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, |
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period fromto. |
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)(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)incorporation or organization)
Avenida Presidente Juscelino Kubitschek, 2,041 and 2,235 – Bloco2041, Suite 281, Block A
Condomínio WTORRE JK, Vila Olímpia
Nova Conceição
São Paulo, 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 New York 10022(212) (212) 350-3604
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbols | 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 value | SANB3 | New York Stock Exchange* |
Preferred Shares, no par value | SANB4 | New York Stock Exchange* |
American Depositary Shares, each representing one unit (or a right to receive one unit) which is composed of 1 common share, no par value, and 1 preferred share, no par value, of Banco Santander (Brasil) S.A. | 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. |
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 |
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 shares | |
Preferred shares |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
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☒
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 ☐
Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted 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 such files).
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 definition of “large accelerated filer”,filer,” “accelerated filer”,filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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 whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
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
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
☐Item 17☐Item 18
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
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table of contents
Page
PRESENTATION OF FINANCIAL AND OTHER INFORMATION
General
Presentation of Financial and Other Information
General
In this annual report, the terms “Santander Brasil,” the “Bank,” “we,” “us,” “our,” “our company” and “our organization” meanrefer to 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, 2018,2021, which was R$3.87485.5805 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, 2018, 2017 and 2016, and for the years ended December 31, 2018, 20172021, 2020 and 2016.2019. Such consolidated financial statements have been prepared in accordance with International Financial Reporting Standards, or “IFRS”,IFRS, as issued by the International Accounting Standards Board, or “IASB”IASB and interpretations issued by the IFRS Interpretation Committee, or“IFRIC”.Committee. Our consolidated financial statements as of and for the years ended December 31, 2018, 20172021, 2020 and 20162019 have been audited by PricewaterhouseCoopers Auditores Independentes or “PwC.” PwC isLtda., an independent registered public accounting firm, whose report and unqualified opinion is included herein.
IFRS differs in certain significant aspects in comparison with the generally accepted accounting principles in the United States, or “U.S. GAAP”.U.S. GAAP. IFRS also differs in certain significant aspects in comparison with the Brazilian GAAP (as defined below).GAAP. Appendix I to our audited consolidated financial statements for the years ended December 31, 2018, 20172021, 2020 and 2016,2019, included herein, contains information relating to certain differences between IFRS and Brazilian GAAP.
Under Brazilian law, we areAs required by the Brazilian Central Bank toand Brazilian law, we must prepare consolidated financial statements according toin accordance with IFRS. However, we will also continue to prepare statutory financial statements in accordance with accounting practicesthe Brazilian GAAP, as established by Law No. 6,404, dated December 15, 1976, as amended by Law 11,638, or the “Brazilianby: (i) Brazilian Corporate Law” and standards established byLaw; (ii) the National Monetary Council ((CMN - Conselho Monetário Nacional), or “CMN,”; (iii) the Brazilian Central Bank
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and document template provided including the regulatory reports set forth in the AccountingStandard Chart of Accounts for NationalBrazilian Financial System Institutions (Plano Contábil das Instituições do Sistema Financeiro Nacional), and(iv) the Brazilian Securities and Exchange Commission ((CVM - Comissão de Valores Mobiliários), or “CVM,” to the extent that such practices do not conflict with the rules of the Brazilian Central Bank,Bank; (v) the Accounting Pronouncements Committee (C(CPC - Comitê de Pronunciamentos Contábeis), to the extent that such practices are approved by the Brazilian Central Bank,Bank; (vi) the National Council of Private Insurance (Conselho Nacional de Seguros Privados),; and (vii) the Superintendence of Private Insurance ((SUSEP -Superintendência de Seguros Privados), or “SUSEP.” We refer to such Brazilian accounting practices as “Brazilian GAAP.”which is responsible for the supervision and control of the insurance, open private pension funds and capitalization markets in Brazil. See “Item 4. Information on the Company—B. Business Overview—Regulation and Supervision—Other Applicable Laws and Regulations—Auditing Requirements.”Requirements” for additional information.
iii |
The Getnet Spin-Off
We completed the Spin-Off of our merchant acquiring business, conducted through Getnet and its consolidated subsidiaries, on October 26, 2021. As a result of the Spin-Off, Santander Brasil’s share capital was reduced by a total amount of R$2 billion, without the cancellation of shares, with Santander Brasil’s share capital decreasing from R$57 billion as of December 31, 2020 to R$55 billion as of December 31, 2021, and we stopped consolidating Getnet within our results of operations on March 31, 2021.
Furthermore, on April 15, 2021, we entered into a partnership agreement with Getnet, or the “Getnet Partnership Agreement,” which provides a framework for our relationship with Getnet following the Spin-Off.
For additional information on the Spin-Off, see “Item 4. Information on the Company—A. History and Development of the Company—The Getnet Spin-Off” and notes 3, 13 and 27 to our audited consolidated financial statements included elsewhere in this annual report.
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. These data are 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 associationNational Association of financialFinancial and capital markets entitiesCapital Markets Entities (Associação Brasileira das Entidades dos Mercados Financeiro e de Capitais) or “ANBIMA”; the Brazilian Central Bank; the Brazilian social and economic development bankDevelopment 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 federationBank Federation (Federação Brasileira de Bancos), or “FEBRABAN”; the national federationNational Federation of private retirementPrivate Retirement and life insuranceLife Insurance (Federação Nacional de Previdência Privada e Vida); the Getúlio Vargas Foundation (Fundação Getúlio Vargas) or “FGV”; the Brazilian Central Bank systemInformation System (Sistema de Informações do Banco Central); the SUSEP; and the CVM, among others.
Certain Definitions
Unless otherwise indicated or the context otherwise requires, all references to:
“ADRs” mean American Depositary Receipts representing ADSs.
“ADSs” mean American Depositary Shares.
“ANBIMA” means the National Association of Financial and Capital Markets Entities (Associação Brasileira das Entidades dos Mercados Financeiro e de Capitais).
“B3” means the B3 S.A. – Brasil, Bolsa, Balcão, or the São Paulo Stock Exchange.
“BNDES” means the Brazilian Development Bank (Banco Nacional de Desenvolvimento Econômico e Social).
“Brazil” means the Federative Republic of Brazil and the phrase “Brazilian government” refers to the federal government of Brazil.
“Brazilian Capital Markets Law” means Brazilian Law No. 6,385/76, as amended.
“Brazilian Central Bank” means the Central Bank of Brazil (Banco Central do Brasil).
“Brazilian Corporate Law” means Brazilian Law No. 6,404/76, as amended.
“Brazilian GAAP” means the generally accepted accounting principles in Brazil.
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iv |
“CDI Rate” is the overnight interbank deposit rate (Certificado de Depósito Interbancário), which is the average daily interbank deposit rate in Brazil (at the end of Contentseach month and annually) for the given year.
FORWARD-LOOKING STATEMENTS“CMN” means the National Monetary Council (Conselho Monetário Nacional).
“COPOM” means the Brazilian Monetary Policy Committee (Cômite de Política Monetária).
“CPC” means the Accounting Pronouncements Committee (Comitê de Pronunciamentos Contábeis).
“CVM” means the Brazilian Securities and Exchange Commission (Comissão de Valores Mobiliários).
“Exchange Act” means the U.S. Securities Exchange Act of 1934, as amended.
“FEBRABAN” means the Brazilian Bank Federation (Federação Brasileira de Bancos).
“FGV” means the Getúlio Vargas Foundation (Fundação Getúlio Vargas).
“Getnet” means Getnet Adquirência e Serviços para Meios de Pagamento S.A. Getnet was one of our subsidiaries until the completion of the Spin-Off. For additional information on the Spin-Off of Getnet, see “Item 4. Information on the Company—A. History and Development of the Company—The Getnet Spin-Off” and notes 3, 13 and 27 to our audited consolidated financial statements included elsewhere in this annual report.
“IASB” means the International Accounting Standards Board.
“IBGC” means the Brazilian Institute of Corporate Governance (Instituto Brasileiro de Governança
Corporativa).
“IBGE” means the Brazilian Institute of Geography and Statistics (Instituto Brasileiro de Geografia e Estatística).
“IFRS” means International Financial Reporting Standards as issued by the IASB.
“IPCA” means the Brazilian consumer prices index (Índice de Preços ao Consumidor – Amplo), as calculated by FGV.
“IGP-M” means the Brazilian general index of market prices (Índice Geral de Preços – Mercado), as calculated by the IBGE.
“LGPD” means Law No. 13,709/2018, or the Brazilian General Data Protection Act (Lei Geral de Proteção de Dados).
“Nasdaq” means the Nasdaq Global Select Market.
“NYSE” means the New York Stock Exchange.
“Santander Spain” mean Banco Santander, S.A. and its consolidated subsidiaries.
“Santander Group” mean the worldwide operations of the Santander Spain conglomerate, as indirectly controlled by Santander Spain and its consolidated subsidiaries, including Getnet and Santander Brasil.
“Securities Act” means the U.S. Securities Act of 1933, as amended.
“SELIC” means the Brazilian Special Settlement and Custody System (Sistema Especial de Liquidação e Custodia), 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.
“SMEs” means small and medium-sized enterprises.
“Spin-Off” means the distribution of all of the units, common shares and preferred shares of Getnet to holders of Santander Brasil units, common shares and preferred shares, including holders of Santander Brasil units represented by Santander Brasil ADSs, on a pro rata basis (excluding treasury shares), completed on October 26, 2021. For additional information on the Spin-Off of Getnet, see “Item 4. Information on the Company—A. History and Development of the Company—The Getnet Spin-Off” and notes 3, 13 and 27 to our audited consolidated financial statements included elsewhere in this annual report.
v |
“SUSEP” means the Superintendence of Private Insurance (Superintendência de Seguros Privados).
“TJLP” means the Long-Term Interest Rate (Taxa de Juros de Longo Prazo), the interest rate applied by the BNDES for long-term financing (at the end of the period).
“U.S. GAAP” means the generally accepted accounting principles in the United States.
“United States” or “U.S.” means the United States of America.
vi |
Forward-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.Overview” and “Item 5. Operating and Financial Review and Prospects.” 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:
the 2019 coronavirus, or “COVID-19,” pandemic and other actual or potential epidemics, pandemics, outbreaks, or other public health crises, which could have an adverse impact on our business (see “Item 3. Key Information—D. Risk Factors—Risks Relating to the Brazilian Financial Services Industry and Our Business— The global COVID-19 pandemic has materially impacted our business, and the continuance of this pandemic or any future outbreak of any other highly contagious diseases or other public health emergency, could materially and adversely impact our business, financial condition, liquidity and results of operations,” “Item 4. Information on the Company—A. History and Development of the Company—Impact of COVID-19” and “Item 5. Operating and Financial Review and Prospects—A. Operating Results—Principal Factors Affecting Our Financial Condition and Results of Operations—Impact of COVID-19”); |
● | the impact of the COVID-19 pandemic on general economic and business conditions in Brazil, Latin America and globally and any restrictive measures imposed by governmental authorities in response to the outbreak; |
● | our ability to implement, in a timely and efficient manner, any measure necessary to respond to, or reduce the impacts of the COVID-19 pandemic (including any variants of the virus) on our business, operations, cash flow, prospects, liquidity and financial condition; general economic, political, social and business conditions in Brazil, including the impact of the current international economic environment and the macroeconomic conditions in Brazil, and the policies of the |
exposure to various types of inflation and interest rate risks, and the Brazilian |
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, including a global downturn; |
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 an increase in the level of nonperforming loans or non-performance by counterparties to other types of financial instruments; |
vii |
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 |
restrictions on the |
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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; |
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.
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ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
1A. Directors and Senior Management
Not applicable.
1B. Advisers
Not applicable.
1C. Auditors
Not applicable.
Not applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
2A. Offer Statistics |
Not applicable.
2B. Method and Expected Timetable |
Not applicable.
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FinancialThe following tables set forth the selected financial information forof Santander Brasil as of and for the years ended December 31, 2018, 2017, 2016, 20152021, 2020 and 2014 has been2019 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“Item 5. Operating and Financial Review and Prospects,” as well as our audited consolidated financial statements and the related notes thereto included within this annual report.
In the year ended December 31, 2021, we revisited the accounting treatment of electric energy sales contracts, which no longer include the amount of the principal and, “Item 5. Operatingtherefore, only the adjustments to fair value and Financial Reviewinterest determined in these transactions are recorded in equity accounts. The financial information as of and Prospects”for the years ended December 31, 2020 and 2019 presented in this annual report already reflects the aforementioned adjustments. See and note 8 to our audited consolidated financial statements included elsewhere in this annual report.
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Income Statement Data
For the Year Ended December 31, | For the Year Ended December 31, | |||||||||||||||||||||||||||||
2018 | 2017 | 2016 | 2015 | 2014 | 2021 | 2021 | 2020 | 2019 | 2018 | 2017 | ||||||||||||||||||||
(in millions of U.S.$)(1) | (in millions of R$) | (in millions of U.S.$)(1) | (in millions of R$) | |||||||||||||||||||||||||||
Interest and similar income | 18,189 | 70,478 | 71,418 | 77,146 | 69,870 | 58,924 | 13,975 | 77,987 | 62,775 | 72,841 | 70,478 | 71,418 | ||||||||||||||||||
Interest expense and similar charges | (7,370) | (28,557) | (36,472) | (46,560) | (38,533) | (31,695) | (4,779 | ) | (26,669 | ) | (18,332 | ) | (28,520 | ) | (28,557 | ) | (36,472 | ) | ||||||||||||
Net interest income | 10,819 | 41,921 | 34,946 | 30,586 | 31,337 | 27,229 | 9,196 | 51,318 | 44,443 | 44,321 | 41,921 | 34,946 | ||||||||||||||||||
Income from equity instruments | 8 | 33 | 83 | 259 | 143 | 222 | 16 | 90 | 34 | 19 | 33 | 83 | ||||||||||||||||||
Income from companies accounted for by the equity method | 17 | 66 | 72 | 48 | 116 | 91 | 26 | 144 | 112 | 149 | 66 | 72 | ||||||||||||||||||
Fee and commission income | 4,575 | 17,728 | 15,816 | 13,548 | 11,797 | 11,368 | 3,653 | 20,388 | 20,607 | 20,392 | 17,728 | 15,816 | ||||||||||||||||||
Fee and commission expense | (928) | (3,596) | (3,094) | (2,571) | (2,314) | (2,602) | (917 | ) | (5,115 | ) | (4,378 | ) | (4,679 | ) | (3,596 | ) | (3,094 | ) | ||||||||||||
Gains (losses) on financial assets and liabilities (net) | (718) | (2,783) | 969 | 3,016 | (20,002) | 2,748 | 40 | 222 | 12,998 | 2,463 | (2,783 | ) | 969 | |||||||||||||||||
Exchange differences (net) | (724) | (2,806) | 605 | 4,575 | 10,084 | (3,636) | (359 | ) | (2,002 | ) | (24,701 | ) | (2,789 | ) | (2,806 | ) | 605 | |||||||||||||
Other operating income (expenses) | (272) | (1,056) | (672) | (625) | (347) | (470) | (201 | ) | (1,119 | ) | (873 | ) | (1,108 | ) | (1,056 | ) | (672 | ) | ||||||||||||
Total income | 12,777 | 49,507 | 48,725 | 48,837 | 30,814 | 34,950 | 11,455 | 63,926 | 48,242 | 58,769 | 49,507 | 48,725 | ||||||||||||||||||
Administrative expenses | (4,334) | (16,792) | (16,121) | (14,920) | (14,515) | (13,942) | (3,103 | ) | (17,316 | ) | (17,115 | ) | (16,942 | ) | (16,792 | ) | (16,121 | ) | ||||||||||||
Depreciation and amortization | (449) | (1,740) | (1,662) | (1,483) | (1,490) | (1,362) | (436 | ) | (2,434 | ) | (2,579 | ) | (2,392 | ) | (1,740 | ) | (1,662 | ) | ||||||||||||
Provisions (net)(2) | (516) | (2,000) | (3,309) | (2,725) | (4,001) | (2,036) | (391 | ) | (2,179 | ) | (1,657 | ) | (3,682 | ) | (2,000 | ) | (3,309 | ) | ||||||||||||
Impairment losses on financial assets (net)(3) | (3,281) | (12,713) | (12,338) | (13,301) | (13,634) | (11,272) | (3,067 | ) | (17,113 | ) | (17,450 | ) | (13,370 | ) | (12,713 | ) | (12,338 | ) | ||||||||||||
Impairment losses on other assets (net) | (131) | (508) | (457) | (114) | (1,221) | 4 | (30 | ) | (166 | ) | (85 | ) | (131 | ) | (508 | ) | (457 | ) | ||||||||||||
Gains (losses) on disposal of assets not classified as non-current assets held for sale | (7) | (25) | (64) | 4 | 781 | 87 | (3 | ) | (15 | ) | 231 | 11 | (25 | ) | (64 | ) | ||||||||||||||
Gains (losses) on non-current assets held for sale not classified as discontinued operations | 47 | 182 | (260) | 87 | 50 | 15 | 9 | 48 | 77 | 10 | 182 | (260 | ) | |||||||||||||||||
Operating profit before tax | 4,106 | 15,910 | 14,514 | 16,384 | (3,216) | 6,443 | ||||||||||||||||||||||||
Operating income before tax | 4,435 | 24,750 | 9,664 | 22,273 | 15,910 | 14,514 | ||||||||||||||||||||||||
Income taxes | (803) | (3,110) | (5,376) | (8,919) | 13,050 | (736) | (1,647 | ) | (9,191 | ) | 3,787 | (5,642 | ) | (3,110 | ) | (5,376 | ) | |||||||||||||
Consolidated Profit for the Year | 3,303 | 12,800 | 9,138 | 7,465 | 9,834 | 5,708 | ||||||||||||||||||||||||
Consolidated net income for the Year | 2,788 | 15,559 | 13,451 | 16,631 | 12,800 | 9,138 |
(1) | Translated for convenience only using the selling rate as reported by the Brazilian Central Bank as of December 31, |
(2) | Mainly provisions for tax risks and legal obligations, and judicial and administrative proceedings of labor and civil lawsuits. For further discussion, see notes |
(3) |
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Earnings and Dividend per Share Information
For the Year Ended December 31, | ||||||
2018 | 2017 | 2016 | 2015 | 2014 | ||
Basic and Diluted Earnings per 1,000 shares | ||||||
From continuing and discontinued operations(1) | ||||||
Basic Earnings per shares (reais) | ||||||
Common Shares | 1,604.34 | 1,133.43 | 929.93 | 1,236.96 | 709.69 | |
Preferred Shares | 1,764.78 | 1,246.77 | 1,022.92 | 1,360.66 | 780.66 | |
Diluted Earnings per shares (reais) | ||||||
Common Shares | 1,604.34 | 1,132.44 | 929.03 | 1,235.79 | 709.40 | |
Preferred Shares | 1,764.78 | 1,245.69 | 1,021.93 | 1,359.36 | 780.34 | |
Basic Earnings per shares (U.S. dollars) (2) | ||||||
Common Shares | 414.05 | 342.63 | 285.34 | |||
Preferred Shares | 455.45 | 376.90 | 313.87 | |||
Diluted Earnings per shares (U.S. dollars) (2) | ||||||
Common Shares | 414.05 | 342.33 | 285.06 | |||
Preferred Shares | 455.45 | 376.57 | 313.57 | |||
From continuing operations | ||||||
Basic Earnings per shares (reais) | ||||||
Common Shares | 1,604.34 | 1,133.43 | 929.93 | 1,236.96 | 709.69 | |
Preferred Shares | 1,764.78 | 1,246.77 | 1,022.92 | 1,360.66 | 780.66 | |
Diluted Earnings per shares (reais) | ||||||
Common Shares | 1,604.34 | 1,132.44 | 929.03 | 1,235.79 | 709.40 | |
Preferred Shares | 1,764.78 | 1,245.69 | 1,021.93 | 1,359.36 | 780.34 | |
Basic Earnings per shares (U.S. dollars) (2) | ||||||
Common Shares | 414.05 | 342.63 | 285.34 | |||
Preferred Shares | 455.45 | 376.90 | 313.87 | |||
Diluted Earnings per shares (U.S. dollars) (2) | ||||||
Common Shares | 414.05 | 342.33 | 285.06 | |||
Preferred Shares | 455.45 | 376.57 | 313.57 | |||
Dividends and interest on capital per 1,000 shares (undiluted) | ||||||
Common Shares (reais) | 841.68 | 801.63 | 666.21 | 784.90 | 193.26 | |
Preferred Shares (reais) | 925.85 | 881.80 | 732.83 | 863.39 | 212.59 | |
Common Shares (U.S. dollars)(2) | 217.22 | 242.33 | 204.42 | 201.01 | 72.76 | |
Preferred Shares (U.S. dollars)(2) | 238.94 | 266.57 | 224.86 | 221.11 | 80.03 | |
Weighted average share outstanding (in thousands) – basic | ||||||
Common Shares | 3,807,386 | 3,822,057 | 3,828,555 | 3,839,159 | 3,851,278 | |
Preferred Shares | 3,668,527 | 3,683,145 | 3,689,696 | 3,700,299 | 3,710,746 | |
Weighted average shares outstanding (in thousands) – diluted(3) | ||||||
Common Shares | 3,807,386 | 3,825,313 | 3,832,211 | 3,842,744 | 3,852,823 | |
Preferred Shares | 3,668,527 | 3,686,401 | 3,693,352 | 3,703,884 | 3,712,291 |
For the Year Ended December 31, | ||||||||||||||||||||
2021 | 2020 | 2019 | 2018 | 2017 | ||||||||||||||||
Basic and Diluted Earnings per 1,000 shares | ||||||||||||||||||||
From continuing and discontinued operations(1) | ||||||||||||||||||||
Basic Earnings per shares (reais) | ||||||||||||||||||||
Common Shares | 1,981.65 | 1,713.45 | 2,094.83 | 1,604.34 | 1,133.43 | |||||||||||||||
Preferred Shares | 2,179.82 | 1,884.80 | 2,304.32 | 1,764.78 | 1,246.77 | |||||||||||||||
Diluted Earnings per shares (reais) | ||||||||||||||||||||
Common Shares | 1,981.65 | 1,713.45 | 2,094.83 | 1,604.34 | 1,132.44 | |||||||||||||||
Preferred Shares | 2,179.82 | 1,884.80 | 2,304.32 | 1,764.78 | 1,245.69 | |||||||||||||||
Basic Earnings per shares (U.S. dollars) (2) | ||||||||||||||||||||
Common Shares | 355.10 | 329.72 | 519.72 | 414.05 | 342.63 | |||||||||||||||
Preferred Shares | 390.61 | 362.69 | 571.69 | 455.45 | 376.90 | |||||||||||||||
Diluted Earnings per shares (U.S. dollars) (2) | ||||||||||||||||||||
Common Shares | 355.10 | 329.72 | 519.72 | 414.05 | 342.33 | |||||||||||||||
Preferred Shares | 390.61 | 362.69 | 571.69 | 455.45 | 376.57 | |||||||||||||||
From continuing operations | ||||||||||||||||||||
Basic Earnings per shares (reais) | ||||||||||||||||||||
Common Shares | 1,981.65 | 1,713.45 | 2,094.83 | 1,604.34 | 1,133.43 | |||||||||||||||
Preferred Shares | 2,179.82 | 1,884.80 | 2,304.32 | 1,764.78 | 1,246.77 | |||||||||||||||
Diluted Earnings per shares (reais) | ||||||||||||||||||||
Common Shares | 1,981.65 | 1,713.45 | 2,094.83 | 1,604.34 | 1,132.44 | |||||||||||||||
Preferred Shares | 2,179.82 | 1,884.80 | 2,304.32 | 1,764.78 | 1,245.69 | |||||||||||||||
Basic Earnings per shares (U.S. dollars) (2) | ||||||||||||||||||||
Common Shares | 355.10 | 329.72 | 519.72 | 414.05 | 342.63 | |||||||||||||||
Preferred Shares | 390.61 | 362.69 | 571.69 | 455.45 | 376.90 | |||||||||||||||
Diluted Earnings per shares (U.S. dollars) (2) | ||||||||||||||||||||
Common Shares | 355.10 | 329.72 | 519.72 | 414.05 | 342.33 | |||||||||||||||
Preferred Shares | 390.61 | 362.69 | 571.69 | 455.45 | 376.57 | |||||||||||||||
Dividends and interest on capital per 1,000 shares (undiluted) | ||||||||||||||||||||
Common Shares (reais) | 1,231.79 | 1,693.28 | 1,378.87 | 841.68 | 801.63 | |||||||||||||||
Preferred Shares (reais) | 1,354.97 | 1,631.71 | 1,516.76 | 925.85 | 881.80 | |||||||||||||||
Common Shares (U.S. dollars)(2) | 220.73 | 325.84 | 342.09 | 217.22 | 242.33 | |||||||||||||||
Preferred Shares (U.S. dollars)(2) | 242.80 | 313.99 | 376.30 | 238.94 | 266.57 | |||||||||||||||
Weighted average share outstanding (in thousands) – basic | ||||||||||||||||||||
Common Shares | 3,802,851 | 3,800,140 | 3,802,303 | 3,807,386 | 3,822,057 | |||||||||||||||
Preferred Shares | 3,664,423 | 3,664,666 | 3,663,444 | 3,668,527 | 3,683,145 | |||||||||||||||
Weighted average shares outstanding (in thousands) – diluted(3) | ||||||||||||||||||||
Common Shares | 3,802,851 | 3,800,140 | 3,802,303 | 3,807,386 | 3,825,313 | |||||||||||||||
Preferred Shares | 3,664,423 | 3,664,666 | 3,663,444 | 3,668,527 | 3,686,401 |
(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, |
12
10 |
Balance Sheet Data
As of December 31, | ||||||||||||||||||||||||
2021 | 2021 | 2020 | 2019 | 2018 | 2017 | |||||||||||||||||||
(in millions of U.S.$)(1) | (in millions of R$) | |||||||||||||||||||||||
Assets | ||||||||||||||||||||||||
Cash and balances with the Brazilian Central Bank(2) | 2,985 | 16,657 | 20,149 | 20,127 | 19,464 | 20,642 | ||||||||||||||||||
Financial assets held for trading(2) | - | - | - | - | - | 86,271 | ||||||||||||||||||
Financial Assets Measured At Fair Value Through Profit Or Loss | 3,379 | 18,859 | 60,900 | 32,342 | 43,712 | - | ||||||||||||||||||
Financial Assets Measured At Fair Value Through Profit Or Loss Held For Trading | 12,646 | 70,571 | 95,843 | 55,396 | 68,852 | - | ||||||||||||||||||
Non-Trading Financial Assets Mandatorily Measured At Fair Value Through Profit Or Loss | 156 | 870 | 500 | 171 | 917 | - | ||||||||||||||||||
Other financial assets at fair value through profit or loss | - | - | - | - | - | 1,692 | ||||||||||||||||||
Available-for-sale financial assets | - | - | - | - | - | 85,823 | ||||||||||||||||||
Financial Assets Measured At Fair Value Through Other Comprehensive Income | 18,142 | 101,242 | 109,740 | 96,120 | 85,437 | - | ||||||||||||||||||
Held to maturity investments | - | - | - | - | - | 10,214 | ||||||||||||||||||
Loans and receivables(2) | - | - | - | - | - | 368,729 | ||||||||||||||||||
Financial Assets Measured At Amortized Cost (2) | 113,474 | 633,241 | 554,925 | 474,681 | 429,731 | - | ||||||||||||||||||
Hedging derivatives | 61 | 342 | 743 | 340 | 344 | 193 | ||||||||||||||||||
Non-current assets held for sale | 146 | 816 | 1,093 | 1,325 | 1,380 | 1,155 | ||||||||||||||||||
Investments in associates and joint ventures | 221 | 1,233 | 1,095 | 1,071 | 1,053 | 867 | ||||||||||||||||||
Tax assets | 7,483 | 41,757 | 41,064 | 33,599 | 31,566 | 28,826 | ||||||||||||||||||
Other assets | 1,084 | 6,049 | 7,222 | 5,061 | 4,800 | 4,578 | ||||||||||||||||||
Property, plant and equipment | 1,574 | 8,784 | 9,537 | 9,782 | 6,589 | 6,510 | ||||||||||||||||||
Intangible assets | 5,517 | 30,787 | 30,766 | 30,596 | 30,019 | 30,202 | ||||||||||||||||||
Total assets | 166,868 | 931,208 | 933,578 | 760,613 | 723,865 | 645,703 | ||||||||||||||||||
Average total assets* | 168,834 | 942,177 | 854,615 | 735,507 | 685,531 | 637,511 | ||||||||||||||||||
Liabilities | ||||||||||||||||||||||||
Financial liabilities held for trading (4) | 6,622 | 36,953 | 75,020 | - | - | 49,323 | ||||||||||||||||||
Financial Liabilities Measured At Fair Value Through Profit Or Loss Held For Trading | - | - | - | 44,440 | 50,939 | - | ||||||||||||||||||
Financial Liabilities Measured At Fair Value Through Profit Or Loss | 1,337 | 7,460 | 7,038 | 5,319 | 1,946 | - | ||||||||||||||||||
Financial liabilities at amortized cost | 134,413 | 750,094 | 707,289 | 575,230 | 547,295 | 478,881 | ||||||||||||||||||
Deposits from the Brazilian Central Bank and deposits from credit institutions | 21,684 | 121,006 | 131,657 | 99,271 | 99,023 | 79,375 | ||||||||||||||||||
Customer deposits | 84,036 | 468,961 | 445,814 | 336,515 | 304,198 | 276,042 | ||||||||||||||||||
Marketable debt securities | 14,163 | 79,037 | 56,876 | 73,702 | 74,626 | 70,247 | ||||||||||||||||||
Subordinated debts | - | - | - | - | 9,886 | 519 | ||||||||||||||||||
Debt Instruments Eligible to Compose Capital | 3,520 | 19,641 | 13,120 | 10,176 | 9,780 | 8,437 | ||||||||||||||||||
Other financial liabilities | 11,011 | 61,449 | 59,823 | 55,566 | 49,783 | 44,261 | ||||||||||||||||||
Hedging derivatives | 80 | 447 | 145 | 201 | 224 | 163 | ||||||||||||||||||
Provisions(3) | 2,079 | 11,604 | 13,815 | 16,332 | 14,696 | 13,987 | ||||||||||||||||||
Tax liabilities | 1,465 | 8,175 | 10,130 | 10,960 | 8,075 | 8,248 | ||||||||||||||||||
Other liabilities | 1,882 | 10,501 | 14,051 | 10,921 | 9,095 | 8,014 | ||||||||||||||||||
Total liabilities | 147,878 | 825,234 | 827,488 | 663,404 | 632,270 | 558,615 | ||||||||||||||||||
Stockholders’ equity | 19,541 | 109,047 | 106,205 | 96,736 | 91,882 | 87,425 | ||||||||||||||||||
Other Comprehensive Income | (610 | ) | (3,406 | ) | (428 | ) | (86 | ) | (879 | ) | (774 | ) | ||||||||||||
Non-controlling interests | 60 | 334 | 313 | 559 | 593 | 437 | ||||||||||||||||||
Total Stockholders’ Equity | 18,990 | 105,974 | 106,090 | 97,209 | 91,595 | 87,088 | ||||||||||||||||||
Total liabilities and stockholders’ equity | 166,868 | 931,208 | 933,578 | 760,613 | 723,865 | 645,703 | ||||||||||||||||||
Average interest-bearing liabilities* | 116,074 | 647,752 | 573,429 | 491,187 | 463,388 | 416,816 | ||||||||||||||||||
Average total stockholders’ equity* | 18,828 | 105,070 | 101,531 | 95,836 | 89,263 | 87,868 |
As of December 31, | ||||||
2018 | 2018 | 2017 | 2016 | 2015 | 2014 | |
(in millions of U.S.$)(1) | (in millions of R$) | |||||
Assets | ||||||
Cash and balances with the Brazilian Central Bank(2) | 8,185 | 31,716 | 34,125 | 26,285 | 89,143 | 55,904 |
Financial assets held for trading(2) | - | - | 86,271 | 131,245 | 50,537 | 56,014 |
Financial Assets Measured At Fair Value Through Profit Or Loss | 11,281 | 43,712 | - | - | - | - |
Financial Assets Measured At Fair Value Through Profit Or Loss Held For Trading | 17,769 | 68,852 | - | - | - | - |
Non-Trading Financial Assets Mandatorily Measured At Fair Value Through Profit Or Loss | 237 | 917 | - | - | - | - |
Other financial assets at fair value through profit or loss | - | - | 1,692 | 1,711 | 2,080 | 997 |
Available-for-sale financial assets | - | - | 85,823 | 57,815 | 68,265 | 75,164 |
Financial Assets Measured At Fair Value Through Other Comprehensive Income | 22,049 | 85,437 | - | - | - | - |
Held to maturity investments | - | - | 10,214 | 10,048 | 10,098 | - |
Loans and receivables(2) | - | - | 355,247 | 333,997 | 306,269 | 264,608 |
Financial Assets Measured At Amortized Cost | 107,742 | 417,479 | - | - | - | - |
Hedging derivatives | 89 | 344 | 193 | 223 | 1,312 | 213 |
Non-current assets held for sale | 356 | 1,380 | 1,155 | 1,338 | 1,237 | 930 |
Investments in associates and joint ventures | 272 | 1,053 | 867 | 990 | 1,061 | 1,023 |
Tax assets | 8,146 | 31,566 | 28,826 | 28,753 | 34,770 | 23,020 |
Other assets | 1,239 | 4,800 | 4,578 | 5,104 | 3,802 | 5,067 |
Tangible assets | 1,700 | 6,589 | 6,510 | 6,646 | 7,006 | 7,071 |
Intangible assets | 7,747 | 30,019 | 30,202 | 30,237 | 29,814 | 30,221 |
Total assets | 186,814 | 723,865 | 645,703 | 634,393 | 605,395 | 520,231 |
Average total assets* | 176,920 | 685,531 | 637,511 | 605,646 | 571,918 | 478,560 |
Liabilities | ||||||
Financial liabilities held for trading | - | - | 49,323 | 51,620 | 42,388 | 19,570 |
Financial Liabilities Measured At Fair Value Through Profit Or Loss Held For Trading | 13,146 | 50,939 | - | - | - | - |
Financial Liabilities Measured At Fair Value Through Profit Or Loss | 502 | 1,946 | - | - | - | - |
Financial liabilities at amortized cost | 141,245 | 547,295 | 478,881 | 471,579 | 457,282 | 392,186 |
Deposits from the Brazilian Central Bank and deposits from credit institutions | 25,556 | 99,023 | 79,375 | 78,634 | 69,451 | 63,674 |
Customer deposits | 78,507 | 304,198 | 276,042 | 247,445 | 243,043 | 220,644 |
Marketable debt securities | 19,259 | 74,626 | 70,247 | 99,843 | 94,658 | 70,355 |
Subordinated debts | 2,551 | 9,886 | 519 | 466 | 8,097 | 7,294 |
Debt Instruments Eligible to Compose Capital | 2,524 | 9,780 | 8,437 | 8,312 | 9,959 | 6,773 |
Other financial liabilities | 12,848 | 49,783 | 44,261 | 36,879 | 32,073 | 23,446 |
Hedging derivatives | 58 | 224 | 163 | 311 | 2,377 | 894 |
Provisions(3) | 3,793 | 14,696 | 13,987 | 11,776 | 11,410 | 11,127 |
Tax liabilities | 2,084 | 8,075 | 8,248 | 6,095 | 5,253 | 12,423 |
Other liabilities | 2,347 | 9,095 | 8,014 | 8,199 | 6,850 | 5,346 |
Total liabilities | 163,175 | 632,270 | 558,615 | 549,581 | 525,559 | 441,548 |
Stockholders’ equity | 23,713 | 91,882 | 87,425 | 85,435 | 83,532 | 80,105 |
Other Comprehensive Income | (227) | (879) | (774) | (1,348) | (4,132) | (1,802) |
Non-controlling interests | 153 | 593 | 437 | 726 | 435 | 380 |
Total Stockholders’ Equity | 23,639 | 91,595 | 87,088 | 84,812 | 79,835 | 78,683 |
Total liabilities and stockholders’ equity | 186,814 | 723,865 | 645,703 | 634,393 | 605,395 | 520,231 |
Average interest-bearing liabilities* | 119,590 | 463,388 | 416,816 | 408,067 | 400,008 | 318,639 |
Average total stockholders’ equity* | 23,037 | 89,263 | 87,868 | 84,283 | 81,475 | 78,818 |
* 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, 2021, for reais into U.S. dollars of R$5.5805 to U.S.$1.00.
