Services Plc(2)--(156,976)
Real Fundo de Investimento Multimercado Santillana Credito Privado--(379,239)
Loans and other values with credit institutions - Cash and overnight operations in foreign currency23,248,821-136,634
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. – México--65
Loans and advances to customers-11,1121,205,153
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)26,414940,236-
Banco Santander – Spain26,414--
Companhia de Crédito, Financiamento e Investimento RCI Brasil(7)-939,861-
Banco RCI Brasil S.A.(7)-375-
Other Assets235,5322,842-
Banco Santander – Spain235,532--
Companhia de Crédito, Financiamento e Investimento RCI Brasil(7)-2,276-
Banco RCI Brasil S.A.(7)-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(7)-(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.(7)-(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 Services Brasil Participações S.A.(2)--(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, S.A. – 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--(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(7)(9,435,823)--
 (*)

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

All loans and other amounts with related parties were made in the ordinary course

(Thousand 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.Brazilian Reais - R$ - unless otherwise stated) 

 

(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.
Thousand of Reais   2019
        Parent(1) Joint-controlled
companies		 Other Related-Party(2)
          
Income       (1,458,386) 226,141 1,254,022
Interest and similar income - Loans and amounts due from credit institutions 109,530 218,661 630
Banco Santander Espanha     109,530 - -
Banco RCI Brasil S.A.       - 218,661 -
Key Management Personnel - - 630
Guarantees and Limits       - - 24
Key Management Personnel - - 24
Interest expense and similar charges - Customer deposits  - (25) (27,433)
Santander Brasil Gestão de Recursos Ltda - - (16,387)
Gestora de Inteligência de Crédito - - (3,275)
Webmotors S.A. - (25) -
Key Management Personnel - - (7,747)
Others - - (24)
Interest expense and similar charges - Deposits from credit institutions (174) (3,375) (96,579)
Banco Santander – Espanha (174) - -
Banco RCI Brasil S.A. (6) - (3,375) -
SAM Brasil Participações - - (37)
Real Fundo de Investimento Multimercado Santillana Credito Privado - - (67,821)
Santander Securities Services Brasil DTVM S.A. (2) - - (27,595)
Santander Asset Management, S.A. SGIIC. - - (1,126)
Fee and commission income (expense)   2,310 10,418 2,635,325
Banco Santander – Espanha 2,310 - -
Banco RCI Brasil S.A. (6) - 10,201 -
Banco Santander International - - 35,294
Webmotors S.A. - 217 -
Zurich Santander Brasil Seguros S.A. - - 231,920
Zurich Santander Brasil Seguros e Previdência S.A. - - 2,356,596
Key Management Personnel - - 343
Others - - 11,172
Gains (losses) on financial assets and liabilities (net) and exchange differences (net) (724,169) 462 44,858
Banco Santander, S.A. – Espanha (724,169) - -
Real Fundo de Investimento Multimercado Santillana Credito Privado - - (598)
Santander Securities Services Brasil DTVM S.A. (2) - - (2,297)
Zurich Santander Brasil Seguros e Previdência S.A. - - 43,858
Key Management Personnel - - 168
Others - 462 3,727
Administrative expenses and Amortization   (153,332) - (1,283,788)
Banco Santander, S.A. – Espanha (153,332) - -
ISBAN Chile S.A. - - (28)
Aquanima Brasil Ltda. - - (32,032)
TECBAN - Tecnologia Bancaria Brasil - - (345,610)
Santander Securities Services Brasil DTVM S.A. (2) - - (49,241)
Santander Global Technology, S.L., SOCI - - (336,952)
Key Management Personnel - - (482,852)
Others - - (37,073)
Others Administrative expenses - Donation   - - (19,015)
Fundação Santander - - (1,615)
Instituto Escola Brasil - - (1,300)
Fundação Sudameris - - (16,100)
Debt Instruments Eligible to Compose Capital   (692,551) - -
Banco Santander Espanha (2)(8) (692,551) - -

  

(2)Refers to the Company’s subsidiaries (Banco Santander Spain).

(3)In December 31, 2017, refers to the cash of R$587,531 (2016 - R$582,571 and 2015 - R$1,866,683).

 

F-106 

F-119

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Brazilian Reais - R$ - unless otherwise stated)

 (4)

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

As

(Thousand of December 31, 2017, refers to raising funds through operations transfers abroad amounted to R$387,937 (2016Brazilian Reais - R$327,466 and 2015 - R$219,037), with maturity until November, 2018 and interest between 0.56% and 6.65%p.y.unless otherwise stated) 

 

(5)On December 31, 2017, include foreign currency investments (overnight applications) due on January 2, 2018 in the amount of R$7,384,335 (2016 - R$10,269,812 and 2015 - R$20,699,539) and interest of 1.43% p.a. held at Santander Brasil EFC, Banco Santander Brasil 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.

      
Thousand of Reais 2017   2018
Parent(1)Joint-controlled companiesOther Related-Party(2) Parent(1) Joint-controlled
companies		 Other Related-Party(2)
 
Income389,663126,7811,210,444 (972,799) 192,889 1,323,622
Interest and similar income - Loans and advances to customers 272,500 273,332 1,541
Key Management PersonnelKey Management Personnel - - 461
Interest and similar income - Loans and amounts due from credit institutions87,21787,3811,417Interest and similar income - Loans and amounts due from credit institutions 136,250 136,666 1,080
Banco Santander, S.A. – Spain87,217-
Banco Santander EspanhaBanco Santander Espanha 136,250 - -
Banco RCI Brasil S.A.(6)-87,381-Banco RCI Brasil S.A. (6) - 136,666 -
Abbey National Treasury Services Plc-879Abbey National Treasury Services Plc - - 157
Cibrasec-538Cibrasec - - 923
Interest expense and similar charges - Customer deposits-(4,486)(41,026)Interest expense and similar charges - Customer deposits - (92) (23,146)
ISBAN Brasil S.A.-(2,145)ISBAN Brasil S.A. - - (90)
Santander Securities Services Brasil Participações S.A.-(6,190)
Santander Brasil Gestão de Recursos Ltda-(6,636)Santander Brasil Gestão de Recursos Ltda - - (8,329)
Santander Securities Services Brasil DTVM S.A.-(24,344)
Santander Cultural-(69)Santander Cultural - - (36)
Gestora de Inteligência de CréditoGestora de Inteligência de Crédito - - (5,743)
Webmotors S.A.-(4,486)-Webmotors S.A. - (92) -
Produban Serviços de Informática S.A.-(1,547)
Santander Brasil Tecnologia S.A. (atual denominação da Produban Serviços de Informática S.A.)Santander Brasil Tecnologia S.A. (atual denominação da Produban Serviços de Informática S.A.) - - (215)
Key Management PersonnelKey Management Personnel - - (8,707)
Others-(95)Others - - (27)
Interest expense and similar charges - Deposits from credit institutions(13,038)(3,026)(113,569)Interest expense and similar charges - Deposits from credit institutions (6,889) (5,871) (134,896)
Banco Santander, S.A. – Spain(13,038)-
Banco Santander – EspanhaBanco Santander – Espanha (6,889) - -
Banco RCI Brasil S.A.(6)-(3,026)-Banco RCI Brasil S.A. (6) - (5,871) -
Santander Securities Services Brasil Participações S.A. (2)Santander Securities Services Brasil Participações S.A. (2) - - (26,378)
SAM Brasil Participações-(95)SAM Brasil Participações - - (47)
Real Fundo de Investimento Multimercado Santillana Credito Privado-(112,211)Real Fundo de Investimento Multimercado Santillana Credito Privado - - (102,928)
Santander Securities Services Brasil DTVM S.A. (2)Santander Securities Services Brasil DTVM S.A. (2) - - (4,442)
Santander Asset Management, S.A. SGIIC.-(1,263)Santander Asset Management, S.A. SGIIC. - - (1,101)
Fee and commission income (expense)(5,099)14,9992,453,179Fee and commission income (expense) 6,213 32,960 2,653,014
Banco Santander, S.A. – Spain(5,099)-
Banco Santander – EspanhaBanco Santander – Espanha 6,213 - -
Banco RCI Brasil S.A.(6)-14,996-Banco RCI Brasil S.A. (6) - 31,981 -
Banco Santander International-20,480Banco Santander International - - 30,789
Webmotors S.A.-3-Webmotors S.A. - 979 -
Zurich Santander Brasil Seguros S.A.-295,508Zurich Santander Brasil Seguros S.A. - - 300,868
Zurich Santander Brasil Seguros e Previdência S.A.-2,134,755Zurich Santander Brasil Seguros e Previdência S.A. - - 2,302,295
Key Management PersonnelKey Management Personnel - - 355
Others-2,436Others - - 18,707
Gains (losses) on financial assets and liabilities (net) and exchange differences (net)592,91931,913(39,534)Gains (losses) on financial assets and liabilities (net) and exchange differences (net) (680,903) 29,226 (199,985)
Banco Santander, S.A. – Spain592,919-
Banco Santander, S.A. – EspanhaBanco Santander, S.A. – Espanha (680,903) - -
Real Fundo de Investimento Multimercado Santillana Credito Privado-(79,480)Real Fundo de Investimento Multimercado Santillana Credito Privado - - (210,324)
Abbey National Treasury Services Plc-23,843Abbey National Treasury Services Plc - - (17,726)
Santander Securities Services Brasil DTVM S.A. (2)Santander Securities Services Brasil DTVM S.A. (2) - - 1,312
Zurich Santander Brasil Seguros e Previdência S.A.Zurich Santander Brasil Seguros e Previdência S.A. - - 40,305
Banco RCI Brasil S.A.(6)-31,913-Banco RCI Brasil S.A. (6) - 29,226 -
Santander Securities Services Brasil DTVM S.A.(2)-(26,102)
Santander Investment Securities Inc.-(13,492)
Zurich Santander Brasil Seguros e Previdência S.A.-52,981
Zurich Santander Brasil Seguros S.A.-1,788
Key Management PersonnelKey Management Personnel - - 239
Others-928Others - - (13,791)
Administrative expenses and Amortization(50,271)-(1,028,750)Administrative expenses and Amortization - - (952,432)
Banco Santander, S.A. – Spain(50,271)-
ISBAN Brasil S.A.-(337,161)ISBAN Brasil S.A. - - (14,210)
Produban Serviços de Informática S.A.-(242,191)
Santander Brasil Tecnologia S.A. (atual denominação da Produban Serviços de Informática S.A.)Santander Brasil Tecnologia S.A. (atual denominação da Produban Serviços de Informática S.A.) - - (33,567)
ISBAN Chile S.A.-(23)ISBAN Chile S.A. - - (24)
Aquanima Brasil Ltda.-(25,638)Aquanima Brasil Ltda. - - (30,021)
TECBAN - Tecnologia Bancaria Brasil-(262,046)TECBAN - Tecnologia Bancaria Brasil - - (313,433)
Produban Servicios Informaticos Generales, S.L.-(46,494)
Ingeniería de Software Bancario, S.L.-(70,385)
Santander Securities Services Brasil Participações S.A.(2)-(42,603)
Santander Securities Services Brasil DTVM S.A. (2)Santander Securities Services Brasil DTVM S.A. (2) - - (46,884)
Santander Global Technology, S.L., SOCISantander Global Technology, S.L., SOCI - - (175,466)
Key Management PersonnelKey Management Personnel - - (289,612)
Others-(2,209)Others - - (49,216)
Others Administrative expenses - DonationOthers Administrative expenses - Donation - - (20,013)
Santander CulturalSantander Cultural - - (2,748)
Fundação SantanderFundação Santander - - (1,330)
Fundação SudamerisFundação Sudameris - - (15,935)
Debt Instruments Eligible to Compose CapitalDebt Instruments Eligible to Compose Capital (427,470) - -
Banco Santander Espanha (2)(8)Banco Santander Espanha (2)(8) (427,470) - -
 