(2) In the fiscal year ended December 31, 2018, as a result of the implementation of IFRS 9, the balances related loans and receivables, assets held for trading, held to maturity, available for sale and compulsory deposits on time deposits were reclassified to new accounts prescribed by IFRS 9.
(3) Mainly provisions for tax risks and legal obligations, and judicial and administrative proceedings of labor and civil lawsuits.
(4) In the year ended December 31, 2021, we revisited the accounting treatment of electric energy sales contracts, which no longer include the amount of the principal and, therefore, only the adjustments to fair value and interest determined in these transactions are recorded in equity accounts. The financial information as of and for the years ended December 31, 2020 and 2019 presented in this annual report already reflects the aforementioned adjustments. See note 8 to our audited consolidated financial statements included elsewhere in this annual report.
11 |
Selected Consolidated Ratios (*)
As of and for the Year Ended December 31, | ||||||||||||||||||||
2021 | 2020 | 2019 | 2018 | 2017 | ||||||||||||||||
(%) | ||||||||||||||||||||
Profitability and performance | ||||||||||||||||||||
Return on average total assets | 1.7 | 1.6 | 2.3 | 1.9 | 1.4 | |||||||||||||||
Asset quality | ||||||||||||||||||||
Impaired assets as a percentage of loans and advances to customers (gross)(1) | 5.5 | 5.5 | 6.7 | 7.0 | 6.7 | |||||||||||||||
Impaired assets as a percentage of total assets(1) | 2.9 | 2.5 | 3.1 | 3.1 | 3.0 | |||||||||||||||
Impairment losses to customers as a percentage of impaired assets(1) (4) | 105.9 | 103.8 | 87.8 | 90.3 | 80.5 | |||||||||||||||
Impairment losses to customers as a percentage of loans and advances to customers (gross) (5) | 5.8 | 5.8 | 5.9 | 6.3 | 5.4 | |||||||||||||||
Derecognized assets as a percentage of loans and advances to customers (gross) | 3.0 | 3.7 | 4.3 | 3.5 | 4.7 | |||||||||||||||
Impaired assets as a percentage of stockholders’ equity(1) | 25.5 | 21.8 | 24.3 | 24.5 | 22.0 | |||||||||||||||
Capital adequacy | ||||||||||||||||||||
Basel capital adequacy ratio(2) | 14.9 | 15.3 | 15.0 | 15.1 | 15.8 | |||||||||||||||
Efficiency | ||||||||||||||||||||
Efficiency ratio(3) | 27.1 | 35.5 | 28.8 | 33.9 | 33.1 |
* | 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. |
13
Selected Consolidated Ratios (*)
As of and for the Year Ended December 31, | ||||||
2018 | 2017 | 2016 | 2015 | 2014 | ||
(%) | ||||||
Profitability and performance | ||||||
Return on average total assets | 1.9 | 1.4 | 1.2 | 1.7 | 1.2 | |
Asset quality | ||||||
Impaired assets as a percentage of loans and advances to customers (gross)(1) | 7.0 | 6.7 | 7.0 | 7.0 | 5.6 | |
Impaired assets as a percentage of total assets(1) | 3.1 | 3.0 | 3.0 | 3.1 | 2.7 | |
Impairment losses to customers as a percentage of impaired assets(1) (4) | 90.3 | 80.5 | 87.0 | 81.9 | 95.8 | |
Impairment losses to customers as a percentage of loans and advances to customers (gross) (5) | 6.3 | 5.4 | 6.1 | 5.7 | 5.4 | |
Derecognized assets as a percentage of loans and advances to customers (gross) | 3.5 | 4.7 | 4.3 | 4.4 | 4.9 | |
Impaired assets as a percentage of stockholders’ equity(1) | 24.5 | 22.0 | 22.3 | 23.3 | 17.8 | |
Capital adequacy | ||||||
Basel capital adequacy ratio(2) | 15.1 | 15.8 | 16.3 | 15.7 | 17.5 | |
Efficiency | ||||||
Efficiency ratio(3) | 33.9 | 33.1 | 30.6 | 47.1 | 39.9 |
(1) | Impaired assets include all loans and advances past due by more than 90 days and other doubtful credits. For further information, see “Item 4. Information on the Company—B. Business Overview—Selected Statistical Information— |
(2) | Basel capital adequacy ratio |
(3) | Efficiency ratio is determined by |
14
(4) | In |
(5) | In |
See also “Item 4. Information on the Company—B. Business Overview—Selected Statistical Information—Selected Credit Ratios.”
12 |
Selected Consolidated Ratios, Including Non-GAAP Ratios (*)
As of and for the Year Ended December 31, | ||||||||||||||||||||
2021 | 2020 | 2019 | 2018 | 2017 | ||||||||||||||||
(%) | ||||||||||||||||||||
Profitability and performance | ||||||||||||||||||||
Net yield(1) | 5.9 | 6.0 | 6.8 | 6.9 | 6.4 | |||||||||||||||
Return on average stockholders’ equity(2) | 14.8 | 13.3 | 17.4 | 14.3 | 10.4 | |||||||||||||||
Adjusted return on average stockholders’ equity(2) | 20.2 | 18.4 | 24.7 | 21.0 | 15.4 | |||||||||||||||
Average stockholders’ equity as a percentage of average total assets(2)(*) | 11.2 | 11.9 | 13.0 | 13.0 | 13.8 | |||||||||||||||
Average stockholders’ equity excluding goodwill as a percentage of average total assets excluding goodwill(2)(*) | 8.4 | 8.8 | 9.6 | 9.3 | 9.8 | |||||||||||||||
Asset quality | ||||||||||||||||||||
Impaired assets as a percentage of credit risk exposure (3) | 4.9 | 5.0 | 6.0 | 6.2 | 5.8 | |||||||||||||||
Impaired assets as a percentage of stockholders’ equity excluding goodwill(2)(3) | 34.5 | 29.8 | 34.4 | 35.5 | 32.6 | |||||||||||||||
Liquidity | ||||||||||||||||||||
Loans and advances to customers, net as a percentage of total funding(4) | 70.2 | 76.3 | 62.9 | 60.6 | 62.7 | |||||||||||||||
Efficiency | ||||||||||||||||||||
Adjusted efficiency ratio(5) | 28.2 | 27.8 | 28.2 | 30.3 | 32.5 |
As of and for the Year Ended December 31, | ||||||
2018 | 2017 | 2016 | 2015 | 2014 | ||
(%) | ||||||
Profitability and performance | ||||||
Net yield(1) | 6.9 | 6.4 | 6.2 | 6.6 | 6.9 | |
Return on average stockholders’ equity(2) | 14.3 | 10.4 | 8.9 | 12.1 | 7.3 | |
Adjusted return on average stockholders’ equity(2) | 21.0 | 15.4 | 13.3 | 18.5 | 11.3 | |
Average stockholders’ equity as a percentage of average total assets(2)(*) | 13.0 | 13.8 | 13.9 | 14.2 | 16.4 | |
Average stockholders’ equity excluding goodwill as a percentage of average total assets excluding goodwill(2)(*) | 9.3 | 9.8 | 9.7 | 9.8 | 11.3 | |
Asset quality | ||||||
Impaired assets as a percentage of credit risk exposure (3) | 6.2 | 5.8 | 6.3 | 6.0 | 4.8 | |
Impaired assets as a percentage of stockholders’ equity excluding goodwill(2)(3) | 35.5 | 32.6 | 33.5 | 36.1 | 27.5 | |
Liquidity | ||||||
Loans and advances to customers, net as a percentage of total funding(4) | 60.6 | 62.7 | 58.0 | 59.3 | 63.9 | |
Efficiency | ||||||
Adjusted efficiency ratio(5) | 38.5 | 32.5 | 34.9 | 34.8 | 38.1 |
(*) 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) “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., or “GetNet” and Super Pagamentos e Administração de Meios Eletrônicos Ltda., or “Super”,“Super,” both in 2014, Banco Olé Bonsucesso Consignado S.A. (current name of(formerly known as Banco Bonsucesso Consignado S.A.) 60% in 2015 and the remaining 40% in 2020, 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 GetNetGetnet and Super both during 2014, the acquisition of an interest in Banco Olé Bonsucesso Consignado S.A. in 2015.2015 (although Getnet and Super are no longer subsidiaries of Santander Brasil, the goodwill arising from their respective acquisitions continues to have an effect on our consolidated financial statements). 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 profitincome 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. The adjusted efficiency ratio excluding the hedge of investments held abroad is a non-GAAP measure. For more details,further information, see the table below.below and “—Reconciliation of Non-GAAP Measures and Ratios to Their Most Directly Comparable IFRS Financial Measures.”
For the Year Ended December 31, | For the Year Ended December 31, | |||||||||||||||||||||||||
2018 | 2017 | 2016 | 2015 | 2014 | 2021 | 2020 | 2019 | 2018 | 2017 | |||||||||||||||||
(in millions of R$, except percentages) | (in millions of R$, except percentages) | |||||||||||||||||||||||||
Effects of the hedge for investments held abroad | Effects of the hedge for investments held abroad | 5,867 | (810) | (6,140) | 10,919 | 1,668 | 2,512 | 13,583 | 1,264 | 5,867 | (810 | ) | ||||||||||||||
Efficiency ratio | 33.9% | 33.1% | 30.6% | 47.1% | 39.9% | 27.1 | % | 35.5 | % | 28.8 | % | 33.9 | % | 33.1 | % | |||||||||||
Adjusted efficiency ratio | 38.5% | 32.5% | 34.9% | 34.8% | 38.1% | 28.2 | % | 27.8 | % | 28.2 | % | 30.3 | % | 32.5 | % |
See also “Item 4. Information on the Company—B. Business Overview—Selected Statistical Information—Selected Credit Ratios.”
15
13 |
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$1.1 billion goodwill arising from the acquisition of GetNetGetnet and Super both during 2014, the acquisition of Banco Olé Bonsucesso Consignado S.A. in 2015 and the significance of other factors affecting stockholders’ equity and the related ratios. See “Item 4. Information on the Company—4A.A. History and Development of the Company—Important Events.” The limitation associated with the exclusion of goodwill from stockholders’ equity is that it has the effect of excluding a portion of the total investment in our assets. We compensate for this limitation by also considering stockholders’ equity including goodwill, as set forth in the above tables. Accordingly, while we believe that the non-GAAP financial measures presented are useful to investors and support their analysis, the non-GAAP financial measures have important limitations as analytical tools, and investors should not consider them in isolation or as substitutes for analysis of our results as reported under GAAP measures including under IFRS.
14 |
As of and for the Year Ended December 31, | ||||||||||||||||||||
2021 | 2020 | 2019 | 2018 | 2017 | ||||||||||||||||
(in millions of R$, except as otherwise indicated) | ||||||||||||||||||||
Return on average stockholders’ equity: | ||||||||||||||||||||
Consolidated net income for the year | 15,559 | 13,451 | 16,631 | 12,800 | 9,138 | |||||||||||||||
Average stockholders’ equity (*) | 105,070 | 101,531 | 95,836 | 89,263 | 87,868 | |||||||||||||||
Return on average stockholders’ equity (*) | 14.8 | % | 13.2 | % | 17.4 | % | 14.3 | % | 10.4 | % | ||||||||||
Adjusted return on average stockholders’ equity(*): | ||||||||||||||||||||
Consolidated net income for the year | 15,559 | 13,451 | 16,631 | 12,800 | 9,138 | |||||||||||||||
Average stockholders’ equity(*) | 105,070 | 101,531 | 95,836 | 89,263 | 87,868 | |||||||||||||||
Average goodwill(*) | 27,967 | 28,513 | 28,213 | 28,176 | 28,360 | |||||||||||||||
Average stockholders’ equity excluding goodwill(*) | 77,103 | 73,018 | 67,623 | 61,087 | 59,508 | |||||||||||||||
Adjusted return on average stockholders’ equity(*)(3) | 20.2 | % | 18.4 | % | 24.6 | % | 21.0 | % | 15.4 | % | ||||||||||
Average stockholders’ equity as a percentage of average total assets(*): | ||||||||||||||||||||
Average stockholders’ equity(*) | 105,070 | 101,531 | 95,836 | 89,263 | 87,868 | |||||||||||||||
Average total assets(*) | 942,177 | 854,615 | 735,507 | 685,531 | 637,511 | |||||||||||||||
Average stockholders’ equity as a percentage of average total assets(*) | 11.2 | % | 11.9 | % | 13.0 | % | 13.0 | % | 13.8 | % | ||||||||||
Average stockholders’ equity excluding goodwill as a percentage of average total assets excluding goodwill(*): | ||||||||||||||||||||
Average stockholders’ equity(*) | 105,070 | 101,531 | 95,836 | 89,263 | 87,868 | |||||||||||||||
Average goodwill(*) | 27,967 | 28,513 | 28,213 | 28,176 | 28,360 | |||||||||||||||
Average stockholders’ equity excluding goodwill(*) | 77,103 | 73,018 | 67,623 | 61,087 | 59,508 | |||||||||||||||
Average total assets(*) | 942,177 | 854,615 | 735,507 | 685,531 | 637,511 | |||||||||||||||
Average goodwill(*) | 27,967 | 28,513 | 28,213 | 28,176 | 28,360 | |||||||||||||||
Average total assets excluding goodwill(*) | 914,210 | 826,102 | 707,294 | 657,355 | 609,151 | |||||||||||||||
Average stockholders’ equity excluding goodwill as a percentage of average total assets excluding goodwill(*) | 8.4 | % | 8.8 | % | 9.6 | % | 9.3 | % | 9.8 | % | ||||||||||
Impaired assets as a percentage of stockholders’ equity: | ||||||||||||||||||||
Impaired assets | 26,923 | 23,176 | 23,426 | 22,426 | 19,145 | |||||||||||||||
Stockholders’ equity | 105,974 | 106,090 | 97,209 | 91,595 | 87,088 | |||||||||||||||
Impaired assets as a percentage of stockholders’ equity | 25.4 | % | 21.8 | % | 24.1 | % | 24.5 | % | 22.0 | % | ||||||||||
Impaired assets as a percentage of stockholders’ equity excluding goodwill: | ||||||||||||||||||||
Impaired assets | 26,923 | 23,176 | 23,426 | 22,426 | 19,145 | |||||||||||||||
Stockholders’ equity | 105,974 | 106,090 | 97,209 | 91,595 | 87,089 | |||||||||||||||
Goodwill | 27,915 | 28,360 | 28,375 | 28,378 | 28,364 | |||||||||||||||
Stockholders’ equity excluding goodwill | 78,059 | 77,730 | 68,834 | 63,217 | 58,724 | |||||||||||||||
Impaired assets as a percentage of stockholders’ equity excluding goodwill | 34.5 | % | 29.8 | % | 34.0 | % | 35.5 | % | 32.6 | % | ||||||||||
Impaired assets as a percentage of loans and receivables: | ||||||||||||||||||||
Loans and advances to customers, gross | 493,355 | 417,822 | 347,257 | 321,933 | 287,829 | |||||||||||||||
Impaired assets | 26,923 | 23,176 | 23,426 | 22,426 | 19,145 | |||||||||||||||
Impaired assets as a percentage of loans and receivables | 5.5 | % | 5.5 | % | 6.7 | % | 7.0 | % | 6.7 | % | ||||||||||
Impaired assets as a percentage of credit risk exposure: | ||||||||||||||||||||
Loans and advances to customers, gross | 493,355 | 417,822 | 347,257 | 321,933 | 287,829 | |||||||||||||||
Guarantees | 47,518 | 48,282 | 44,313 | 42,260 | 42,645 | |||||||||||||||
Credit risk exposure | 540,873 | 466,115 | 391,569 | 364,182 | 330,474 | |||||||||||||||
Impaired assets | 26,923 | 23,176 | 23,426 | 22,426 | 19,145 | |||||||||||||||
Impaired assets as a percentage of credit risk exposure | 5.0 | % | 5.0 | % | 6.0 | % | 6.2 | % | 5.8 | % | ||||||||||
Loans and advances to customers, net as a percentage of total funding: | ||||||||||||||||||||
Loans and advances to customers, gross | 493,355 | 417,822 | 347,257 | 321,933 | 287,829 | |||||||||||||||
Impairment losses(1) | 28,511 | 24,054 | 20,557 | 20,242 | 15,409 | |||||||||||||||
Total Funding(2) | 688,645 | 647,465 | 519,664 | 497,512 | 434,620 | |||||||||||||||
Loans and advances to customers, net as a percentage of total funding(2) | 75.8 | % | 60.8 | % | 62.9 | % | 60.6 | % | 62.7 | % |
As of and for the Year Ended December 31, | ||||||
2018 | 2017 | 2016 | 2015 | 2014 | ||
(in millions of R$, except as otherwise indicated) | ||||||
Return on average stockholders’ equity: | ||||||
Consolidated profit for the year | 12,800 | 9,138 | 7,465 | 9,834 | 5,708 | |
Average stockholders’ equity (*) | 89,263 | 87,868 | 84,283 | 81,475 | 78,818 | |
Return on average stockholders’ equity (*) | 14.3% | 10.4% | 8.9% | 12.1% | 7.3% | |
Adjusted return on average stockholders’ equity(*)(3): | ||||||
Consolidated profit for the year | 12,800 | 9,138 | 7,465 | 9,834 | 5,708 | |
Average stockholders’ equity(*) | 89,263 | 87,868 | 84,283 | 81,475 | 78,818 | |
Average goodwill(*) | 28,176 | 28,360 | 28,343 | 28,376 | 27,747 | |
Average stockholders’ equity excluding goodwill(*) | 61,087 | 59,508 | 55,940 | 53,130 | 51,071 | |
Adjusted return on average stockholders’ equity(*)(3) | 21.0% | 15.4% | 13.3% | 18.5% | 11.3% | |
Average stockholders’ equity as a percentage of average total assets(*): | ||||||
Average stockholders’ equity(*) | 89,263 | 87,868 | 84,283 | 81,475 | 78,818 | |
Average total assets(*) | 685,531 | 637,511 | 605,646 | 571,918 | 478,560 | |
Average stockholders’ equity as a percentage of average total assets(*) | 13.0% | 13.8% | 13.9% | 14.2% | 16.5% | |
Average stockholders’ equity excluding goodwill as a percentage of average total assets excluding goodwill(*): | ||||||
Average stockholders’ equity(*) | 89,263 | 87,868 | 84,283 | 81,475 | 78,818 | |
Average goodwill(*) | 28,176 | 28,360 | 28,343 | 28,376 | 27,747 | |
Average stockholders’ equity excluding goodwill(*) | 61,087 | 59,508 | 55,940 | 53,130 | 51,071 | |
Average total assets(*) | 685,531 | 637,511 | 605,646 | 571,918 | 478,560 | |
Average goodwill(*) | 28,176 | 28,360 | 28,343 | 28,376 | 27,747 | |
Average total assets excluding goodwill(*) | 657,355 | 609,151 | 577,303 | 543,573 | 450,813 | |
Average stockholders’ equity excluding goodwill as a percentage of average total assets excluding goodwill(*) | 9.3% | 9.8% | 9.7% | 9.8% | 11.3% | |
Impaired assets as a percentage of stockholders’ equity: | ||||||
Impaired assets | 22,426 | 19,145 | 18,887 | 18,599 | 14,011 | |
Stockholders’ equity | 91,595 | 87,088 | 84,813 | 79,835 | 78,683 | |
Impaired assets as a percentage of stockholders’ equity | 24.5% | 22.0% | 22.3% | 23.3% | 17.8% | |
Impaired assets as a percentage of stockholders’ equity excluding goodwill: | ||||||
Impaired assets | 22,426 | 19,145 | 18,887 | 18,599 | 14,011 | |
Stockholders’ equity | 91,595 | 87,088 | 84,813 | 79,835 | 78,683 | |
Goodwill | 28,378 | 28,364 | 28,355 | 28,333 | 28,271 | |
Stockholders’ equity excluding goodwill | 63,217 | 58,723 | 56,458 | 51,502 | 50,412 | |
Impaired assets as a percentage of stockholders’ equity excluding goodwill | 35.5% | 32.6% | 33.5% | 36.1% | 27.8% | |
Impaired assets as a percentage of loans and receivables: | ||||||
Loans and advances to customers, gross | 321,933 | 287,829 | 268,438 | 267,266 | 249,111 | |
Impaired assets | 22,426 | 19,145 | 18,887 | 18,599 | 14,011 | |
Impaired assets as a percentage of loans and receivables | 7.0% | 6.7% | 7.0% | 7.0% | 5.6% | |
Impaired assets as a percentage of credit risk exposure: | ||||||
Loans and advances to customers, gross | 321,933 | 287,829 | 268,438 | 267,266 | 249,111 | |
Guarantees | 42,260 | 42,645 | 33,265 | 43,611 | 39,334 | |
Credit risk exposure | 364,182 | 330,474 | 301,703 | 310,877 | 288,445 | |
Impaired assets | 22,426 | 19,145 | 18,887 | 18,599 | 14,011 | |
Impaired assets as a percentage of credit risk exposure | 6.2% | 5.8% | 6.3% | 6.0% | 4.9% | |
Loans and advances to customers, net as a percentage of total funding: | ||||||
Loans and advances to customers, gross | 321,933 | 287,829 | 268,438 | 267,266 | 249,111 | |
Impairment losses(1) | 20,242 | 15,409 | 16,435 | 15,233 | 13,421 | |
Total Funding(2) | 497,513 | 434,620 | 434,702 | 425,209 | 368,741 | |
Loans and advances to customers, net as a percentage of total funding(2) | 60.6% | 62.7% | 58.0% | 59.3% | 63.9% |
(*) | The average annual balance sheet data has been calculated based upon the average of the monthly balances at 13 dates: at December 31 of the prior year and for each of the month-end balances of the 12 subsequent months. |
(1) | Provision for impairment losses of loans and advances to customers. |
(2) | Total funding is the sum of financial liabilities at amortized cost, excluding |
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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.
As of and for the Year Ended December 31, | ||||||||||||||||||||
2021 | 2020 | 2019 | 2018 | 2017 | ||||||||||||||||
(in millions of R$, except as otherwise indicated) | ||||||||||||||||||||
Efficiency ratio | ||||||||||||||||||||
Administrative expenses | 17,316 | 17,115 | 16,942 | 16,792 | 16,121 | |||||||||||||||
Total income | 63,926 | 48,242 | 58,769 | 49,507 | 48,725 | |||||||||||||||
of which: | ||||||||||||||||||||
Gains (losses) on financial assets and liabilities (net) and exchange differences (net) | (1,781 | ) | (11,703 | ) | (326 | ) | (5,589 | ) | 1,574 | |||||||||||
Efficiency ratio | 27.1 | % | 35.5 | % | 28.8 | % | 33.9 | % | 33.1 | % | ||||||||||
Total Income | 63,926 | 48,242 | 58,769 | 49,507 | 48,725 | |||||||||||||||
Effects of the hedge for investments held abroad | 2,512 | 13,583 | 1,264 | 5,867 | (810 | ) | ||||||||||||||
Total income excluding effects of the hedge for investments held abroad | 66,438 | 61,825 | 60,033 | 55,374 | 47,915 | |||||||||||||||
Administrative expenses | 17,316 | 17,115 | 16,942 | 16,792 | 16,121 | |||||||||||||||
Efficiency ratio adjusted for effects of the hedge for investments held abroad | 26.1 | % | 27.7 | % | 28.2 | % | 30.3 | % | 33.6 | % |
As of and for the Year Ended December 31, | ||||||
2018 | 2017 | 2016 | 2015 | 2014 | ||
(in millions of R$, except as otherwise indicated) | ||||||
Efficiency ratio | ||||||
Administrative expenses | 16,792 | 16,121 | 14,920 | 14,515 | 13,942 | |
Total income | 49,507 | 48,725 | 48,837 | 30,814 | 34,950 | |
of which: | ||||||
Gains (losses) on financial assets and liabilities (net) and exchange differences (net) | (5,589) | 1,574 | 7,591 | (9,918) | (888) | |
Efficiency ratio | 33.9% | 33.1% | 30.6% | 47.1% | 39.9% | |
Total Income | 49,507 | 48,725 | 48,837 | 30,814 | 34,950 | |
Effects of the hedge for investments held abroad | 5,867 | (810) | 6,140 | (10,919) | (1,668) | |
Total income excluding effects of the hedge for investments held abroad | 43,640 | 49,535 | 42,697 | 41,733 | 36,618 | |
Administrative expenses | 16,792 | 16,121 | 14,920 | 14,515 | 13,942 | |
Efficiency ratio adjusted for effects of the hedge for investments held abroad | 38.5% | 32.5% | 34.9% | 34.8% | 38.1% |
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15 |
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 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 Incomeincome 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.
As of and for the year ended December 31, | ||||||||||||||||||||
2021 | 2020 | 2019 | 2018 | 2017 | ||||||||||||||||
(in millions of R$, except as otherwise indicated) | ||||||||||||||||||||
Gains/losses on financial assets and liabilities (net) plus exchange differences (net) | (1,781 | ) | (11,703 | ) | (326 | ) | (5,589 | ) | 1,574 | |||||||||||
Effects on hedge for investment held abroad | 2,512 | 13,583 | 1,264 | 5,867 | 810 | |||||||||||||||
Adjusted Gains/losses on financial assets and liabilities (net) plus exchange differences (net) | (4,293 | ) | (25,286 | ) | (1,590 | ) | (11,456 | ) | 2,384 | |||||||||||
Total Income | 63,926 | 48,242 | 58,769 | 49,507 | 48,725 | |||||||||||||||
Effects on hedge for investment held abroad | 2,512 | 13,583 | 1,264 | 5,867 | (810 | ) | ||||||||||||||
Adjusted Total Income | 66,438 | 61,825 | 60,033 | 55,374 | 47,915 | |||||||||||||||
Operating income before tax | 24,750 | 9,664 | 22,273 | 15,910 | 14,514 | |||||||||||||||
Effects on hedge for investment held abroad | 2,512 | 13,583 | 1,264 | 5,867 | (810 | ) | ||||||||||||||
Adjusted Operating income before tax | 27,262 | 23,247 | 23,537 | 21,777 | 13,704 | |||||||||||||||
Income Tax | (9,191 | ) | 3,787 | (5,642 | ) | (3,110 | ) | (5,376 | ) | |||||||||||
Effects on hedge for investment held abroad | 2,512 | (13,583 | ) | (1,264 | ) | (5,867 | ) | 810 | ||||||||||||
Adjusted Income tax | (6,679 | ) | (9,796 | ) | (6,906 | ) | (8,977 | ) | (4,566 | ) | ||||||||||
Operating income before tax – Commercial Banking | 19,491 | 4,666 | 18,375 | 12,397 | 11,220 | |||||||||||||||
Effects on hedge for investment held abroad | 2,512 | 13,583 | 1,264 | 5,867 | 810 | |||||||||||||||
Adjusted Operating Income before tax – Commercial Banking | 22,003 | 18,249 | 19,639 | 18,264 | 12,030 |
As of and for the year ended December 31, | ||||||
2018 | 2017 | 2016 | 2015 | 2014 | ||
(in millions of R$, except as otherwise indicated) | ||||||
Gains/losses on financial assets and liabilities (net) plus exchange differences (net) | (5,589) | 1,574 | 7,591 | (9,918) | (888) | |
Effects on hedge for investment held abroad | 5,867 | (810) | 6,140 | (10,919) | (1,668) | |
Adjusted Gains/losses on financial assets and liabilities (net) plus exchange differences (net) | (11,456) | 2,384 | 1,451 | 1,001 | 780 | |
Total Income | 49,507 | 48,725 | 48,837 | 30,814 | 34,950 | |
Effects on hedge for investment held abroad | 5,867 | (810) | 6,140 | (10,919) | (1,668) | |
Adjusted Total Income | 43,640 | 49,535 | 42,697 | 41,733 | 36,618 | |
Operating profit before tax | 15,910 | 14,514 | 16,384 | (3,216) | 6,443 | |
Effects on hedge for investment held abroad | 5,867 | (810) | 6,140 | (10,919) | (1,668) | |
Adjusted Operating profit before tax | 10,043 | 15,424 | 10,244 | 7,703 | 8,111 | |
Income Tax | (3,110) | (5,376) | (8,919) | 13,050 | (736) | |
Effects on hedge for investment held abroad | 5,867 | (810) | 6,140 | (10,919) | (1,668) | |
Adjusted Income tax | 2,757 | (6,182) | (2,779) | 2,130 | (2,404) | |
Operating profit before tax – Commercial Banking | 12,397 | 11,220 | 12,652 | (5,565) | 4,231 | |
Effects on hedge for investment held abroad | 5,867 | (810) | 6,140 | (10,919) | (1,668) | |
Adjusted Operating Profit before tax – Commercial Banking | 6,530 | 12,030 | 6,512 | 5,354 | 5,899 |
Exchange Rates
The Brazilian foreign exchange system allows the purchase and sale of foreign currency and the international transfer ofreais by 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. In the past,However, the Brazilian Central Bank has intervened occasionally to control high volatility in the foreignmoderate exchange rates.rate volatility. 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.
16 |
Furthermore, Brazilian law provides that, whenever there is a serious imbalance in Brazil’s balance of payments or there are compelling reasons to foresee a serious imbalance; temporary restrictions may be imposed on remittances of foreign capital abroad. Any such restrictions on remittances of foreign capital abroad may limit our ability to make distributions to holders of our ADRs.American Depositary Receipts, or “ADRs.” We cannot assure 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” as well as the U.S. dollar equivalent of any
18
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 “—“Item 3. Key Information—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 us.”
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: | |||||
2014 | 2.66 | 2.36 | 2.19 | 2.74 | |
2015 | 3.90 | 3.34 | 2.57 | 4.19 | |
2016 | 3.26 | 3.48 | 3.12 | 4.16 | |
2017 | 3.31 | 3.19 | 3.05 | 3.38 | |
2018 | 3.87 | 3.68 | 3.14 | 4.19 | |
Month Ended: | |||||
August 2018 | 4.14 | 3.93 | 3.71 | 4.18 | |
September 2018 | 4.00 | 4.12 | 4.00 | 4.19 | |
October 2018 | 3.72 | 3.76 | 3.64 | 4.03 | |
November 2018 | 3.86 | 3.79 | 3.70 | 3.89 | |
December 2018 | 3.87 | 3.88 | 3.83 | 3.93 | |
January 2019 | 3.65 | 3.74 | 3.65 | 3.86 | |
February 2019 | 3.74 | 3.72 | 3.67 | 3.78 | |
March 2019 (through March 15, 2019) | 3.83 | 3.83 | 3.78 | 3.87 |
Period-end | Average(1) | Low | High | |||||||||||||||
(per U.S. dollar) | ||||||||||||||||||
Year: | ||||||||||||||||||
2017 | 3.31 | 3.19 | 3.05 | 3.38 | ||||||||||||||
2018 | 3.87 | 3.68 | 3.14 | 4.19 | ||||||||||||||
2019 | 4.03 | 4.11 | 4.02 | 4.22 | ||||||||||||||
2020 | 5.20 | 5.16 | 4.02 | 5.94 | ||||||||||||||
2021 | 5.58 | 5.40 | 4.92 | 5.87 | ||||||||||||||
Month Ended: | ||||||||||||||||||
September 2021 | 5.44 | 5.28 | 5.16 | 5.44 | ||||||||||||||
October 2021 | 5.64 | 5.54 | 5.39 | 5.71 | ||||||||||||||
November 2021 | 5.62 | 5.56 | 5.41 | 5.67 | ||||||||||||||
December 2021 | 5.58 | 5.65 | 5.56 | 5.74 | ||||||||||||||
January 2022 | 5.36 | 5.53 | 5.36 | 5.70 | ||||||||||||||
February 2022 (through February 22, 2022) | 5.06 | 5.22 | 5.06 | 5.33 |
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 operating results of operations in euros. As of December 31, 2018,2021, the exchange rate foreuro toreal was R$4.4390 6.3210 per €1.00.