  

 

F-107 F-120

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

Thousand of Reais   2017
        Parent(1) Joint-controlled
companies		 Other Related-Party(2)
             
Income       389,663 126,781 1,210,444
Interest and similar income - Loans and amounts due from credit institutions 87,217 87,381 1,417
Banco Santander Espanha 87,217 - -
Banco RCI Brasil S.A. (6) - 87,381 -
Abbey National Treasury Services Plc - - 879
Cibrasec - - 538
Interest expense and similar charges - Customer deposits  - (4,486) (41,026)
ISBAN Brasil S.A. - - (2,145)
Santander Securities Services Brasil Participações S.A. - - (6,190)
Santander Brasil Gestão de Recursos Ltda - - (6,636)
Santander Securities Services Brasil DTVM S.A - - (24,344)
Santander Cultural - - (69)
Webmotors S.A. - (4,486) -
Santander Brasil Tecnologia S.A. (current name of Produban Serviços de Informática S.A.) - - (1,547)
Others - - (95)
Interest expense and similar charges - Deposits from credit institutions (13,038) (3,026) (113,569)
Banco Santander – Espanha (13,038) - -
Banco RCI Brasil S.A. (6) - (3,026) -
SAM Brasil Participações - - (95)
Real Fundo de Investimento Multimercado Santillana Credito Privado - - (112,211)
Santander Asset Management, S.A. SGIIC. - - (1,263)
Fee and commission income (expense)   (5,099) 14,999 2,453,179
Banco Santander – Espanha (5,099) - -
Banco RCI Brasil S.A. (6) - 14,996 -
Banco Santander International - - 20,480
Webmotors S.A. - 3 -
Zurich Santander Brasil Seguros S.A. - - 295,508
Zurich Santander Brasil Seguros e Previdência S.A. - - 2,134,755
Others - - 2,436
Gains (losses) on financial assets and liabilities (net) and exchange differences (net) 592,919 31,913 (39,534)
Banco Santander, S.A. – Espanha 592,919 - -
Real Fundo de Investimento Multimercado Santillana Credito Privado - - (79,480)
Abbey National Treasury Services Plc - - 23,843
Banco RCI Brasil S.A. (6) - 31,913 -
Santander Securities Services Brasil DTVM S.A. - - (26,102)
Santander Investment Securities Inc. - - (13,492)
Zurich Santander Brasil Seguros e Previdência S.A. - - 52,981
Zurich Santander Brasil Seguros S.A. - - 1,788
Others - - 928
Administrative expenses and Amortization   (50,271) - (1,028,750)
Banco Santander, S.A. – Espanha (50,271) - -
ISBAN Brasil S.A. - - (337,161)
Santander Brasil Tecnologia S.A. (atual denominação da Produban Serviços de Informática S.A.) - - (242,191)
ISBAN Chile S.A. - - (23)
Aquanima Brasil Ltda. - - (25,638)
TECBAN - Tecnologia Bancaria Brasil - - (262,046)
Produban Servicios Informaticos Generales, S.L. - - (46,494)
Ingeniería de Software Bancario, S.L. - - (70,385)
Santander Securities Services Brasil DTVM S.A. - - (42,603)
Others - - (2,209)
Others Administrative expenses - Donation   - - (21,273)
Santander Cultural - - (3,513)
Fundação Santander - - (1,837)
Instituto Escola Brasil - - (873)
Fundação Sudameris - - (15,050)
Debt Instruments Eligible to Compose Capital   (222,065) - -
Banco Santander Espanha (2)(8) (222,065) - -

 

BANCO SANTANDER (BRASIL)(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.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Thousands(2) Refers to the Company's subsidiaries (Banco Santander, S.A .- Spain).

(3) Refers the profit on disposal of Brazilian Reais - R$ - unless otherwise stated)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.

 

Thousand of Reais47.2017
Parent(1)Joint-controlled companiesOther Related-Party(2)Risk management

Others Administrative expenses - Donation--(21,273)
Santander Cultural--(3,513)
Fundacao Santander--(1,837)
Instituto Escola Brasil--(873)
Fundação Sudameris--(15,050)
Debt Instruments Eligible to Compose Capital(222,065)--
Banco Santander Espanha(222,065)--

Thousand of Reais  2016
 Parent(1)Joint-controlled companiesOther Related-Party(2)
Income(798,022)136,1111,197,489
Interest and similar income - Loans and amounts due from credit institutions39,677114,909396
Banco Santander, S.A. – Spain39,677--
Companhia de Crédito, Financiamento e Investimento RCI Brasil(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.(6)-(10,959)-
Santander Securities Services Brasil DTVM S.A.--(20,979)
SAM Brasil Participações--(133)
Real Fundo de Investimento Multimercado Santillana Credito Privado--(88,467)
Santander Securities Services Brasil Participações S.A.(2)--(4,119)
Santander Asset Management, S.A. SGIIC.--(1,760)
Fee and commission income (expense)5,33420,1331,955,255
Banco Santander, S.A. – Spain5,334--
Banco RCI Brasil S.A. (Current Company Name of Social da RCI Brasil Leasing)(6)-19,211-
Banco Santander International--20,959
Santander Securities Services Brasil DTVM S.A.--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)39,024267,983
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 RCI Brasil Leasing)(6)-39,024-
Santander Securities Services Brasil DTVM S.A.--(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)

F-108 

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Brazilian Reais - R$ - unless otherwise stated)

Thousand of Reais2016
Parent(1)Joint-controlled companiesOther Related-Party(2)
Santander Securities Services Brasil DTVM S.A.--(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(225,161)--

Thousand of Reais  2015
 Parent(1)Joint-controlled companiesOther Related-Party(2)
Income(761,189)189,1822,504,302
Interest and similar income - Loans and amounts due from credit institutions31,930163,684104
Banco Santander, S.A. – Spain31,930--
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 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)21,3761,883,916
Companhia de Crédito, Financiamento e Investimento RCI Brasil(6)(8,022)--
Banco RCI Brasil S.A.(6)-3,863-
Banco Santander, S.A. – Spain-16,579-
Webmotors S.A.--8,804
Zurich Santander Brasil Seguros S.A.-934-
Zurich Santander Brasil Seguros e Previdência S.A.--248,824
Others--1,626,288
Gains (losses) on financial assets and liabilities (net) and exchange differences (net)(406,523)30,899953,678
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)

F-109 

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Brazilian Reais - R$ - unless otherwise stated)

Thousand of Reais2015
Parent(1)Joint-controlled companiesOther Related-Party(2)
Fundacao Santander--(3,500)
Instituto Escola Brasil--(1,140)
Fundação Sudameris--(10,200)
Debt Instruments Eligible to Compose Capital(378,263)--
Banco Santander, S.A. – Spain(2) (8)(378,263)--
Income from 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
(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.

48. Risk management

 

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

 

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

 

2.B. Involvement of the Senior Management in decision-making;

 

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

 

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

 

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

 

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

 

7.G. Common management tools

 

8.H. Organizational structure

 

9.I. Scopes and responsibilities

 

10.

F-121

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

J. Risk limitation

 

11.K. Recognition

 

12.L. Effective information channel

 

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

 

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

 

• Policies and procedures definition that are part of the Regulatory Framework Risk, which regulates the risk activities and processes. They follow the instructions of the Board of Directors, the regulations of the BACEN and the international best practices in order to protect the capital and ensure business’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)I. Adaptation of corporate management frameworks and policies that reflect Banco Santander’s risk management principles.

F-110 

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Brazilian Reais - R$ - unless otherwise stated)

 

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

 

c)III. Risks measurement using methods and models periodically tested.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

a) Corporate Governance of the Risk Function

 

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

 

Its main responsibilities are:

 

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

 

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

 

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

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

 

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

 

The organizational structure of the executive vice-presidency consists of areas which are responsible for credit risk management, market and structural, operationalmodel risk management and risk model.non-financial risks. The credit risk management structure is composed by 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 task, itvision, as well as the Group's headquarters in Spain. There is also

F-122

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

an area responsible for the attendance to regulators, external and internal auditors, as well as the Group’s headquarters in Spain.auditors.

 

It has a department called risk architecture,ERM-Enterprise Risk Management, 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 alladequate risk management.. This structure includes the areas of risk), Governance, PolicyMethodology & Basel Project (model development and parameterization); Decision engines; Credit Risk Culture, Capital, Stress TestControl; Risk Control and Performance; Integrated Management and Relationship with Supervisors (covering Risk MI (responsible for the generation, exploitationCulture); and dissemination of information beyond the project information systems) are areas part of this structure.Local Provision & IFRS9.

 

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.

F-111 

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Brazilian Reais - R$ - unless otherwise stated)

 

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’clients' characteristics, being segregated between individual clients (with the accompanied of dedicated analysts) and customers with similar characteristics (standardized).

 

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

 

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

 

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

 

b.2) Measures and measurement tools

 

Rating tools

 

The Bank uses proprietary internal rating models to measure the credit quality of a given customer or transaction. Each rating relates to a certain probability of default or non-payment, determined on the basis of the customer’scustomer's historical experience, to predict default. 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 registeredregistratered information updated frequently. New modes of operation are subject to credit risk evaluation, verification and adaptation to the controls adopted by the Bank.

 

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

 

Credit risk parameters

 

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

 

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

 

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

 

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

 

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

 

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

 

F-112 

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Brazilian Reais - R$ - unless otherwise stated)

The Bank use proprietary internal rating models to measure the credit quality of a given client or transaction. Each rating relates to a certain probability of default or non-payment, determined on the basis of the client’sclient'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.

 

F-123

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

The table shown in note 10.b9.b shows the portfolio by the internal risk rating levels and their probability of default.

 

Thousand of reais     2019 2018 2017
           
By maturity          
Less than 1 Year     186,196,849 186,373,511 174,247,968
Between 1 and 5 years     117,841,564 99,309,551 82,513,030
More than 5 years     43,218,247 36,250,128 31,068,215
Loans and advances to customers, gross     347,256,660 321,933,190 287,829,213
           
By internal classification of risk          
Low     257,133,115 240,440,294 226,098,497
Medium-low     56,549,196 50,485,682 33,635,378
Medium     11,754,806 11,967,262 10,423,293
Medium-High     8,512,386 7,722,198 8,215,024
High     13,307,156 11,317,754 9,457,021
Loans and advances to customers, gross     347,256,660 321,933,190 287,829,213

To the portfolios which the Bank presents limited historic data, reference external information are used to complement internal available data. The portfolios for which reference external information represent significant data to measure the expected credit losses are present below.

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

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

b.3) Observed loss: measures of credit cost

 

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

 

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

 

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

 

b.4) Credit risk cycle

 

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

 

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

 

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

 

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

 

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

 

Planning and setting risk limits

 

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

 

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

 

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

 

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

F-124

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

 

Risk analysis and rating process

 

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

 

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

 

Decision-Making on Operations

 

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

 

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

F-113 

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Brazilian Reais - R$ - unless otherwise stated)

 

Risk monitoring and control

 

The preventive detection of the operation’s credit quality is from the commercial manager responsibility in conjunction with the risk analyst. Additionally, the risk monitoring is made through a permanent observation process in order to anticipate the identification of incidents which can occur in the evolution of the operations, clients and environment.