3B. Capitalization and Indebtedness
Not applicable.
3C. Reasons for the Offer and Use of Proceeds
Not applicable.
This section is intended to be a summary of more detailed discussions contained elsewhere in this annual report. You should carefully read and consider the following risks, along with the other information included in this annual report on Form 20-F. The risks described below are not the only ones we face. Additional risks that we do not presently consider material, or of which we are not currently aware, may also affect us. Our business, financial condition and results of operations or financial condition could be materially and adversely affectedimpacted if any of thethese risks described below occur. Asmaterialize and, as a result, the market price of our unitsUnits and of our ADRs could be affected.
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Summary of Risk Factors
Summary of Risks Relating to Brazil and Macroeconomic and Political Conditions in Brazil and Globally
● | The COVID-19 pandemic has had, and is expected to continue to have, a negative impact on global, regional and Brazilian economies, and we would be materially adversely affected by a protracted economic downturn. |
● | 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. |
● | Inflation, 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. |
● | Exposure to Brazilian federal government debt could have a material adverse effect on us. |
● | Fluctuations in interest rates and other factors may affect our obligations under legacy employee pension funds. |
● | Exchange rate volatility may have a material adverse effect on the Brazilian economy and on us. |
● | Infrastructure, labor force deficiency and other factors in Brazil may impact economic growth and have a material adverse effect on us. |
● | 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. |
Summary of Risks Relating to the Brazilian Financial Services Industry and Our Business
● | The global COVID-19 pandemic has materially impacted our business, and the continuance of this pandemic or any future outbreak of any other highly contagious diseases or other public health emergency, could materially and adversely impact our business, financial condition, liquidity and results of operations. |
● | The strong competitive environment in the Brazilian financial services market may adversely affect us, including our business prospects. |
● | 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 subject to increasing scrutiny and regulation from data protection laws. Failure to protect personal information could adversely affect us. |
● | We are exposed to risk of loss from legal and regulatory proceedings. |
● | Disclosure controls and procedures over financial reporting may not prevent or detect all errors or acts of fraud. |
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● | Changes in taxes and other fiscal assessments may adversely affect us. Furthermore, we are subject to review by tax authorities, and an incorrect interpretation by us of tax laws and regulations may have a material adverse effect on us. |
● | Our loan and investment portfolios are subject to risk of prepayment, which could have a material adverse effect on us. |
● | The credit quality of our loan portfolio may deteriorate and our loan loss reserves could be insufficient to cover our loan losses, which could have a material adverse effect on us. |
● | 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. |
● | 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. We may face significant challenges in possessing and realizing value from collateral with respect to loans in default. |
● | We may not effectively manage risks associated with the replacement or reform of benchmark indices. |
● | 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. |
● | 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. |
● | We are subject to counterparty risk in our business. |
● | Our financial results are constantly exposed to market risk. We are subject to fluctuations in interest rates and other market risks, which may materially and adversely affect us. |
● | We engage in transactions with related parties that others may not consider to be on an arm’s- length basis. |
● | Our business is highly dependent on the proper functioning of information technology systems. |
Summary of Risks Relating to Our Controlling Shareholder, Our Units and American Depositary Receipts or “ADRs”, could decline, and investors could lose all or part of their investment.(ADRs)
● | Our ultimate controlling shareholder has a great deal of influence over our business and its interests could conflict with ours. |
● | Our status as a controlled company and a foreign private issuer exempts us from certain of the corporate governance standards of the NYSE, limiting the protections afforded to investors. Furthermore, our corporate disclosure may differ from disclosure regularly published by issuers of securities in other countries, including the U.S. |
● | The liquidity and market prices of the units and the ADRs may be adversely affected by the cancellation of units or substantial sale of units and shares in the market, or by the relative volatility and limited liquidity of the Brazilian securities markets. |
● | 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. |
● | Holders of our units and our ADRs may not receive any dividends or interest on stockholders’ equity, may be unable to exercise preemptive rights with respect to our units underlying the ADRs, and may find it difficult to exercise voting rights at our shareholders’ meetings. |
● | Investors may find it difficult to enforce civil liabilities against us, our directors or officers. In addition, judgments of Brazilian courts with respect to our units or ADRs will be payable only in reais. |
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● | Holders of ADRs could be subject to Brazilian income tax on capital gains from sales of ADRs. Furthermore, if you exchange your ADRs for their underlying Units, you risk losing Brazilian tax advantages and the ability to remit foreign currency abroad. |
Risks Relating to Brazil and Macroeconomic and Political Conditions in Brazil and Globally
The COVID-19 pandemic has had, and is expected to continue to have, a negative impact on global, regional and Brazilian economies, and we would be materially adversely affected by a protracted economic downturn.
The COVID-19 pandemic added a new source of uncertainty to global economic activity and it has had, and is expected to continue to have, a negative impact on global, regional and national economies and to disrupt supply chains and reduce international trade and business activity. New variants of the virus have emerged against which existing vaccines and acquired immunity may not be effective. Restrictions will likely remain in place, suppressing activity, if the contagion does not subside. The materialization of these risks has affected global growth and may decrease investors’ interest in assets from Brazil, which has adversely affected the market price of our securities, possibly making it more difficult for us to access capital markets and, as a result, to finance our operations in the future.
The current COVID-19 pandemic and its potential impact on the global economy may affect our ability to meet our financial targets. A continued downturn in local, regional or global economic conditions may adversely affect our business, results of operations and financial condition.
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.
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We and the trading price of our securities may be adversely affected by changes in policy, laws or regulations at the federal, state and municipal levels involving or affecting factors such as:
interest rates; |
currency volatility; |
inflation; |
reserve requirements; |
capital requirements; |
liquidity of capital and lending markets; |
non-performing loans; |
tax policies; |
the regulatory framework governing our industry; |
exchange rate controls and restrictions on remittances abroad; and |
other political, social and economic developments in or affecting Brazil. |
Uncertainty over whether the Brazilian government will implement changes in policy or regulation, createsas well as uncertainties related to the 2022 Brazilian presidential election, create 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.
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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-makerspolicymakers 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.
The recent economic instability in Brazil has contributedThere 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 2019. In addition, various ongoing investigations into allegations of money laundering and corruption being conducted by the Brazilian Federal Prosecutor’s Office, including the largest such investigation known as “Lava Jato,” have negatively impactedexternal perception regarding the Brazilian economy and political environment.
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In recent years, there has been significant political turmoil in connection 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 ongoing “Lava Jato” investigations. Presidential elections were held in Brazil in October 2018. We cannot predict which policies the new President of Brazil, who assumed office on January 1, 2019, may adopt or change during his mandate or the effect that any such policies mightcould have a negative impact on our business and the price of our securities. In addition, a tax reform proposed in 2021 that has not been voted on, suggests 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.
The political uncertainty resulting from the presidential elections and the transition to a new government may have an adverse effect on our business, results of operations and financial condition.
Furthermore, 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 their high debt burdens (particularly following the COVID-19 pandemic and the need for the Brazilian government to fund extensive economic relief programs), declining revenues and inflexible expenditures. While the Brazilian Congress has approved a ceiling on government spending that will limit primary public expenditure growth to the prior year’s inflation for a period of at least 10 years, fiscal reforms and, in particular, a reform of Brazil’s pension system, will be critical for Brazil to comply with the spending limit. Diminished confidence in the Brazilian government’s budgetary condition and fiscal stance could result in downgrades of Brazil’s sovereign debt by credit rating agencies, negatively impact Brazil’s economy, lead to further depreciation of therealand an increase in inflation and interest rates, thus adversely affecting our business, results of operations and financial condition.
In February 2019, the Brazilian federal government outlined plans for a proposed “anti-crime package.” The package includes the following measures: enforcement of sentences after conviction by an appeals court (without res judicata), certain procedural changes to jury trials, restrictions on oppositions to motion to reverse judgments (embargos infringentes) in acquittal cases, certain changes to the requirements for legitimate self-defense, harsher sentences for recidivists and those convicted of active or passive bribery, embezzlement, heinous crimes or criminal organization, among others, a widening of the definition of criminal organization, measures to enhance the government’s ability to seize the proceeds of criminal activities and, to enable use of assets seized by public security agencies, measures to stay the counting of the statute of limitation while a person is serving a sentence abroad or when motion for clarification or appeals to high courts are pending judgment, measures to allow for the use of non-prosecution agreements for non-violent crimes with sentences of less than four years, to enable settlement agreements in malfeasance in office actions, for example, by means of plea bargaining or lenience agreements, to facilitate the judgment of crimes with electoral effects, measures to introduce new rules relating to whistleblowers (in order to protect the identities of such persons and ensure they can receive rewards in certain circumstances). As of the date of this annual report, the Brazilian Congress has just started review of the proposal and it is not possible to estimate if and when it will be approved, or what changes will be proposed.
In February 2019, the Brazilian federal government submitted a proposal the Brazilian Congress for a constitutional amendment to effect a reform of Brazil’s social security system. The main purpose of this reform is to reduce public expenditures, including through: a reorganization of the general welfare system based on a capitalization principle, the adoption of progressive and distinct rates of social security contributions for employees, the increase of the minimum contribution time and women’s minimum age of retirement, the discontinuation of the right to retire after a given number of years of contributions to the system, the alteration of the nature of the welfare regime applicable to rural works, the alignment of the pensions conditions applicable to civil servants with those applicable to private sector employees, the reduction of the benefits for those who only fulfilled the minimum requirements, and the requirement for each federal entity to create private pension regimes for its own employees. As of the date of this annual report, the Brazilian Congress has just started review of the proposal and it is not possible to estimate if and when it will be approved, or what changes will be proposed.
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Uncertainty about the Brazilian government’s implementation of changes in policies or regulations that affect such implementation, as well as uncertainty arising from the 2022 Presidential election, 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 facinghave faced 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 isare 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”)Zelotes). It is alleged that the purpose of such improper payments was to induce those officials to reduce or waive certain tax-related penalties imposed by the Brazilian Federal Revenue Authority, which were under appeal in the CARF. Such investigations involve and/or involved 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.
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Furthermore, the negative effects on such companies and others may also impact the level of investments in infrastructure in Brazil, which may lead to lower economic growth or contraction in the near to medium term (accordingterm. According to data from the IBGE, the Brazilian economy’s gross domestic product, or “GDP”,“GDP,” contracted by 3.5%3.3% in 2016, butthen increased by 1.0%1.3% in 2017, 1.8% in 2018 and 1.1%1.2% in 2018)2019. In 2020, Brazilian GDP contracted by 3.9% as a result of the adverse macroeconomic effects of COVID-19 pandemic. In 2021, Brazilian GDP is estimated to have increased by 4.6%. In addition, although we have reduced our exposure to companies involved in the “Lava Jato”Lava Jato and other government investigations, we cannot assure 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 SStandard & Poor's, or “S&P,” in September 2015, by Fitch Ratings, or “Fitch,” 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 prior Brazilian government to approve certain reforms.reforms, Brazil’s sovereign rating is currently rated by the three major riskrisk- rating agencies as follows: BB- by S&P (stable outlook) and Fitch (negative outlook) and Ba2 by Moody’s.Moody’s (stable outlook). Further downgrading of Brazil’s credit rating could reduce the trading price of units and ADRs. 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.investments. In addition, the “Lava Jato”Lava Jato investigations have also reached members of the executive and legislative branches of the Brazilian government, which has caused considerable political instability, and, as a result, persistently poor economic conditions in Brazil could have a material adverse effect on us. It is difficult to predict the effects of such political instability, which may include further deteriorations in Brazil’s economic conditions.
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Inflation, 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 2017 and 2018 consumer price inflation decreased to 2.9% and 3.7%, respectively. The Brazilian government’s measures to fight inflation, principally through the Brazilian Central Bank, have had and may in the future have significant effects on the Brazilian economy and our business.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.
In DecemberThe SELIC rate had been on a downward trend since mid-2016. The SELIC rate reached a high as 14.25% as of October, 2016, the SELIC (basic interest rate) was loweredbefore decreasing to 13.75%, p.a. by the end of 2016. The SELIC rate fell further to 7.00% p.a. by the end of 2017, and to 6.50% p.a. in January 2017March 2018. The SELIC rate remained at this level until June 2019, when it resumed its downward trend, ending 2019 at 4.50% p.a. As a result of the negative economic impact of the COVID-19 pandemic, the SELIC rate was further loweredcontinued to 13.0%,fall during 2020, and to 12.25%reached a historical low of 2.00% p.a. by the end of the year and remained at that level until mid-March 2021, when it reached 2.75%. As a result of inflationary pressures that have arisen in February 2017. In May 2017, the Monetary Policy Committee (Comitê de Política Monetária) ofBrazil and globally in late 2021 and early 2022, the Brazilian Central Bank or COPOM, decided to lowerstarted tightening monetary policy: the SELIC rate to 10.25%, lowering it tothen reached 6.25% p.a. in late September 2021, 7.75% p.a. in late October 2021, 9.25% in July 2017 and to 7.50% in October 2017, and to 7.0%p.a. in December 2017. In2021, and reached 10.75% p.a. in February 2018,2022. As of the COPOM lowereddate of this annual report, the SELIC rate to 6.75% and then to 6.50% in March 2018 and kept throughout the year 2018. On February 6, 2019, the COPOM has decided to maintain the SELIC rate at 6.50%.
is 10.75% p.a..
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 2018,2021, a 1.0% increase or decrease in the basicbase interest rate would have resulted in a decrease or increase, respectively, in our net interest income of R$419553 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, generallysuch as the consumer price index (Índice de Preços ao Consumidor – Amplo), or “IPCA,”IPCA, and the general index of market prices (Índice Geral de Preços-Mercado), or “IGPM.”IGP-M. For example, considering the amounts in 2018,2021, each additional percentage point change in inflation would impact our personnel and other administrative expenses by approximately R$9290 million and R$7683 million, respectively.
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DespiteInflation, as measured by the Brazilian Central Bank’s maintenanceIPCA, reached 4.52% in 2020, compared to 4.31% in 2019, mainly as a result of temporary supply shocks affecting the prices of foodstuff items. These inflationary pressures have persisted in 2021 and have also been compounded by additional ones, including climate events that hit electricity generation and led to an increase in energy prices, disruption in supply chains and the depreciation of the SELIC rate,real, among others. As a result, inflation has increased during 2018, reachingas measured by the IPCA reached 10.06% in 2021, significantly above the target of 3.75% set for the 12-month period ending December 31, 2018, and decreasing to 0.75% for the period ending February 28, 2019.
period.
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.
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Exposure to Brazilian Federal Governmentfederal government debt could have a material adverse effect on us.
We invest in Brazilian Federal Government sovereignfederal government bonds. As of December 31, 2018,2021, approximately 16.1%18.4% of our total assets, and 66.4%76.1% of our securities portfolio, consisted of debt securities issued by the Brazilian Government.federal government. Any failure by the Brazilian Government to make timely payments under the terms of these securities, or a significant decrease in their market value, will have a material adverse effect on us.
Fluctuations in interest rates and other factors may affect our obligations under legacy employee pension funds.
We sponsor certain defined benefit pension plans and a health carehealthcare plan that benefit certain of ourfor 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, see note 2221 to our audited consolidated financial statements.statements included elsewhere in this annual report.
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.
DecreasesIncreases in interest rates can increasedecrease the present value of obligations under our legacy defined benefit pension plans and may materially and adversely affectlifetime medical assistance plan. Therefore, in 2021, there were two factors that contributed to the funded statusreduction of our legacy defined benefit plansprovisions when compared to 2020: first, increases in interest rates, and require ussecondly, the greater-than-average profitability of investments indexed to makethe IGP-M.
As of December 31, 2021, our provisions for pensions and similar obligations totaled R$2.7 billion (out of total provisions for legal and administrative proceedings, commitments, pensions and other matters of R$11.6 billion). For additional contributionsinformation, see note 21 to these plans to meet our pension funding obligations.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.
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FromAlthough long-term depreciation of the real is generally linked to the rate of inflation in Brazil, depreciation of the real occurring over shorter periods of time has resulted in significant variations in the exchange rate among the real, the U.S. dollar and other currencies. As a result of fluctuations in commodity prices, international developments and periods of progress and setbacks on the domestic front—such as during the presidential impeachment process in 2016, or the approval of the national pension system reform in 2019—the real has weakened over the last few years. After having ended 2013 to 2014, thereal depreciated due to a decrease in commodities prices, reachingwith an exchange rate of R$2.34 per U.S.$1.00, on December 31, 2013 andthe real/U.S. dollar exchange rate was R$2.65 per U.S.$1.00 on December 31, 2014. During 2015, due2014, depreciating further 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 fell 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%, reaching R$3.91 per U.S.$1.00 on December 31, 2015. In 2016,Despite the instability caused by a change in the country’s presidency, the real faced continuing fluctuations, primarily as a result of Brazil’s political instability, but had appreciated 17.0% year-over-year against the U.S. dollar as of December 31, 2016 to R$3.26 per U.S.$1.00. 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, thereal2017, but continued to depreciate againstin the U.S. dollar with the exchange ratefollowing years, reaching R$3.883.87 per U.S.$1.00 as of December 31, 2018. On March 15, 2019,2018, and R$4.03 per U.S.$1.00 as of December 31, 2019. In 2020, in response to the turbulence and uncertainty caused by the COVID-19 pandemic, the real depreciated significantly against the U.S.$ dollar, but finished the year at R$5.20 per U.S.$1.00. In 2021, the fallout of the COVID-19 pandemic continued to weigh on the performance and prospects of the Brazilian economy. The adverse economic effects of the COVID-19 pandemic have led to pressure on the Brazilian government to increase its support for the economy, which has led it to increase its already high indebtedness. Along with an ongoing perception that the Brazilian government could continue such support and further increase its indebtedness, this has led to a depreciation of the real. As of December 31, 2021, the exchange rate was R$3.835.58 per U.S.$1.00. There can be no assurance that therealwill not substantially depreciate or appreciate further against the U.S. dollar.
In the year ended December 31, 2018,2021, 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$261.17 million.
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Depreciationdepreciation of thereal relative to the U.S. dollar has created additional inflationary pressures in Brazil, which has 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 therealmay 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 therealcould 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 therealrelative to the U.S. dollar and other foreign currencies could lead to a deterioration of the Brazilian balance of payments, as well as dampenhinder export-driven growth. Depending on the circumstances, either a depreciation or appreciation of therealcould materially and adversely affect the growth of the Brazilian economy and our business, financial condition and results of operations.
Infrastructure, 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 a contraction of 3.5%3.3% in 2016 andfollowed by a three-year streak of growth of 1.0% and 1.1% in 2017 (1.3%), 2018 (1.8%) and 2018, respectively.2019 (1.2%). In 2020, the Brazilian GDP contracted by 3.9% as a result of the effects of the COVID-19 pandemic, and despite the significant economic support measures put in place by the Brazilian government (although it is believed that these measures averted an even stronger contraction).We estimate that Brazilian GDP increased by 4.6% in 2021 due to the extension of income supports programs and the relaxation of certain mobility restrictions that allowed some businesses to resume their activities (e.g., after having contracted by 3.9% in 2020, we estimate that the services sector increased by 4.8% in 2021). Growth ishas been 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. Additionally, travel restrictions or potential impacts on personnel due to the COVID-19 pandemic may disrupt our business and adversely affect the financial condition of our customers. Any of these factors could lead to labor market volatility and generally impact income, purchasing power and consumption levels, which could limit growth, increase delinquency rates and ultimately have a material adverse effect on us.
Developments and the perception of risk in other countries may adversely affect the Brazilian economy and market price of Brazilian issuers’ securities.
The market value of securities of Brazilian issuers is affected by economic and market conditions in other countries, including the United States, European countries (including Spain, where Santander Spain, our controlling shareholder, is based), and in other Latin American and emerging market countries. Although economic conditions in Europe and in the United States may differ significantly from economic conditions in Brazil, investors’ reactions to developments in these other countries may have an adverse effect on the market value of securities of Brazilian issuers. In particular, investor perceptions of the risks associated with our securities may be affected by perception of risk conditions in Spain. Additionally, crises in other emerging market countries may diminish investor interest in securities of Brazilian issuers, including our securities. This could adversely affect the market price of our securities, restrict our access to capital markets and compromise our ability to finance our operations in the future on favorable terms, or at all.
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In 2018, 20172021, 2020 and 2016,2019, 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,countries. In 2021 and 2020, the uncertainties regardingfallout of the COVID-19 pandemic has also affected the performance of Brazilian macroeconomic and political conditions.markets. 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.
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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 andsetbacks derived from the Eurozone, the end of quantitative easing by the U.S. Federal Reserve and the uncertain impact of “Brexit.”COVID-19 pandemic. 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.
Pandemics, epidemics or outbreaks of infectious diseases can have an adverse effect on the global market and economy, as well as on our operations. Historically, some epidemics and regional or global outbreaks, such as Zika virus, Ebola virus, H5N5 virus (popularly known as avian influenza), foot-and-mouth disease, H1N1 virus (influenza A, popularly known as swine flu), middle east respiratory syndrome (MERS) and severe acute respiratory syndrome (SARS) have affected certain sectors of the economy in the countries where these diseases have spread.
On March 11, 2020, World Health Organization, or “WHO,” declared that the COVID-19 epidemic rose to the level of a pandemic. This declaration triggered severe measures by government officials around the world with the aim of controlling the spread of COVID-19, including restrictions on the flow of people, with limitations on travel, use of public transport, quarantines and lockdowns, prolonged closure of commercial establishments, interruptions in the supply chain and reduction of consumption in general. These measures, combined with the uncertainties caused by the COVID-19 pandemic, had an adverse impact on the economy and the global capital market, including Brazil, including causing eight circuit breakers in B3 negotiations throughout March 2020. The price of most of the assets traded on B3 was adversely affected due to the COVID-19. Impacts similar to these may reoccur, causing the prices of securities traded on the B3 to fluctuate.
In addition, any material changes in the economy and the global capital market, including Brazil, may decrease the interest of investors in Brazilian assets, including our ADRs, which may adversely affect the market price of our securities, in addition to making it difficult for us to access the capital markets and finance our operations, including on acceptable terms.
There have also 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 proposed 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. In 2022, the military conflict between the Russian Federation and Ukraine is contributing to further increases in the prices of energy, oil and other commodities and to volatility in financial markets globally, as well as a new landscape in relation to international sanctions. 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.
In addition, on January 31, 2020, the UK ceased to be a member of the EU, on withdrawal terms that established a transition period until December 31, 2020. During the transition period, the UK continued to be treated as an EU member state and applicable EU legislation continued to be in force. A trade deal was agreed between the UK and the EU prior to the end of the transition period and the new regulations came into force on January 1, 2021. Uncertainty remains around the terms of the UK’s relationship with the European Union and the lack of a fully comprehensive trade agreement may negatively impact the economic growth of both regions. Similarly, an adverse effect on the UK and the European Union may have an adverse effect on the wider global economy 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.
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Moreover, the risk of returning to a fragile and volatile environment and to heightened political tensions in Europe exists if, among others, the policies implemented to provide relief to the economies most affected by the COVID-19 pandemic do not succeed, the reforms aimed at improving productivity and competition fail, the banking union and other measures of European integration do not take hold or anti-European groups become more widespread. A deterioration of the economic and financial environment in Europe could have a material adverse impact on the global economy, affecting our operating results, financial position and prospects. In addition, growing protectionism and trade tensions, such as the tensions between the United States and China in recent years, could have a negative impact on the global economy, which would also impact our operating results, financial condition and prospects.
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.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 have 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.
If all or some of the foregoing risks were to materialize, this could have a material adverse effect on our results, financial condition and prospects.
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 adverse conditions may adversely affect our ability to access capital and liquidity on financial terms acceptable to us, if at all, including, among other things to the extent such conditions adversely affect the value and/or perception of value of Brazilian government securities.
all.
Part of our funding originates from repurchase agreements. These types of transactionsagreements 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 Brazilian government securities may be significant forsignificantly impact the availability of funds. For example,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 adverse conditions in financial and credit markets, or other factors, the cost of these transactions could increase, 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 could adversely impact global economic or market conditions.
On June 23, 2016, the UK electorate voted in a general referendum in favor of the UK’s exit from the European Union (so-called “Brexit”). On March 29, 2017, the UK gave formal notice under Article 50 of the Treaty on European Union of its intention to leave the European Union. The announcement of Brexit caused significant volatility in global stock markets and currency exchange rate fluctuations. The ongoing process of negotiations between the UK and the European Union will determine the future terms of the UK’s relationship with the European Union, including access to European Union markets, either during a transitional period or more permanently. Although the UK is due to leave the European
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Union on March 29, 2019, we note that the withdrawal agreement has not been approved yet. Brexit could lead to potentially divergent laws and regulations as the UK determines which European Union laws to replace or replicate. Uncertainty regarding the terms of Brexit, and its eventual effects once implemented, could adversely affect global economic or market conditions and investor confidence. This could, in turn, adversely affect our business and/or the market value of our securities.
Risks Relating to the Brazilian Financial Services Industry and Our Business
The global COVID-19 pandemic has materially impacted our business, and the continuance of this pandemic or any future outbreak of any other highly contagious diseases or other public health emergency, could materially and adversely impact our business, financial condition, liquidity and results of operations.
Health and safety restrictions adopted in 2020 and 2021 to contain the impact of the COVID-19 pandemic, including imposing mass quarantines, shelter-in-place orders, medical screenings, travel restrictions and limiting public gatherings, resulted and many continue to result in a severe decrease of global economic activity and decreases in production and demand, which led to sharp declines in the GDP of those countries that were most affected by the pandemic, including Brazil. Some of these measures remained in force as of the date of this annual report. Other consequences included increased unemployment levels, sharp decreases and high volatility in the stock markets, disruption of global supply chains, exchange rate volatility, steady customer draws on lines of credit, decline in real estate prices, and uncertainty in relation to the future impact in regional and global economies in the medium and long term. These measures have also negatively impacted, and could continue to negatively impact, businesses, market participants, our counterparties and customers, and the global economy for a prolonged period of time.
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Many governments and regulatory authorities, including central banks, have acted, and may further act, to provide relief from the economic and market disruptions resulting from the COVID-19 pandemic, including providing fiscal and monetary stimuli to support the global economy, lowering federal funds rates and interest rates, and granting partial or total deferral (grace period) of principal and/or interest payments due on loans. Furthermore, it is unclear how the macroeconomic business environment or societal norms may be impacted after the pandemic. The post-COVID-19 environment may undergo unexpected developments or changes in the financial markets, fiscal, tax and regulatory environments as well as customer and corporate client behavior which could have an adverse impact on our business.
It is difficult to predict how effective these and other measures taken to mitigate the economic effects of the pandemic will be. For more information on the measures taken by the Brazilian Central Bank to combat the COVID-19 pandemic, see “Item 4. Information on the Company—B. Business Overview—Regulation and Supervision—Other Applicable Laws and Regulations—Regulatory Developments Related to COVID-19.”
In 2021, high vaccination rates in many countries and a progressive relaxation of health and safety restrictions, together with the fiscal and monetary policy measures implemented, contributed to an increase in employment levels and recovery of the global economy generally, with some variations across sectors and geographies. However, the pandemic remains dynamic and the emergence of variants resistant to existing vaccines remains uncertain. In addition, certain adverse consequences of the pandemic continue to impact the macroeconomic environment and may persist for some time, including labor shortages and disruptions of global supply chains, that are contributing to rising inflationary pressures.
If new COVID-19 waves or variants of the virus force countries to re-adopt measures that restrict economic activity, the macroeconomic environment could deteriorate and adversely impact our business and results of operations, which could include, but is not limited to (i) a continued decreased demand for our products and services; (ii) protracted periods of lower interest rates and resulting pressure on our margins; (iii) further material impairment of our loans and other assets including goodwill; (iv) decline in value of collateral; (v) constraints on our liquidity due to market conditions, exchange rates and customer withdrawal of deposits and continued draws on lines of credit; and (vi) downgrades to our credit ratings. See also “Our cost of funding is affected by our credit ratings, and any risks may have an adverse effect on both variables. Any downgrade in (i) the rating of Brazil’s, (ii) our controlling 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.”
Moreover, our operations could still be impacted by risks from remote working arrangements or bans on non-essential activities. For example, some of our branches in Brazil have been closed and others have been functioning with reduced hours for a significant period of time. During 2020, we had more than half of our total workforce working remotely, which has increased cybersecurity risks given greater use of computer networks outside the corporate environment.
During 2021, there was a progressive move to return to the office while still maintaining flexibility to work remotely, particularly during the peaks of the COVID-19 waves. If we become unable to successfully operate our business from remote locations including, for example, due to failures of our technology infrastructure, increased cybersecurity risks, or governmental restrictions that affect our operations, this could result in business disruptions that could have a material and adverse effect on our business.
We may also be adversely affected by measures taken by the Brazilian and other governments to mitigate the effects of the COVID-19 pandemic. For example, in 2020, a temporary suspension on dividends and other distributions was enacted in Brazil through Resolution No. 4,820, limiting the distributions to shareholders 30% of adjusted net profit (following amendments enacted on December 23, 2020). As a result, we only distributed R$3,837 million in 2020 compared to R$10,800 million in 2019. This restriction was not applied in 2021, but we cannot assure you that the Brazilian Central Bank or other government agencies will not apply similar measures to us in the future, whether in an effort to mitigate the effects of the COVID-19 pandemic or otherwise.
The COVID-19 pandemic may persist for some time, which could affect the global economy and/or adversely affect our business, financial condition, liquidity or results of operations, and may also increase the likelihood and/or magnitude of other risks described in this “Item 3. Key Information—D. Risk Factors.” The extent to which the consequences of the COVID-19 pandemic affect our business, financial condition, liquidity and results of operations will depend on future developments that remain uncertain, including the rate of distribution and ad ministration of vaccines globally, the severity and duration of any resurgence of COVID-19 variants, future actions taken by governments, central banks and other third parties in response to the pandemic, and the effects on our customers, counterparties, employees and third-party service providers.
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For more information about specific measures that we have adopted and the impact on our business operations, see “Item 4. Information on the Company—A. History and Development of the Company—Impact of COVID-19” and “Item 5. Operating and Financial Review and Prospects—A. Operating Results—Principal Factors Affecting Our Financial Condition and Results of Operations—Impact of COVID-19.”
Our growth, asset quality and profitability, among others, may be adversely affected by a slowdown in Brazil, as well as volatile macroeconomic and political conditions.
A slowdown or recession in Brazil and other major world economies, such as the severe recession caused by COVID-19 that started in 2020, could lead major financial institutions, including some of the world’s largest global commercial banks, investment banks, mortgage lenders, mortgage guarantors and insurance companies to experience significant difficulties, including runs on deposits, the need for government aid or assistance or the need to reduce or cease providing funding to borrowers (including to other financial institutions). The year 2021 was marked by an accelerated recovery in the level of activity in the main global economies, as a result of the expansionary monetary and fiscal policy, including reductions in interest rates. As a result, inflation rates have increased considerably in Brazil and around, due to the strong increase in aggregate demand and bottlenecks in supply and production chains due to unavailability of inputs.
In Brazil, this process of generalized increase in prices was intensified by the depreciation of the Brazilian real against the U.S. dollar and other leading currencies, leading the Brazilian Central Bank to start raising interest rates. This increase in interest rates may have an adverse effect on economic growth in 2022 and 2023. It is also widely expected that Brazil will experience greater economic volatility in 2022 as a result of the Presidential elections which are scheduled to take place in the second half of the year.
Volatile conditions in financial markets could also have a material adverse effect on us, including on our ability to access capital and liquidity on financial terms acceptable to us, if at all. If capital markets financing ceases to become available, or becomes excessively expensive, we may be forced to raise the rates we pay on deposits to attract more customers and become unable to maintain certain liability maturities. Any such increase in capital markets funding availability or costs or in deposit rates could have a material adverse effect on our interest margins and liquidity.
In particular, we face, among others, the following risks related to the economic downturn and volatile conditions:
● | reduced demand for our products and services; |
● | strong political polarization of the political scenario in Brazil, aggravated by the socioeconomic impacts of the pandemic; |
● | intensification of government action in banking regulation (BC#, CSLL, IOF and Tax Reform), technological disruptions (PIX and Open Finance) and the entry of new players including large technology companies, fintech and marketplaces) have made and may continue to make our industry more competitive and potentially less profitable; |
● | increased inflationary pressure, continued high unemployment and continued reductions in growth prospects could make the economic environment more unpredictable and adversely affect our results of operations; |
● | increased regulation of our industry and compliance with such regulation will continue to increase our costs and may affect the pricing for our products and services, increase our regulatory risks and limit our ability to pursue business opportunities; and |
● | inability of our borrowers to comply with their existing obligations on a timely basis, whether in part or at all. Continued macroeconomic uncertainty may adversely affect customers’ income across both our retail and corporate business, and may adversely affect the recoverability of our loans, resulting in increased loan losses. |
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Any of the developments mentioned above may have a material adverse effect on our business, financial condition and results of operations, including without limitation as a result of a higher cost of capital and limitations on the availability of funding given the market’s requirement for a higher risk premium due to market conditions, expectations for the sector and availability of liquidity in the Brazilian and global economy.
Each of these factors could also affect the credit quality of our counterparties, due to the slowdown in the Brazilian economy as a whole, reduction in purchasing power and operating margins. The process we use to estimate losses inherent in our credit exposure requires complex judgments, including forecasts of economic conditions and how these economic conditions might impair the ability of our borrowers to repay their loans. The degree of uncertainty concerning economic conditions may adversely affect the accuracy of our estimates, which may, in turn, impact the reliability of the process and the sufficiency of our loan loss allowances.
The value and liquidity of the portfolio of investment securities that we hold may be adversely affected.
The recoverability of our loan portfolios and our ability to increase the amount of loans outstanding and our results of operations and financial condition in general, are dependent to a significant extent on the level of economic activity in Brazil. See “—The credit quality of our loan portfolio may deteriorate and our loan loss reserves could be insufficient to cover our loan losses, which could have a material adverse effect on us.”
In addition, we are exposed to sovereign debt in Brazil. Our net exposure to Brazilian sovereign debt as of December 31, 2021 was R$171.4 billion (or 18.4% of our total assets as of that date) and consistent principally of National Treasury Bills (LTN), Treasury Bills (LFT) and National Treasury Notes (NTN-A, NTN-B, NTN-C e NTN-F). Recessionary conditions in Brazil would likely have a significant adverse impact on our loan portfolio and sovereign debt holdings and, as a result, on our financial condition, cash flows and results of operations.
Our revenues are also subject to risk of deterioration from unfavorable political and diplomatic developments, social instability, international conflicts, and changes in governmental policies, including expropriation, nationalization, international ownership legislation, interest-rate caps, tax and monetary policies.
The economy of Brazil has experienced significant volatility in recent decades. This volatility resulted in fluctuations in the levels of deposits and in the relative economic strength of various segments of the Brazilian economy to which we lend. In addition, Brazil is affected by commodities price fluctuations, which in turn may affect financial market conditions through exchange rate fluctuations, interest rate volatility and deposits volatility. Furthermore, the Brazilian government has implemented fiscal and monetary policies and initiatives to mitigate the effects of the COVID-19 pandemic on the economy, individual businesses and households. These fiscal and monetary policy measures have accelerated the economic recovery in 2021 but have significantly increased public debt. Among the risks that could lead to an economic slowdown and financial markets falls are (i) the rise in energy prices that can cause inflation; (ii) the breakdown of global supply chains; (iii) excess liquidity and low interest rates, which has already led to an increase in inflation; and (iv) further tightening of monetary and public deficit policies. Negative and fluctuating economic conditions, such as slowing or negative growth and a changing interest rate environment, could impact our profitability by causing lending margins to decrease and credit quality to decline and leading to decreased demand for higher margin products and services.
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 Internetinternet search engines, as well as the increase in the availability of payment services using cryptocurrencies and/or blockchainfor block-chain 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 pricingprices 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.”Supervision”
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New competitors have entered and may continue to 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 our competitive position and business. Furthermore, the widespread adoption of new technologies, including distributed ledger, artificial intelligence and/or biometrics, to provide services such as cryptocurrencies and payment systems,payments, 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 could negatively impact the value of our investments in bank premises, equipment and personnel for our branch network. The persistence or acceleration of this shift in demand toward internet and mobile banking may necessitate changes to our retail distribution strategy. Our failure to swiftly and effectively implement changes to our distribution strategy swiftly and effectively could have an adverse effect on our competitive position.
In particular, we face the challenge to compete in an ecosystem where the relationship with the consumer is based on access to digital data and interactions. This access is increasingly dominated by digital platforms who are already eroding our results in very relevant markets such as payments. In addition, neobanks (i.e., banks that are fully digital) have begun operating in Brazil and have drawn significant numbers of customers. This privileged access to data can be used as a leverage to compete with us in other adjacent markets and may reduce our operations and margins in core businesses such as lending or wealth management. The alliances that our competitors are starting to build with major technology companies can make it more difficult for us to successfully compete with them and could adversely affect us.
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, andfurther increasing competition for investment opportunities.
In addition, if our customer service levels wereare 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.
Our ability to maintain our competitive position depends, in part, on the success of new products and services that we offer to our customers, as well as our ability to offer products and services that meet the customers’ needs throughout their entire life cycle, and we may not be able to manage emerging risks as we expand our range of products and services, which could have a material adverse effect on us.
The success of our operations and our profitability depends, in part, on the success of new products and services we offer our customers and our ability to offer products and services that meet the customers’ needs during their entire life cycle. However, our customers’ needs and/or desires may change over time, and such changes may render our products and services obsolete, outdated or unattractive and we may not be able to develop new products that meet our customers’ changing needs and/or desires. Our success is also dependent on our ability to anticipate and leverage new and existing technologies that may have an impact on products and services in the banking industry. Technological changes may further intensify and complicate the competitive landscape and influence client behavior. If we cannot respond in a timely fashion to the changing needs and/or desires of our customers, we may lose them, which could in turn materially and adversely affect us. In addition, the cost of developing products is likely to affect our results of operations.
As we expand the range of our products and services, some of which may be at an early stage of development, in certain regional markets where we operate, we will be exposed to new and potentially increasingly complex risks, such as conduct risk arising from relationships with customers, and development expenses. Our employees and risk management systems, as well as our experience and that of our partners may not be sufficient to enable us to properly manage such risks. Any or all of these factors, individually or collectively, could have a material adverse effect on us.
While we have successfully increased our customer service levels in recent years, should these levels ever be 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 our operating results, financial condition and prospects.
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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; |
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 regulationregulations governing Brazilian financial institutions isare 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. RegulationRegulations 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 usthose that 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.
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
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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 applyapplied 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 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. In May 2018, the United States Congress passed, and President Donald Trump signed into law,government enacted the Economic Growth, Regulatory Relief, and Consumer Protection Act, or “EGRRCPA”,“EGRRCPA,” the first major piece of legislation rebalancing the financial regulatory landscape since the passage of the Dodd-Frank Act. The U.S. financial regulatory agencies have begun to propose regulations implementing EGRRCPA, but the ultimate impact of these reforms on our operations is currently uncertain. For 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 reforms 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.
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We are subject to potential supervisionintervention 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, thatwhich 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.
We are subject to regulation on a consolidated basis and may be subject to liquidation or intervention on a consolidated basis.
We operate in a number of credit and financial services related sectors through entities under our control. For certain purposes related to regulation and supervision, the Brazilian Central Bank treats us and our subsidiaries and affiliates as a single financial institution. While our consolidated capital base provides financial strength and flexibility to our subsidiaries and affiliates, their individual activities could indirectly put our capital base at risk. Any investigation or intervention by the Brazilian Central Bank, particularly in the activities carried out by any of our subsidiaries and affiliates, could have a material adverse impact on our other subsidiaries and affiliates and, ultimately, on us. If we or any of our financial subsidiaries become insolvent, the Brazilian Central Bank may carry out an intervention or liquidation process on a consolidated basis rather than conduct such procedures for each individual entity. In the event of an intervention or a liquidation process on a consolidated basis, our creditors would have claims to our assets and the assets of our consolidated financial subsidiaries. In this case, claims of creditors of the same nature held against us and our consolidated financial subsidiaries would rank equally in respect of payment. If the Brazilian Central Bank carries out a liquidation or intervention process with respect to us or any of our financial subsidiaries on an individual basis, our creditors would not have a direct claim on the assets of such financial subsidiaries, and the creditors of such financial subsidiaries would have priority in relation to our creditors in connection with such financial subsidiaries’ assets. The Brazilian Central Bank also has the authority to carry out other corporate reorganizations or transfers of control under an intervention or liquidation process.
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Increases in reserve, compulsory deposit and minimum capital requirements may have a material adverse effect on us.
The Brazilian Central Bank has periodically changed the level of reserves and compulsory deposits that financial institutions in Brazil are required to maintain, with the Brazilian Central Bank, as well as determined compulsory allocation requirements to finance government programs. The Brazilian Central 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; and |
must be used to finance government programs, including a federal housing program and rural sector subsidies. |
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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 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”Leverage - Basel—Basel III” and “Item 5. Operating and Financial Review and Prospects—B. Liquidity and Capital Resources—Liquidity and Funding—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, or “AML”,“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 exposed person screening) and keep our customer, account and transaction information up to date. We have implemented financial crime policies and procedures in place 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 becomecontinues to be 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. Key standard-setting and regulatory bodies continue to provide guidelines to strengthen the interaction and cooperation between prudential and Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT supervisors). Compliance with these laws and regulations requires automated systems, sophisticated monitoring and skilled compliance personnel. The Brazilian Central Bank has recently submitted a draft regulation to public consultation, which, if it comes into force, would provide new rules regarding AML requirements to financial institutions, particularly with regards to internal policies. For more information on the proposed draft, see “Item 4. Information on the Company—B. Business Overview—Regulation and Supervision—Anti-Money Laundering Regulations”.
We maintain updated policies and procedures aimed at detecting and preventing the use of our banking network for money laundering and other financial crime-relatedcrime related activities. However, emerging technologies, such as cryptocurrencies and blockchain,innovative payment methods, 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
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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.
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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 lawlaws and regulations issued by the Brazilian Central Bank forrequiring the implementation of the aforementioned resolution in Brazil, additional compliance requirements were imposed on us and on other financial institutions operating in Brazil, which relate to the local enforcement of sanctions imposed by the United Nations Security Council resulting from certain resolutions. We believe we already have the control and compliance procedures in place to satisfy such additional compliance requirements. However, we continue to evaluate their impact on our control and compliance procedures and whether adjustments will need to be made to our control and compliance procedures as a result.
If we are unable to comply 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.
Furthermore, the Brazilian Public Federal Prosecutor’s Office (Ministério Público Federal), 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 benefit of R$83 million (approximately U.S.$15 million) for 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 are currently ongoing. 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 ourexpect relevant counterparties to maintain and properly apply their own appropriate compliance measures, procedures and internal policies. Such measures procedures and internal policies may not be completely effective in preventing third parties from using our (and our relevant counterparties’) services as a conduit for illicit purposes (including illegal cash operations) without our (or our relevant counterparties’) knowledge. If we are associated with, or even accused of being 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“watch 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 the application ofincreasing scrutiny and regulation from data protection lawlaws, including penalties in the event of noncompliance with the terms and conditions of certain new European and Brazilian regulations.
We receive, maintain, transmit, store and otherwise process proprietary, sensitive and confidential data, including public and non-public personal information of our customers, employees, counterparties and other third parties, including, but not limited to, personally identifiable information and personal financial information. The collection, sharing, use, retention, disclosure, protection, transfer and other processing of this information is governed by stringent federal, state, local and foreign laws, rules and regulations, and the regulatory framework for data privacy and cybersecurity is in considerable flux and evolving rapidly. As data privacy and cybersecurity risks for banking organizations and the broader financial system have significantly increased in recent years, data privacy and cybersecurity 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, April 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“General Data Protection RegulationRegulation” or GDPR)“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 “GDPA”LGPD was approved in the Federal Official Gazette on August 14, 2018 and, as amended by the Provisional MeasureLaw No. 869, issued in December 2018 by the President of Brazil, will take13,853/2019, took effect in September 2020, with the exception of its Articles 52, 53 and 54, which address administrative penalties, which entered into force on August 2020.1, 2021. 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 GDPALGPD 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.persons.
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Although a number of basic existing principles have remained the same, the GDPRLGPD has introduced extensive new obligations on data controllers and rights for data subjects, including, among others: (1) accountability and transparency requirements, which require data controllers to demonstrate and record compliance with the GDPR and to provide detailed information to data subjects regarding processing; (2) enhanced data consent requirements, which includes “explicit” consent in relation to the processing of sensitive data; (3) obligations to consider data privacy as any new products or services are developed and limit the amount of information collected, processed, stored and its accessibility; (4) constraints on
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using data to profile data subjects; (5) providing data subjects with personal data in a useable format on request and erasing personal data in certain circumstances; and (6) reporting of breaches without undue delay.subjects. The GDPALGPD applies to individuals, as well as private and public entities, regardless of the country where they are headquartered or where data areis 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 GDPALGPD 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.
internet.
The GDPR has also introduced new fines and penalties for a breach of requirements, including fines for systematic breaches of up to the highesthigher of 4% of annual worldwide turnover or €20 million, and fines for other specified infringements of up to the highest of 2% of annual worldwide turnover or €10 million.million (whichever is highest) for other specific infringements. The GDPR identifies a list of points to consider when imposing fines (including the nature, gravity and duration of the infringement). The GDPALGPD 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%)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 GDPALGPD 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-compliancenoncompliance with the new procedures. If there are breaches of the GDPR and or the GDPALGPD 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.
For more information on the rules implementing LGPD, see “Item 4. Information on the Company—B. Business Overview—Regulation and Supervision—Other Applicable Laws and Regulations—Data Protection Requirements.”
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 regulatory 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, we cannot state with confidencecertainty 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, which is calculated based on the probability of loss of each claim, 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, 2021, we had provisions for taxes, other legal contingencies and other provisions of R$8,876 million.
See more information in note 22 to our audited consolidated financial statements included in this annual report and in “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—Legal Proceedings.”
We may face operational difficulties under the Brazilian instant payment scheme.
On November 16, 2020, the Brazilian Central Bank instituted its instant payment scheme, or “PIX,” as well as the Instant Payment System (Sistema de Pagamentos Instantâneos), or “SPI,” which enables participants to settle electronic transfers of funds in real time and is available for 24 hours a day, seven days a week, and every day in the year.
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As a direct participant of the PIX, we may face operational issues, as well as difficulties in adapting to the requirements established by the PIX payment scheme regulations and by the other applicable rules, mainly related to the minimum level of service to be provided on a recurring basis to customers, as well as recent new security and fraud prevention requirements set forth by the Brazilian Central Bank. The Brazilian Central Bank has also enacted a new rule to be implemented by July 2022 setting a limited amount of R$ 1,000.00 for PIX transactions carried out between 8 p.m. (or, at the user’s discretion, between 10 p.m.) and 6 a.m. As a result, we may be the target of administrative sanctions and/or judicial claims, either by the Brazilian Central Bank itself or as a result of complaints brought by our customers. Furthermore, as a consequence of potential administrative sanctions or judicial claims, we may face difficulties in retaining customers in relation to Santander SX, our solution for our customers to access PIX, which may have a material adverse effect on our financial results, as well as our reputation.
In addition, the Brazilian Central Bank may issue new and stricter rules applicable to PIX participants, including new operational capacity requirements. The imposition by the Brazilian Central Bank of new requirements may adversely affect our operations.
For more information related to the PIX and the SPI, see “Item 4. Information on the Company—B. Business Overview—Regulation and Supervision—Other Applicable Laws and Regulations—Brazilian Payment and Settlement System.”
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 companyus in reports filed or submitted under the U.S. Securities Exchange Act of 1934, (theas amended, or the “Exchange Act”)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 forms.
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These disclosure controls and procedures have inherent limitations, which include the possibility that judgments in decision-making can be faulty and that breakdowns occur because ofresult 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 taxingtax 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 taxingtax 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 taxingtax 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.
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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, which used to be charged at a rate of 1.0% per day onover the notional value of increased foreign exchange exposure, but has currently been reduced the rate to zero with respect to foreign exchange. The IOF Tax rates applicable to local loans toof 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.
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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 impactedimpact 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.globally, including as a result of the COVID-19 pandemic. In 2021, as a response to the macroeconomic shock of the COVID-19 pandemic, we used a part of the provision overlay on expected credit losses created in 2020. If we wereare 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. Because
Since, 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 incurred losses, we may be required to increase our provisions for impairment losses, which may adversely affect us. If we were unable to control or reduce the level of our non-performing or poor credit quality loans, this could have a material adverse effect on us.
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On December 31, 2021, our credit risk (which includes gross loans and advances to customers, guarantees and documentary credits) amounted to R$540,873 million (compared to R$466,104 million as of December 31, 2020).
Economic uncertainty may lead to a contraction in our loan portfolio.
The recent slow growth rate of the Brazilian economy in 2021, 2020, 2019 and 2018, and 2017 and recession in 2016,as well as a slowdown in the growth of customer demand, an increase in market competition, changes in governmental regulation, and ana recent increase of the SELIC rate, as well as a recession in 2016 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 thisthese factors could lead to a decrease in demand for borrowings in general, which could have a material adverse effect on our business.
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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 available to meet our obligations as they fall due, or that we can only secure them onlysuch financial resources at excessive cost. This risk is inherent in any retail and commercialwholesale banking business and can be heightened by a number of enterprise-specific factors, including over-relianceoverreliance on a particular source of funding, changes in credit ratings or market-wide phenomena such as market dislocation. Continued constraintsdislocation, including as a result of the COVID-19 pandemic, Constraints in the supply of liquidity, including in interbank lending, has affected and maycan materially and adversely affect the cost of funding of 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, and increases in interest rates and our credit spreads can significantly increasethese factors raise 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, 2018, 80.6%2021, 87% of our customer deposits had remaining maturities of one year or less, or were payable on demand, while 31.6%55% of our assets havehad maturities of one year or more, resulting in a mismatch between the maturities of liabilities and the maturities of assets.assets, The ongoing availability of this type of funding is sensitive to a variety of factors beyond 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 around the world have taken extraordinary measures to increase liquidity in the financial markets as a response to the financial crisis and the COVID-19 crisis. As a result of inflationary pressures in late 2021 and early 2022 central banks have begun to reduce or discontinue these measures. If current credit facilities wereare rapidly removed or significantly reduced, this could have a material adverse effect on our ability to access liquidity and on our funding costs.
Additionally, our activities could be adversely impacted by liquidity tensions arising from generalized drawdowns of committed credit lines to our customers.
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.”
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We cannot assure 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”“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. AtFor the observations in this disclosure (exercised with daily balances for October, November and December 31, 2018, our2021), Santander Brasil had an LCR ratio was 131%of 148.5%, above the 100% minimum requirement. The Net Stable Funding Ratio, or “NSFR”“NSFR,” provides a sustainable
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maturity structure of assets and liabilities suchso 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 117.3%111.7% for us as of December 31, 2018.
2021.
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.
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.
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 ratingsrating downgrade could adversely affect our ability to sell or market certaintrade some 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 interrelated 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-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.
Santander Spain’s long-term debt is currently rated investment grade by the major rating agencies: A2 stable outlook by Moody’s, A with a stablenegative outlook by Standard & Poor’s Ratings Services, or “S&P”&P,” and A- with a stablenegative outlook by Fitch Ratings Ltd., or “Fitch”.“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. FollowingApril 2018, following the upgrade of the Spanish sovereign debt rating, in April 2018 S&P and 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.
In 2019, the agencies maintained their 2018 analysis, considering, in some cases, a positive rating depending Santander UK’sSpain’s performance in 2019. However, due to the crisis caused by the COVID-19 pandemic and the macroeconomic deterioration in 2020, S&P and Fitch revised the outlook to negative, while Moody’s maintained its rating and outlook. In 2021, Fitch revised the outlook to stable and S&P revised its outlook to negative, considering the strength of Santander Spain’s geographic diversification and the fact that it has the potential to withstand an additional deterioration of its assets’ quality in some geographies and business segments. Santander Spain’s long-term debt in foreign currency is currently rated investment grade by the major rating agencies: Aa3A+ with a positivenegative outlook by Moody’s, AS&P, and A2 with a stable outlook by S&P and A+ with a stable outlook by Fitch.Moody’s.
Banco Santander (Brasil)’sOur long-term debt in foreign currency is currently rated BB- with a stable outlook by S&P and Ba1 with a stable outlook by Moody’s.
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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”Lava Jato investigations, and uncertainty as to whether the Brazilian government will enact reforms in the 2016 federal budget to improve the country’sBrazil’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 prior Brazilian government to approve certain reforms. Fitch 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.Brazil. 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, and Ba2 (stable) by Moody’s. In February 2019, S&P maintained Brazil’s sovereign credit rating at BB-. Any further downgrade in Brazil’s sovereign rating would likely increase our funding costs and adversely affect us, including our asset quality.
As a result of the lowering of Brazil’s sovereign credit rating, our long-term foreign currency credit rating was lowered during the course of 2015 and in early 2016. On August 12, 2015, Moody’s lowered our credit rating from Baa2 to Baa3, lowering it again on February 25, 2016 to Ba3, and in March and May 2017, it affirmed the rating at Ba3.of Ba1. 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 outlook to negative. In January 2018, Santander Brasil waswe were 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 Ba1 with a stable outlook from BB with a negative outlook. We are currently rated as follows: BB- by S&P and Ba3Ba1 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 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. In general, the future evolution of our ratings will be linked, to a large extent, to the macroeconomic outlook and to the impact of the COVID-19 pandemic (including, for example, additional waves, new lockdowns, etc.) on our asset quality, profitability and capital, as well as on the rating of Santander Spain. 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 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 the market, credit and operational risks to which we are exposed.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.
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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.
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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 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). We are also exposed to the risk that our assessment that a product or service we provide is socially or environmentally responsible will be challenged by customers, regulators or third parties. 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.
Furthermore, the Brazilian Central Bank has recently issued new regulations and standards applicable to us relating to the management and governance of social, environmental and climate risks by financial institutions. These rules relate both to risks resulting from our products, services and activities, and to risks arising out of the activities of our counterparties, controlled entities, suppliers and outsourced service providers. The majority of these regulations will enter into effect in July 2022. Any failure by us to adequately identify and assess these risks may subject us to future sanctions by the Brazilian Central Bank, as well as have a material adverse impact on our business and financial condition. For more information on the new regulatory requirements issued by the Brazilian Central Bank relating to environmental, social and governance requirements applicable to Brazilian financial institutions, see “Item 4. Information on the Company—B. Business Overview—Regulation and Supervision—Other Applicable Laws and Regulations—Environmental, Social and Governance (ESG) requirements applicable to financial institutions.”
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,as a result of a prolonged COVID-19 pandemic or a weaker than expected economic recovery after the COVID-19 pandemic and macroeconomic factors globally and in Brazil, as well as force majeure events.events, such as natural disasters (including as a result of climate change). 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 we are unable to recover sums owed to us under secured loans in default through extrajudicial measures such as restructurings, our last recourse with respect to such loans may be to enforce the collateral secured in our favor by the applicable borrower. Depending on the type of collateral granted, we either have to enforce such collateral through the courts or through extrajudicial measures. However, even where the enforcement mechanism is duly established by the law, Brazilian law allows borrowers to challenge the enforcement in the courts, even if such challenge is unfounded, which can delay the realization of value from the collateral. In addition, our secured claims under Brazilian law will in certain cases rank below those of preferred creditors such as employees and tax authorities. As a result, we may not be able to realize value from the collateral, or may only be able to do so to a limited extent or after a significant amount of time, thereby potentially adversely affecting our financial condition and results of operations.
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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 87.4%88.6% of our total assets as of December 31, 2018. 2021. As of December 31, 2021, the notional value of derivatives in our books amounted to R$2,427,444 million (with a market value of R$21,125 million of debit balance and R$24,619 million of credit balance).
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,
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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 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 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 or reform of benchmark indices.
Interest rate, equity, foreign exchange rate and other types of indices, which are deemed to be “benchmarks” are“benchmarks,” including those in widespread and long-standing use, have been the subject of ongoing international, national and other regulatory scrutiny and initiatives and proposals for reform. Some of these reforms are already effective while others are still to be implemented or are under consideration. These reforms have caused and may in the future cause benchmarks to perform differently than in the past, or to disappear entirely, or have other consequences, which cannot be fully anticipated.
Any of the benchmark reforms which have been proposed or implemented, or the general increased regulatory scrutiny. For example,scrutiny of benchmarks, could also increase the costs and risks of administering or otherwise participating in 2017, the UK’ssetting of benchmarks and complying with regulations or requirements relating to benchmarks. Such factors may have the effect of discouraging market participants from continuing to administer or contribute to certain benchmarks, trigger changes in the rules or methodologies used in certain benchmarks or lead to the disappearance of certain benchmarks.
Any of these developments, and any future initiatives to regulate, reform or change the administration of benchmarks, could result in adverse consequences to the return on, value of and market for loans, mortgages, securities, derivatives and other financial instruments whose returns are linked to any such benchmark, including those issued, funded or held by us.
Various regulators, industry bodies and other market participants in the U.S. and other countries have worked to develop, introduce and encourage the use of alternative rates to replace certain benchmarks. A transition away from the widespread use of interest rate benchmarks to alternative rates has begun and will continue over the course of the next few years. While central bank-sponsored committees in various jurisdictions have recommended alternative rates for various important interest rate benchmarks, if a particular benchmark were to be discontinued and an alternative rate had not been successfully introduced to replace that benchmark, this could result in widespread dislocation in the financial markets, engender volatility in the pricing of securities, derivatives and other instruments, and suppress capital markets activities, all of which could have adverse effects on our results of operations. In addition, the transition of a particular benchmark to a replacement rate could affect hedge accounting relationships between financial instruments linked to that benchmark and any related derivatives, which could adversely affect our results.
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On 5 March 2021, the U.K. Financial Conduct Authority, or the “FCA”, announced that it will no longer persuade or compel banks to submit rates for the calculation of“FCA,” which regulates the London interbank offered rate (LIBOR), published an announcement to confirm the dates immediately after which all LIBOR settings will either cease to be provided by any administrator or “LIBOR”no longer be representative: December 31, 2021 for all EUR, GBP, JPY and CHF LIBOR tenors and 1-week and 2-month USD LIBOR tenors, and June 30, 2023 for the remaining USD LIBOR tenors (overnight, 1-, benchmark after 2021. This announcement indicates that3-, 6- and 12-month). Therefore, since January 1, 2022, most LIBOR settings have ceased to be available. While publication of the continuation1-, 3- and 6-month GBP and JPY tenors will continue at least until the end of LIBOR2022 on the current basis cannotof a “synthetic” methodology, these rates are solely available for use in legacy transactions. In addition, while certain USD LIBOR tenors are expected to continue to be published until June 30, 2023, U.S. regulators and will not be guaranteedthe FCA have published guidance instructing banks to cease entering into new contracts referencing USD LIBOR no later than December 31, 2021, with limited exceptions.
In October 2020, the International Swaps and Derivatives Association, or “ISDA,” launched the 2020 IBOR Fallbacks Protocol, which amends the ISDA’s interest rate definitions used among protocol adherents, to incorporate new fallbacks for legacy non-cleared derivatives linked to LIBOR and certain other interest rate benchmarks. The protocol became effective as of January 25, 2021. We have adhered to this new protocol. Similarly, ISDA’s IBOR Fallbacks Supplement also amended ISDA’s standard definitions to incorporate these new fallbacks in new derivatives entered into on or after that same effective date. Following December 31, 2021, and it appears likelyderivatives referencing non-USD LIBOR that LIBORwere amended through adherence to the 2020 IBOR Fallbacks Protocol or that incorporate the IBOR Fallbacks Supplement are or will be discontinuedvalued using the adjusted version of the applicable risk-free reference rate selected as an alternative to the applicable IBOR by the appropriate national committee.
With respect to USD LIBOR-linked contracts that are governed by New York law, New York State has enacted legislation that will replace references to LIBOR in certain contracts with a benchmark based on the Secured Overnight Financing Rate (SOFR), including any spread adjustment, recommended by the Federal Reserve Board, the Federal Reserve Bank of New York or modifiedthe Alternative Reference Rates Committee (the ARRC) convened by 2021. Thisthe Federal Reserve Board and the Federal Reserve Bank of New York. The Federal Reserve Bank of New York currently publishes the SOFR based on overnight U.S. Treasury repurchase agreement transactions, which has been recommended as the alternative to USD LIBOR by the ARRC.
Our exposure to LIBOR-linked contracts as of December 31, 2021 was limited and related only to USD LIBOR. In 2021, we adopted the SOFR (Secured Overnight Finance Rate) as a replacement for USD LIBOR for new agreements and since January 1, 2022 we are no longer entering into new USD LIBOR transactions. We are communicating with our customers to amend existing agreements to include appropriate fallback clauses for when USD LIBOR ceases to be published.
These and other reforms have caused and may in the future cause benchmarks to perform differently than in the past, or to disappear entirely, or have other consequences, which cannot be fully anticipated, which introducesintroduce a number of risks for us includingus. These risks include (i) legal risks arising from potential changes required to documentation for new and existing transactions,transactions; (ii) risk management, financial and accounting risks arising from any changes in themarket risk models and from valuation, hedging, discontinuation and recognition of financial instruments linked to benchmark rates,rates; (iii) business risk of a decrease in revenues of products linked to indices that will be replaced; (iv) pricing risks arising from how changes to benchmark indices could impact pricing mechanisms on some instruments,instruments; (v) operational risks arising from the potential requirement to adapt IT systems, trade reporting infrastructure and operational processes, andprocesses; (vi) conduct risks arising from the potential impact of communication with customers and engagement during the transition period.period and inquiries, reviews or other actions from regulators regarding our preparation, readiness and transition plans and (vii) litigation risks and risks relating to other disputes and actions with clients, counterparties, investors and other parties regarding our existing products and services, which could adversely impact our profitability. The replacement benchmarks and their transition path have been defined, but, with respect to some benchmarks, the timing of and mechanisms for implementation have not yet been confirmed by central banks.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. We may also be adversely affected if the change restricts our ability to provide products and services or if it necessitates the development of additional information technology systems.
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Failure to successfully implement and continue to improve our risk management policies, procedures and methods, including our credit risk management system,systems, could materially and adversely affect us, and we may be exposed to unidentified or unanticipated risks.
TheRisk 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. OurThus, our losses thus could be
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significantly greaterhigher than the historical measures indicate. In addition, our quantified modeling doesstatistical models may not take all risks into account. Our more qualitative approach to managing those risks could prove insufficient, exposing us to material unanticipated losses. We could face adverse consequences as a result of decisions, which may lead 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. In addition, a number of internal models used by our subsidiaries are designed, managed and analyzed by us and may not appropriately capture the risks and exposures at the subsidiary level. Any 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.individual customers and SMEs. 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 oura higher 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 found deficient,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 any such models. If our models are not approved by our regulators, we may be subject to an additional capital requirement, whichthem. 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.
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.
We face various cybersecurity 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 our organization, ransomware affecting our services and cyber-attacksend-user technology, social engineering and phishing attacks, and cyberattacks causing systems degradation or service unavailability that may result in business losses.
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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 increasingly targeted, and the techniques used to obtain unauthorized, improper or illegal access to information technology systems have become increasingly complex and sophisticated. Furthermore, such techniques change frequently and are often not recognized or detected until after they have been launched and can originate from a wide variety of sources, including 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,cyberattacks, such as denial of service, malware and phishing. Cyber-attacksCyberattacks 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-attackscyberattacks could give rise to the disablement ofdisrupt our information technologyelectronic systems used to service our customers.
If we fall victim to successful cyber-attackscyberattacks or experience cybersecurity, operational or security incidents in the future, we may incur substantial costs and suffer other negative consequences, such as remediation costs (liabilities for
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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 customerscustomers’ and investors’ confidence, as well as damages to our 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. In April 2018,evolving, and includes CMN Resolution No. 4,893/2021. See “Item 4. Information on the CMN issued regulationCompany��B. Business Overview—Regulation and Supervision—Other Applicable Laws and Regulations—Regulations on cyber risks and cloud storage applicable to financial services following the public consultation held in 2017. Pursuant to thisCybersecurity.” We could be adversely affected if new rule, financial institutionslegislation or regulations are nowadopted or if existing legislation or regulations are modified such that we are required to put in place internal controls regarding their cyber risk management and cloud computing. The new CMN rule also requires that financial institutions also put in place policies and action plansalter our systems or require changes to prevent and respond to cybersecurity incidents by May 2019, and fully compliant by December 2021.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 cybersecurity 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 or other damages, litigation expenses, 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-attackscyberattacks against critical infrastructures of Brazil. Our information technology systems are dependent on such critical infrastructure, and any cyber-attackcyberattack 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.cyberattack. See “Item 4. Information on the Company—B. Business Overview.”
It is important to highlight that even when a failure of or interruption in our systems or facilities is resolved in a timely resolvedmanner or an attempted cyber incident or other security breach is successfully avoided or thwarted, normally substantial resources are expendexpended in doing so, and 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.
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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, 1.1%1.2% of our loan portfolio is allocated to our largest debtor and 8.3%7.4% to our next 10 largest debtors. However, we cannot assure this will continue to be the case. If counterparty risks give rise to losses, this could materially and adversely affect our results of operations and financial condition.
Our financial results are constantly exposed to market risk. We are subject to fluctuations in interest rates and other market risks, which may materially and adversely affect us and our profitability.
The COVID-19 pandemic has caused and may continue to cause significant market volatility which may materially and adversely affect us and our trading and banking book.
Market risk refers to the probability of variations in our interest income/(charges) or in the market value of our assets and liabilities due to volatility of interest rate, inflation, exchange rate, commodity price or equity price. Changes in interest rates affect the following areas, among others, of our business:
● | interest income / (charges); |
● | the volume of loans originated; |
● | credit spreads; |
● | the market value of our securities holdings; |
● | the value of our loans and deposits; and |
● | the value of our derivatives transactions. |
Interest rates are sensitive to many factors beyond our control, including increased regulation of the financial sector, monetary policies and domestic and international economic and political conditions. Variations in interest rates could affect the interest earned on our assets and the interest paid on our borrowings, thereby affecting our interest income/(charges), which comprises the majority of our revenue, reducing our growth rate and potentially resulting in losses. In addition, costs we incur as we implement strategies to reduce interest rate exposure could increase in the future (which, in turn, will impact our results).