 

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

 

Risk control function

 

The control function is performed by assessing risks from various complementary perspectives, the main pillars are the control by geographical location, business area, management model, product and process, facilitating thus the detection of specific areas requiring measures for which decisions should be taken. To obtain an overview of the bank’sbank'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.periodically. 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’sclient's recovery.

 

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

 

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

 

b.6) Credit risk from other perspective

 

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

 

Concentration risk

 

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

 

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

 

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

 

The 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 guarantees to mitigate the companies risk, credit derivatives for hedge purposes or the performance of securitization transactions, in order to optimize the risk/return ratio of the total portfolio.

 

Credit risk from financial market operations

 

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

 

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

 

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

 

F-114 

F-125

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Brazilian Reais - R$ - unless otherwise stated)

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

 

Environmental risk

 

"The Banco Santander's Social and Environmental RiskResponsibility Policy (PRSA), which follows the guidelines of CMN Resolution 3232/2014 and the SARB Regulation Nº. 14 of Febraban, establishes guidelines and consolidates specific policies for socio-environmental practices in business and in relationships with stakeholders. These practices include the management for the Wholesale Bankof socio-environmental risks, impacts and opportunities related to topics such as adequacy in credit granting and use, supplier management and socio-environmental risk analysis, which is performedcarried out through the analysis of socialclients' socio-environmental practices. and environmental practicesVarejo, of customers whothe Corporate segment 3 (one of the Corporate Retail segments of the Bank), which have limits or credit risk over R$1 million. This analysis considers items such as contaminated land, deforestation, working conditionsabove R $ 5 million and other possible pointswhich are part of environmental attention where therethe 14 socio-environmental care sectors. In this case, the socio-environmental risk is analyzed in order to mitigate the possibilityissues of penaltiesoperational risk, capital risk, credit risk and losses. The procedurereputational risk. Since 2009, Santander has been a signatory to the Equator Principles and this set of guidelines 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 client guarantees. The analysis focuses on preserving capital and reputationused to mitigate socio-environmental risks in the market and the spreadfinancing 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.large projects.

 

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

 

b.7) Variations in main aggregates in 2016 (unaudited)

The trends observed in 2017 were consistent with those of 2016, where in a challenging economic scenario, the Bank model proved to be effective. The Bank was able to preserve the good quality of the business and reduce the default rate. In December 2017, this index was 6.6% against 7%, 31 in December 2016 and 7% on December 31, 2015.

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 client’s financial life; and the deployment of strong debt renegotiation campaigns.Credit Management - Main changes

 

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 credit risk reduction.

 

The analysis of credit for projects and companies in the Wholesale segment, continue to integrate opinions of our area of ​​Environmental Risk.

 

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

 

 2019 2018 2017
201720162015 
Credit risk exposure - customers (Thousand of Reais)330,474,249301,702,586310,877,166Credit risk exposure - customers (Thousand of Reais) 391,569,227 364,193,664 330,474,249
Loans and advances to customers, gross (note 10)287,829,213268,437,556267,266,449
Contingent Liabilities - Guarantees and other sureties (note 45.a)42,645,03633,265,03043,610,717
Loans and advances to customers, gross (note 9) 347,256,660 321,933,190 287,829,213
Contingent Liabilities - Guarantees and other sureties (note 44.a) Contingent Liabilities - Guarantees and other sureties (note 44.a) 44,312,567 42,260,474 42,645,036
Non-performing loans ratio (%) - unaudited6.65%7.04%7.00% 6.75% 6.98% 6.65%
Impairment coverage ratio (%) - unaudited95.39%96.31%82.86% 96.58% 102.42% 95.39%
Specific credit loss provisions, net of RAWO (*) (Thousand of Reais) - unaudited18,261,63818,191,12615,411,760Specific credit loss provisions, net of RAWO (*) (Thousand of Reais) - unaudited22,625,750 22,969,315 18,261,638
Cost of credit (% of risk) - unaudited3.98%4.52%5.07% 3.93% 3.90% 3.98%
Data prepared on the basis of management criteria and the accounting criteria of the controller unit.Data prepared on the basis of management criteria and the accounting criteria of the controller unit. 
(*) RAWO = Recoveries of Assets Derecognized. 

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

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

Below are the assets with excess or insufficiency of guarantees:

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

(1) Vehicles and others loans. 

(2) Cayman and Luxemburgo. 

Unsecured loans: 195,765.

Data preparedF-126

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

The Bank identified and documented the main determinants of credit risk and credit losses for each portfolio of financial instruments and, using a historical data analysis, estimated the relationships between macroeconomic variables and credit risks and credit losses.

2019
Unemployment rates11.9%
Interest Rates4.5%
increase in GDP1.2%

The expected relation between key-indicators and default rates and several financial assets losses were predicted based on the basishistoric analysis data of management criteria and the accounting criteria of the controller unit.

(*) RAWO = Recoveries of Assets Derecognized.recent years.

 

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;

·Functional independence;

 

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

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

 

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

·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.

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

 

F-115 

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Brazilian Reais - R$ - unless otherwise stated)

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

 

- 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.

·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 clients, trading operations and positioning mainly in fixed-income, equity , foreign currency products and shares.

I.Trading: this item includes financial services for clients, 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.

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

 

- Structural risks:

III.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).

·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.

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

 

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

 

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

 

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

 

Interest rate Risk

 

The following table aggregates by product the cash flows of the operations of our perimeter of companies that have interest income. The transactions are presented by the book balance at the closing date of the years 20162019, 2018 and 2017. It is not associated with the risk management of changes in interest rates or indexer mismatches, which is done by monitoring metrics of Marketplace.market. However, it allows to

F-127

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

evaluate the concentrations of term and possible risks and below it, the balances of the same products are presented at the redemption value at maturity, except for the line dealing with receivables and obligations linked to derivative contracts.

 

Position of accounts subject to interest rate risk   2017
In millions of Reais
 0 to 30 days31 to 180 days181 to 365 days1 to 5 yearsAbove 5 yearsTotal
Interest-earning assets:      
Financial Assets Held For Trading5,5411,7796,55629,96810,19454,038
Debt instruments6538905,73916,7098,14832,139
Equity instruments490----490
Trading derivatives4,39888981813,2592,04621,410
Available-For-Sale Financial Assets2,0321,27217,09246,50223,71190,609
Debt instruments9251,27217,09246,50223,71189,503
Equity instruments1,107----1,107
Other Financial Assets At Fair Value Through Profit Or Loss7213504791,0081,622
Debt instruments3813504791,0081,589
Equity instruments33----33
Non-Current Assets Held For Sale801682223,0827,04010,593
Reserves from Brazilian Central Bank59,051----59,051
           2019
Position of accounts subject to interest rate risk     In millions of Reais
    0 to 30 days  31 to 180 days  181 to 365 days  1 to 5 years  Above 5 years  Total
              
Interest-earning assets:           
              
 Financial assets measured at fair value through profit or loss 3,891 1,091 737 8,444 4,446 18,609
 Debt instruments - 3 140 188 889 1,220
 Equity instruments 171 - - - - 171
 Trading derivatives 3,720 1,088 597 8,256 3,557 17,218
 Other Financial Assets At Fair Value Through Profit Or Loss 4,261 802 3,981 16,737 7,075 32,856
 Debt instruments 2,232 802 3,981 16,737 7,075 30,827
 Equity instruments 2,029 - - - - 2,029
 Investments Held to Maturity 98 96 280 3,679 3,981 8,134
 Reserves from Brazilian Central Bank 69,663 - - - - 69,663
 Financial Assets Measured at Amortized Cost 28,416 75,794 51,603 112,467 54,815 323,095
 Total 106,329 77,783 56,601 141,327 70,317 452,357
              
Interest-bearing liabilities:           
              
 Customer Deposits and Credit Institutions224,610 62,181 69,277 70,882 2,556 429,506
 Subordinated debts- - - 10,077 - 10,077
 Marketable debt securities3,677 25,781 19,125 28,134 3,475 80,192
 Trading derivatives4,597 1,621 1,074 9,119 3,828 20,239
 Short positions23,501 - - - - 23,501
 Total 256,385 89,583 89,476 118,212 9,859 563,515
              
           2018
Position of accounts subject to interest rate risk     In millions of Reais
    0 to 30 days  31 to 180 days  181 to 365 days  1 to 5 years  Above 5 years  Total
              
Interest-earning assets:           
              
 Financial assets measured at fair value through profit or loss 8,193 6,155 12,013 67,606 25,964 119,931
 Debt instruments 5,359 5,192 8,294 58,363 23,460 100,668
 Equity instruments 807 - - - - 807
 Trading derivatives 2,027 963 3,719 9,243 2,504 18,456
 Other Financial Assets At Fair Value Through Profit Or Loss 677 9,091 368 16,702 3,577 30,415
 Debt instruments 379 9,091 368 16,702 3,577 30,117
 Equity instruments 298 - - - - 298
 Investments Held to Maturity 24 521 89 3,603 3,826 8,063
 Reserves from Brazilian Central Bank 70,103 - - - - 70,103
 Financial Assets Measured at Amortized Cost 27,387 101,441 35,900 85,318 60,966 311,012
 Total 106,384 117,208 48,370 173,229 94,333 539,524
              
Interest-bearing liabilities:           
              
 Deposits from credit institutions200,818 47,172 65,606 71,413 5,343 390,352
 Subordinated debts9,857 - - - 9,687 19,544
 Marketable debt securities13,353 20,875 14,612 30,138 9,715 88,693
 Trading derivatives1,104 1,370 3,257 9,673 3,322 18,726
 Short positions32,440 - - - - 32,440
 Total 257,572 69,417 83,475 111,224 28,067 549,755
              

F-128

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

 

           2017
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 Trading5,541 1,779 6,556 29,968 10,194 54,038
 Debt instruments653 890 5,739 16,709 8,148 32,139
 Equity instruments490 - - - - 490
 Trading derivatives4,398 889 818 13,259 2,046 21,410
 Available-For-Sale Financial Assets2,032 1,272 17,092 46,502 23,711 90,609
 Debt instruments925 1,272 17,092 46,502 23,711 89,503
 Equity instruments1,107 - - - - 1,107
 Other Financial Assets At Fair Value Through Profit Or Loss72 13 50 479 1,008 1,622
 Debt instruments38 13 50 479 1,008 1,589
 Equity instruments33 - - - - 33
 Non-Current Assets Held For Sale80 168 222 3,082 7,040 10,593
 Reserves from Brazilian Central Bank59,051 - - - - 59,051
 Loans and Receivables22,033 81,275 34,430 86,645 71,453 295,835
 Total 88,809 84,507 58,351 166,677 113,406 511,750
              
Interest-bearing liabilities:           
              
 Deposits from credit institutions150,719 46,254 62,605 69,778 5,119 334,474
 Subordinated debts- 789 257 7,784 - 8,829
 Marketable debt securities4,436 36,208 12,313 15,544 847 69,348
 Trading derivatives4,618 659 504 12,243 2,285 20,310
 Short positions32,531 - - - - 32,531
 Total 192,304 83,909 75,679 105,349 8,251 465,492

 

F-116 F-129

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Brazilian Reais - R$ - unless otherwise stated)

Position of accounts subject to interest rate risk 2017
In millions of Reais

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 0 to 30 days
31 to 180 days181 to 365 days1 to 5 yearsAbove 5 yearsTotal