Due to the historically low interest rate environment in Brazil in recent years, the rates on many of our interest-bearing deposit products have been priced at or near zero or negative, limiting our ability to further reduce rates and thus negatively impacting our margins.
Interest rates have been increasing in Brazil since March 2021. Increases in interest rates may reduce the volume of loans we originate. We have generally observed an inversely proportional relationship between interest rates and credit demand. We believe this is due to the fact that higher interest rates increase transaction costs and therefore discourage consumption. However, the demand for certain products and services, such as overdrafts and revolving checks, is not significantly affected by increases in interest rates. As a result of these factors, we estimate that the recent increases in interest rates could result both in decreased demand for credit products but also in changes to the overall composition of our portfolio.
Sustained high interest rates may dampen economic growth. Higher interest rates have historically discouraged customers from borrowing and have resulted in increased delinquencies in outstanding loans and deterioration in the quality of assets.
Increases in interest rates may reduce the value of our financial assets and may reduce gains or require us to record losses on sales of our loans or securities. In particular, certain assets are constantly marked-to-market and are therefore affected by changes in prevailing interest rates. This process may result in significant reductions in book values and to impairment losses.
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We are also exposed to foreign exchange rate risk as a result of Contentsmismatches between assets and liabilities denominated in different currencies. Fluctuations in the exchange rate between currencies may negatively affect our earnings and value of our assets and securities.
We are also exposed to equity price risk in our investments in equity securities in the banking book and in the trading portfolio. The performance of financial markets may cause changes in the value of our investment and trading portfolios. The volatility of world equity markets due to the continued economic uncertainty and sovereign debt crisis has had a particularly strong impact on the financial sector. Continued volatility may affect the value of our investments in equity securities and, depending on their fair value and future recovery expectations, could become a permanent impairment which would be subject to write-offs against our results.
Market conditions have resulted and could result in material changes to the estimated fair values of our financial assets. Negative fair value adjustments could have a material adverse effect on our operating results, financial condition and prospects.
In the past, financial markets have been subject to significant stress resulting in steep falls in perceived or actual financial asset values, particularly due to volatility in global financial markets and the resulting widening of credit spreads, including as a result of the COVID-19 pandemic. We have material exposures to securities, loans and other investments that are recorded at fair value and are therefore exposed to potential negative fair value adjustments. Asset valuations in future periods, reflecting then-prevailing market conditions, may result in negative changes in the fair values of our financial assets and these may also translate into increased impairments. In addition, the value ultimately realized by us on disposal may be lower than the current fair value. Any of these factors could require us to record negative fair value adjustments, which may have a material adverse effect on our operating results, financial condition or prospects.
In addition, to the extent that fair values are determined using financial valuation models, such values may be inaccurate or subject to change, as the data used by such models may not be available or may become unavailable due to changes in market conditions, particularly for illiquid assets, and particularly in times of economic instability. In such circumstances, our valuation methodologies require us to make assumptions, judgements and estimates in order to establish fair value, and reliable assumptions are difficult to make and are inherently uncertain and valuation models are complex, making them inherently imperfect predictors of actual results. Any consequential impairments or write-downs could have a material adverse effect on our operating results, financial condition and prospects.
We face risks related to market concentration.
Concentration risk is the risk associated with potential high financial losses triggered by significant exposure to particular component of risk, whether it be related to a particular counterparty, industry or geographic concentration. Examples of such risks include significant exposure to a single counterparty, to counterparties operating in the same economic sector or geographical region, or to financial instruments that depend on the same index or currency.
We believe that an excessive concentration with respect to a particular risk factor could generate a relevant financial loss for us, especially if the risk is one described in this annual report. We recognize the importance of this risk and the potential impacts that may affect our portfolio and results of operations.
The financial problems faced by our customers could adversely affect us.
MarketPotential 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-performingnonperforming loan ratios, impair our loan and other financial assets, and result in decreased demand for borrowings in general. We have credit exposure to borrowers whichthat 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. Any of the conditions described above could have a material adverse effect on us.
We engage in transactions with related parties that others may not consider to be on an arm’s- lengtharm’s-length basis.
We and our affiliates have entered into a number of services agreements pursuant to which we render and/or receive services, such as administrative, accounting, finance, treasury, legal services and others from (or provide such services to) related parties. We are likely to continue to engage in transactions with such related parties (including our controlling shareholder) that others may not consider to be on an arm’s-length basis. Future conflicts of interests 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.”
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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.
For further information about developments in financial accounting and reporting standards see note 1 to our audited consolidated financial statements included elsewhere in this annual report.
Our financial statements are based in part on assumptions and estimates which, if inaccurate, could cause material misstatement ofthat impact the results of our operations and financial position.
operations.
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 whichthat 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 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,financial assets measured at amortized cost, goodwill impairment, valuation of financial instruments, impairment of available-for-sale financial assets measured at fair value through other comprehensive income, 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 our 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.
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We do not operate all of our redundant systems on a real-time basis and cannot assure 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, 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-effective basis. We must continually make significant investments and improvements in our information technology infrastructure in order to remain competitive. We cannot assure 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 infrastructure and management systems effectivelyin an effective, timely and cost-effective manner, including in response to new or onmodified cybersecurity and data privacy laws, rules and regulations could have a timely basis could materially and adversely affectmaterial adverse effect on us.
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Failure to protect personal information could adversely affect us.
We receive, maintain and store confidential personal information of our customers and counterparties, including, but not limited to, personally identifiable information and personal 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. Both personally identifiable information and personal financial information are increasingly subject to legislation and regulation, the intent of which is to protect the privacy of personal information that is collected and handled.
Although we have procedures and controls in place to safeguard personal and other confidential or sensitive information in our possession, unauthorized disclosuresaccess or security breachesdisclosures could subject us to legal actions and administrative sanctions, as well as damages and reputational harm that could materially and adversely affect our operating results, financial condition and prospects. Further,Furthermore, our business is exposed to risk from employees’ potential non-compliance with policies, employee misconduct, or negligence andor fraud, which could result in regulatory sanctions and serious reputational orand 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 to our systems and other security breaches, to the relevant regulatory authorities. Any material disruption or slowdown of our systems could cause information, including data related to customer requests, to be lost or to be delivered to our customers with delays or errors, which could reduce demand for our services and products and could materially and adversely affect us. In addition, ifIf we cannot maintain an effective and secure electronic data and information, management systemand processing systems or if we fail to maintain complete physical and electronic records, this could result in disruptions to our operations, claims from customers, regulators, employees and other parties, violations of applicable privacy and other laws, regulatory sanctions and serious reputational and financial harm to us. Moreover, as a result of the COVID-19 pandemic, we have increased the number of employees working remotely, which may increase the vulnerability of our systems and impact our ability to conduct business.
Furthermore, data breaches and other security incidents with respect to our or our third-party vendors’ systems could adversely affect our business or reputation, and create significant legal, regulatory or financial exposure. Although we work with our clients, vendors, service providers, counterparties and other third parties to develop secure data and information processing, collection, authentication, management, usage, storage and transmission capabilities and to ensure the eventual destruction of sensitive and confidential information, including personal information, to prevent against information security risk, we routinely manage personal, confidential and proprietary information by electronic means, and we, our third-party vendors or other third parties with which we do business may be the target of attempted cyberattacks or subject to other information security incidents or breaches. This is especially applicable in the current environment, which is still being affected by the COVID-19 pandemic, and the shift to work-from-home policies for a significant portion of our workforce, as they access our secure networks remotely (see “—The global COVID-19 pandemic has materially impacted our business, and the continuance of this pandemic or any future outbreak of any other highly contagious diseases or other public health emergency, could materially and adversely impact our business, financial condition, liquidity and results of operations”). If we cannot maintain effective and secure electronic data and information (including personal information), management and processing systems or if we fail to maintain complete physical and electronic records, this could result in disruptions to our operations, litigation or claims from customers, regulators, employees and other third parties, violations of applicable privacy and other laws, rules or regulations, 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 brand, attract and retain customers, investors and employees and conduct business transactions with counterparties. Damage to our reputation cancould therefore cause significant harm to our business and prospects. Harm to our reputation cancould arise from numerous sources, including, among others, employee misconduct, including the possibility of fraud perpetrated by our employees, litigation or regulatory 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, and the activities of customers, service providers and counterparties.other counterparties, including activities that negatively affect the environment. Further, negative publicity regarding us may result in harm to our prospects.
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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 clientscustomers 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.
We may be the subject of misinformation 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 may also not be successful in any reorganizations, dispositions or spin-offs we undertake.
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:
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 |
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.
Similarly, we cannot ensure that we will be able to successfully divest or spin off businesses or other assets that we have identified for this purpose, or that any completed divestment or spin-off will achieve the expected strategic benefits, operational efficiencies or opportunities, or that the divestment or spin-off will ultimately maximize shareholder value.
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We may not realize the anticipated benefits from the Spin-Off, and the Spin-Off could harm our business.
We completed the Spin-Off of Contentsour merchant acquiring business, conducted through Getnet and its consolidated subsidiaries, in October 2021. We cannot assure you that the Spin-Off will achieve the expected strategic benefits, operational efficiencies or opportunities we envisaged, or that it will ultimately maximize shareholder value.
Furthermore, on April 15, 2021, we entered into the Getnet Partnership Agreement with Getnet, which provides a framework for our relationship with Getnet following the Spin-Off. Pursuant to the Partnership Agreement, both parties have the right to terminate the Partnership Agreement at will, upon one-year prior written notice to the other party. In case of fault by the other party, as described by the Partnership Agreement, such as due to insolvency, bankruptcy, loss of material license, among others, the non-defaulting party is free to terminate the Partnership Agreement by means of a simple notification sent to the other party. We may suffer a material adverse effect if the Getnet Partnership Agreement is terminated or not renewed, or if we are unable to enter into a favorable agreement with a new partner in the event of termination of the Getnet Partnership Agreement.
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.
Our ability to attract and retain qualified employees is affected by perceptions of our culture and management, our profile in the markets in which we operate and the professional opportunities we offer.
In addition, the financial industry has experienced 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.
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.access (including cloud-based services). 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. ReplacingWhile we have diversified providers for the main services and keep strict and close monitoring on them, in some instances, replacing these third-party vendors could also entail delays and expense. Further, the operational and regulatory risk we face as a result of these arrangementsarrange ments 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.
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Past performance of our loan portfolio may not be indicative of future performance; changes in the profile of our business may adversely affect our loan portfolio. In addition, the value of any 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.
Our historical loan loss experience may not be indicative of our future loan losses. While the quality of our loan portfolio is associated with the default risk in the sectors in which we operate, changes in our business profile may occur due, among other factors, to our organic growth, merger and acquisition activity, changes in local economic and political conditions, a slowdown in customer demand, an increase in market competition, changes in regulation and in the tax regimes applicable to the sectors in which we operate and, to a lesser extent, other related changes in countries in which we operate and in the international economic environment. In addition, the market value of any collateral related to our loan portfolio may fluctuate, from the time we evaluate it at the beginning of the trade to the time such collateral can be executed upon, due to the factors related to changes in economic, political or sectorial factors beyond our control, and we may be unable to realize the full value of the collateral securing our loan portfolio.
We rely on models for many of our decisions. Their inaccurate or incorrect use could have a material adverse effect on us.
We use models for approval (scoring/rating), capital calculation, behavior, provisions, market risk, operational risk, compliance and liquidity. A model is a system, approach or quantitative method that applies statistical, economic, financial or mathematical theories, techniques or hypotheses to transform input data into quantitative estimates. It involves simplified representations of real world relationships between characteristics, values and observed assumptions that allows us to focus on specific aspects.
Model risk is the negative consequence of decisions based on inaccurate, improper or incorrect use of models. Sources of model risk include (i) incorrect or incomplete data in the model itself or the modelling method used in systems; and (ii) incorrect use or implementation of the model.
Model risk can cause financial loss, erroneous commercial and strategic decision-making or damage to our transactions any of which could have a material adverse effect on our operating results, financial condition and prospects. In addition, our models and the underlying methodologies are subject to scrutiny from our supervisors, who could identify potential weaknesses or deficiencies that may result in enforcement actions, including sanctions, fines and/or the imposition of stricter capital requirements, as well as mandates and recommendations with respect to the methodologies underlying our models, which could also lead us to more onerous or inefficient capital consumptions.
Unprecedented movement in economic and market drivers related to the COVID-19 pandemic required monitoring and adjustment of financial models (including credit loss models, capital models, traded risk models and models used in the asset/liability management process) to comply with the guidance and recommendations of standard setters, regulators and supervisors, particularly for credit loss models. It also resulted in the use of mitigants for model limitations, such as adjustments to model outputs to reflect consideration of management judgment. The performance and usage of models was and may continue to be impacted by the consequences of the COVID-19 pandemic. In addition, data obtained during the COVID-19 pandemic may not be representative and may distort the calibration of the models in the future, which could have a material adverse effect on us.
In addition, the fair value of our financial assets, determined using financial valuation models, may be inaccurate or subject to change and, as a consequence, we may have to register impairments or write-downs that could have a material adverse effect on our operating results, financial condition and prospects. See “—Market conditions have resulted and could result in material changes to the estimated fair values of our financial assets. Negative fair value adjustments could have a material adverse effect on our operating results, financial condition and prospects.
Climate change can create transition risks, physical risks and other risks that could adversely affect us.
There is an increasing concern over the risks of climate change and related environmental sustainability matters. Climate change may imply three primary drivers of financial risk that could adversely affect us:
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● | 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, which could increase our expenses and impact our strategies. |
● | Physical risks related to discrete events, such as flooding and wildfires, and extreme weather impacts and longer term shifts in climate patters, such as extreme heat, sea level rise and more frequent and prolonged drought, which could result in financial losses that could impair asset values and the creditworthiness of our customers. Such events could disrupt our operations or those of our customers or third parties on which we rely and do business with, including through direct damage to assets and indirect impacts from supply chain disruption and market volatility. |
● | Liability risks derived from parties who may suffer losses from the effects of climate change and may seek compensation from state entities, regulators, investors and lenders, among others. |
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: our reputation and client relationships may be damaged as a result of our practices and decisions related to climate change, social and environmental matters, or to the practices or involvement of our clients, in certain industries or projects associated with causing or exacerbating climate change. |
As a financial institution, we are already subject to certain regulatory environmental, social and governance, or “ESG,” requirements as detailed under “Item 4. Information on the Company—B. Business Overview—Regulation and Supervision—Other Applicable Laws and Regulations—Environmental, Social and Governance (ESG) requirements applicable to financial institutions.” These requirements may increase going forward as a result of the increasing importance of ESG matters. This and other changes in regulations in Brazil and international markets may expose us to increased compliance costs, limit our ability to pursue certain business opportunities and provide certain products and services, each of which could adversely affect our business, financial condition and results of operations.
As climate risk is interconnected with all key risk types, we have developed and continue to enhance processes to embed climate risk considerations into our risk management strategies established for risks; however, because the timing and severity of climate change may not be predictable, our risk management strategies may not be effective in mitigating climate risk exposure.
Any of the conditions described above could have a material adverse effect on our business, financial condition and results of operations.
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%89.53 % of our total capital (not including the shares held by Banco Madesant – Sociedade Unipessoal).capital. Due to its share ownership, our controlling shareholder has the power to control us and our subsidiaries, including the power to:
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elect a majority of our directors that appoint our executive officers, set our management policies and exercise overall control over our |
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influence the appointment of our principal officers; |
declare the payment of any dividends; |
agree to sell or otherwise transfer its controlling stake in our |
determine the outcome of substantially all actions requiring shareholder approval, including amendments of our bylaws, transactions with related parties, corporate reorganizations, acquisitions and dispositions of assets, and dividends. |
In December 2012, primarily in response to the requirements of the European Banking Authority, Santander Spain adopted a corporate governance framework (Marco de Gobierno Interno del Grupo Santander) to organize and standardize the corporate governance practices of certain companies of 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 our corporate governance practices, including our policies for related-party transactions and for disclosure of material acts and facts.limitations. Our corporate governance model was further amended in 2015 to reflect certain new requirements imposed on our parent company, Santander Spain, by the European Central Bank, the Bank of Spain and regulators in different 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 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, or “NYSE”,“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.
market, or by the relative volatility and limited liquidity of the Brazilian securities markets.
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.
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Also, sales of a substantial number of our units, 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, 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, 2018,2021, the aggregate market capitalization of the B3 was equivalent to approximately R$3.2 4.5 trillion (U.S.$820.70.8 billion), and the top ten stocks in terms of trading volume accounted for approximately 54.3%43% of all shares traded on B3 in the year ended December 31, 2018.2021. In contrast, as of December 31, 2018,2021, the aggregate market capitalization of the NYSE was approximately U.S.$25.827.7 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 remainder being held by small groups of controlling persons, government entities or a principal shareholder.
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The uncertainties caused by the outbreak of COVID-19 had an adverse impact on the global economy and global capital markets, including in Brazil, during the course of 2020 and, to a lesser extent, 2021 and early 2022. As a result of this volatility, the B3’s circuit breaker mechanism was triggered eight times during March 2020. The prices of most of the securities traded on the NYSE and the B3, including the price of our securities, was adversely affected by the COVID-19 pandemic. Impacts similar to those described above may reoccur, which may result in volatility in the prices of our securities traded on the NYSE and on the B3. We cannot assure you that the price of our securities will not fall below the lowest levels at which our securities traded during the ongoing pandemic.
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 securities issued by other companies in our sector, the price and trading volume of our ADRs and/or our shares could decline.
The trading market for our ADRs and our shares has been affected in part by the research and reports that industry and financial analysts publish about us or our business. We do not control these analysts. Furthermore, if one or more of the analysts who cover us downgrade our ADRs, our shares or our industry, change their views regarding the shares of any of our competitors, or other companies in our sector, or publish inaccurate or unfavorable research about our business, the market price of our ADRs and/or shares could decline. If one or more of these analysts ceases coverage of 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.
Company or decrease the market price of our shares, units or ADRs.
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.
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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, or “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
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availability. We paid R$5.310.9 billion, R$6.33.8 billion and R$6.610.8 billion (R$1.40,2.94, R$1.681.03 and R$1.772.90 per unit, respectively) as dividends and interest on stockholders’ equity (considering gross value) in 2016, 20172021, 2020 and 2018,2019, 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. SeeThese regulations have recently included a temporary restriction on dividend distributions and other payments as a result of measures taken by the Brazilian Central Bank to combat the COVID-19 pandemic’s effect on the Brazilian financial sector (see “Item 4. Information on the Company—B. Business Overview—Regulation and Supervision—Other Applicable Laws and Regulations—Regulatory Developments Related to COVID-19—Temporary Suspension of Dividend Distributions and Other Payments” and “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—History of Payment of Dividends and Interest Attributable to Stockholders’Shareholders’ Equity.”
Although this restriction has not been reinstated in 2021, we cannot assure you that it will not be reinstated in the future.
Holders of ADRs may find it difficult to exercise voting rights at our stockholders’shareholders’ meetings.
Holders of ADRs will not be our direct shareholders and will be unable to enforce directly the rights of shareholders under our By-Laws and Brazilian Corporate Law. Holders of ADRs may exercise voting rights with respect to the units represented by ADRs only in accordance with the deposit agreement governing the ADRs. Holders of ADRs will face practical limitations in exercising their voting rights because of the additional steps involved in our communications with ADR holders. For example, we are required to publish a notice of our stockholders’ meetings in specified newspapers in Brazil. Holders of our units will be able to exercise their voting rights by attending a stockholders’ meeting in person or voting by proxy. By contrast, holders of ADRs will receive notice of a stockholders’ meeting by mail from the ADRs depositary following our notice to the depositary requesting the depositorydepositary to do so. To exercise their voting rights, holders of ADRs must instruct the ADR depositary on a timely basis on how they wish to vote. This voting process necessarily will take longer for holders of 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 No. 10,833 of December 29, 2003 provides that the disposal of assets located in Brazil by a nonresident to either a Brazilian resident or a nonresident 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 nonresident of Brazil to another nonresident 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 no. 10,833 of December 29, 2003 and, accordingly, we are unable to predict whether Brazilian courts may decide that it applies to dispositions of our ADRs between non-residentsnonresidents 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 nonresident of Brazil to another nonresident of Brazil. See “Item 10. Additional Information—E. Taxation—Brazilian Tax Considerations.”
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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 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.
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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 of process in the United States or to the jurisdiction of any U.S. court. As a result, it may not be difficultpossible for investorsholders of our shares, units and/or ADRs to effect service of process against these other persons within the United States or other jurisdictions outside Brazil or to enforce against these other persons judgments obtained in the United States or other jurisdictions outside Brazil. Holders of our ADRs may face greater difficulties in protecting their interests due to actions by us or our directors or executive officers than would shareholders of a U.S. corporation, because judgments of U.S. courts for civil liabilities based upon the U.S. federal securities laws may only be enforced in Brazil if the judgment meets the following conditions: (i) it must comply with the formalities necessary for enforcement under the laws of the jurisdiction in which it was rendered; (ii) it must have been issued by a competent jurisdiction/court after proper service of process on the parties, which service must comply with Brazilian law if made in Brazil, or after sufficient evidence of the parties’ absence (revelia) has been given, as required by applicable law; (iii) it must be final, binding and therefore not subject to appeal (res judicata) in the jurisdiction in which it was issued; (iv) it must be apostilled by a competent authority of the country from which the document emanates according to the Hague Convention of 5 October 1961 Abolishing the Requirement of Legalization for Foreign Public Documents or, if such persons.
country is not signatory of the Hague Convention, it must be duly authenticated by a competent Brazilian consulate in the country where the foreign judgment is issued; (v) it must be accompanied by a translation thereof into Portuguese made by a certified translator in Brazil, unless an exemption is provided by an international treaty to which Brazil is a signatory; (vi) it must not be contrary to Brazilian national sovereignty, good morals or public policy or violate the dignity of the human person (as set forth in Brazilian law); (vii) it must not relate to a matter which is also subject to a similar proceeding in Brazil involving the same parties, based on the same grounds and with the same object, which has already been judged by a Brazilian court (res judicata); and (viii) it must not violate the exclusive jurisdiction of Brazilian courts pursuant to the provision of Article 23 of the Brazilian Code of Civil procedure (Law No. 13,105/2015). Judgments which meet these criteria are not subject to an analysis of the merits or a retrial by Brazilian courts.
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 amongstamong 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.
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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 under Brazilian law 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.
If you exchange your ADRs for their underlying Units, you risk losing Brazilian tax advantages and the ability to remit foreign currency abroad.
Brazilian law requires that parties obtain registration with the Brazilian Central Bank in order to remit foreign currencies, including U.S. dollars, abroad. The Brazilian custodian for the Units must obtain the necessary registration with the Brazilian Central Bank for payment of dividends or other cash distributions relating to the Units or after disposal of the Units. If you exchange your ADRs for the underlying Units, however, you may only rely on the custodian’s certificate for five business days from the date of exchange. Thereafter, you must obtain your own registration in accordance with the rules of the Brazilian Central Bank and the CVM, in order to obtain and remit U.S. dollars abroad after the disposal of the Units or the receipt of distributions relating to the Units. If you do not obtain a certificate of registration, you may not be able to remit U.S. dollars or other currencies abroad and may be subject to less favorable tax treatment on gains with respect to the Units. For more information, see “Item 10. Additional Information—D. Exchange Controls.”
If you attempt to obtain your own registration, you may incur expenses or suffer delays in the application process, which could delay your receipt of dividends or distributions relating to the Units or the return of your capital in a timely manner. The custodian’s registration and any certificate of foreign capital registration you may obtain may be affected by future legislative changes. Additional restrictions applicable to you, to the disposal of the underlying Units or to the repatriation of the proceeds from disposal may be imposed in the future.
Holders of the ADRs may not be entitled to a jury trial with respect to claims arising under the deposit agreement, which could be less favorable or less desirable to the plaintiff(s) in any such action.
The deposit agreement provides that, to the extent permitted by law, holders of the ADRs waive the right to a jury trial of any claim they may have against us or the depositary arising out of or relating to our shares, the ADRs or the deposit agreement. The deposit agreement, including the waiver of the right to jury trial, governs the rights of the initial holders of the ADRs as well as the rights of subsequent holders that acquire holders of the ADRs in the secondary market.
If you or any other holders or beneficial owners of the holders of the ADRs bring a claim against us or the depositary in connection with matters arising under the deposit agreement or the ADRs, you or such other holder or beneficial owner may not be entitled to a jury trial with respect to such claims, which may have the effect of limiting and discouraging lawsuits against us and/or the depositary. Any plaintiff(s) in such an action may believe that a non-jury trial would be less favorable to the plaintiff(s) or otherwise less desirable.
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ITEM 4. INFORMATION ON 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(Junta Comercial do Estado de São Paulo or JUCESP)“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, Bloco2041, Suite 281, Block A, Condomínio WTORRE JK - Vila Olímpia, 04543-011.Nova Conceição, 04543-011, in the city of São Paulo, state of São Paulo, Federative Republic of Brazil. Our telephone number is 55-11-3553-3300. Our+55-11-3553-3300 and our website is https://www.ri.santander.com.br.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, and is 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 that operates countrywide. We operate in both the retail and wholesale segments with high-added value offers, which allows us to provide our products and services to individuals, small and medium enterprises, and large corporate customers.
The following figure summarizesWe are part of the key milestones of our history in Brazil.
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The Santander Group, wasa financial institution founded in Spain in 1857, and that has expanded globally through a numbernumerous acquisitions. Under the Santander Group’s business model each major unit is autonomous and self-sufficient in terms of acquisitionscapital and liquidity. However, our relationship with the integration of acquired businesses.Santander Group allows us to:
● | access the Santander Group’s global operation network, using the operational synergies with the Santander Group to enhance 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 international markets, predominantly in Latin America and Western Europe; |
● | assimilate best practices with respect to products, services, internal controls and risk management, that were implemented by the Santander Group internationally; and develop our employees’ skills by means of local and international training and development initiatives, including international experiences at the Santander Group’s offices worldwide. |
Our history in the Brazilian banking industry goes back to the 1970s and is as summarized in the following figure:
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Santander 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 continued to pursue this strategy through
Since the 1990s, the Santander Group established its presence in Latin America, particularly in Brazil, by capitalizing on organic growth as well as acquisitions, among whichand pursuing 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 |
On July 24, 2008, Santander Spain took an indirect share control of Banco Real, which |
Since October 7, 2009, our units, and common and preferred shares have been listed and traded on B3 under the B3symbols: “SANB11,” “SANB3” and our“SANB4,” respectively. Our ADRs representing American Depositary Shares, or “ADSs”have been registered with the SEC under the Securities Act have beenand are listed and traded on the NYSE.NYSE under the symbol “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., or “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 S.A.; (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.
In 2017, we acquired a 70% equity interest in Ipanema Empreendimentos e Participações S.A., or “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., or “HDI Seguros”, in the field of car insurance. We
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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.
In 2018, Webmotors S.A., a company in which we indirectly hold 70% equity interest, entered into an agreement to acquire a 51% stake in Loop Gestão de Pátios S.A., or “Loop”. Loop conducts physical and virtual auctions of motor vehicles. This acquisition has enabled Webmotors to expand its service portfolio and strengthen its leadership position. We also set up a company called BEN Benefícios e Serviços S.A., or “BEN Beneficios”, which aims to transform the employee benefits industry (including the provision of meal tickets and related activities), and the launch of PI Distribuidora de Títulos e Valores Mobiliários S.A., or “PI DTVM,” a new online investment platform that complements the product and services we offer to both account and non-account holders.
Important Events
InvestmentWe have set forth below important recent events in Super Pagamentos e Administração de Meios Eletrônicos S.A.the development of our business. For further information, please see to note 3 to our audited consolidated financial statements included elsewhere in this annual report.
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, with the purpose of eliminating trading in cents of reais.
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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 Offering.” In addition, our board of directors also approved the redemption of debt instruments issued to form part of our Tier 1 and Tier 2 regulatory capital, as set out in the board’s resolution of January 14, 2014. The proceeds from the Notes Offering were used to fund this redemption. On December 12, 2014, we, through Aymoré CFI, acquired shares issued by Super Pagamentos e Administração de Meios Eletrônicos S.A., or “Super”, representing 50% of Super’s total and voting capital. Super is a Brazilian digital service provider that offers online payment accounts, prepaid cards and access to simplified financial services.
On January 4, 2016, Aymoré CFI informed the sellers of its decision to exercise the call option for the shares representing the remaining 50% of Super’s total voting capital owned by the sellers, for a value of approximately R$113 million. The transaction was completed on March 10, 2016, following receipt of approval from18, 2018, the Brazilian Central Bank.Bank authorized the transactions contemplated in the Notes Offering and the redemption, which were completed on January 29, 2019.
Financial Cooperation and Joint Venture with Banque PSA Finance
Sale of Santander Securities Services Brasil Distribuidora de Títulos e Valores Mobiliários S.A., or “SSS DTVM.”
On July 24, 2015,June 19, 2014, we executed preliminary documents containing the main terms and in furtheranceconditions of the partnership in Europe between Banque PSA Finance, or “Banque PSA”,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 Consumer Finance forSpain and a group of private equity funds managed by Warburg Pincus. Following the joint operationsale, we will continue to act as the administrator of the vehicle financing business related to PSA Peugeot Citroën, or “PSA”, brands (which include Peugeot, Citroën and DS), we entered into binding agreements for a joint venture in Brazil with Banque PSA to offer financial and insurance products to consumers and distributorsfunds, as per CVM Instruction No. 306, dated as of PSA brands in Brazil.May 5, 1999, as amended.
After the fulfilmentThe closing of the applicable conditions precedent, which included obtaining the appropriate regulatory authorizations, the joint venture began its operationstransaction occurred on August 1, 2016.
The principal entity under which31, 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 partnership is active 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 contemplated the acquisition by Santander Brasil of 100% of PSA Finance Arrendamento Mercantil S.A. and 50% of PSA Corretora de Seguros e Serviços Ltda., an entityclosing of the PSA group dedicated to the distributiontransaction which generated gains 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, especiallyR$751 million before taxes recorded in the vehicle-financing sector.“Other non-financial gains/losses” line.
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Establishment of the 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, GestoraCredit Intelligence Bureau (Gestora de Inteligência de Crédito S.A., or “CIB”). The CIB was 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. havehas a 20% ownership stakeequity interest in the corporation.
The purpose of the CIB is to develop a database that, in conformitycompliance with the applicable laws,law, will collect, reconcile and handleprocess 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’ssuch database. We believe this initiative will lead to an increased degree of efficiency and improvement ofimprovements in our credit management activities, and will also facilitate the disbursement of long-long and medium-term lines of credit to participants in the Brazilian Financial System and to other corporate entities.
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. On April 14, 2017, the definitive documents were signedexecuted by theCIB’s shareholders. The necessary regulatory authorizations, including those issued by the Brazilian Central Bank and theby CADE, have already been granted. We estimate that theThe CIB will becomebecame fully operational in 2019.
Joint Venture withFormation of Banco Hyundai Capital Services, Inc.
Brasil S.A.
On April 28, 2016, our wholly-owned subsidiary Aymoré Crédito, Financiamento e Investimento S.A., or “Aymoré CFI,” entered into a joint venture with Hyundai Capital Services, Inc., or “Hyundai Capital”,Capital,” for the purposes of incorporating (i) Banco Hyundai Capital Brasil S.A. and (ii) an insurance brokerage company. These entities were incorporated in order to provide, respectively, auto financefinancing and insurance brokerage services and products to consumers through the Hyundai dealerships in Brazil.
Aymoré CFI holdsowns a 50% equity stakeinterest in Banco Hyundai Capital Brasil S.A., whileand Hyundai Capital holdsowns the remaining 50% equity interest.
On February 21, 2019, the Brazilian Central Bank granted Banco Hyundai Capital Brasil S.A. the authorization to operate as a banking entity. We estimate that Banco Hyundai Capital Brasil S.A. will begin operationsbegan operating in the first half of 2019.
TheOn April 30, 2019, the Brazilian Central Bank authorized the formation of the insurance brokerage company. The insurance brokerage company remains subjectwas incorporated on July 2, 2019 and began operating in November 2019.
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Accession to regulatory approval. We expectCertain Tax Payment Plans
In August 2017, we joined the PERT. The program allows for certain tax debts to receivebe repaid in installments. In connection with our participation in this approval during the course of 2019.
Partnership with American Airlines Inc.
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 customersprogram, we are repaying in installments certain amounts due as a result of their daily purchases.
Openinglawsuits 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 branchreduction arising from our participation in Luxembourg
On June 9,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 received authorization fromhave made within the Brazilian Central Bank to establishprescribed time limits. As a branch in Luxembourg, with capitalresult of our participation, we recorded expenses in an amount equivalent to U.S.$1 billion. The purpose of this branch is to offer international financial services to corporate customers with overseas operations. The branch was authorizedR$364 million (after tax) in the third quarter of 2017.
In October 2017, we joined the Incentive Payment Programs and Installments (Programas de Parcelamento Incentivado) created by the Ministercities Rio de Janeiro and São Paulo. The program allows 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 Finance of Luxembourg on March 5, 2018.
Acquisition of equity stake in Ipanema Empreendimentos e Participações S.A., currently named Return Capital Serviços de Recuperação de Créditos S.A. (“Return Credit Management”),lawsuits 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 subsidiary Atual Companhia Securitizadora de Créditos Financeiros, acquired a direct equity interest in Return Credit Management, and an indirect equity interest in Return Asset, correspondingadministrative proceedings relating to 70% of Return Entities’ share capital.