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

Loans and Receivables22,03381,27534,43086,64571,453295,835
Total88,80984,50758,351166,677113,406511,750
Interest-bearing liabilities      
Deposits from credit institutions150,71946,25462,60569,7785,119334,474
Subordinated debts-7892577,784-8,829
Marketable debt securities4,43636,20812,31315,54484769,348
Trading derivatives4,61865950412,2432,28520,310
Short positions32,531----32,531
Total192,30483,90975,679105,3498,251465,492

 

Position of accounts subject to interest rate risk    2016
In millions of Reais
 0 to 30 days31 to 180 days181 to 365 days1 to 5 yearsAbove 5 yearsTotal
Interest-earning assets:      
Financial Assets Held For Trading26,9605,2424,59331,93814,91883,651
Debt instruments20,2322,3702,71123,47910,33559,127
Equity instruments397----397
Trading derivatives6,3312,8721,8828,4594,58224,126
Available-For-Sale Financial Assets2,9401,3501,76142,68311,04659,780
Debt instruments9541,3501,76142,68311,04657,794
Equity instruments1,985----1,985
Other Financial Assets At Fair Value Through Profit Or Loss8014504869811,611
Debt instruments3814504869811,569
Equity instruments42----42
Non-Current Assets Held For Sale791682202,9206,5499,936
Reserves from Brazilian Central Bank58,594----58,594
Loans and Receivables16,43599,92432,59079,46768,120296,536
Total105,088106,69839,214157,494101,614510,108
Interest-bearing liabilities:      
Deposits from credit institutions135,45749,97346,68669,6054,987306,708
Subordinated debts-2682558,260-8,783
Marketable debt securities6,21440,22933,33623,647495103,921
Trading derivatives6,0461,3081,2687,1234,16719,912
Short positions31,551----31,551
Total179,26891,77881,545108,6359,649470,875

Currency Risk

 

Position of accounts subject to interest rate risk    2015
In millions of Reais
 0 to 30 days31 to 180 days181 to 365 days1 to 5 yearsAbove 5 yearsTotal
Interest-earning assets:      
Financial Assets Held For Trading3,3995,2886,91721,4368,14945,189 
Debt instruments1,2251,8064,54212,0384,18223,793 
Equity instruments405----405 
Trading derivatives1,7693,4822,3749,3983,96720,990 
Available-For-Sale Financial Assets2,2103,1098,64331,24221,84267,046 
Debt instruments1,0473,1098,64331,24221,84265,883 
Equity instruments1,162----1,162 
Other Financial Assets At Fair Value Through Profit Or Loss61112484278931,991 
Debt instruments3812484278931,418 
Equity instruments574----574 
Non-Current Assets Held For Sale801632152,0967,3279,881 
Reserves from Brazilian Central Bank52,183----52,183 
Loans and Receivables20,25979,07340,63582,69559,986282,648 
Total78,74287,64556,458137,89698,197458,938 
Interest-bearing liabilities      
Deposits from credit institutions116,36539,97236,96095,6025,764294,663 
Subordinated debts44877,9909,694-17,815 
Marketable debt securities8,07024,82312,48452,0325297,461 
Trading derivatives1,5503,6711,4307,1222,85416,627 
Short positions20,899----20,899 
Total146,92868,55358,864164,4508,670447,465 
          2019
          In millions of Reais
             
             
Asset:     Dollar Euro Others Total
            
Cash/Applications/Debt Instruments    12,406 224 1 12,631
Loans and advances to customers 4,776 1,920 - 6,696
Investments in Foreign Subsidiaries and Dependence    50,193 3,557 - 53,750
Derivatives    150,538 13,053 9,712 173,303
Others    10,521 574 - 11,095
Total    228,434 19,328 9,713 257,475
             
Liabilities:     Dólar Euro Outros Total
            
Funding in foreign currency    59,416 925 49 60,390
Derivatives    169,136 20,184 8,515 197,835
Others    - 60 1,009 1,069
Total    228,552 21,169 9,573 259,294
             
          2018
          In millions of Reais
             
             
Asset:     Dollar Euro Others Total
            
Cash/Applications/Debt Instruments    348,797 - - 348,797
Loans and advances to customers 4,505 155 - 4,660
Investments in Foreign Subsidiaries and Dependence    45,345 3,390 - 48,735
Derivatives    231,240 18,163 2,490 251,893
Others    23,619 1,974 42 25,635
Total    653,506 23,682 2,532 679,720
             
Liabilities:     Dólar Euro Outros Total
            
Funding in foreign currency    390,418 462 145 391,025
Derivatives    262,396 24,809 2,391 289,596
Others    1,007 - - 1,007
Total    653,821 25,271 2,536 681,628

F-117 F-130

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Brazilian Reais - R$ - unless otherwise stated)

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

 

Currency Risk

Position of accounts subject to interest rate risk   2017
In millions of Reais
Asset:DollarEuroOthersTotal
Cash/Applications/Debt Instruments54,38011,68410,37776,442
Loans and advances to customers3,818321-4,139
Investments in Foreign Subsidiaries and Dependence36,6133,010-39,623
Derivatives262,09245,3179,640317,049
Others46,20013,0286,23765,465
Total403,10273,36126,254502,717
Liabilities:DollarEuroOthersTotal
Funding in foreign currency32,9623,0471736,025
Derivatives277,35854,6339,294341,284
Others93,82115,97517,068126,864
Total404,14073,65426,378504,173

Position of accounts subject to currency risk 2016
In millions of Reais
            
 2017
 In millions of Reais
 
 
Asset:DollarEuroOthersTotal Dollar Euro Others Total
 
Cash/Applications/Debt Instruments4,839-4,839Cash/Applications/Debt Instruments 54,380 11,684 10,377 76,442
Loans and advances to customers3,485-3,485Loans and advances to customers 3,818 321 - 4,139
Investments in Foreign Subsidiaries and Dependence34,3372,662-36,999Investments in Foreign Subsidiaries and Dependence 36,613 3,010 - 39,623
Derivatives166,62624,17311,241202,040Derivatives 262,092 45,317 9,640 317,049
Others25,2731,020-26,293Others 46,200 13,028 6,237 65,465
Total234,56027,85511,241273,656Total 403,102 73,361 26,254 502,717
 
Liabilities:DollarEuroOthersTotal Dólar Euro Outros Total
 
Funding in foreign currency32,255640-32,895Funding in foreign currency 32,962 3,047 17 36,025
Derivatives183,27727,97311,426222,676Derivatives 277,358 54,633 9,294 341,284
Others19,198-10419,302Others 93,821 15,975 17,068 126,864
Total234,73028,61311,530274,873Total 404,140 73,654 26,378 504,173

 

c.2) Methodologies

 

Trading

 

The Bank calculates its market risk capital requirement using a standard model provided by Bacen.Bacen and the Internal Model.

 

The standard methodology applied to trading activities by the Banco Santander in 2017, 20162019, 2018 and 20152017 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 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 view 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 the Bank 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 the Bank to observe and detect the impact of changes in financial variables in the portfolios.

F-118 

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Brazilian Reais - R$ - unless otherwise stated)

 

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.

F-131

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

 

c.3) Balance-sheet management

 

Interest rate risk

 

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

 

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

 

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

 

Interest rate gap of assets and liabilities

 

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

 

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

 

Net interest margin (NIM) sensitivity

 

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

 

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

 

Market value of equity (MVE) sensitivity

 

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

 

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

 

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

 

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

 

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

 

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

 

The value at risk for balance sheet headings and investment portfolios are 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.

F-119 

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Brazilian Reais - R$ - unless otherwise stated)

c.4) Liquidity risk

 

Liquidity risk is associated with the Bank’sBank's ability to finance itspurchase commitments at reasonable market prices and to carry out its business plans with stable sources of funding. Thefinancing.

Liquidity Management of Santander Bank permanently monitors maximum gap profiles.

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

Then, we can cite:

Short-term metrics and liquidity stress:

a. LCR

 

The measures used to control liquidity risk in balance sheet 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 headings 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.

TheSantander 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 touses 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 LiquidityCoverage 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(LCR) in its liquidity risk management the Liquidity Coverage Ratio (LCR).management. LCR is a short-term liquidity ratioindex for a 30-day30 days stress scenario. Represents the result ofscenario, results from the division of the high quality assets and the net cash outflows.outflows in 30 days.

 

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

 

Throughout the three observations in this disclosure (exercise with balances from the end of October, November and December 2017) the institution presented a surplus (difference between net assets and net outflows) of R$14.7 billion, which resulted in an LCR of 123%.

F-120 F-132

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

 

BANCO SANTANDER (BRASIL) S.A.b. Liquidity stress scenarios:

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(ThousandsThe Liquidity management requires the analysis of Brazilian Reais - R$ - unless otherwise stated)financial scenarios in which potential problems whit liquidity are assessed, for which is necessary to construct and study scenarios in crisis situations. The model used for this analysis is the Stress Test

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

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

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

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

Long-term metrics

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

c. Liquidity indicators

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

 

Clients Funding

 

SantanderThe Bank has different funding sources, of funding, both in terms of products and the mix of clients, with emphasis on retail operationsa healthy distribution between the segments. The total of the Time Deposits. Total customer funds are currently at the level of R$356 million and showed a slight decrease compared to volumes at the end of 2016, mainly because of the maturity of some operations (Financial Letters) that were not renewed.clients resources is presented bellow:

 

 In millions of Reais
Customers Funding20172016
In millions of Reais		 2019 2018
0 a 30 daysTotal%0 a 30 daysTotal%  0 a 30 days  Total  %  0 a 30 days  Total  %
Demand deposits15,252100%15,794100% 29,524 29,524 100% 18,854 18,854 100%
Savings accounts40,570100%35,901100% 49,040 49,040 100% 46,068 46,068 100%
Time deposits39,549170,57023%24,452150,68616% 53,321 190,344 28% 49,771 190,971 26%
Interbank deposit6223,24419%9442,37940% 871 4,299 20% 863 4,118 21%
Funds from acceptances and issuance of securities4,43669,3486%6,304105,1206%Funds from acceptances and issuance of securities3,921 85,963 5% 3,681 70,110 5%
Borrowings and Onlendings5,60648,30412%4,11446,1249% 5,077 54,880 9% 5,181 45,936 11%
Subordinated Debts / Debt Instruments Eligible to Compose Capital-8,8290%-8,7840% - 10,175 2% 9,857 19,666 50%
Total106,035356,11730%87,509364,78823% 141,754 424,225 33% 134,275 395,723 34%
 
 In millions of Reais
Customers Funding   2017
  0 a 30 days  Total  %
Demand deposits 15,252 15,252 100%
Savings accounts 40,570 40,570 100%
Time deposits 39,549 170,570 23%
Interbank deposit 622 3,244 19%
Funds from acceptances and issuance of securitiesFunds from acceptances and issuance of securities 4,436 69,348 6%
Borrowings and Onlendings 5,606 48,304 12%
Subordinated Debts / Debt Instruments Eligible to Compose Capital - 8,829 0%
Total 106,035 356,117 30%

 

Customers Funding  In millions of Reais
2015
 0 a 30 daysTotal%
Demand deposits14,99014,990100%
Savings accounts35,84235,842100%
Time deposits22,048148,68215%
Interbank deposit1,8962,85566%
Funds from acceptances and issuance of securities8,12698,2468%
Borrowings and Onlendings2,83652,7695%
Subordinated Debts / Debt Instruments Eligible to Compose Capital23418,0061%
Total85,972371,39023%