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The Return 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. Return Credit Management focuses on portfolio pricing, collection and credit recovery management while Return Asset, as an authorized asset manager duly licensed by the CVM, is responsibleISS for the managementperiods from 2005 to 2016 in a total amount of credit funds in which the portfoliosR$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 Return Entities’ customers are concentrated.
We intend to increase our recovery indicators with regards to non-performing loans by using the know-howreversal of the Return Entities. We also intend for the Return Entities to continue to provide non-performing loan recovery and credit management services to third parties.
certain provisions, net of tax effects, in an amount of R$96 million.
Joint Venture with HDI Seguros
On December 20, 2017, we entered into binding agreements with HDI Seguros for the formation of a partnership throughinvolving the creation of a new insurance company called Santander Auto S.A., or “Santander Auto”.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.Seguros, Santander Auto will focus on offering motor insurance policies through a 100%fully digital platform. The transaction closed on October 9, 2018 when the documentation to form Santander Auto S.A. was executed.executed and we and HDI Seguros undertook a joint capital contribution of R$15 million into Santander Auto. On January 11, 2019, SUSEP granted Santander Auto thewas granted regulatory authorization to operate.
begin operations by SUSEP and effectively started its operations in the second half of 2019.
Sale of equity interest in BW Guirapá I S.A.
On December 22, 2017, our wholly-owned subsidiary Santander Investimentos, Corretora de Seguros, Investimentos e Serviços S.A., or “Santander Investimentos”, Cia. de Ferro Ligas da Bahia – FERBASAFerbasa S.A., or “FERBASA” and Brazil Wind S.A., or “Brazil Wind” entered into an agreement for the sale of 100% of the shares issued by BW Guirapá I S.A., or “BW I” and owned held by Santander InvestimentosCorretora de Seguros and Brazil Wind to FERBASA.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 purchase price for the total shares owned by Santander Investimentosconsideration paid was R$392450 million, (anand an additional paymentamount of up to R$34.835 million may still be duepaid if certain future operational milestones set forth in the agreementcontractual targets are achieved).met. The CADE approved the transaction on January 17, 2018, and the transaction was completedclosed on April 2, 2018.
Acquisition of Technology Companies
On February 19, 2018 and February 28, 2018, Santander Brasil concluded the acquisition of the totality of shares of, respectively, 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., or the Technology Companies,and all shares issued by Produban Serviços de Informática S.A. from Produban Servicios Informáticos Generales, S.L., for a price of approximately R$61 million61,078 thousand and R$43 million,42,731 thousand, respectively. The Technology Companies were indirectlyWhile all parties to these transactions are ultimately controlled by Santander Spain. Additionally,Spain, the transactions were conducted on an arm’s length basis. On February 28, 2018, Isban Brasil S.A. was merged into Produban Serviços de Informática S.A. which,and on the same date, hadProduban Serviços de Informática S.A. changed its corporate name changed to Santander Brasil Tecnologia S.A., or “Santander Tecnologia”.
The Technology Companies were the main providers of technical support and maintenance services related to software and hardware of Santander Brasil. The transaction permitted Santander Brasil to directly control local technology services through Santander Tecnologia and therefore increase the proximity thereof to its business, adopt time-to-market solutions, flexibility, and improve quality and efficiency.
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 Distribuidora de Títulos e Valores Mobiliários S.A., or “PI DTVM.” The corporate name change was approved by the Brazilian Central Bank on January 22, 2019.
PI DTVM began its operations in March 2019. PI DTVM is a securities brokerage company, with an open digital platform, which willwhose focus is to broaden the portfolio of financial products we are able to offer to our clients.customers.
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Formation of BEN Beneficios
On June 11, 2018, we incorporated BEN Beneficios, Benefícios e Serviços S.A., or “Ben,” an entity fully held by Santander Brasil, whose purpose is to create, supply and administer various types of vouchers and tickets used for the provision ofto provide employee benefits (such as for meals, transportation and cultural events) in the form of printed electronic and magnetic cards. We estimatecards, BEN Beneficios will begin operations duringbegan operating in the firstsecond quarter of 2019.
Formation of Esfera Fidelidade S.A.
OnEsfera Fidelidade was incorporated on August 14, 2018 we incorporatedas our wholly-owned subsidiary. Esfera Fidelidade S.A., an entity fully held by Santander Brasil, whose purpose iswas formed to develop and manage Santander Brasil’s customer loyalty programs. The company beganstarted its operations in November 2018.
Investment in Loop Gestão de Pátios S.A.
DiscontinuationIn 2018, Webmotors, 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 Projections Disclosure
On August 22,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 we informedfor the market that we have decided to cease disclosing projections (guidance), including with regards to our delinquency ratio, efficiency ratio, status of commissions, indicators regarding our base of loyal customers and return on equity indicators.
Buyback Program
On November 1, 2018, our board of directors approved, in continuation of the buyback program set to expire on November 5, 2018, 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 37,753,760 units or ADRs, representing a combination of 37,753,760 common and 37,753,760 preferred shares, corresponding to approximately 1% of our share capital. The term of the buyback program is up to 12 months beginning November 6, 2018, expiring on November 5, 2019.
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.
R$23.9 million.
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”,Option,” pursuant to the Shares’Share Purchase and Sale Agreement and Other Covenants executed between the parties on April 4, 2014, or “SPA”.“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% of the entity’s equity interest, in the amount of R$1.4311.4 billion. The acquisition transaction was approved by the Brazilian Central Bank on February 18, 2019 and closing occurredclosed on February 25, 2019. AsWe subsequently spun-off Getnet to our shareholders as a result of this transaction,which Getnet is no longer a subsidiary of Santander Brasil, currently owns 100%see “—A. History and Development of Getnet’s issued and outstanding share capital.
the Company—The Getnet Spin-Off.”
Put option of the remaining equity interest in Banco Olé Bonsucesso Consignado S.A. against Aymoré Crédito, Financiamento e Investimento S.A.
On March 14, 2019, the minority shareholder of Banco Olé Consignado S.A., or “Banco Olé” formalized its interest in exercising the put option right provided in the Investment Agreement executed with Aymoré CFI on July 30, 2014, to sell its 40% equity interest in Banco Olé to Aymoré CFI, a controlled entity of Santander Brasil. On January 31, 2020, Santander Brasil and the shareholders of Bosan Participações S.A. (a holding company whose single asset is the shares representing 40% of the corporate capital of Banco Olé) entered into the definitive agreements and performed the closing acts related to the purchase and sale of all shares issued by Bosan, upon the transfer of Bosan’s shares to Santander Brasil and payment of the total price of R$1,608.8 million to the sellers. As a result, Santander Brasil became, both directly and indirectly, the holder of all shares issued by Banco Olé.
Acquisition of Summer Empreendimentos Ltda.
On May 14, 2019, we and our wholly-owned subsidiary Santander Holding Imobiliária S.A., or “SHI,” entered into a binding document with the shareholders of Summer Empreendimentos Ltda., or “Summer,” for the acquisition of Summer’s issued share capital. The acquisition was approved by the Brazilian Central Bank on September 16, 2019 and concluded on September 20, 2019. We now hold, directly and indirectly through SHI, 100% of Summer’s share capital. Initially, Summer was not consolidated in our financial statements because it was treated as a temporary investment (non-current assets for sale). However, the investment is no longer considered temporary, and therefore Summer is included in our consolidated financial statements.
Sale of equity stake in CIBRASEC – Companhia Brasileira de Securitização
On July 24, 2019, we completed the sale of our entire equity interest in CIBRASEC – Companhia Brasileira de Securitização, or “Cibrasec,” to ISEC Securitizadora S.A., or “ISEC.” Our interest amounted to 4,000 common shares and 50 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 among Santander Brasil, the other shareholders of Cibrasec, ISEC and Cibrasec, who acted as an intervening party. We received consideration of R$9.8 million for our interest in Cibrasec. As a result, we are no longer a shareholder of Cibrasec.
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Acquisition of equity stake in 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 subsidiary Atual Companhia Securitizadora de Créditos Financeiros, or “Atual,” acquired a direct equity interest in Return Credit Management, and an indirect equity interest in Return Asset corresponding to 70% of Return Entities’ share capital.
On October 16, 2019, 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 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 outstanding share capital. The Return 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.
Incorporation of the spun-off portion of Integry Tecnologia e Serviços A.H.U Ltda.
On October 31, 2019, we approved a spin-off of Integry Tecnologia e Serviços AHU Ltda, or “Integry,” a then wholly-owned subsidiary of Getnet (which was itself a subsidiary of Santander Brasil until the completion of the Getnet Spin-Off). Subsequently on December 20, 2019, Getnet and Santander Merchant Platform Solutions, S.L., or “SMPS Global,” a company based in Spain and controlled by Santander Spain, entered into a share purchase agreement as a result of which SMPS Global now holds 100% of Integry’s share capital. On December 23, 2019, Integry changed its name to Santander Merchant Platform Solutions Brasil Ltda.
Sale of equity stake in Super Pagamentos e Administração de Meios Eletrônicos S.A.
On February 28, 2020, we sold our entire equity interest in Super Pagamentos e Administração de Meios Eletrônicos S.A., or “Superdigital,” to Superdigital Holding Company, S.L., a company indirectly controlled by Santander Spain, for the amount of R$270 million as consideration. As a result of such transaction, we are no longer a shareholder of Superdigital.
Disclosure of Projections
On July 29, 2020, we informed the market that we will no longer disclose guidance, as previously announced in the material fact dated October 8, 2019. This decision comes in response to the ongoing uncertainty with respect to the impact of the COVID-19 pandemic on our business, financial condition, assets, liquidity, cash flows and results of operations, as well as on the macroeconomic environment in Brazil and globally.
Acquisition of direct equity interest in Toque Fale Serviços de Telemarketing LTDA
On March 24, 2020, we acquired all of the outstanding share of Toque Fale Serviços de Telemarketing Ltda., or “Toque Fale,” held by our then subsidiaries Getnet and Auttar HUT Processamento de Dados LTDA for an amount of R$1.1 million, corresponding to the equity value of the quotas on February 29, 2020. As a result, we became the direct holders of 100% of Toque Fale’s share capital.
Purchase of Equity Interest in Gira – Gestão Integrada de Recebíveis do Agronegócio S.A.
On August 11, 2020, Santander Brasil executed a share purchase and sale agreement and other covenants with the shareholders of Gestão Integrada de Agronegócio S.A., or “Gira” to acquire 80% of Gira’s share capital. Gira is a technology company that operates in the management of agribusiness receivables and whose platform has the potential to make agricultural credit transactions more secure. This increased layer of security is achieved through the use of applications, such as geolocation of productive areas, capture and analysis of agronomic data and permanent monitoring of production performance for sites involved in credit transactions. Gira’s solutions also include the review and digital registration of collateral provided under commercial contracts and continuous observation of crop development as a way of monitoring risks. The applicable regulatory approvals were received on December 18, 2020 and the closing of the transaction took place on January 8, 2021. As a result, Santander Brasil now holds an 80% equity interest in Gira.
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Merger of Banco Olé Consignado S.A. into Banco Santander (Brasil) S.A.
Following the acquisition of the remaining equity interest over Banco Olé Consignado S.A., through the holding company Bosan Participações S.A., together referred to as “Olé Companies,” the shareholders of Santander Brasil and the Olé Companies approved the merger of Olé Companies into Santander Brasil, as provided by the general meetings held on August 31, 2020. As a result, the Olé Companies ceased to exist and were succeeded by Santander Brasil. The incorporation of the Olé Companies has been approved by the Brazilian Central Bank and is in the process of being registered with the applicable commercial registries (juntas comerciais).
Purchase of Equity Interest in Toro Corretora de Títulos e Valores Mobiliários Ltda.
On September 29, 2020, Santander Brasil’s subsidiary, PI DTVM, entered into an investment and other covenant agreement with the shareholders of Toro Controle e Participações S.A., or “Toro Controle,” to invest in Toro Controle. Toro Controle is the holding company of Toro Corretora de Títulos e Valores Mobiliários Ltda, or “Toro Corretora,” and Toro Investimentos S.A., or “Toro Investimentos,” which jointly run an investment platform focused on the retail market, founded in Belo Horizonte in 2010. We refer to Toro Controle, Toro Corretora and Toro Investimentos as “Toro.” As a result of the transaction, and the subsequent merger of Toro Controle into Toro Corretora, PI DTVM holds 60% of Toro Corretora’s share capital.
In addition, PI DTVM and Toro Corretora combined their market experiences to develop a complete platform of fixed and variable income products. This platform is based on shared expertise, technology and operate in the growing Brazilian investment market. The completion of the transaction occurred in April, 2021, following the execution of certain customary agreements between the parties, the fulfillment of customary conditions precedent and the receipt of certain regulatory approvals, including the approval of the Brazilian Central Bank.
Capital reduction of Norchem Holding e Negócios S.A. and Norchem Participações e Consultoria S.A.
On October 8, 2020, the shareholders of Norchem Holding e Negócios S.A. and Norchem Participações e Consultoria S.A., which we refer to jointly as the “Norchem Companies,” approved a capital reduction in the two Norchem Companies, in the amounts of R$14.7 million and R$19.9 million, respectively. As a result, we ceased to be shareholders of the Norchem Companies.
Dissolution and liquidation of Santander Brasil, Establecimiento Financiero de Credito, S.A.
On November 12, 2020, we approved the dissolution and liquidation of Santander Brasil, Establecimiento Financiero de Credito, S.A., a Spanish entity wholly-owned by us, which we 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. The capital invested abroad was repatriated to Brazil in November 2020. The deed of dissolution and liquidation of the entity was registered with the Mercantile Registry of Madrid and effective on December 15, 2020. These activities are now carried out by our Luxembourg branch.
Acquisition of Paytec Tecnologia em Payments Ltda, and Paytec Logística e Armazém EIRELI
On December 8, 2020, we entered into a quota purchase agreement with the owners of Paytec Tecnologia em Payments Ltda, and Paytec Logística e Armazém Eireli (jointly “Paytec”) for the acquisition of the entirety of Paytec’s issued share capital. Paytec is a logistics operator with Brazil-wide coverage which focuses on the payments market. The transaction closed on March 12, 2021.
Buyback Program
On February 2, 2021, our board of directors approved, in continuity with the buyback program that expired on November 4, 2020, a new buyback program of our units and ADRs. Our units and ADRs will be acquired either directly or through our branch in the Cayman Islands, to be held in treasury or subsequently sold. The buyback program covers the acquisition of up to 36,956,402 units or ADRs, representing a combination of 36,956,402 common and 36,956,402 preferred shares, corresponding to approximately 1% of our share capital. The term of the buyback program is up to 18 months beginning on February 3, 2021 and expiring on August 2, 2022.
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Corporate reorganization Santander Leasing S.A. Arrendamento Mercantil and Banco Bandepe S.A.
On May 11, 2021, Santander Brasil and Banco Bandepe SA, or “Bandepe,” entered into an Agreement for the Purchase and Sale of Shares through which Santander Brasil acquired the entire equity interest held by Bandepe in Santander Leasing S.A. Arrendamento Mercantil, or “Santander Leasing,” which amounted to 21.42% of Santander Leasing’s share capital. As a result, Santander Brasil became the sole shareholder of Santander Leasing. On May 27, 2021, an incorporation of all the shares of Bandepe by Santander Leasing was approved, in order to convert Bandepe into a wholly-owned subsidiary of Santander Leasing. As a result, the capital stock of Santander Leasing increased by approximately R$5.4 billion.
Acquisition of Equity Interest in Monetus Investimentos Ltda. and Monetus Corretora de Seguros Ltda.
On June 15, 2021, Pi DTVM, Toro Corretora and Toro Investimentos SA, or “Toro Investimentos” entered into an investment agreement and other covenants with the partners of Monetus Investimentos Ltda. and Monetus Corretora de Seguros Ltda., or, collectively, “Monetus,” by means of which Toro Investimentos will hold, upon the closing of the transaction, 100% of the capital stock of Monetus. Monetus, originally from Belo Horizonte in the state of Minas Gerais, carries out its activities through an automated investment application. Taking into account a customer’s needs and risk profile, this application automatically creates, executes and tracks a diversified and personalized investment strategy to provide optimal service to customers. The transaction is subject to the execution of the definitive agreements and the occurrence of certain conditions usual to this type of transaction, including the applicable regulatory approvals.
Acquisition of Equity Interest in Mobills Labs Soluções em Tecnologia Ltda. and Mob Soluções em Tecnologia Ltda.
On June 15, 2021, Pi DTVM, Toro Corretora and Toro Investimentos S.A. executed an investment agreement and other covenants with the partners of Mobills Labs Soluções em Tecnologia Ltda., and Mob Soluções em Tecnologia Ltda (jointly “Mobills”), by which, once the transaction is concluded, Toro Investimentos will hold 100% of the capital stock of Mobills. Domiciled in Ceará, Mobills has a variety of financial applications that have a large user base, especially related to financial planning. After the conditions precedent established in the investment agreement were fulfilled, the transaction closed on January 4, 2022.
Acquisition of Equity Interest in Solutions 4 Fleet Consultoria Empresarial Ltda.
On July 13, 2021, Aymoré Crédito, Financiamento e Investimento S.A., or “Aymoré,” and the partners of Solution 4 Fleet Consultoria Empresarial Ltda., or “Solution4Fleet,” executed a certain Investment Agreement and Share Purchase and Sale Agreement, by means of which Aymoré will hold, upon the closing of the transaction, 80% of the capital stock of Solution4Fleet, or “Solution4Fleet Transaction.” Solution4Fleet specializes in structuring vehicle rental and subscription businesses – long-term rental for individuals. The transaction closed on October 8, 2021 after the applicable conditions precedent were fulfilled.
Acquisition of equity interest in Car10 Tecnologia e Informação S.A. and Pag10 Fomento Mercantil Eireli.
On July 13, 2021, Webmotors S.A., or “Webmotors,” the shareholders of Car10 Tecnologia e Informação S.A., or “Car10 Tecnologia,” and Pag10 Fomento Mercantil Eireli, or “Pag10,” and, together with Car10 Tecnologia, “Car10,” entered into certain agreements for the acquisition by Webmotors of 66.7% of the capital stock of Car10 Tecnologia, which is the sole holder of Pag10. Car10 acts as a marketplace that brings together more than 7,000 service providers such as workshops and autocenters, auto body and paint, and cleaning and sanitizing, as well as emergency assistance and towing. The transaction closed on September 20, 2021.
Acquisition of equity interest in Liderança Serviços Especializados em Cobranças Ltda. and Fozcobra Agência de Cobranças Ltda.
On August 4, 2021, Atual Serviços de Avaliação de Créditos e Meios Digitais S.A., or “Atual,” a wholly-owned subsidiary of Santander Brasil and the shareholders of Liderança Serviços Especializados em Cobranças Ltda., or “Liderança,” entered into a certain Agreement for the Assignment of Quotas and Other Covenants, for the acquisition by Atual of 100% of the capital stock of Liderança. Liderança operates in the industry of overdue credit recovery, providing extrajudicial collection services to financial institutions and other industries, and has a subsidiary: Fozcobra Agência de Cobranças Ltda. The transaction closed on October 1, 2021. Subsequently, Fozcobra Agência de Cobranças Ltda. was merged into Liderança on October 4, 2021.
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Acquisition of Equity Interest in Apê11 Tecnologia e Negócios Imobiliários Ltda.
On September 2, 2021, Santander Holding Imobiliária S.A., or “SHI,” a wholly-owned subsidiary of Santander Brasil, entered into a Share Purchase and Sale Agreement and Investment Agreement with the shareholders of Apê11 Tecnologia e Negócios Imobiliários Ltda., or “Apê11,” for the acquisition of 90% of the capital stock of Apê11. Apê11 acts as a collaborative marketplace, pioneering the digitization of the purchase journey of houses and apartments. After the conditions precedent established in the agreement were fulfilled, the closing of the transaction occurred on December 16, 2021.
Issuance of Notes
In November and December 2021, Santander Brasil issued Financial Bills with a subordination clause, to be used to compose our Tier 2 regulatory capital, in the total amount of R$5.5 billion. The Financial Bills have a term of ten years, and redemption and repurchase options in accordance with the applicable regulations. The Financial Bills had an estimated impact of 92 basis points on our Tier 2 regulatory capital.
Acquisition of Equity Interest in CSD Central de Serviços de Registro e Depósito aos Mercados Financeiro e de Capitais S.A.
On January 21, 2022, Santander Corretora de Seguros, Investimentos e Serviços S.A., or “Santander Corretora,” together with other investors (including Banco BTG Pactual S.A. and CBOE III, LLC) entered into an investment agreement with CSD Central de Serviços de Registro e Depósito aos Mercados Financeiro e de Capitais S.A., or “CSD BR,” and its shareholders for the acquisition of a minority equity interest in CSD BR. CSD BR operates as a register of financial assets, derivatives, securities and insurance policies, authorized by the Brazilian Central Bank, the CVM and the SUSEP. Subject to closing, Santander Corretora’s interest in CSD BR will be 20%. The closing of the transaction is conditionedsubject to the conclusion of definitive agreements and the implementation of certain customary conditions precedent, including the proceedingsreceipt of applicable regulatory approvals.
The Getnet Spin-Off
On February 25, 2021, further to the Material Facts disclosed on November 16, 2020 and February 2, 2021, we announced that our Board of Directors approved the spin-off of our merchant acquiring business, which was undertaken by our then-subsidiary Getnet, in order to concentrate the technology and payments businesses of Santander Group within PagoNxt, a new technology-focused global payment platform. On March 31, 2021, the shareholders of Santander Brasil approved the Spin-Off. As a result of the Spin-Off, each holder of our common shares, preferred shares and Santander Brasil units, including the custodian for the Santander Brasil ADS facility, received Getnet common shares, preferred shares and Getnet units, at the rate of 0.25 common share, preferred share or Getnet Unit, as the case may be, for each one common share, preferred share or Santander Brasil Unit issued by us held at close of trading on the B3 on the relevant record date. Additionally, each holder of Santander Brasil ADSs representing Santander Brasil units received Getnet ADSs, each representing two Getnet units, at a rate of 0.125 Getnet ADS for each Santander Brasil ADS held at the close of trading on the NYSE on the relevant ADS record date. The Getnet common shares, preferred shares and Getnet units are traded on B3, and Getnet ADSs are traded on Nasdaq under the symbol “GET.” The Spin-Off was completed on October 26, 2021.
As a result of the Spin-Off, Santander Brasil’s share capital was reduced by a total amount of R$2 billion, without the cancellation of shares, with Santander Brasil’s share capital decreasing from R$57 billion as of December 31, 2020 to R$55 billion as of December 31, 2021, and we stopped consolidating Getnet within our results of operations on March 31, 2021. On April 15, 2021, we entered into the Getnet Partnership Agreement, which provides a framework for our relationship with Getnet following the Spin-Off. See “ Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions—Spin-Off of Getnet and Related Arrangements—Partnership Agreement.”
The charts below set forth ina summary of our simplified corporate structure before and after the Investment Agreement.Spin-Off and after the reorganization of the PagoNxt group, of which Getnet forms part:
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Corporate Structure Prior to the Spin-Off
Corporate Structure After the Spin-Off
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Corporate Structure After the Reorganization of the PagoNxt Group
Impact of COVID-19
We are closely monitoring the evolution of the COVID-19 pandemic in Brazil and globally, in order to take preventive measures to minimize the spread of the virus, ensure the continuity of operations and safeguard the health and safety of our personnel. Based on the information available as of the date of this annual report, we present below a summary of the main effects of the COVID-19 pandemic on our business and results of operations:
● | As the COVID-19 pandemic escalated in Brazil starting March 2020, we adjusted our operations to be able to continue providing our products and services to our customers while ensuring the health and safety of our employees. We have prioritized the safety and health of our employees and customers by adhering to prevention and care measures recommended by the Brazilian health and labor ministries, while striving to minimize the impact on our business. From the beginning, we implemented remote working arrangements to safeguard employees most at risk from COVID-19. We have also provided telemedicine services in addition to standard medical support to support the care of our employees and their families. Furthermore, we have instituted a protocol for mapping, protecting, and monitoring all contaminated individuals and those in contact with them, as well as a remote working strategy that evolved in lockstep with the pandemic. We supported our employees throughout the COVID-19 pandemic by offering them and their dependent remote medical care through an agreement with a leading Brazilian hospital. We also provided advance payment of thirteenth salary installments in April 2020 (these are normally paid in April and November of each year). |
● | From March 2020 to October 2021, our branches operated with reduced service hours; from 9:00 a.m. to 2:00 p.m. from March 2020 to July 2020 and then from 9:00 a.m. to 3:00 p.m. until October 2021. From November 2021 through to the date of this annual report, we have been expanding our service hours in our branches from 9:00 a.m. to 4:00 p.m. We adopted a staggered entry system in branches with heavy customer traffic in order to reduce the total number of customers in the branch at any given time. We also reserved the period from 9:00 a.m. to 10:00 a.m. for customers who would are more vulnerable to COVID-19. To provide continuous service and meet the increased demand of our call centers, we temporarily relocated retail employees to our call centers to help deal with the increased demand for remote banking services. In line with our commitment to clear customer communication, we launched the “Overcome Together” and “Santander Supports You” websites, which gathered resources and initiatives related to our business. |
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● | We have offered individual, microentrepreneur and SME customers the possibility of deferring their loan payments for up to 60 days. In May 2020, we allowed an extension for an additional 30 days, as a result of which our deferred loan portfolio reached a total of R$49.8 billion as of June 30, 2020, R$40.6 million as of December 31, 2020 and R$25.9 million as of December 31, 2021. At the same time, we continuously monitored our loan quality indicators, which remained at acceptable levels throughout the COVID-19 pandemic and through the date of this annual report. We also participated in government programs created in 2020 that granted special credit lines for businesses, particularly in retail, to minimize the negative effects of the pandemic including CMN Resolution No. 4,846, which was published on August 24, 2020 and regulated lending under the Emergency Employment Support Program, initially established by Provisional Measure No. 944/2020. For more information, see “—B. Business Overview—Regulation and Supervision—Other Applicable Laws and Regulations—Regulatory Developments Related to COVID-19” As a result, our total portfolio balance of government-sponsored loans reached R$10.3 billion as of December 31, 2021. |
● | The onset of COVID-19 had a negative impact on our net fee and commission income, especially in the first half of 2020, due to a lower volume of customer transactions, which adversely affected the total amounts we were able to charge in credit and debit card fees. As a result, we experienced reductions in the growth rates of our net fee and commission income and of our net interest income from the six months ended June 30, 2019 to the six months ended June 30, 2020, as compared to the growth rates of our net fee and commission income and of our net interest income from the six months ended June 30, 2018 to the six months ended June 30, 2019. These reductions were due to the abovementioned lower transaction volumes, a higher share of global wholesale banking in the loan portfolio, alongside a shift in the product mix, with a decreased share of higher risk products, such as credit cards and overdrafts. In 2021, in particular in the second half of the year, there was a recovery in economic activity. As a result, in the year ended December 31, 2021, our net interest income increased by 15.5% compared to the year ended December 31, 2020 (although our net fee and commission income decreased by 5.9% in the same period), our sales through physical distribution channels increased (by 46% in the year ended December 31, 2021 compared to the year ended December 31, 2020) and so did our sales through digital channels (which increased by 45% in the year ended December 31, 2021 compared to the year ended December 31, 2020) and we added 784,000 new customers in December 2021 (which is 78% more than in December 2020). For more information, see “Item 5. Operating and Financial Review and Prospects—A. Operating Results—Results of Operations for the Years Ended December 31, 2021, 2020 and 2019—Results of Operations—Net Interest Income” and “Item 5. Operating and Financial Review and Prospects—A. Operating Results—Results of Operations for the Years Ended December 31, 2021, 2020 and 2019—Results of Operations—Net Fee and Commission Income.” |
● | In 2020, we constituted an additional provision in the amount of R$3,200 million. This provision was calculated based on the analysis of the potential macroeconomic effects and took into account not only quantitative and qualitative indicators, but also the adequate and accurate identification of risks and a collective assessment of exposures. In 2021 as a response to the macroeconomic shock of the COVID-19 pandemic, we used a part of the provision overlay on expected credit losses created in 2020, as further explained under “Item 5. Operating and Financial Review and Prospects—A. Operating Results— Results of Operations for the Years Ended December 31, 2021, 2020 and 2019—Results of Operations—Impairment Losses on Financial Assets (Net).” However, we also experienced an improvement in our loan portfolio, in particular with respect to individuals as loans to individuals increased by 17% in the year ended December 31, 2021 compared to the year ended December 31, 2020. For more information, see “Item 5. Operating and Financial Review and Prospects—A. Operating Results—Results of Operations for the Years Ended December 31, 2021, 2020 and 2019— Results of Operations—Impairment Losses on Financial Assets (Net).” |
● | In 2020, the National Monetary Council, or “CMN,” and the Brazilian Central Bank introduced measures to minimize the impact of COVID-19 on the financial system. With respect to liquidity, these changes included: (i) a reduction in the time deposit reserve requirement from 31% to 17%; and (ii) an increase in the additional limit on the reserve requirement treated as High Quality Liquidity Assets from 15% to 30%, ensuring greater liquidity in a stress scenario. In addition, a temporary suspension on dividends and other distributions was enacted through Resolution No. 4,820, limiting the distributions to shareholders 30% of adjusted net profit (following amendments enacted on December 23, 2020). As a result, we only distributed R$3,837 million as dividends and interest on equity in 2020 compared to R$10,800 million in 2019. This suspension on the payment of dividends was not renewed in 2021. The CMN also published Resolution No. 4,783, which temporarily reduced the capital conservation buffer (where all rates relate |
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to the total amount of risk-weighted assets) required from financial institutions from 2.5% to 1.25% as of the second quarter of 2020, leading our Basel ratio to reach 15.3% as of December 31, 2020. In 2021, the time deposit reserve requirement increased from 17% to 20% as of November 2021, and the capital conservation buffer required from financial institutions rose from 1.25% to 1.625% as of April, 2021, with this percentage increasing gradually until April 2022, when it will reach 2.5%. For more information, see “—B. Business Overview—Regulation and Supervision—Other Applicable Laws and Regulations—Regulatory Developments Related to COVID-19” and “—B. Business Overview—Regulation and Supervision—Other Applicable Laws and Regulations—Compulsory Reserve Requirements.”
● | We experienced an increase in digital business. Specifically, we recorded an increase of 45% in the number of new contracts originated through digital channels in the year ended December 31, 2021 compared to the year ended December 31, 2020. |
See also “Item 3. Key Information—3D. Risk Factors—Risks Relating to the Brazilian Financial Services Industry and Our Business— The global COVID-19 pandemic has materially impacted our business, and the continuance of this pandemic or any future outbreak of any other highly contagious diseases or other public health emergency, could materially and adversely impact our business, financial condition, liquidity and results of operations” and “Item 5. Operating and Financial Review and Prospects—A. Operating Results—Principal Factors Affecting Our Financial Condition and Results of Operations—Impact of COVID-19.”
Capital Expenditures and Divestitures
Our main capital expenditures include investments in our Information Technology (“IT”)information technology platform. Our ITinformation technology platform focuses on our customers and supports our business model. In 2018, 20172021, 2020 and 2016,2019, total investments in ITinformation technology were R$1,5521,905 million, R$1,1321,432 million, and R$8951,858 million, respectively.
In 2018, 20172021, 2020 and 2016,2019, we continually improved in our technology platformplatforms by means of investmentsinvestment in our digital applications, core systemsespecially through the implementation of new solutions in the areas of artificial intelligence (machine learning, AIOPs), micro services, blockchain technology, cyber insurance, facial recognition and cloud-based technologies, among others. The application of these new technologies improved our interaction with our customers enabled us to provide solutions across credit, consortium, payroll loan, insurance, private banking, cards, payments, agribusiness, investments to better address client needs. We also continued to invest in our physical distribution network (branches, PABs and PAEs), including: biometric identification for corporate customers, digital purchase and payment of exchange, among other initiatives. For more details about our technology and infrastructure, renewal. Oversee the last 18 months, we have adopted 97 new tools and technologies in several areas ranging from business services to Antifraud, Cyber Security, AI (Artificial Intelligence), AI Ops (Artificial Intelligence for IT Operations) and RPA (Robotic Process Automation).
We have continued our migration towards cloud-based computing in order to provide improved IT services management, flexibility and cost optimization. For example, in 2018 we made the Microsoft Office 365 platform available in cloud format for more than 43,400 users, allowing greater collaboration between teams, increased productivity, simplified internal processes and improved mobility. For further discussion regarding our technology infrastructure seeitem “—B. Business Overview—Technology and Infrastructure”.Infrastructure.”
Our ongoing capital expenditures consist primarily of investments in IT.information technology. We expect to fund our ongoing capital expenditures principally from our cash flow from operations.
Our major divestituredivestitures in the past three fiscal years and until the date of this annual report waswere the Spin-Off of Getnet and the sale of BW I in 2017. Super Pagamentos.
For more information, see “Item 5. Operating and Financial Review and Prospects—A. Operating Results—Principal Factors Affecting the Comparability of Our Financial Condition and Results of Operations and “—Important Events—Sale of BW Guirapá I S.A.Operations.”).
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 customers.
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:
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Our Strategy
Our goalstrategy is centered on endeavoring 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 way to grow in agenerate profitable, recurring, and sustainable mannergrowth. We believe the expansion of our customer base over the years is due to our ability to capture new customers and increase their loyalty. We have achieved this by providing excellentoffering a comprehensive portfolio of products and services, with a particular emphasis on quality and a constant drive to improve customer satisfaction. We serve our customers through multi-channel solutions which we believe enable us to provide a tailored and human service which is responsive to the needs of our customers. We rely on our four integrated service channels to do offer our services to enhance customer satisfaction levelsour customers: digital, remote, physical and attract more customers, making them more loyal. Our actions are basedexternal channels.
We recorded net income of R$15,559 million, R$13,451 millionand R$16,631 million in the years ended December 31, 2021, 2020 and 2019, an increase of 15.7% in the year ended December 31, 2021 compared to the year ended December 31, 2020. In the years ended December 31, 2021, 2020 and 2019 we achieved capital adequacy ratios of 14.9%, 15.3% and 15.0% respectively. In the years ended December 31, 2021, 2020 and 2019, we have achieved efficiency ratios of 27.1%, 35.5% and 28.8%, and adjusted efficiency ratios of 28.2%, 27.7% and 28.2%, respectively. In addition, we achieved an adjusted return on establishing closeaverage stockholders’ equity of 20.2%, 18.4% and long-lasting relationships with customers, suppliers24.6% in 2021, 2020 and shareholders. To accomplish that goal,2019, respectively. Adjusted return on average stockholders’ equity is a non-GAAP financial 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.” We believe these metrics demonstrate our purpose istrack record of consistent performance and the results of our constant efforts to help peopleimprove our productivity.
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In recent years, we have undergone significant transformations, thereby enabling us to identify and businesses prosper by being a Simple, Personalcapitalize on business opportunities. We have expanded our platform to diversify our offering of products and Fair bank, guided by following strategic priorities:
services:
● | In 2017, we took steps to improve service quality and |
● | In 2018, alongside our culture of service, we advanced our pursuit of efficiency by |
● | In 2019, we expanded our ecosystem by introducing new, innovative products into the market. We launched Sim, emDia, Santander Auto, Auto Compara and Ben Visa Vale while repositioning ourselves in the card market, as well as refocusing our efforts on customer and account holder loyalty. |
● | In 2020, we focused our efforts on assisting customers in facing the challenges posed by the COVID-19 pandemic by providing products and services |
● | Finally, in 2021 we redoubled our efforts to improve customer experience and satisfaction across all channels. Our |
● | We strive to continuously improve our customer experience through the addition of new services, the expansion of our |
We have consolidated and improved our four service channels through which customers can select the product or solution that best meets their needs. Our digital channel averaged 442 million total visits per month in 2021, adding 554,000 new accounts in December 2021. Similarly, the physical channel, which consists of our branch network that is expanding into Brazil’s rural areas, recorded a monthly average of more than 15 million visits by customers and potential customers, serving as a crucial pillar for business origination. In the remote channel, with the implementation of SX Negócios, a new service model, we have redefined our model to move away from a call center and toward a business channel. We have built a platform to capture new business, processing over 25 million support requests per month in the year ended December 31, 2021, 4.6 million of which are handled by humans. The external channel is comprised of bank correspondents, which are entities allowed to provide specific services to customers, including customer services, on behalf of another financial institutions, and our business verticals, such as payroll-deductible loans, Prospera and Olé Consignado.
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We believe that our digital platform enables us not only to offer our customers a comprehensive set of services but also to benefit from the business generation potential which arises from the ease with which customers are able to purchase our products and services through our digital sales channels. Sales of our products and services through our digital channels increased by 45% in the year ended December 31, 2021, compared to the year ended December 31, 2020, including an increase in the number of premium bonds (capitalização) contracts of 360% and 23% in premiums written in open insurance contracts (considering life insurance, personal accident insurance, home insurance, and other types of insurance) in each case in the year ended December 31, 2021 compared to the year ended December 31, 2020. GENT&, our artificial intelligence channel, recorded over 18.5 million interactions in December 2021 and is currently capable of answering more than 26,000 questions.
We believe that our business has the potential to grow by means of innovation and technology, in conjunction with user experience enhancements and steady evolution in the quality of our services. Our products, services, and businesses form part of the daily lives of all our customers, whether businesses or individuals, and include, among others, payment solutions (i.e., payment platforms), investment and advisory services, vehicle and consumer goods financing, mortgage loans, payroll-deductible and agribusiness loans, as well as the products and services offered through our wholesale unit. We also endeavor to maintain sound risk management, which entails continuously improving our credit granting models to maintain our credit risk indicators at acceptable levels.
In order to strengthen our platform, we have launched new businesses that continue to evolve and support our customer loyalty strategy, such as (i) Ben, which grew its customer base to 565,000 cards as of December 31, 2021 along with 2,675 human resources customers and 365,432 partner establishments as of the same date; (ii) Sim, which surpassed the five million customer mark and reached a loan portfolio of R$1.6 billion as of December 31, 2021; (iii) emDia, which increased recovered credit volume by 12% in the year ended December 31, 2021 compared to the year ended December 31, 2020, and (iv) Santander Auto, where the percentage of new consumer finance contract purchasers who also acquired insurance reached 20% in 2021, resulting in over R$210 million in written premiums in 2021. In 2020, we also announced the acquisition of securities brokerage firm Toro Corretora to complement our investment platform and broaden our product offering. Finally, in 2021, we launched Auto Compara, a fully online auto insurance comparison and offering platform that is now also available to non-customers. Auto Compara had an average of 350,000 website visits in the year ended December 31, 2021 and we increased by 26% in premiums written during the year. Additionally, we reinforced our position in the automotive and real estate industries by completing acquisitions of businesses and solutions to expand our business and build a more comprehensive platform.
As a result of our efforts to constantly improve our business, we were recognized the Best Bank in Brazil in 2021 by The Banker Magazine.
Our People
Our people are a key pillar of our strategy, supported by a culture that values employees, promotes diversity, encourages efficiency, and fosters innovation, while also preparing us for a new cycle and enabling us to continue anticipating market trends. Our performance is the embodiment of our culture, with our people serving as the catalyst for the transformation. Thus, we have built a diverse and engaged team. We value meritocracy, diversity, and inclusion, as evidenced by the fact that, as of December 31, 2021, 31% of our leadership positions were held by women, 27% of our employees were black employees, and 5% were held by people with disabilities. We also place a premium on proactive knowledge acquisition: in 2021, over 3,200 courses were held on the Santander Academy platform, with 78% of them being taught by employees. Close leadership and open communication are ingrained in our DNA. Our actions are backed by a culture that is increasingly centered on our people – 94% of whom are proud to work for Santander, according to the Great Place to Work, or “GPTW,” survey from 2021. As a result of our efforts, we have been named one of the top 10 best companies to work for in Brazil by GPTW 2021, appearing in the following categories: Ethnic-Racial, Women, LGBTQI+, Early Childhood, 50+, and Healthy Management. Additionally, we were honored with the following awards: (i) Ethnic-Racial by Exame magazine’s Diversity Guide, (ii) Diversity and Inclusion by Euromoney’s Awards for Excellence, and (iii) Bloomberg’s Gender Equality Index. Finally, we were also included on the GPTW B3 index.
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Social and Environmental Initiatives
Similarly, and consistent with our strategy of responsible growth, we recognize our role as a financial institution in Brazil’s development. Hence, for twenty years, we have sought to foster sustainable businesses. We highlight our Amigo de Valor program, one of the main social programs in Brazil today, started in 2002. In 2021, we continued to advance initiatives that reflect how sustainability and social issues are embedded in every layer of our organization:
● | In the social realm, we lead initiatives that have impacted more than one million people over the last three years. For the past 19 years, we have worked to protect, promote, and defend the rights of children and adolescents in vulnerable situations through the Amigo de Valor program, benefiting thousands of people and raising R$20 million in 2021 through employee and customer contributions. Since 2002, we have been promoting financial inclusion by means of Prospera Santander Microfinance (Prospera Santander Microfinanças), which had 708,000 active customers and a R$1.9 billion portfolio as of December 31, 2021, with the |
● | With respect to our environmental initiatives, we offer a comprehensive suite of financing solutions for the development of sustainable businesses, both for individuals and businesses, which we accelerated in 2021, generating R$ 51.6 billion in sustainable businesses in the year ended December 31, 2021. We pioneered green financing, with over R$ 1.3 billion loans linked to environmental, social and governance, or “ESG,” goals and green loans in our portfolio as of December 31,2021, in addition to being among the leaders in CBIOs (decarbonization credit). We are also active solar energy loans, financing photovoltaic panels for individuals, companies, |
We implement routine socioenvironmental risk assessment, for which we rely on a Socioenvironmental Questionnaire, or “QSA,” by means of which we collect information on customers that have environmental practices, including data on carbon emissions, management of offsets and extreme weather events. The QSA is applied to the Wholesale and Business 3 segments, as well as to Retail customers. This analysis is part of the annual credit review for 14 sectors in which we operate, all of which are potentially affected by climate change according to the Task Force on Climate-related Financial Disclosures, or “TCFD.”
Since 2016, we have taken climate change issues into consideration in the credit rating of Wholesale customers, and, since 2020, we have used a water stress calculator in our socioenvironmental assessments. This tool considers our customers’ economic activity, watershed location and measures taken to save water. It has been developed considering customer vulnerability to climate change in general, even as a result of changes in legislation or consumer preferences.
Regarding decarbonization targets, in 2021 we announced our intention to achieve net zero carbon emissions by 2050 to support the goals of the Paris Agreement on climate change using 100% renewable energy sources by 2025 and eradicating single-use plastic from all our operations. We have been carbon neutral since 2010, fully offsetting our emission sources.
In July 2021, we established a forum with the goal of preventing greenwashing by seeking to ensure that operations which we describe as green, social, or sustainable comply with Santander Group’s taxonomy and market standards. The forum, which is composed of senior executives from the Sustainability, Risk, Social and Environmental Risk, Business, Compliance, and Legal departments, also assesses reputational risks associated with our operations. Out of a total of 40 proposals to label a particular service of product as being “green” which were reviewed by the forum in 2021, 31 have been approved.
In addition, we also strive to ensurehave developed products that our banking activities contribute to lowering the social and economic progress of the communities in which we are present, in a responsible and sustainable manner and with a special commitment to higher education.
impact on climate change, such as:
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Recent Business Developments
● | Low Carbon CDB, we launched the Low Carbon CDB, a sustainable, low risk investment aimed at companies that want to have more sustainable investments in their portfolio capable of reducing their greenhouse gas emissions. The resources of the investments in CDB will be used to finance sustainable projects of companies that promote actions to reduce greenhouse gas emissions. |
● | Carbonômetro (Carbon meter), a tool that calculates the daily greenhouse gas emissions of our operations. |
● | Carbon Calculator, which encourages employees of Santander Brasil and affiliates to calculate their carbon footprint. |
● | "The Future of the Carbon Market in Brazil” live video. We produced a live video to discuss the future of the carbon market in Brazil and the challenges and opportunities for the business sector. |
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 demonstratedJuly 2020, we announced a plan to promote sustainable development in the following table.
For the Year Ended December 31, | ||||||
2018 | 2017 | 2016 | 2018 | 2017 | 2016 | |
Net interest income | Net fee and commissions income | |||||
(%) | ||||||
Commercial Banking | 94.0 | 92.7 | 89.5 | 88.7 | 88.5 | 87.3 |
Global Wholesale Banking | 6.0 | 7.3 | 10.5 | 11.3 | 11.5 | 12.7 |
We attribute muchAmazon, in collaboration with two other largest private-sector banks in Brazil. Part of this plan, named “Plano Amazônia,” aims to eliminate deforestation in the increasesupply chain for cattle farms for beef processors in net interest incomethe Amazon, aiming to finance the cultivation of local crops, such as açaí, Brazilian nuts and net feecocoa, and commission income generated byto identify opportunities for the development of bioeconomy chains. In 2021, we also launched the new commercial banknetwork Rede Norte Amazônica, in order to expand our customer-centricoperations in the region, and we have established the North Amazon Network, a business model,unit comprised of four Brazilian states (Amazonas, Acre, Rondônia, and Roraima), with the objective of fostering business in the region and a particular focus on sustainability. Since its creation, we have made over R$ 270 million in credit lines available to cooperatives and agribusinesses, as well as to producers of Amazonian products who adopt sustainable practices.
In 2021, we inaugurated Brazil’s first sustainable train station in partnership with the improvementState Government of São Paulo, maximizing on-site natural resource efficiency by means of solar energy panels and a water reuse system. Furthermore, in customer experiencecollaboration with the International Finance Corporation, a World Bank Group institution, and satisfaction. the State Government of São Paulo, we supported the Pinheiros River clean-up program.
We also use ESG as one of the criteria for evaluating our executives, evidencing how deeply embedded the subject is in our culture.
In this vein,recognition of our efforts, we have tailored our products and services, which allowed usreceived several ESG accolades in 2021, including Exame magazine’s Best ESG Bank, the Eco Brazil Award, Época Negócios 360°’s Most Sustainable Company, in addition to gradually expand our customer base. Amongbeing named to Fortune magazine’s Change the initiatives put in place to achieve this goal, we highlight the following:World list.
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Our Business
Overview
We operate along two segments through which we offerprovide our 24.2 million active individual, SME and large corporate customers a complete portfolio of products and services:
services to our 30 million active customers as of December 31, 2021 through the following business segments:
Commercial |
Global Wholesale |
The following chart sets forthWe outline below the business divisions for each of our operating segments, and their main focus.
|
|
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Our Commercial Banking and Global Wholesale Banking segments are strongly integrated, which enables us to capitalize on each segment’s strengths to the benefit of the other. We are able to offer joint solutions to customers in 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 profitoperating income before tax by operating segment:
For the Year Ended December 31, | ||||||
2018 | 2017 | 2016 | 2018 | 2017 | 2016 | |
Net interest income | Operating profit before tax | |||||
(R$ millions) | ||||||
Commercial Banking (1) | 39,391 | 32,392 | 27,366 | 12,397 | 11,219 | 12,652 |
Global Wholesale Banking | 2,531 | 2,554 | 3,221 | 3,512 | 3,294 | 3,732 |
Total | 41,922 | 34,946 | 30,586 | 15,909 | 14,514 | 16,384 |
As of December 31, 2018, our net interest income increased by 20.0%, reaching R$41,922 million compared to R$34,946 million as of December 31, 2017. 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, 2018, our operating profit before tax increased 9.6% and reached R$15,909 million compared to R$14,514 million as of December 31, 2017. Excluding the effects of the hedge for investment held abroad operating profit before tax amounted to R$10,043 million for the year ended December 31, 2018, a 26.7% increase from R$15,424 million compared to the year ended December 31, 2017. Operating profit before tax and operating before tax excluding the effects of the hedge investment abroad are non-GAAP measures. For further information, see “Item 3. Key Information—A. Selected Financial Data—Reconciliation of Non-GAAP Measures and Ratios to Their Most Directly Comparable IFRS Financial Measures.”
The following table shows a managerial breakdown of our loans and advances to customers by customer category at the dates indicated:
As of December 31, | Change between 2017 | Change between 2016 | ||||
2018 | 2017 | 2016 | and 2018 | and 2017 | ||
(R$ millions) | ||||||
Individuals | 133,603 | 107,610 | 91,195 | 24.2% | 18.0% | |
Consumer Finance | 40,964 | 33,170 | 26,608 | 23.5% | 24.7% | |
SMEs | 49,624 | 46,879 | 42,440 | 5.9% | 10.5% | |
Corporate(1) | 97,742 | 100,171 | 108,195 | -2.4% | -7.4% | |
Total Credit Portfolio | 321,933 | 287,829 | 268,438 | 11.8% | 7.2% |
As of December 31, 2018, our loans and advances to customers increased by 11.8%, reaching R$321,933 million compared to R$287,829 million as of December 31, 2017. This increase is primarily due to an increase in loans to individuals and in our consumer finance portfolio. For further information, see “Item 5. Operating and Financial Review and Prospects—A. Operating Results—Results of Operations.”
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Commercial Banking
Individuals
The services we provide to individuals are currently as follows:
We offer our retail lending products to customers through our extensive branch network and on-site service units. See “—Service Channels.” The following table sets forth our individual customer loan portfolio at the dates indicated, as per our management records:
For the Year Ended December 31, | Change between December 31, 2018 and 2017 | ||||
2018 | 2017 | 2016 | R$ million | % | |
(R$ millions) | |||||
Leasing/Auto Loans(1) | 2,341 | 1,895 | 1,869 | 446 | 23.5 |
Credit cards | 30,928 | 24,278 | 20,524 | 6,650 | 27.4 |
Payroll loans(2) | 33,691 | 25,547 | 18,918 | 8,144 | 31.9 |
Mortgages | 34,042 | 28,232 | 27,313 | 5,810 | 20.6 |
Agricultural Loans | 6,084 | 5,232 | 3,416 | 852 | 16.3 |
Personal loans/Other | 26,516 | 22,426 | 19,155 | 4,090 | 18.2 |
Total | 133,603 | 107,610 | 91,195 | 25,993 | 24.2 |
Small and Medium Enterprises
We serve SMEs through our Santander Negócios e Empresas brand. Our current classification model for SMEs is as follows:
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experts for more complex demands and loan managers specializing in risk management for each segment. We also provide specialized services to multinationals and other major corporates in order to meet their specific needs.
In recent years, we have developed products specifically for SMEs, including industry-specific offerings specially designed to meet the needs of bars and restaurants, gas stations, medical offices and clinics, franchises, supermarkets, hotels and high schools. In addition, we have also repositioned the “Santander Negócios & Empresas” customer segment, improving our financial offerings and launching a non-financial product called “Programa Avançar.” The program provides companies with concrete deliverables, such as videos, events and workshops in order to develop partner and employee skills, to build teams to support talent hiring and to help connect our customers to international trade through the Santander Trade portal.
The table below sets forth our SME loan portfolio at the dates indicated, as per our management records:
For the Year Ended December 31, | Change between December 31, 2018 and 2017 | ||||
2018 | 2017 | 2016 | R$ million | % | |
(R$ millions) | |||||
Agricultural lending | 923 | 506 | 322 | 417 | 82.4 |
Working capital loans | 12,687 | 12,359 | 12,695 | 328 | 2.7 |
Buyer financing | 12 | 32 | 21 | (20) | (63.7) |
Vendor financing | 15 | 16 | 10 | (1) | (6.7) |
Discounted receivables | 1,519 | 1,667 | 1,491 | (148) | (8.9) |
Comex | 4,139 | 1,723 | 1,259 | 2,416 | 140.2 |
Overdraft facility | 2,642 | 2,773 | 2,837 | (131) | (4.7) |
Refinancing | 4,129 | 4,169 | 4,365 | (40) | (1.0) |
Resolution 2,770 | 37 | 16 | 35 | 21 | 132.7 |
Account overdraft loans | 1,819 | 1,820 | 1,734 | (1) | (0.0) |
CDC/leasing(1) | 2,335 | 1,724 | 1,506 | 611 | 35.4 |
Other(2) | 19,366 | 20,074 | 16,165 | (708) | (3.5) |
Total(3) | 49,624 | 46,879 | 42,440 | 2,745 | 5.9 |
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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 customer finance portfolio of R$40.9 billion which is primarily composed of auto loans for individuals. We are the market leader in auto loans, with a market share of 23.7% as of December 31, 2018, according to the Brazilian Central Bank.
In 2017 we launched “+Negócios,” an innovative digital trading platform designed to be simple and intuitive, which enables faster execution of loan simulations and credit approval and proposal formalization, in addition to providing portfolio management reports. Also in 2017, we introduced “+Vezes,” which allows retailers to offer installment payment options when they sell goods and services.
Our positioning is reinforced by the offering of integrated financing solutions together with Webmotors S.A., an online portal available in the Brazilian market, through which consumers can advertise their cars for sale. In 2018, Webmotors launched Cockpit, a platform for car dealers, which combines solutions for the entire car buying and selling journey with features such as: business management/performance, buyer profile (CRM), data intelligence, predictive pricing models and market data (AutoGuru). The Cockpit tool 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.
Also in 2018, we 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 improved the customer's after-sales journey through several functionalities available on an online portal that gives them autonomy and practicality. These refinements have already led to an increase in NPS in the segment, as well as greater operational efficiency.
We have joint ventures with RCI (Renault and Nissan) and PSA (Peugeot, Citroën and DS), and white-label partnerships with Hyundai, Subaru, Volvo, Chery and Kia Motors do Brasil. 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, sustainability (accessibility equipment, renewable energy and cleaner processes sectors), among others. Additionally, on February 21, 2019, the Brazilian Central Bank granted to Banco Hyundai Capital Brasil S.A. the authorization to operate as a banking entity, which will support our leadership in the segment.
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 2017 and | Change between 2016 and | |||
2018 | 2017 | 2016 | 2018 | 2017 | |
Consumer finance loan portfolio market share (1) (%) | 23.7% | 23.1% | 20.3% | 0.6 p.p | 2.8 p.p |
Consumer finance portfolio (R$ billion) | 40.9 | 33.1 | 26.6 | 23.6% | 24.7% |
Share of auto loan in the consumer finance portfolio (%) | 87.0% | 85.6% | 83.0% | 1.4 p.p | 2.6 p.p |
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Corporate
Our corporate customer segment comprises large companies that have annual gross revenues greater than R$200 million (except for our Santander Corporate & Investment Banking customers). We focus on fostering a close relationship with our corporate customers by providing them with customer-tailored services.
Global Wholesale Banking
Santander Corporate & Investment
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For the Year Ended December 31, | ||||||||||||||||||||||||
Net interest income | Operating income before tax | |||||||||||||||||||||||
2021 | 2020 | 2019 | 2021 | 2020 | 2019 | |||||||||||||||||||
(R$ millions) | ||||||||||||||||||||||||
Commercial Banking(1) | 46,236 | 41,457 | 42,044 | 19,491 | 4,666 | 18,375 | ||||||||||||||||||
Global Wholesale Banking | 5,082 | 2,985 | 2,277 | 5,260 | 4,998 | 3,898 | ||||||||||||||||||
Total | 51,318 | 44,443 | 44,321 | 24,750 | 9,664 | 22,273 |
(1) | Operating income 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 2021, 2020 and 2019 amounted to loss of R$2,512 million, R$13,583 million and loss of R$1,264 million, respectively. |
The following table shows a managerial breakdown of our loans and advances by customer type at the dates indicated:
As of December 31, | Change between 2020 and 2021 | Change between 2019 and 2020 | ||||||||||||||||||
2021 | 2020 | 2019 | ||||||||||||||||||
(R$ millions) | ||||||||||||||||||||
Individuals | 203,678 | 174,042 | 156,177 | 17.0 | % | 11.4 | % | |||||||||||||
Consumer Finance | 55,441 | 51,637 | 48,421 | 7.4 | % | 6.6 | % | |||||||||||||
SMEs | 59,602 | 54,525 | 53,119 | 9.3 | % | 2.6 | % | |||||||||||||
Corporate(1) | 174,634 | 137,618 | 89,539 | 26.9 | % | 53.7 | % | |||||||||||||
Total Credit Portfolio | 493,355 | 417,822 | 347,257 | 18.1 | % | 20.3 | % |
(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
Retail
Individuals
We have structured the individual customer service segment as follows:
● | Private Banking – is |
● | Santander Select – is responsible for customers with a monthly income above R$10,000, and R$30,000 in investments, or more than R$100,000 in 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 |
● | 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. |
Furthermore, 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 catering to regions where we do not have a physical presence.
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We launched the following products or functionalities for retail customers in 2021:
● | Santander Especial – New customers who opened their accounts on our digital channels have access to Santander Direct. |
● | New account digital process - We endeavor to simplify the account opening process using internal and external information and making the experience quick and simple for new customers. |
Small and Medium Enterprises (SMEs)
We serve SMEs under the “Santander Negócios e Empresas” brand, with the following customer service segmentation model:
● | Empresas 3 Núcleos (Core Companies) – 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, technology companies and other major corporations in order to meet their specific needs. |
● | Empresas 2 Polo (Hub Companies) – responsible for companies with annual revenues between R$3 million and R$30 million. We offer these customers a comprehensive range of |
● | Empresas 1 Agência (Branch Businesses) – responsible for companies with annual revenues 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, or “POS,” terminal hosted by our former subsidiary Getnet. Through this arrangement, our customers receive benefits for using the Getnet solution to process their credit card sales, with receipts being posted to a Santander Brasil checking account. |
● | Negócios Direct - for companies with annual revenues of up to R$300 thousand. We offer these customers direct access to 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 the client’s day to day needs. |
● | Empresas MEI (Individual Microentrepreneur) – responsible for companies with annual revenues of up to R$81 thousand. We offer these customers a simplified and cost-effective option through our Santander Conta MEI, a remote service, and digital solutions such as Gent& Santander – the artificial intelligence solution for service and sales. |
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 consumer finance business for the periods indicated:
As of December 31, | Change between 2020 and 2021 | Change between 2019 and 2020 | |||
2021 | 2020 | 2019 | |||
Individual consumer finance loan portfolio market share (1) (%) | 24.4% | 25.1% | 25.0% | (1.1) p.p. | 0.1 p.p. |
(1) | Source: Brazilian Central Bank. |
Corporate
Our corporate banking segment aims to be the main distribution channel of the Santander Group to Brazilian and foreign and/or multinational corporate clients. The product offering ranges from simple cash accounts to
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mergers and acquisitions advisory services. We leverage our strength in consumer finance, asset and wealth management, payments and markets to serve our clients and their shareholders, employees, clients and suppliers. We serve companies with annual gross revenues in excess of than R$200 million located across Brazil by physical and digital channels. Our corporate banking segment has been constantly evolving as a segment relying on a disciplined analytical toolkit, consistent communication and workforce upskilling.
Global Wholesale Banking
Santander Corporate & Investment Banking (SCIB)
SCIB is the global business unit that serves customers, who, 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 comprises 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 Santander Group’s global structure of services, which is supported by its worldwide-integrated wholesale banking network and global services solutions, as well as local market expertise and provision of integrated services.
Our Portfolio of Products and Services
Payments
Credit and Debit Cards
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 that are compatible with the income level and lifestyle of each of our customers.
In order to reach a greater number of customers and remain competitive, we launched the SX card in November 2020, as part of the SX strategy detailed below. This product benefits highly engaged and transactional customers, facilitating the exemption from annual card fees. In addition, we also took the opportunity with the SX card to launch a more modern and ambitious card design for our customers.
To improve customer experience for the high-income segment, where we are aiming to increase market share and brand awareness, we launched the Gold, Platinum and Centurion products with American Express which include NFC technology, the accumulation of Esfera points that do not expire and still allow access to Membership Rewards, an exclusive American Express program.
In line with Santander Brasil’s global purpose of becoming NetZero by 2050, we launched cards made from recycled material in July 2021. The new cards made of recycled material were issued to customers who already had an SX or Elite card, close to expiry. We expect to make the official launch for the first quarter of 2022, with the issuance of 100% of SX and Elite cards with recycled material. Currently, we are the only bank in Brazil that issues cards made from recycled material.
In the SMEs segment, believing in the great potential of microentrepreneurs, or “MEI,” who represent more than half of the companies in Brazil, we developed an exclusive card for this segment. The MEI card grants customers discounts on purchases made with partners, chosen according to the microentrepreneurs field of activity, as a result of which cardholders have access to exclusive offers for the purchase of input for their companies. In addition, there is the possibility of an annual fee waiver by binding the card by using the card on a monthly basis or by registering with the PIX system.
In line with the objective of becoming an open financial services platform, in November 2021 we launched a partnership with Samsung, a solution that offers digital account opening, card sales and SIM loans on the first screen of Samsung pay. The objective is to provide a simple and fluid journey within the app that is already used on a daily basis to pay for on-the-go purchases.
We also improved our digital journey to provide better customer self-service, which we believe is a key component for higher customer engagement. A recent novelty is “Clique e Retire,” a new physical card delivery system that provides a quick, autonomous solution for customers by allowing them to opt to collect their cards from self-service machines.
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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 2020 and 2021 | Change between 2019 and 2020 | ||||||||||||||||||
2021 | 2020 | 2019 | ||||||||||||||||||
Credit card portfolio market share (1) | 12.4 | % | 13.4 | % | 12.9 | % | (1.0 p.p.) | 0.5 p.p. | ||||||||||||
Credit card portfolio (R$ billion) (2) | 48 | 37.8 | 36.1 | 27.0 | (100.0 | %) | ||||||||||||||
Total card turnover (R$ billion) (2) | 306.0 | 242.0 | 236.4 | 26.4 | 2.4 | % | ||||||||||||||
Credit card turnover (R$ billion) (2) | 203 | 158.7 | 161.0 | 27.9 | (1.4 | %) | ||||||||||||||
Total card transactions (in millions) (2) | 3,555.3 | 2,570.8 | 2,725.4 | 38.3 | (5.7 | %) | ||||||||||||||
Credit card transactions (in millions) (2) | 1,859.1 | 1,300.0 | 1,450.9 | 43.0 | (10.4 | %) | ||||||||||||||
Participation of credit card in the household consumption (only debit)– Market overview (2)(%) | 24.1 | % | 17.4 | % | 13.8 | % | 6.7 p.p. | 3.6 p.p. | ||||||||||||
Participation of credit card in the household consumption (only credit) – Market overview (2)(%) | 42.1 | % | 25.2 | % | 24.0 | % | 16.9 p.p. | 1.2 p.p. | ||||||||||||
Participation of credit card in the household consumption (total, debit and credit) – Market overview (2)(%) | 69.3 | % | 43.5 | % | 38.2 | % | 25.8 p.p. | 5.3 p.p. |
(1) | Source: Brazilian Central Bank, as of September 31, 2021. Data for the year ended December 31, 2021 was not available as of the date of this annual report. |
(2) | Source ABECS – “Monitor bandeiras,” The data relating for the year ended December 2021 has been revised as a consequence of the restatement of the methodology of monitoring issued by ABECS. |
Santander Way
Santander Way is an app available to our cardholders that allows them to manage their Santander Brasil cards at any time and place. This complete payment platform also works as a digital wallet, enabling customers to conduct instant contactless payments. The app is frequently updated with new features. Some of the most notable features launched in 2021 included: (i) extra loan and installment offers, (ii) virtual cards that allow purchases before the physical card arrives, (iii) functions for safer online purchases without a physical card, (iv) possibility for the customer to update his or her income to obtain a higher credit limit, and (v) chargeback from unrecognized purchases. In 2021, we have nine million active customers using Santander Way.
Merchant Acquiring Market | Getnet
Getnet is a technology company that offers payment solutions to a range of merchants, from large businesses to the small entrepreneurs, both physically and digitally. Getnet was our subsidiary until the completion of the Spin-Off on October 26, 2021. For more information on the Spin-Off of Getnet, see “—A. History and Development of the Company—The Getnet Spin-Off.”
The following table sets forth certain historical key financial and operating data regarding Getnet’s business for the periods indicated.
As of and For the Year Ended December 31, | Change between 2020 and 2021 | Change between 2019 and 2020 | ||||||||||||||||||
2021 (1) | 2020 | 2019 | ||||||||||||||||||
(R$ millions, except as otherwise indicated) | ||||||||||||||||||||
Market share of total turnover (2) | 15.3 | % | 14.9 | % | 11.3 | % | 0.4 p.p. | 3.6 p.p. | ||||||||||||
Debit turnover (3) | 105.8 | 105.8 | 80.9 | 0 | % | 30.8 | % | |||||||||||||
Credit turnover (3) | 182.7 | 167.9 | 126.6 | 8.8 | % | 32.6 | % | |||||||||||||
(1) | We completed the Spin-Off of Getnet on October 26, 2021 and, as a result, Getnet is no longer a subsidiary of Santander Brasil. We stopped consolidating Getnet within our results of operations on March 31, 2021. For additional information on the Spin-Off, see “Item 4. Information on the Company—A. History and Development of the Company—The Getnet Spin-Off” and notes 3, 13 and 27 to our audited consolidated financial |
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(2) | Source: Data for 2021 relates to |
(3) | Considers data until September, 2021. |
We completed the Spin-Off of Getnet in October 2021, and Getnet is no longer our subsidiary. However, on April 15, 2021, we entered into the Getnet Partnership Agreement, which provides a framework for our relationship with Getnet following the Spin-Off. See “Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions—Spin-Off of Getnet and Related Arrangements—Partnership Agreement.
Following the Spin-Off, Getnet is operating as the Brazilian leg and regional acquirer of the Santander Group’s PagoNxt merchant solutions. PagoNxt is a strategic initiative that seeks to promote sustainable and profitable growth by integrating various payment solutions for businesses and consumers using the latest technology. PagoNxt is an autonomous company within the Santander Group. Through its three lines of business, namely merchant solutions for businesses, trade solutions for international trade and consumer solutions for consumers, it provides solutions not only to banking clients of the Santander Group but also to third-party customers, financial institutions and fintechs.
Esfera
Esfera is our loyalty program, which can be accessed through its own website and mobile app. Our loyalty platforms enable our credit card holders to exchange their reward points for many products, services and travel benefits, including exclusive deals and discounts with a broader selection of partners such as some of Brazil’s largest retailers and a cinema chain, among others. Esfera also operates a marketplace offering cashback to is clients on purchases of products that aggregate more than sixty partners as of the date of this annual report.
Ben
Ben is an employee benefits company that provides greater flexibility, purchasing power and quality of life to its users by creating, supplying and managing types of employee benefit vouchers (e.g. meals, such as Vale Alimentação and Vale Refeição, as well as transportation) in the form of magnetic cards. These benefits are offered through an integrated digital platform.
Since 2019, Ben has provided transportation benefits in partnership with RB Serviços Empresariais Ltda.
Ben is currently working on development of new products, such as fuel cards and other benefit options to expand its portfolio.
Ben added Ben Único to its portfolio. This product allows customers to have two kinds of benefits in a single card, reducing the cost with card emission and logistics, contributing with ESG metrics,
According with new products developing planning, Ben submitted a request to the Brazilian Central Bank to issue a license to operate as a payment institution (instituição de pagamento) and it was granted in December 2021.
The following table sets forth certain key financial and operating data regarding Ben´s business for the periods indicated.