F-133

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

 

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

 

 2019
Non-Discounted Future Flows Except Derivatives  2017
In millions of Reais		Non-Discounted Future Flows Except Derivatives In millions of Reais
0 to 30 days31 to 180 days181 to 365 days1 to 5 yearsAbove 5 yearsTotal  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 Trading5,0511,7886,73732,84118,84865,265
 
Financial assets measured at fair value through profit or lossFinancial assets measured at fair value through profit or loss3,766 1,103 802 8,894 6,157 20,722
Debt instruments6548995,91919,58216,80143,856Debt instruments46 15 205 638 2,600 3,504
Trading derivatives4,39888981813,2592,04621,410Trading derivatives3,720 1,088 597 8,256 3,557 17,218
Available-For-Sale Financial Assets9251,28312,69556,16750,329121,399
Other financial assets at fair value through profit or lossOther financial assets at fair value through profit or loss2,642 1,160 4,853 23,638 15,502 47,795
Debt instruments9251,28312,69556,16750,329121,399Debt instruments2,642 1,160 4,853 23,638 15,502 47,795
Other Financial Assets At Fair Value Through Profit Or Loss3813515431,9942,640
Debt instruments3813515431,9942,640
Non-Current Assets Held For Sale811692273,3709,57313,419
Investments Held to MaturityInvestments Held to Maturity99 111 327 4,066 6,030 10,633
Financial assets at amortized costFinancial assets at amortized cost32,417 89,335 65,395 159,615 110,607 457,369
Reserves from Brazilian Central Bank59,051-59,051Reserves from Brazilian Central Bank69,663  69,663
Loans and Receivables74,88793,58745,397117,08484,560415,515
Financial Assets Measured at Amortized CostFinancial Assets Measured at Amortized Cost- - - - - -
Total140,03496,84065,107210,005165,304677,290Total108,587 91,709 71,377 196,213 138,296 606,182
Interest-earning assets:  
 
Interest-bearing liabilities: 
 
Deposits from credit institutions150,97950,93666,57184,2748,191360,951Deposits from credit institutions3,697 26,096 19,829 31,407 4,628 85,657
Subordinated Debts / Debt Instruments Eligible to Compose Capital-8072577,784-8,848Subordinated Debts / Debt Instruments Eligible to Compose Capital4,597 1,621 1,074 9,119 3,828 20,239
Marketable debt securities4,44536,85512,90418,42186673,491Marketable debt securities23,501 - - - - 23,501
Trading derivatives4,61865950412,2432,28520,310Trading derivatives250,678 89,178 92,856 132,865 11,116 576,693
Short positions32,531-32,531Short positions- - - - - -
Total192,57389,25780,236122,72211,342496,130 282,473 116,895 113,759 173,391 19,572 706,090

F-121 

F-134

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

             
             
          2018
Non-Discounted Future Flows Except Derivatives     In millions of Reais
   0 to 30 days  31 to 180 days  181 to 365 days  1 to 5 years  Above 5 years  Total
             
Interest-earning assets:            
             
Financial assets measured at fair value through profit or loss7,388 6,199 12,162 80,590 52,584 158,923
Debt instruments5,361 5,236 8,443 71,347 50,080 140,467
Trading derivatives2,027 963 3,719 9,243 2,504 18,456
Other financial assets at fair value through profit or loss379 9,230 379 18,666 6,037 34,691
Debt instruments379 9,230 379 18,666 6,037 34,691
Investments Held to Maturity24 558 126 3,904 5,119 9,731
Reserves from Brazilian Central Bank70,103 - - - - 70,103
Financial Assets Measured at Amortized Cost29,234 111,216 45,564 116,107 85,637 387,758
Total 107,128 127,203 58,231 219,267 149,377 661,206
             
Interest-bearing liabilities:            
             
Deposits from credit institutions198,259 46,926 67,142 79,161 8,819 400,307
Subordinated Debts / Debt Instruments Eligible to Compose Capital9,857 - - - 9,687 19,544
Marketable debt securities13,395 21,343 15,290 33,627 9,717 93,372
Trading derivatives1,104 1,370 3,257 9,673 3,322 18,726
Short positions32,440 - - - - 32,440
Total 255,055 69,639 85,689 122,461 31,545 564,389
             
             
          2017
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 Trading5,051 1,788 6,737 32,841 18,848 65,265
Debt instruments654 899 5,919 19,582 16,801 43,856
Trading derivatives4,398 889 818 13,259 2,046 21,410
Available-For-Sale Financial Assets925 1,283 12,695 56,167 50,329 121,399
Debt instruments925 1,283 12,695 56,167 50,329 121,399
Other Financial Assets At Fair Value Through Profit Or Loss38 13 51 543 1,994 2,640
Debt instruments38 13 51 543 1,994 2,640
Non-Current Assets Held For Sale81 169 227 3,370 9,573 13,419
Reserves from Brazilian Central Bank59,051 - - - - 59,051
Loans and Receivables74,887 93,587 45,397 117,084 84,560 415,515
Total 140,034 96,840 65,107 210,005 165,304 677,290
             
Interest-bearing liabilities:            
             
Deposits from credit institutions150,979 50,936 66,571 84,274 8,191 360,951
Subordinated Debts / Debt Instruments Eligible to Compose Capital- 807 257 7,784 - 8,848
Marketable debt securities4,445 36,855 12,904 18,421 866 73,491
Trading derivatives4,618 659 504 12,243 2,285 20,310
Short positions32,531 - - - - 32,531
Total 192,573 89,257 80,236 122,722 11,342 496,130

F-135

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Brazilian Reais - R$ - unless otherwise stated)

Non-Discounted Future Flows Except Derivatives     2016
In millions of Reais
 0 to 30 days31 to 180 days181 to 365 days1 to 5 yearsAbove 5 yearsTotal
Interest-earning assets:      
Financial Assets Held For Trading27,0935,2624,74936,13525,57398,812
Debt instruments20,7622,3902,86727,67620,99174,686
Trading derivatives6,3312,8721,8828,4594,58224,126
Available-For-Sale Financial Assets1,4921,3731,81955,05629,85489,594
Debt instruments1,4921,3731,81955,05629,85489,594
Other Financial Assets At Fair Value Through Profit Or Loss3814525861,8242,514
Debt instruments3814525861,8242,514
Non-Current Assets Held For Sale791702273,3079,97913,762
Reserves from Brazilian Central Bank58,594----58,594
Loans and Receivables18,151112,33742,763106,51882,770362,539
Total105,447119,15649,610201,602150,000625,815
Interest-bearing liabilities:      
Deposits from credit institutions135,72551,09850,02486,5357,444330,826
Subordinated Debts / Debt Instruments Eligible to Compose Capital-34733010,633-11,310
Marketable debt securities6,23441,43135,39027,344521110,920
Trading derivatives6,0461,3081,2687,1234,16719,912
Short positions31,551----31,551
Total179,55694,18487,012131,63512,132504,519

Non-Discounted Future Flows Except Derivatives     2015
In millions of Reais
 0 to 30 days31 to 180 days181 to 365 days1 to 5 yearsAbove 5 yearsTotal
Interest-earning assets:      
Financial Assets Held For Trading2,8314,1257,03124,03216,62354,642
Debt instruments1,2261,8604,76115,43013,15136,428
Trading derivatives1,6052,2652,2708,6023,47218,214
Available-For-Sale Financial Assets1,0483,1859,47541,89455,640111,242
Debt instruments1,0483,1859,47541,89455,640111,242
Other Financial Assets At Fair Value Through Profit Or Loss3812484278931,418
Debt instruments3812484278931,418
Non-Current Assets Held For Sale801632192,36010,35813,180
Reserves from Brazilian Central Bank52,183-52,183   
Loans and Receivables22,71789,90751,196110,20473,132347,156
Total78,89797,39267,969178,917156,646579,821
Interest-bearing liabilities:      
Deposits from credit institutions116,52540,67640,453128,6278,594334,875
Subordinated Debts / Debt Instruments Eligible to Compose Capital2971138,84512,606-21,861
Marketable debt securities8,09325,73213,90067,049116114,890
Trading derivatives1,2301,9371,2656,9152,60413,951
Short positions20,899----20,899
Total147,04468,45864,463215,19711,314506,476
 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

 

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 its 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.

F-122 

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Brazilian Reais - R$ - unless otherwise stated)

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 throughin the Liquidity Stress Test, the Bank prepares itsbank draws up the Liquidity Contingency Plan, which isconstitutes a formal combinationset of preventive and corrective actions to be takentriggered in times of liquidity crisis. The activation of the Plan results from the monitoring of internal parameters related to the conditions of the market and the Bank’s liquidity. These parameters serve identify different levels of crisis scenarios.severity and, then, determine if there need to start the activation process.

 

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 – afterAfter the crisis is identified, ita communication is necessary to establish clear communication channels to mitigateestablished between the internal areas capable of carrying out the corrective actions and mitigating the problems raised. People responsible for taking these contingency actions should be notified of the extent of the contingency and measures to be taken.originated.

 

• CorrectiveThese corrective actions – Actions intended to actually generate the funds requiredare measures capable of generating liquidity to solve or mitigate the effects of the crisis as follows:and are taken considering their complexities, implementation period and its liquidity impact.

 

- Assess the typeThe parameters and severitymeasures of the crisis;

- Identify the most impacted segment;

- Put in practice the measures planned to generate funds, considering the required amount and costthis Plan are reviewed at any time, when necessary, however its minimum period 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.is annual.

 

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

 

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

 

c.5.1) Complementary measures

 

Calibration and test measures

 

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

 

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

 

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

 

c.6) Control system

 

Limit setting

 

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

 

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

 

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

 

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

 

F-123 

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Brazilian Reais - R$ - unless otherwise stated)

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

 

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

 

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

 

c.7) Risks and results in 20172019

 

Financial Intermediation Activities

 

The average VaR from the Bank´s trading portfolio in 20172019 ended in R$1.4 billion (2016 - R$804 million and 2015 – R$926 million).30,3 million. The dynamic management of this profile allows the Bank to change its strategy to capitalize the opportunities offered by a uncertain environment.

 

c.7.1) Asset and liability management (1)

F-136

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

 

Interest rate risk

 

Convertible currencies

 

At 20172019 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$378334 million.

 

Also at 20172019 year-end, the sensitivity market value of equity to parallel increases of 100 basis points applied to the Banco Santander in the BRL interest rate curve was positive by R$2.0662,063 million.

 

Quantitative risk analysis

 

The interest rate risk in balance sheets management portfolios, measured in terms of sensitivity of the net interest margin (NIM) at one year to a parallel increase of 100 b.p. in the interest rate curve, was at the beginning of 20172019 and 2016,2018, reaching a maximum of R$458134 million in June.December 2019. The sensitivity value increaseddecreased R$386202 million during 2017,2019, reaching a maximum of R$2,1772,342 million in September.October. The main factors that occurred in 20172019 and influenced in sensitivity were the volatility of the exchange rate (convexity effect), portfolio’s decay,decayment update of implicit methodology on cash flow of the Bank’s products and liquidity.

 

Million of Reais   
 201720162015
Sensibilities   
Net Interest Margin378385525
Market Value of Equity2,0661,6801,800
Value at Risk - Balance   
VaR1,380804926

(1)       Includes the financial statement 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, ensuring to the Bank suitable sources of funding, aligned with the strategic plan and assumed risk profile.

The main features of the structural liquidity management in 2017 were as follows:

• Comfortable position of structural liquidity. Since Banco Santander is basically a commercial Bank, client 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 financial statements.

• 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 financial statement should be self-funded.

• Based on stress test results, a minimum liquidity buffer is maintained.

• Banco Santander reliance in international funding is not considerable.

F-124 

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Brazilian Reais - R$ - unless otherwise stated)

• The aim is that hard currency related activities be funded with third parties hard currency funding.

• Though, given to 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.

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 considering 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 financial statement control measures, such as the liquidity gap and liquidity ratios.

Simultaneously, different scenarios (or stress-scenarios) analysis are conducted which consider the additional requirements that could arise if certain extreme but plausible events occur. The goal pursued is to cover a broad view of situations that are more or less likely to affect the Bank, thus enabling it to prepare the related contingency plans.

Million of Reais            
        2019 2018 2017
Sensibilities            
Net Interest Margin       334 200 378
Market Value of Equity       2,063 1,861 2,066
Value at Risk - Balance            
VaR       1,755 1,744 1,380

 

c.8) Sensitivity analysis

 

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

 

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

 

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

 

The table below summarizes the stress amounts generated by Banco Santander’s corporate systems, related to the Banking and trading portfolio, for each one of the portfolio scenarios as of December 31, 2017.2019.

 

Trading portfolio

 

  2017   2019
Risk FactorDescriptionScenario 1Scenario 2Scenario 3 Description   Scenario 1 Scenario 2 Scenario 3
Interest Rate - ReaisExposures subject to changes in interest fixed rate(2,447)(73,635)(147,269)  Exposures subject to changes in interest fixed rate (21,481) (269,501) (539,003)
Coupon Interest RateExposures subject to changes in coupon rate of interest rate(944)(19,373)(38,746)  Exposures subject to changes in coupon rate of interest rate (1,940) (8,513) (17,025)
InflationExposures subject to change in coupon rates of price indexes(5,032)(77,354)(154,707)
Coupon - US DollarExposures subject to changes in coupon US Dollar rate(5,306)(16,830)(33,659)  Exposures subject to changes in coupon US Dollar rate (5,612) (370) (739)
Coupon - Other CurrenciesExposures subject to changes in coupon foreign currency rate(6,399)(29,576)(59,152)Coupon - Other CurrenciesExposures subject to changes in coupon foreign currency rate(7,349) (7,472) (14,943)
Foreign currencyExposures subject to foreign exchange(4,933)(123,334)(246,668)  Exposures subject to foreign exchange (2,132) (53,297) (106,594)
Eurobond/Treasury/GlobalExposures subject to changes in interest rate negotiated roles in international market(1,469)(8,734)(17,469)
Inflation  Exposures subject to change in coupon rates of price indexes (6,527) (13,446) (26,892)
Shares and IndexesExposures subject to change in shares price(1,768)(44,194)(88,388)  Exposures subject to change in shares price (1,815) (45,365) (90,731)
Commodities  Exposures subject to change in commodities' prices (3) (67) (133)
Total(1) (28,298)(393,030)(786,058) (46,859) (398,031) (796,060)

(1) Amounts net of taxes.

 

F-125 

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Brazilian Reais - R$ - unless otherwise stated)

Scenario 11:: a shock of 10 base points on the interest curves and 1% to price changes (currency and stocks);

 

Scenario 22:: a shock of +25% and -25% in all risk factors, are considered the greatest losses per risk factor;

 

Scenario 33:: a shock of +50% and -50% in all risk factors, are considered the greatest losses per risk factor.

 

F-137

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

Portfolio Banking

 

    2017
Risk FactorDescriptionScenario 1Scenario 2Scenario 3
Interest Rate - ReaisExposures subject to changes in interest fixed rate(57,347)(1,099,710)(2,144,967)
TR and Long-Term Interest Rate - (TJLP)Exposures subject to changes in Exchange of TR in TJLP(17,245)(327,661)(638,940)
InflationExposures subject to change in coupon rates of price indexes(34,794)(661,094)(1,289,132)
Coupon - US DollarExposures subject to changes in coupon US Dollar rate(7,123)(135,334)(263,901)
Coupon - Other CurrenciesExposures subject to changes in coupon foreign currency rate(2,423)(46,031)(89,761)
Interest Rate Markets InternationalExposures subject to changes in interest rate negotiated roles in international market(10,655)(202,441)(394,759)
Foreign CurrencyExposures subject to Foreign Exchange(1,116)(27,896)(55,793)
Total(1)Exposures subject to Foreign Exchange(130,703)(2,500,167)(4,877,253)
(1)Amounts net of taxes.
       2019
Risk Factor  Description    Scenario 1 Scenario 2 Scenario 3
Interest Rate – Reais  Exposures subject to changes in interest fixed rate  (35,618) (497,773) (992,076)
TR and Long-Term Interest Rate - (TJLP)Exposures subject to changes in Exchange of TR in TJLP (52,084) (644,255) (928,539)
Inflation  Exposures subject to change in coupon rates of price indexes(61,225) (370,602) (734,662)
Coupon - US Dollar  Exposures subject to changes in coupon US Dollar rate  (54,233) (720,883) (1,385,597)
Coupon - Other CurrenciesExposures subject to changes in coupon foreign currency rate(7,108) (93,628) (178,749)

Interest Rate Markets

International

Exposures subject to changes in interest rate negotiated roles in international market (4,716) (80,963) (144,169)
Foreign Currency  Exposures subject to Foreign Exchange(761) (19,022) (38,043)
Total(1)       (215,744) (2,427,126) (4,401,836)

(1) Amounts net of taxes.

 

Scenario 11:: a shock of 10 base points+10bps and -10bps in interest rate curves and 1% price variance (currency)(currency and stocks); are considered the greatest losses per risk factor;

 

Scenario 22:: a shock of +25% and -25% in all risk factors, are considered the greatest losses per risk factor;

 

Scenario 33:: a shock of +50% and -50% in all risk factors, are considered the greatest losses per risk factor.

 

d) Bank´s business is highly dependent on the proper functioning of information technology systems.

Our business is highly dependent on the ability of our information technology systems to accurately process a large number of transactions across numerous and diverse markets and products in a timely manner, and on our ability to rely on our digital technologies, computer and email services, software and networks, as well as on the secure processing, storage and transmission of confidential data and other information in our computer systems and networks. The proper functioning of our financial control, risk management, accounting, customer service and other data processing systems is critical to our business and our ability to compete effectively.

e) Independent Structure

 

The localOperational Risk & Internal Control area, called Operational Risks Control, is responsible for implementing the management and control model of Operational Risks of Banco Santander. It is subordinated to the Executive Vice-Presidentvice Presidency of RisksRisk, operates independently as a second line of defense, supporting and count with people, structure, standards, methodologieschallenging the first line of defense. They maintain guidelines, policies and tools for ensuring adequacy ofprocesses conduct and to be adequate to the managementOperational Risk Control and control model.Management Model.

 

The Management is an acting part and is aligned witharea adopts the missiondefinition of the areas, recognizing, participatingBasel Committee, the Central Bank of Brazil and sharing responsibility for the continuous improvementCorporative instructions applicable locally to Operational Risk as the possibility of losses resulting from the inadequacy or failure of processes, operational and technological risk management culture. Then they can ensure compliance withsystems, or from external events. In addition, the established objectives and goals, as well as the security and quality of the products and services provided by the Bank.

The Bank’sBank´s Board of Directors opted to adoptfor the Alternative Standardized Approach (ASA) to calculatefor the installmentcalculation of Requiredthe portion of Reference Equity (PRE)(PR) related to operational risk.Operational Risk.

 

d.1)

F-138

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

e.1) Operational Risks & Internal Control

 

It has asIts mission towardsto Banco Santander: Support forSantander is: To corroborate the achievementfulfillment of the strategic objectives and the decision-making process, in the adequacyadaptation and attendance mandatoryfulfillment of the obligatory requirements, in maintaining the maintenance of solidity, reliability, reduction and mitigation of losses due to operational risks, further on tobesides the implementation, dissemination of the culture of operational risks.

 

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 resolutions of the National Monetary Council.Council of Brazil. This model also follows the guidelines established by Banco 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 Bank´s 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, approved in the Executive Committee.

F-126 

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Brazilian Reais - R$ - unless otherwise stated)

Defense Line Model

 

Defense Line Model

 

 

The Operational Risks & Internal Control area is the second line of defense in Santander’sSantander'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.Council of Brazil. Also acts in the control and challenge of the activities performed by the first line of Defense, contributing to its strengthening, vision of an integrated approach to risk management.Defense.

 

d.2) Comprehensivenesse.2) Responsibilities and Sustainabilityduties of the Operational Risks and Internal Controls area

 

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

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

• Maintain the dynamics and control of operational risk control and management, exceeds the allocation of regulatory capital, ensuring its sustainable development, including:exposure in line with risk appetite.

• Improvement of operational efficiencyEstablish roles and productivityresponsibilities, with follow-up with those responsible in the activities and processes.

lines of defense. 

• Compliance with existing regulations: Bacen, Susep, CVMEnsure business continuity and BIS, as well as new requirements and monitoringstrengthen the timely fulfillment of requests from regulators.

Internal Controls environment. 

• StrengtheningProvide adequate level of the reputation and improvementcoverage in the relation of Risk x Return to the public with whom the Bank maintains relationship.

business units. 

• MaintenanceProvide support for the Organization's strategic decisions based on the integrated Operational Risk profile and preservation of the quality and reliability of products and services.

emerging trends. 

• Identifying and addressing timelyImplement the corrections of identified vulnerabilities in processes.

• Dissemination of culture of advancedbest practices for management and control of Operational Risks, by means of internal communication (intranet, on-site courses, "online" courses and monthly communication by “Boletim de RO” and “Boletim Flash de RO”), with reinforcementoperational risks in the "Accountability".1st and 2nd Lines of Defense. 

• Identify the Operational Risk profile of the Organization. 

This solid and efficient structure permits the• Provide continuous enhancementimprovement of existing methodologies and the further dissemination ofdeepening the culture of responsibility in regard to the advanced management of operational risk.for Operational Risks and Internal Controls.

 

d.3)e.3) Differential factor

 

The Operational Risks & Internal Control area invests in the development, training and updating of its professionals so they can keep up

F-139

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

with changes in the business environment, in addition to offering training programs for other professionals through the intranet and on-site courses. Among the personal course, we highlight the achievement of training aimed at increasing culture of RO management, training for the capture of operational losses, among others.

 

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

The Bank highlights:

 

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

 

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

 

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

 

• Development of key risk indicators, aiming to ensure absolute and relative analyses based on volumetric and market analysis;

F-127 

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Brazilian Reais - R$ - unless otherwise stated)

monitor the main operational risks;

 

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

 

d.4)e.4) Communication Policy

 

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

 

Annually, 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 Director.

Additional information can be obtained from the Bank’s Social and Annual Reports on its website.

e) Reputationalf) Reputation Risk

 

e.1) Reputationalf.1) Reputation Risk

 

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

 

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

 

e.2)f.2) Compliance

 

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

 

e.3)f.3) Directives

 

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

 

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

 

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

 

c. New products and services and suitability

 

All new products and services are debated/analyzed internally at various levels until their risks have been fully mitigated, and subsequently approved by the Commercialization Local Committee (CLC), composed of Bank 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)

F-140

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

g) Compliance with the new regulatory framework

 

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

F-128 

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Brazilian Reais - R$ - unless otherwise stated)

 

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

 

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

 

The Bank intends to apply, overinstitution has applied the next five years, the advanced internal ratings-basedmodels based ratings methodology (AIRB) approach underof Basel II for substantially allin part of its subsidiaries, until the percentage of net exposure of the loan portfolio covered by this approach is close to 100%.portfolios, in compliance with regulatory requirements.

 

The additional capital requirements derived from the self-assessment process (Pillar II) should be compensated by the risk profile that characterizes the Bank’sBank's business activities (low average risk), due to its focus on Commercial Bank (small and medium-sized enterprises and Individuals) and the diversification of the business. The Pillar 2II which considers the impact of risks not addressed under Pillar I (regulatory capital) and the benefits arising from the diversification among risks, businesses and geographical locations.

 

Regarding the other risks addressed under Pillar I of Basel II, Banco Santander is developingwas approved for the use of internal models for market risk and will remain using the standardized method for operational risk, since it considers the premature use of advanced models (AMA) for this purpose . Regarding the Market Risk, Banco Santander presented his candidacy in the second half of 2011, pending approval with the regulators forwas approved to the use of internal models for calculating regulatory capital.Internal Models in February 2018 and started to disclose the capital by this method from May 2018.

 

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

 

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

 

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

 

CVA = EE * PD * DF * LGD(1)

 

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

 

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

 

f.1)g.1) Internal validation of risk models

 

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

 

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

 

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

 

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

 

i. Establish general validation principles, conducting an independent evaluation process including (I) data quality, (II) use of the methodology and (III) functioning of the models;

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

 

F-129 

F-141

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Brazilian Reais - R$ - unless otherwise stated)

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

 

ii. Propose documents and model validation guides;

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

 

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

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

 

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

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).

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

 

It is important to note that Banco Santander’sSantander'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’'home regulator' (Banco de España and the European Central Bank) and the Bacen in compliance with the rules Circular 3,648 dated March 4, 2013 (Chapter III), Circular Letter 3,565 of September 6, 2012, and Circular 3,547 of July 2011. 2011, and Circ. 3648 IRB, 3646 IMA of 4/3/13, and Res. 4.277 of 31/10/13 and 4389 of 18/12/14 fair value, Res. 4557 of 23/02/17 GIR and Circ. 3876 of 31/01/18 IRRBB.

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

 

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

 

f.2)g.2) Capital Management

 

Capital management considers the regulatory and economic aspects and its objective is to achieve an efficient capital structure in terms of cost and compliance, meeting the requirements of the regulatory authorities and supporting to accomplish the goals of the classification of rating agencies and investors’investors' expectations. Details regarding the capital management process can be found at www.ri.santander.com.br Corporate Governance -> Risk Management -> Risk and Capital Management Structure.

 

g)h) Economic capital

 

g.1)h.1) Main objectives

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

g.2)

F-142

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

h.2) The Economic Capital Model

 

In calculating the economic capital, it is the Bank’sBank's definition of losses to be covered. Thus, it 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.

continuity.. The risk profile in Brazil is distributed by Credit risk, Market, ALM, Business, Operations and tangiblematerials assets. However, to successfully anticipate the changes proposed in Basel III, new risks have been incorporated to model: Intangibles, pension funds (defined benefit) and deferred tax assets, which allow the Bank to adopt a position even more conservative and prudent.

 

F-130 

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Brazilian Reais - R$ - unless otherwise stated)

% Capital201720162015
Risk TypeNew MethodologyNew MethodologyNew Methodology
Credit70%62%56%
Market4%5%4%
ALM4%9%9%
Business8%8%8%
Operational6%6%5%
Fixed Assets2%2%1%
Intangible Assets1%1%6%
Pension Funds1%1%2%
Deferred Tax Assets4%6%9%
TOTAL100%100%100%

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 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.

% Capital     2019 2018 2017
Risk Type     New Methodology New Methodology New Methodology
Credit     72% 72% 70%
Market     2% 2% 4%
ALM     5% 8% 4%
Business     3% 6% 8%
Operational     7% 5% 6%
Fixed Assets     2% 1% 2%
Intangible Assets     1% 0% 1%
Pension Funds     4% 1% 1%
Deferred Tax Assets     5% 5% 4%
TOTAL     100% 100% 100%

 

RoRAC

 

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

 

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

 

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

 

3 – Measure and monitor business performance.

 

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

 

Among these variables are:

 

1 – Counterparty rating;

 

2 – Maturity;

 

3 – Guarantees;

 

4 – Type of financing;

 

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

 

48.Subsequent Events

a) Acquisition of the remaining 40% of non-controlling interest held by Bosan Participações in Banco Olé Consignado

On January 31, 2020, Santander Brasil and the shareholders of Bosan Participações S.A. (holding company whose single asset are the shares representing 40% of the corporate capital of Banco Olé) have entered into the definitive agreements and performed the closing acts related to the purchase and sale of all shares issued by Bosan, upon transferring Bosan’s shares to Santander Brasil and the payment to the sellers of the total price of R$ 1,608,772,783.47. As a result, Santander Brasil became, directly and indirectly, the holder of all shares issued by Banco Olé.

In addition, on January 30, 2020, the name of Banco Olé was changed from Banco Olé Bonsucesso Consignado S.A. to Banco Olé Cosignado S.A.

b) Sale of equity stake in Super Pagamentos e Administração de Meios Eletrônicos S.A.

On February 28, 2020, the Bank sold to Superdigital Holding Company, S.L., a company indirectly controlled by Santander Spain, its entire equity interest in Super Pagamentos e Administração de Meios Eletrônicos S.A. (“Superdigital”). The Bank received consideration of R$270 million for its interest in Superdigital. As a result, the Bank is no longer a shareholder of Superdigital.

F-131 

F-143

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Brazilian Reais - R$ - unless otherwise stated)

 

This page intentionally left blank. 

F-144

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

SUPPLEMENTAL INFORMATION

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

APPENDIX I – RECONCILIATION OF SHAREHOLDERS’STOCKHOLDERS’ EQUITY AND NET INCOME - BRGAAP vs IFRS

 

The table below presents a conciliation of stockholders’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:

 

Thousand of ReaisNote201720162015
Shareholders’ equity attributed under to the Parent Brazilian GAAP 59,499,95457,771,52454,819,073
IFRS adjustments, net of taxes, when applicable:    
Reclassification of financial instruments at fair value through profit or lossj18,301643 
Reclassification of available-for-sale financial instruments"j34,81823,180 
Impairment on loans and receivablesa(71,091)124,787132,878
Category transfersb351,132608,897704,519
Deferral of financial fees, commissions and inherent costs under effective interest rate methodc664,204297,720138,314
Reversal of goodwill amortizationd26,592,85225,122,57323,344,320
Realization on purchase price adjustmentse702,436778,882798,776
Recognition of fair value in the partial sale in subsidiariesf112,052112,052112,052
Option for Acquisition of Equity Instrumentg(1,287,240)(1,017,000)(1,017,000)
Goodwill acquisition Santander Services (Santusa)h(298,978)  
Others 332,267263,797367,290
Shareholders’ equity attributed to the parent under IFRS 86,650,70784,087,05579,400,222
Non-controlling interest under IFRS 436,894725,504435,062
Shareholders’ equity (including non-controlling interest) under IFRS 87,087,60184,812,55979,835,284

Thousand of ReaisNote201920182017
     
Stockholders' equity attributed under to the Parent Brazilian GAAP 69,773,23265,233,74359,499,954
IFRS adjustments, net of taxes, when applicable:    
Reclassification of financial instruments at fair value through profit or lossi8,7678,34418,301

Reclassification of available-for-sale financial instruments		j--34,818
Reclassification of fair value through other comprehensive incomek73,43172,980-
Impairment of loans and receivablesa--(71,091)
Impairment of financial assets measured at amortized costa(23,589)(1,483,043)-
Remensurations, Debt instruments, due to reclassifications IFRS 9 -26,274-
Category transfers - IAS 39b--351,132
Category transfers - IFRS 9b(206,984)(619)-
Deferral of financial fees, commissions and inherent costs under effective interest rate methodc1,197,325851,629664,204
Reversal of goodwill amortizationd26,933,89226,764,52926,592,852
Realization on purchase price adjustmentse477,366631,120702,436
Recognition of fair value in the partial sale in subsidiariesf112,052112,052112,052
Option for Acquisition of Equity Instrumentg(1,816,799)(1,323,994)(1,287,240)
Goodwill acquisition Santander Services (Santusa)h(239,182)(269,158)(298,978)
Tax Credit with realization over 10 years 184,005322,53962,539
Others 177,064119,074269,728
Stockholders' equity attributed to the parent under IFRS 96,650,58091,065,47086,650,707
Non-controlling interest under IFRS 558,581529,990436,894
Stockholders' equity (including non-controlling interest) under IFRS 97,209,16191,595,46087,087,601
     

 

Thousand of ReaisNote201720162015
Net income attributed to the Parent under Brazilian GAAP 7,996,5775,532,9626,998,196
IFRS adjustments, net of taxes, when applicable:    
Reclassification of financial instruments at fair value through profit or lossj18,7757,960 
Reclassification of available-for-sale financial instruments"j(46,160)(39,234) 
Impairment on loans and receivablesa(195,878)(8,091)4,798
Category transfersb(219,829)(45,314) 
Deferral of financial fees, commissions and inherent costs under effective interest rate methodc366,484148,45023,534
Reversal of goodwill amortizationd1,470,2791,755,7502,783,507
Realization on purchase price adjustmentse(76,446)(76,247)(75,962)
Option to Acquire Own Equity Instrumentg(270,240)  
Others (119,498)58,32749,667
Net income attributed to the parent under IFRS 8,924,0647,334,5639,783,740
Non-controlling interest under IFRS 213,984130,35550,086
Net income (including non-controlling interest) under IFRS 9,138,0487,464,9189,833,826

F-132 

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Brazilian Reais - R$ - unless otherwise stated)

Thousand of ReaisNote201920182017
     
Net income attributed to the Parent under Brazilian GAAP 14,180,98712,166,1457,996,577
IFRS adjustments, net of taxes, when applicable:    
Reclassification of financial instruments at fair value through profit or lossi422(11,974)18,775

Reclassification of available-for-sale financial instruments		j--(46,160)
Reclassification of fair value through other comprehensive incomek45128,419-
Impairment on loans and receivablesa--(195,878)
Impairment of financial assets measured at amortized costa1,872,553140,557-
Remensurations, Debt instruments, due to reclassifications IFRS 9 (16,659)(5,360)-
Category transfers - IAS 39b--(219,829)
Category transfers - IFRS 9b6,437(16,195)-
Deferral of financial fees, commissions and inherent costs under effective interest rate methodc346,298187,425366,484
Reversal of goodwill amortizationd175,257171,6771,470,279
Realization on purchase price adjustmentse(153,752)(71,316)(76,446)
Option to Acquire Own Equity Instrumentg-(143,194)(270,240)
Goodwill acquisition Santander Services (Santusa)h29,89829,820-
Tax credit with realization over 10 years (75,995)260,00062,539
Others 41,035(153,527)(182,037)
Net income attributed to the parent under IFRS 16,406,93212,582,4778,924,064
Non-controlling interest under IFRS 224,518217,441213,984
Net income (including non-controlling interest) under IFRS 16,631,45012,799,9189,138,048

  

a) Impairment on loans and receivables:receivables and financial assets measured at amortized cost:

 

The resultIn 2019 and 2018, refers to the adjustment resulting from the estimate of the expected loss and losses on the loanportfolio of loans and receivables portfolio,subject to impairment, loan commitments to be released and financial guarantee contracts, which was determined based on the criteria described in the accounting practice and compliance in the history of impairment and other circumstances known at the time of the evaluation, in accordance with the guidance provided by IAS 39 and IFRS 9 (in 2017 refer to the resulting adjustment of the estimate of loss incurred in accordance with IAS 39, normative then effective.) "Financial Instruments: Recognition and Measurement". These criteria differ in certain aspects from the criteria adopted underby BRGAAP, which usesuse certain regulatory limits defined by the Central Bank.Bank (Bacen), in addition to the difference in the scope of calculation of these losses, which for the purposes of IFRS considers assets

F-145

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

SUPPLEMENTAL INFORMATION

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

other than those In the Financial Statements under IFRS, this effect considers the impact related to the provisions of certain debt instruments, which for the purposes of BRGAAP are treated as Securities.

 

b) TransferCategories of categoryfinancial assets

 

The IAS 39 permits reclassificationAs detailed in the accounting practices note, IFRS9 provides for the definition of the category "availablebusiness models associated with each portfolio, as well as the performance of the SPPI test - if the returns of that asset are exclusively principal and interest, for sale" to "held to maturity" and "available for sale" to "loans and receivables" at any time, provided thatclassification in 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 onlyfinancial assets. BRGAAP provides for certain differences in the categorization of these financial assets, as well as establishing as an indicator the Management's intention for classification to 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 on July 1, 2015 and to Brazilian GAAP purposes due to local requirements mentioned above such change occurred on December 31, 2015. Considering, the measurement effect of other assets that composesmade. The criteria for reclassification between categories are also different categories between the IFRS and BRGAAP.two accounting practices.

 

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 the income statement 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 systematically amortized systematically over a period of up to 10 years, and additionally,subject to the goodwill recorded is measured annuallyimpairment test at least once a year or whenever there isin a shorter period, in the event of any indication that the asset may be impaired.additional evidence. 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.impaired. 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 toallocation in acquisitions of an entity, substantially, in 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:

• 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 recognized 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 when control is lost, the fair value is recognized over the remaining portion is remeasured at its fair value, the effect of this update being recognized in result (Webmotors). Under BRGAAP, this type of operation, ongoing participation is registered 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 Olé Consignado a put option over all shares of Getnet S.A. and Banco Olé Consignado held by them. The overall out in IAS 32, a financial liability was recognized for this commitment, with a specific charge in a heading in stockholders’stockholders' equity in the amount of R$950 million and R$67 million, respectively. In 2017,Subsequently, the options have been updated and their effect is recognized in income. On December 19, 2018, Banco Santander and the Minority shareholders of Getnet SA entered into an expenseaddendum to the Purchase and Sale Agreement for Shares and Other Covenants of Getnet SA, in which Banco Santander committed to acquire all the shares of the Minority Shareholders, corresponding to 11.5% of the share capital of Getnet SA, for the amount of R$1,431,000. The acquisition was approved by BACEN on February 18, 2019 and concluded on February 25, 2019, so that Banco Santander now holds 100% of the shares representing Getnet SA's share capital. On March 14, 2019, the shareholder minority stake in Banco Olé Bonsucesso Consignado SA formalized its interest in exercising the put option provided for in the consolidated statementsInvestment Agreement, entered into on July 30, 2014, to sell its 40% stake in Olé Consignado to Banco Santander (Brazil) SA On December 20, 2019, the parties entered into a binding agreement for the acquisition, by Banco Santander, of incomeall the shares issued by Bosan Participações SA, for the total amount of R$164 million, was recognized in Getnet S.A. and1.6 billion, to be paid on the closing date of the Operation. On January 30, 2020, the name of Banco Olé Consignado.

F-133 

Tablefrom Banco Olé Bonsucesso Consignado SA was changed to Banco Olé Cosignado SA On January 31, 2020, the Bank and the shareholders of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(ThousandsBosan Participações SA concluded the final agreement and signed the purchase and sale of Brazilian Reais -100% of the shares issued by Bosan, through the transfer of Bosan's shares to the Bank and payment to sellers in the total amount of R$ - unless otherwise stated)

1,608,772,783.47. As a result, the Bank became, directly and indirectly, the holder of 100% of Banco Olé's shares.

 

h) Santander Serviços goodwill (Santusa)

 

According to the IFRS, in line with IFRS 3 "Business Combination", when the owner acquires more shares or other equity instruments of an entity already controlled, it shall consider such amount as an equity reduction. According to the BRGAAP this amount shall be registered in the asset as goodwill or discount on the acquisition off the investment, which is the difference between the acquisitionacquision cost and the equity amount of the shares.

 

i) Reclassification of financial instruments at fair value through profit or loss

 

Under BRGAAP, all loans, financing and deposits are recorded at amortized cost. In IFRS, in accordance with IAS 39IFRS 9 "Financial Instruments: Recognition and Measurement", financial assets may be measured at fair value and included in the category "Other financial assets at fair value through profit or loss", in order to eliminate or significantly reduce accounting mismatches ( accounting(accounting mismatch) of recognition or measurement derived from the measurement of assets or liabilities or from the recognition of gains or losses on these assets / liabilities on a number of bases, which are managed and their performances valued at fair value. Accordingly, the Bank classified loans, financing and deposits that meet these parameters as "fair value through profit or loss", as well as certain debt instruments classified as "available for sale" in BRGAAP. The Bank opted for this classification base in IFRS, since it eliminates an accounting mismatch in the recognition of revenues and expenses.

 

F-146

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

SUPPLEMENTAL INFORMATION

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

j) Reclassification of available-for-sale financial instruments

Under BRGAAP, the Bank accounts for some investments, for example, debt securities initially measured at amortized cost and equity securities at cost. When preparing the 2017 balance sheet, management revised the management strategy for its investments and, in accordance with the premises of Circular 3,068 of the Central Bank of Brazil, the debt securities were reclassified to “trading” category with their value recorded just through the result. According to IFRS, in 2017, the Bank had classified these Investments as available for sale, measuring them at fair value with the effects of this mark being recognized in the "Consolidated statements of comprehensive income", complying with the provisions of IAS 39 "Financial Instruments : Recognition and Measurement”, which does not allow the reclassification of any financial instrument to the fair value category through profit or loss after initial recognition.

k) Reclassification of financial assets measured at fair value through other comprehensive income

 

According to the BRGAAP, the Bank registers some investments, for example, debt instruments initially measured at amortized cost and equity instruments at cost. At the time of this balance sheet, the management reviewed the managing strategy of its investments and according to Bacen Circular 3.068, the debt instruments were reclassified to "trading" measured at fair value with changes in the income statement. According to the IFRS, the Bank is classifying this investments as available for sale measuringfinancial assets measured at fair value through other comprehensive income them at fair value with changes in "other comprehensive income", in line with IAS 399 "Financial Instruments: Recognition and Measurement"Instruments", which does not allow the reclassification of any financial instrument to fair value with changes in the income statement after the initial recognition.

 

F-134 

F-147

Table of Contents

 

BANCO SANTANDER (BRASIL) S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Brazilian Reais - R$ - unless otherwise stated)

 

BANCO SANTANDER (BRASIL) S.A.

SUPPLEMENTAL INFORMATION

(Thousand of Brazilian Reais - R$ - unless otherwise stated) 

 

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.

 

 2017 2016 2015 2019 2018 2017
Thousand of Reais             
Interest and similar income71,418,349 77,146,077 69,870,200 Interest and similar income 72,841,060 70,478,393 71,418,349 
Net fee and commission income12,721,868 10,977,596 9,483,509 Net fee and commission income 15,713,152 14,132,159 12,721,868 
Impairment losses on financial assets (net)(12,338,300) (13,301,445) (13,633,989) Impairment losses on financial assets (net) (13,369,905) (12,713,435) (12,338,300) 
Other income and expense(3,043,565) (751,727) (3,867,959) Other income and expense (4,025,384) (6,861,406) (3,043,565) 
Interest expense and similar charges(36,471,860) (46,559,584) (38,533,089) Interest expense and similar charges (28,519,953) (28,557,051) (36,471,860) 
Third-party input(6,728,881) (5,804,939) (7,061,296)  (7,544,695) (7,219,152) (6,728,881) 
Materials, energy and others(495,913) (510,961) (520,831) Materials, energy and others (659,656) (544,237) (495,913) 
Third-party services(5,107,077) (4,589,468) (4,632,346)  (6,047,498) (5,572,127) (5,107,077) 
Impairment of assets(456,711) (114,321) (1,220,645)  (131,435) (508,310) (456,711) 
Other(669,180) (590,189) (687,474)  (706,106) (594,478) (669,180) 
Gross added value25,557,611 21,705,978 16,257,376  35,094,275 29,259,508 25,557,611 
Retention  
Depreciation and amortization(1,662,247) (1,482,639) (1,490,017) Depreciation and amortization (2,391,857) (1,739,959) (1,662,247) 
Added value produced23,895,364 20,223,339 14,767,359 Added value produced 32,702,418 27,519,549 23,895,364 
Added value received from transfer Added value received from transfer 
Investments in affiliates and subsidiaries71,551 47,537 116,312 Investments in affiliates and subsidiaries 149,488 65,958 71,551 
Added value to distribute23,966,915 20,270,876 14,883,671 Added value to distribute 32,851,906 27,585,507 23,966,915 
Added value distribution15,540,106 Added value distribution 
Employee7,908,74633.0%7,378,37436.4%6,829,96545.9% 8,457,212 25.7% 8,185,896 29.7% 7,908,746 33.0%
Compensation5,795,579 5,455,374 4,824,615  5,961,765 5,863,584 5,795,579 
Benefits1,421,910 1,397,711 1,300,788  1,637,099 1,534,560 1,421,910 
Government severance indemnity funds for employees -FGTS413,871 352,939 391,608 
Government severance indemnity funds for employees - FGTSGovernment severance indemnity funds for employees - FGTS502,173 448,699 413,871 
Other277,386 172,350 312,954  356,175 339,053 277,386 
Taxes6,131,54425.6%4,659,98923.0%(2,527,787)-17.0% 7,674,704 23.4% 5,813,381 21.1% 6,131,544 25.6%
Federal5,481,969 4,101,629 (3,023,224)  6,571,450 4,864,176 5,481,969 
State1,260 717 659  54 224 1,260 
Municipal648,315 557,643 494,778  1,103,200 948,981 648,315 
Compensation of third-party capital -rental788,5773.3%767,5953.8%747,6675.0%
Compensation of third-party capital - rentalCompensation of third-party capital - rental 88,540 0.3% 786,312 2.9% 788,577 3.3%
Remuneration of interest on capital9,138,04838.1%7,464,91836.8%9,833,82666.1%Remuneration of interest on capital 16,631,450 50.6% 12,799,918 46.4% 9,138,048 38.1%
Dividends and interest on capital6,300,000 4,550,000 6,200,000 Dividends and interest on capital 10,800,000 6,600,000 6,300,000 
Profit Reinvestment2,624,064 2,784,563 3,583,740  5,606,932 5,982,477 2,624,064 
Profit (loss) attributable to non-controlling interests213,984 130,355 50,086 Profit (loss) attributable to non-controlling interests 224,518   217,441 213,984 
Total23,966,915100.0%20,270,876100.0%14,883,671100.0% 32,851,906 100.0% 27,585,507 100.0%-23,966,915 100.0%

F-135 

F-148