As of and For the Year Ended December 31, | ||||||||||||
2021 | 2020 | 2019 | ||||||||||
(in R$ millions, except as otherwise indicated) | ||||||||||||
Card Purchases | 1,484 | 946 | 560 | |||||||||
Number of Cards (in thousands) | 565 | 217 | 98 | |||||||||
Number of Transactions (in thousands) | 20,477 | 12,192 | 9,534 | |||||||||
Merchant accredited (in thousands) | 365 | 338 | 253 |
For further information, see also “Item 4. Information on the Company—A. History and Development of the Company—Important Events.”
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Payroll Loans
Payroll loans support both account and non-account holders in the execution of projects and financial organization. Under these loans, monthly installments are deducted directly from the borrowers’ paychecks by their own employers, and then credited to Santander Brasil, significantly reducing our credit risk. We offer these payroll loans to our customers through our mobile banking platform and our branches. Our customers can refinance their payroll loans, as well as choose from other options to help them manage their debts. Furthermore, these loans are also offered to non-account holders through Olé Consignado. For further information on relevant events, relating to Olé Consignado’s corporate events, see “Item 4. Information on the Company—A. History and Development of the Company—Important Events.”
The following table sets forth certain key financial and operating data regarding our payroll loans as of the dates indicated.
As of December 31, | Change between 2020 and 2021 | Change between 2019 and 2020 | ||||||||||||||||||
2021 | 2020 | 2019 | ||||||||||||||||||
Market share in origination (1) | 16.96 | % | 18.90 | % | 13.2 | % | (1.94) | p.p | 9.09 p.p | |||||||||||
Payroll loan portfolio (R$ billion) | 53.3 | 48.1 | 43.0 | 10.85 | % | 11.9 | % |
(1) | Source: Brazilian Central Bank, as of December 31, 2021, 2020 and |
SIM
SIM is a digital lending platform for individuals through which customers can apply, and be approved, for a loan completely online. After two years of operation, SIM has already achieved a positive net profit, a loan portfolio of R$1.6 billion as of December 31, 2021 and a market share of 0.7%, in the year ended December 31, 2021, as well as a total of 6.5 million registered users as of December 31, 2021. SIM also has a high level of customer satisfaction, with an NPS of 80 points in the year ended December 31, 2021.
emDia
emDia is an online debt renegotiation platform. It provides customers with a simple platform to access debt renegotiation services on a 24/7 basis, As of December 31, 2021, emDia had 6.5 million customers and had contributed to the recovery of R$78 million in credit volume in 2021.
Mortgages
We offer long-term financing to our customers for real estate purchases, secured by deeds of trust. We consider mortgages to be a strategic product due to their lower risk (since the acquired property serves as collateral) and their ability to increase our customer loyalty (especially since we offer customers more attractive rates if they choose to bank with us). In this market, our customers, and those of our competitors, are primarily individuals.
We do not offer mortgage loans that do not meet prime lending regulatory standards, which means that (i) we do not finance more than 90% of the value of the property to be purchased, (ii) borrowers must meet certain minimum monthly income levels evidenced by recent payroll information and tax returns to confirm their employment status or other revenue sources, allowing us to evaluate their credit risk profile, and (iii) any other indebtedness added to the financing cannot exceed 35% of the borrower’s monthly gross income,
To facilitate the process for our customers, we provide a real estate digital platform where customers can obtain mortgages completely online. We were the first bank in Brazil to offer customers the opportunity to secure a mortgage without being physically present, except for the signing of the agreement and returning it duly registered. We have a partnership with the largest real estate platform in Brazil in order to improve our sales network and strengthen our digital presence.
The following table sets forth certain key financial and operating data regarding our mortgage business for the periods indicated:
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As of December 31, | Change between 2020 and 2021 | Change between 2019 and 2020 | ||||||||||||||||||
2021 | 2020 | 2019 | ||||||||||||||||||
(in R$ billions, except percentages) | ||||||||||||||||||||
Mortgage loan portfolio | 54.8 | 45.8 | 39.7 | 19.7 | % | 15.4 | % | |||||||||||||
Individual sector mortgage loans | 53.0 | 44.0 | 37.2 | 20.5 | % | 18.3 | % | |||||||||||||
Loan to value(1) – Production (% quarterly average) | 65.5 | % | 64.9 | % | 62.9 | % | 0.06 p.p. | 2.0 p.p. | ||||||||||||
Loan to value – Portfolio (%) | 52.5 | % | 52.2 | % | 49.4 | % | 0.30 p.p. | 2.75 p.p. |
(1) | Ratio between loans and the
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Home Equity
In our portfolio of loan products, we also offer a “home equity” financing product called “UseCasa” in which clients can receive a loan if they provide real estate as collateral. This product enables clients to access financing to pursue their personal objectives. “UseCasa” has increased its market share to 23.5% in 2021, maintaining our position as the leading private sector bank for these types of loans in Brazil. Our portfolio was R$3.2 billion in 2021, an increase of 27% in the year ended December 31, 2021 compared to the year ended December 31, 2020. Efficiency has also improved as approximately 50% of loans are now approved in less than 10 days. We do not offer home equity loans that do not meet prime lending regulatory standards, which means that (i) we do not finance more than 60% of the value of the property, (ii) borrowers must meet certain minimum monthly income levels evidenced by recent payroll information and tax returns to confirm their employment status or other revenue sources, allowing us to evaluate their credit risk profile, and (iii) any other indebtedness added to the financing cannot exceed 35% of borrowers’ monthly gross income.
To facilitate the process, customers can obtain home equity loans completely online through our real estate digital platform. When using this option, customers only need to be physically present when signing the contract and when returning it once it is duly registered.
Tailored Products and Services
As mentioned above, we offer a complete set of services and products worldwide. In this way, we have a portfolio that ranges from basic to tailor-made and highly complex solutions in the following areas:
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, of which the most significant are listed in the table below.
Customer Solutions Agribusiness Agribusiness remains one of our key areas of expansion, and we believe that expanding our agribusiness network will help broaden our reach into the Brazilian countryside to strategic areas in which we are not yet present. We provide a full range of products and services focused on the agribusiness sector. Our approach towards rural producers differs from the one taken with our other customers in that we offer a specialized relationship to our rural producers. We believe that a network of physical stores and digital solutions will result in a more agile and efficient communication with these customers. The following table sets forth certain key financial and operating data regarding our agribusiness for the periods indicated.
Microfinance We believe that Prospera Santander Microfinance is a leading microcredit-oriented operation among privately owned banks in Brazil, based on market share and portfolio value. This product aims to support formal and informal microentrepreneurs by generating business and income with a 100% digitalized service process, in addition to products intended to improve business management skills, we have customers who hire us for services previously not available to them, because they do otherwise have access to financial services, such as property finance, consortium and investment services.
Webmotors Webmotors is the first and largest Brazilian technology company focused on providing automotive purchase and sale solutions for dealers, original equipment manufacturers and private sellers, holding the largest online automotive listing in Brazil. Webmotors received an average of more than 30 million visits per month in 2021. Through Cockpit, a pioneering and disruptive platform for utilities, which brings together solutions for the entire network described above, we offer the following solutions: business management/ performance, buyer profile (CRM), data intelligence, predictive pricing models and market data (AutoGuru). Webmotors endeavors to be a platform that accompanies private and corporate users throughout the life of their vehicle, from purchase, to use and sale. In order to do so, Webmotors reformulated the business of its subsidiary Loop, which was a traditional auctioning business, into an omnichannel dealer which is able to increase the sale value of demobilized fleets in its digital and physical stores. Webmotors also launched “Agenda Fácil,” a product focused on scheduling services through WhatsApp.
Not applicable.
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Not applicable. ITEM 10. ADDITIONAL INFORMATION
Not applicable.
Registration and Business Purpose We are a publicly held company, incorporated under Brazilian law. Our documents of incorporation are duly registered with JUCESP, under NIRE 35300332067. Pursuant to article 4 of our By-Laws, our corporate purpose is to (i) participate in asset, liability and accessory transactions related to our respective authorized portfolios (commercial, investment, credit, financing and investment, real estate credit and leasing), (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.
Brazilian Corporate Law imposes on the members of the As In addition to these provisions, Article 10 of our By-Laws provides that
Rights of Common Shares and Preferred Shares Each common share gives its holder the right to a vote at general
Nevertheless, these rights can only be exercised by the holders of shares The holders of preferred shares are entitled to the following rights according to our By-Laws:
Common shares not belonging to the controlling shareholders also give their holders tag-along rights in the event that our control is transferred on the same terms and conditions as those granted to our controlling shareholders. The shareholders’ general meeting may decide on conversion of the preferred shares into common shares. The Brazilian Corporate Law sets forth that shares without voting rights or shares with restricted rights, including our preferred shares, shall be granted unrestricted voting rights if the company ceases to distribute, during three consecutive fiscal years, any fixed or minimum dividend granted to these shares, until the respective distributions are made.
According to our By-Laws, the dividends that are not claimed by shareholders within three years, from the beginning of their payment, shall prescribe to our benefit. Under the Brazilian Corporate Law, any change in the preferences or 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:
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 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 The custodian shall provide Unit holders with a statement of account at the end of each month in which there is movement and, Upon a written order issued by the holder of the Unit account to a broker authorized by the stock exchange where the Units are traded, the custodian shall block the corresponding Units and transfer them to the buyer upon receipt of a confirmation of the sale from the stock exchange. The Unit holder shall have the right, at any time, to instruct a broker to cancel Units and transfer the underlying shares. The broker must request to us, as 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:
In the event of a capital increase, by means of the 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 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 An extraordinary general meeting may be held at any time, including together with an annual general
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
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 Call Notice of 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 mass circulation newspapers in São Paulo, where the B3 is located. Our call notices Place of Our Shareholders’ General Meetings Our shareholders’ meetings are held at our headquarters at Avenida Presidente Juscelino Kubitschek, Responsibility for Calling General Meetings It is usually the responsibility of our
Conditions for Admission to Shareholders attending general meetings must prove that they are the holders of shares with voting rights, as set forth in the Brazilian Corporate Law. Our shareholders may be represented by a proxy (including a public proxy in accordance with CVM Instruction 481, of December 17, 2009, as amended), appointed not more than one year before the date of the meeting, and this representative must be a shareholder, a manager, a lawyer or, in the case of a publicly held company, as ours is, a financial
Remote Voting The CVM
regulations. Policy on Trading in Our Own Securities The objective of our Policy on Trading in Our Own Securities, prepared in accordance with CVM 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 Among other matters, derivatives, including:
Our policy also establishes that our controlling shareholders, officers, and members of our
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 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 the 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 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 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.
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
Purchase of Our Own Shares Our By-Laws authorize our The decision to acquire our shares is also subject to certain restrictions. It may not, among We may not hold in treasury more than 10% of our outstanding shares of a certain type or class, including shares held by our subsidiaries and affiliated companies and the shares corresponding to the economical exposure arising from derivatives or deferred settlement transactions entered into by us, our subsidiaries and affiliated companies. This limit does not apply to reimbursed shares, We may purchase our shares on the stock exchange, but not for a price above the market value. Acquisitions by means of private transactions must observe the applicable limitations and the approval by the shareholders meeting may be required. We may also buy our own shares in the event that we should cease to be a publicly held company., We may also purchase or issue put or call options on our shares.
On 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, On February 2, 2021, our Board of Directors approved the Unit repurchase program to cover the acquisition, by us or our branch in Cayman, of up to 36,956,402 Units or ADRs, representing 36,956,402 common shares and 36,956,402 preferred shares, corresponding to approximately 1% of the totality of our corporate capital. The repurchase program ends on August 2, 2022. Cancellation of Registration as a Publicly Held Company We may cancel our registration as a publicly held company and, for this purpose, our controlling shareholders must necessarily make a public offer to acquire all our shares in the market, according to the Brazilian Corporate Law and the regulations issued by the CVM. The minimum offer price must be at least equal to the economic value of our shares, as valued by a specialized company using any generally accepted and recognized valuation method, or any other criteria defined by the CVM. The valuation report must be prepared by a specialized and experienced appraiser, who is independent of Santander Brasil, our management team and our controlling shareholders and who shall be chosen by the board of directors. The controlling shareholder shall bear the costs of preparing the valuation report. Disposal of Control Our By-Laws state that disposal of control of our company, either in a single transaction or in a series of transactions, must be subject to the condition, whether a suspensive or resolutory condition, that the acquirer
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 Requirement for Disclosure of Information As a publicly held company, we must comply with the requirements for disclosure of information set forth by the Brazilian Corporate Law and the CVM. Periodic and Occasional Disclosure of Information The regulations applicable to publicly held companies issued by the CVM, including CVM According to CVM Instruction 480, of December 7, 2009, as amended, the reference form CVM Instruction 457, of July 13, 2007, as amended, or “CVM Instruction 457,” provides that we are also subject to the disclosure of our consolidated financial statements based on 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
Disclosure of Information Our We are obliged to send such information to CVM and B3 within Disclosure of Information CVM The
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 Disclosure of Material Facts The Brazilian Securities Market Law and CVM
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 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.
For the two years immediately preceding the publication of this annual report, we were not a party to any material contract outside the ordinary course of business.
Foreign Investment in Brazil Foreign Direct Investment Foreign direct investment in Brazil is regulated by Law No. 4,131,
Foreign capital must be registered with the Brazilian Central Bank through the Electronic Registration System – Foreign Direct Investment, or the “Registro Declaratório Eletrônico – Investimento Externo Direto,” within 30 days of the flow of funds into Brazil in accordance with Law No. 4,131. The registration of foreign capital is required for the remittance of profits abroad, the repatriation of capital and the registration of reinvestments. Investments will always be registered in the foreign currency in which they are
On December 28, 2006, Law No. 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.
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 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. 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:
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
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 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 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 Rate (Taxa de Longo Prazo – TLP), as determined by the Brazilian Central Bank from time to time, and the amount of this deductible expense may not exceed the greater of:
Payment of interest on shareholders’ equity to a Non-Resident Holder is subject to withholding income tax at the rate of 15%, or 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
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. 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:
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:
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
(iii) Capital Reduction In 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% for a Non-Resident Holder located in a Tax Haven. Although subject to interpretation, in the case of Non-Resident Holders carrying out investments pursuant to CMN Resolution 4,373, it is possible to sustain that the income tax should not apply at progressive rates under Law 13,259/ Sale of ADRs Pursuant to Section 26 of Law Gains on the Units Non-Resident Holders may exchange ADRs for the underlying units, sell the units on the Brazilian stock exchange and the sale proceeds may be remitted abroad. As a general rule, the exchange of ADRs for shares is not subject to income taxation in Brazil. Upon receipt of the underlying units in exchange for ADRs, Non-Resident Holders may also elect to register with the Brazilian Central Bank the U.S. dollar value of such units as a foreign portfolio investment under CMN Resolution Alternatively, the Non-Resident Holder is also entitled to register with the Brazilian Central Bank the U.S. dollar value of such units as a foreign direct investment under Law No. 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 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
Pursuant to CMN Resolution 4,373 the progressive rates of Law 13,259/16 to capital gains obtained by Non-Resident Holders not located in a Tax Haven will be applicable and for Non-Resident Holders (whether they are considered to be Non-Resident Holders as a result of CMN Resolution
However, in certain circumstances, there may be arguments to sustain the position that such taxation is not applicable to 4,373 Holders that are not resident or domiciled in a Low or Nil Tax Jurisdiction, which should be subject to the assessment of the withholding income tax at a fixed 15% rate.
Tax on Foreign Exchange Transactions (IOF/Exchange) The Tax on Foreign Exchange Transactions, 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, Under the provisions of the Law, the Brazilian government may increase any of these rates at any time, up to 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% on the notional value of the adjusted purchase sale or maturity of financial derivative contract in Other Brazilian Taxes The inheritance and gift tax, or 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:
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 The summary is based upon the Internal Revenue Code of 1986, as amended, or the
As used herein, a “U.S. Holder” is, for U.S. federal income tax purposes, a beneficial owner of ADRs or units that is:
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
Taxation of Distributions Distributions paid on our units or ADRs (including distributions to shareholders that are treated as interest on net equity for Brazilian tax purposes and amounts withheld in respect of Brazilian tax), other than certain pro rata distributions of our common shares, will be treated as dividends to the extent paid out of our current or accumulated earnings and profits (as determined under U.S. federal income tax principles). Because we do not maintain calculations of our earnings and profits under U.S. federal income tax principles, it is expected that distributions generally will be reported to U.S. Holders as dividends. These dividends will be included in a U.S. Holder’s income on the date of the U.S. Holder’s (or in the case of ADRs, the depositary’s) receipt of the dividend, and will not be eligible for the “dividends received deduction” generally allowed to corporations receiving dividends from domestic corporations under the Code. The amount of the distribution will equal the U.S. dollar value of 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) 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 Foreign Tax Credits Subject to certain generally applicable limitations, which may vary depending upon a U.S. Holder’s circumstances, 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. 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,
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 If we were to be treated as a PFIC in any taxable year in which a U.S. 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. 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 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,
10F. Dividends and Paying Agents |
Not applicable.
10G. Statement by Experts |
Not applicable.
10H. Documents on Display |
We are subject to the information requirements of the Exchange Act, except that as a foreign issuer, we are not subject to the proxy rules or the short-swing profit disclosure rules of the Exchange Act. In accordance with these statutory requirements, we file with or furnish reports and other information to the SEC. Reports and other information filed or furnished by us to the SEC may be inspected and copied at the public reference facilities maintained by the SEC at Room 1024, 100 F Street, N.E., Washington, D.C. 20549. Copies of such material may also be inspected at the offices of the NYSE, 11 Wall Street, New York, New York 10005, on which our ADRs are listed. In addition, the SEC maintains a website that contains information which we have filed electronically with the SEC, which can be accessed over the Internetinternet 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 Internetinternet website that contains reports and other information about issuers, like us, that file electronically with the CVM.CVM, The address of that website is http://www.cvm.gov.br. We also file consolidated financial statements and other periodic information with the B3. The address of the B3 website ishttp://www.bmfbovespa.com.br.www.bmfbovespa.com.br.
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 approach worldwide.
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.
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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; |
iv. | e-mail; |
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v. | video and teleconferences with Santander Spain; and |
vi. | risk committees, including the executive risk committee for Brazil and the 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: |
ii. | Non-standard information: this includes presentations and |
iii. |
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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.
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 |
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 |
Monthly information:
i. | liquidity and market risk: |
Monthly information is generally more detailed than weekly information.
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Risk Management Committees
The following table describes the main risk committees in Brazil (which are responsible for credit decisions and for ongoing control of credit risk matters), theincluding their responsibilities, members and membersfrequency of each such committee and the frequency with which such committees meets.meetings.
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Committee | Main Responsibilities | Members | Meeting Frequency | ||
Executive Risk Committee |
| Enable the application, at the local level, of the Santander Group’s risk |
● | CEO | Weekly |
● | Approves the risk appetite secondary metrics that will be proposed to the board of directors of Santander Brasil; |
● | Vice President Executive Officer (Chief Risk Officer) | ||
● | Manage exposures from different |
● | Vice President Executive Officer of Legal and Corporate Affairs | ||
● | Approve risk proposals for credit and market operations, including, among others, underwriting operations of fixed and variable income, customer limits |
● | Executive Superintendent of Wholesale’s Risks | ||
● | Handle general issues related to market risk, cross-border limits, country risk, global banking operations, and 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 predefined internal risk regulations |
● | Vice President Executive Officer of Private Banking and Wealth Management | ||
● | Authorize management tools, improvement initiatives, follow up on projects and any other relevant activities related to risk management; |
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● | Approve the policy and standards of methodological models and validate their effectiveness; | ● | |||
● | 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; | ● |
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● | Provide information to the board of directors and to the executive committee | ● | |||
● | Approve the creation, modification and termination of other committees or decision bodies and their regulations and delegate to those committees or people empowerment on decision-making and risk | ● | |||
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Risk Control Committee |
● | Oversee the Risk Identification and Assessment (RIA) exercise; |
● | Chief Financial Officer | Biweekly |
● | Conduct a full segment and regular follow up of all risks, including Conduct Risk, checking if the risk profile is set in accordance with the risk appetite, the commercial and strategic plan and the budget approved by the board of directors; | ● |
Chief Risk Officer
Chief IT Officer· Vice President Executive Officer of Communication and Marketing | ||
● | Conduct an independent and periodic control report on risk management activities, which includes: |
● | Executive | ||
● | Full risk profile view of the different businesses, including among others, benchmarking of the main competitors of the Bank and monitoring of key strategic projects; |
| Executive Superintendent of GIR and Relationship with Supervisors |
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●Monitor the observance of appetite and risk policies, advising the board risk committee on these issues; ●Approve the secondary metrics of Risk Appetite,
●Monitor all relevant aspects of capital management and its ●Approve, review and guarantee the correct and effective risk governance, including the control and decision forums, structures, policies and reports to ensure that all relevant risks are identified, managed and reported, ●Approve and review the Strategic, Financial, Business Continuity and Recovery Plans |
●Vice President Executive Officer of Finance and
●Chief Compliance Officer ●Vice President Executive Officer of Legal and Corporate Affairs ●Chief Data Officer ●Audit Director ●Chief Information Security Officer |
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●Support and assist the board in carrying out stress tests, in particular | |||
●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; | |||
●Supervise measures taken regarding risks to comply with the recommendations and directions issued by the supervisory authorities in the exercise of its function and Santander Brasil’s audit; |
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●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; and
●Approve the operation of hierarchically lower-risk control committees and their respective regulations; ●aspects related to capital management, including: ●Present the impact of new regulations and the results of the elaboration of QIS (Quantitative Impact Study); ●Review and evaluate responses to additional requests made by regulators regarding capital management issues; ●Carry out the analysis and supervision of the results of the capital adequacy assessment exercises and their main components (schedule, assumptions, economic scenarios, methodologies, results, capital buffer, contingency plans and other relevant aspects) of the following processes: ICAAP, TEBU (Bottom-up Stress Test), Strategic. |
The Executive Risk Committee and Risk Control Committee, which are described above in detail above, make decisions with regard to risk management in Brazil with representatives of our senior management, including our Chief Executive Officer (CEO), our Vice President Executive Officer of Risk Management (CRO) and other members of the Executive Committee. The main responsibilities of the Executive 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. They also raise any matters to our board of directors that exceed the authority of the committee. Each of our risk management committees has 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.
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Credit Risk
The Santander GroupGroup’s risk management model is based on a prudent management, driven by the definition of risk toleranceappetite defined by the unit and onapproved by the searching by outcome.headquarters. We operate within the risk management culturelimits of the Santander Group following theGroup's risk management guidelines of the group, 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 that of 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.
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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.
CreditThese requests can come from one of our many service channels, such as ourincluding branches, internet banking, mobile applications and ATMs.
Our credit rating system automatically assigns a credit rating based on a scoring model and our risk management policies.
We use two distinct scoring models depending on the phase in two different phases:which the customer is in with respect to their interaction with us (the “application” phase and the “application” process and 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 already had a relationship with us for a period established by our risk management 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 businesses), the method used to evaluate if approval should be granted is based on internally-developed credit risk approval process is based on an automated analysislimits, as well as the customer´s creditworthiness. These approval methods include system credit policies,automation, or manual and individual analysis, based on the creditworthiness of the SME, in accordance with the respective credit risk approval authority levels developed internally. This analysiswhich 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, as well as collateral granted in connection therewith, is also taken into account in the approval process.
Pre-approved limits on lines of credit for a particular individual or an SMEboth individuals and SMEs are granted based on the creditworthiness, and size as determined according toby our scoring criteria. Credit limits are managed based on the performance of the customers, taking into accountconsidering each customer’s risk profile.
Credit authorizationsauthorization limits are established through policies that defineand these are automatically applied to all credit requests. When an automatic credit decision results in the rules and responsibilities ofcustomer’s needs, the members of each committee. We have established procedures and authorized certain organizational bodiescommercial area has the authority to approve credit requests in amounts greater than those delegated to individual branches (bothsubmit a request for individuals and SMEs).manual approval. Such approvals are made following applicationsubjected to review by analysts or committees, depending on the value of the relevant scoring model and individualized analysis by the relevant authorized organization body.
loan sought.
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 | Up to R$500 thousand | |
Decision | Up to R$30 million | |
Retail Risk Higher Committee and | Up to R$680 million |
(1) For individuals, the maximum value is R$200,000. For SMEs the maximum is R$500,000.
(2) Members of risk decision-making centers include superintendents and other representatives of the risk area.
(3)(2) Members of the higher Risk Committee include, among others, the CEOChief Executive Officer of the group, the officers of Wholesale, Retail, Market Risk, Recovery and representatives of the Risk and Compliance Departments.
251 There is also a more robust model called Rating Plus which is addressed to mid-size companies a few other retail clients. This model combines the clients’ internal and external financial behavior, information obtained from their balance sheets and a questionnaire that is adapted in accordance with the companies’ individualities.
Table of ContentsThe evaluation made by Rating Plus seeks to attribute an internal classification for the costumers defining their risk level in comparison with their creditworthiness. The classification as well as the credit analyses for these clients are usually made manually through specific proposals or limits.
Wholesale Lending
With respect to ourIn wholesale customers, the approval process is determined forbanking, 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, analyzing profitability, creditworthiness and adequacy to the customer. risk metrics of Santander Group RAS – Risk Appetite Statement, in order to determine and submit it for approval.
Wholesale lending risk appetite metrics and limits are set annually and tracked monthly through reports sent to the headquarters of the Santander Group. These limits are defined considering the risk appetite of Santander Brasil and the wider Santander Group, in line with current regulations (Brazilian Central Bank and European
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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 Committee | Up to R$ |
Superior and High Risk Committee | Up to R$ |
Wholesale Committee | Up to R$ |
Executive Risk Committee | Up to R$ |
Credit Monitoring
Credit lines to retail banking SME customers are reviewed on a weekly, basis. Credit lines to retail bankingwhereas individual clientscustomers are systematically reviewed systemically, on a daily, basis, based on athe client’s credit rating. This process allows for improvements in the credit exposure ofto customers who have presentedpresent good credit quality. SpecificAdditional 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, 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, forbasis, When 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 Customer 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.transaction, Each rating relates to a certain probability of default or non-payment, determined on the basis of the customer’s history, with the exception of certain portfolios classified as “low default portfolios.” These ratings and models are used in our loan approval and risk monitoring processes.
The table below shows the internal risk rating levels and their corresponding probability of default:
Internal Risk Rating | Probability of Default |
Low | |
Medium-low | |
Medium | |
Medium-high | |
High |
For a breakdown of our portfolio by internal risk rating, see “Item 4. Information on the Company—B. Business Overview—Selected Statistical Information —Assets —InternalInformation—Short-Term Borrowings—Internal Risk Rating.”
Recovery
Our business recovery area is responsible for all of our nonperforming portfolios. This area uses statistical tools to study the behavior of customers and then defines, implements and monitors strategies and performance related to nonperformingthese portfolios, seeking to ensure maximum efficiency in recovery subject to applicable Brazilian law and regulation.
The business recovery area uses statistical tools to study the behavior of clients and develop strategies for more effective recovery. Customers with greater probability of payment are classified as low-risk customers and those with a low probability of payment are classified as high risk. The aforementioned risk classification determines the intensity of collection efforts expended.
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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 clientscustomers 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:
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Internal teams specialized in restructuring and debt recovery work directly with defaulting |
We use specialized external firms to collect, report and assess high-risk customers. These firms are remunerated according to |
● | In addition, we use digital channels as a mean of increasing the availability of renegotiation offers to our customers. |
Once we have exhausted all of the credit recovery resources available to us, we conduct sales of any remaining nonperforming loans. These sales of nonperforming loans are held periodically through an auction process, with the aim of obtaining optimal prices in the markets and thereby reducing 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.
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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. Our exposure to this risk is not significant and ismostly concentrated in derivative operations involving commodities for clients.customers.
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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.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.
mortgage.
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.
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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, commodities 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 rate futures, foreign exchange forwards, foreign exchange futures, foreign exchange options, cross currency swaps, commodities derivatives, equity index futures and equity options and interest rate options. With respect to non-trading activity, derivatives are used in order to manage interest rate risks and foreign exchange risks arising from asset and liability management activity. We also use interest rate and foreign exchange linear derivatives in non-trading activity. We have no credit derivatives in Brazil, as there is no market for credit derivatives in Brazil.
Activities subject to market risk
Our market risk area is responsible for measuring, controlling and monitoring risk, in respect of those operations where risk to our business 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.exposed:
On the basis of the origin of the risk to which we are exposed, our activities are classified as follows:
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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 |
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.
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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; |
ii. | Calculation, analysis, explanation and reconciliation of profit and loss (P&L); |
iii. | Definition, capture, validation and distribution of market data; |
iv. | Definition of limits, products and underlyings; and |
v. | Consolidation of |
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; |
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viii. | Information consolidation; and |
ix. | Contingency plans and technical |
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 |
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. |
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Global market risk management policies define our risk limit structure while the risk committee reviews and approves such policies. Business managers administer their activities within these limits. The risk limit structure covers both our trading and non-trading portfolios and includes limits on fixed income instruments, equity securities, foreign exchange and derivative instruments.
Limits considered to be global limits refer to the business unit level. To date, system restrictions prevent intra-day limits. Our business units must comply with approved limits. Potential excesses require a range of actions carried out by the global market risk function unit including (i) providing risk-reducing suggestions and controls, which are the result of breaking “alarm” limits and (ii) taking executive actions that require risk takers to close out positions in order to reduce risk levels.
The market risk limits used by us are established along different metrics intended to cover all activity subject to market risk from many perspectives, applying criteria we believe to be conservative. The principal limits include:
Trading limits
i. VaR limits; |
ii. | limits of equivalent positions and/or nominal; |
iii. | sensitivity limits to interest rates; |
iv. | vega limits; and |
v. |
limits aimed at reducing the volume of effective losses or protecting results already generated during the period: |
loss trigger; and |
stop loss. |
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Structural limits
i. | structural interest rate risk of the balance sheet: |
sensitivity limit of net interest margin |
sensitivity limit of market value of equity |
ii. | structural exchange rate risk comprised of the net position in each currency; and |
iii. | liquidity risk: limits defined |
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. |
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1. | Assumptions and limitations: our VaR methodology should be interpreted in light of the limitations that (i) a one-day time horizon may not fully capture the market risk of positions that cannot be liquidated or hedged within one day and (ii) at present, we compute VaR at the close of business and trading positions may change substantially during the course of the trading day. |
2. | Calibration measures: in order to calibrate our VaR model, we use back testing, which is a comparative analysis between VaR estimates and the daily clean Profit and Loss (theoretical result generated assuming the mark-to-market daily variation of the portfolio considering only the movement of the market variables). The purpose of these tests is to verify and measure the precision of the models used to calculate VaR. |
Stressed VaR: our stressed VaR model uses the same calculation methodology as VaR with the following two exceptions: (i) the stressed VaR uses a window of |
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 |
Sensitivities: our market risk sensitivity measures |
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Non-trading Activities
Interest rate gap of assets and liabilities: |
NIM sensitivity: |
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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 |
Analysis of results arising from the interest rate scenarios established by Circular No. 3,876 of the Brazilian Central |
Liquidity risk: |
Liquidity gap: |
Analysis of scenarios/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.
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Quantitative Analysis
Trading Activity
Quantitative Analysis of Daily VaR in 2018
2021
Our risk performance with regard to trading activity in financial markets between 20162019 and 2018,2021, measured by daily VaR (measured at a 99% of confidence level, over a one day time frame), is shown in the following graph.
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During 2018,2021, VaR remained relatively stable, fluctuatingfluctuated between R$16.530 million and R$56.540 million, with an average of R$34.5 million. The 2018 average VaR was R$30.3 million, without significant fluctuations during the year as a result of the fact that we did not assume any significant positions throughout the year. Our portfolio diversification also contributed to a low level of VaR. The histogram below shows the distribution of average risk in terms of VaR in 20182021 where the accumulation of days with VaR levels between R$3020 million and R$40 million can be observed in 74.4%79.8% of the distribution.
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VaR by Risk Factor
The minimum, maximum, average and year-end 20182021 VaR values by risk factor were as follows:
2017 | 2018 | 2020 | 2021 | |||||||||||||||||||||||
Period End | Low | Average | High | Period End | Period End | Low | Average | High | Period End | |||||||||||||||||
(in millions of R$) | (in millions of R$) | |||||||||||||||||||||||||
Trading VaR | 28.0 | 16.5 | 30.3 | 56.5 | 46.5 | 31.6 | 16.7 | 34.5 | 63.1 | 34.4 | ||||||||||||||||
Diversification Effect | (10.7) | (4.9) | (18.6) | (43.5) | (23.8) | (33.7 | ) | (5.2 | ) | (27.6 | ) | (54.4 | ) | (12.8 | ) | |||||||||||
Interest Rate VaR | 23.1 | 15.2 | 26.6 | 43.2 | 33.9 | 26.6 | 12.7 | 31.8 | 72.3 | 34.9 | ||||||||||||||||
Equity VaR | 8.1 | 1.9 | 9.8 | 24.3 | 11.6 | 2.8 | 2.6 | 7.5 | 21.5 | 6.4 | ||||||||||||||||
Foreign Exchange VaR | 7.5 | 3.5 | 12.5 | 41.1 | 24.6 | 35.6 | 4.0 | 19.0 | 48.9 | 5.9 | ||||||||||||||||
Commodity VaR | - | 0.4 | 1.9 | 0.2 | 0.3 | 0.1 | 3.8 | 21.4 | 0.1 |
The average VaR for 20182021 was R$30.334.5 million, with most of the risk due to interest rate positions.
Santander Brasil was relatively conservative in equity and commodities trading activity in line with the approach taken over the last few years.
The average VaR of the threefour main risk factors, interest rates, equity prices, and exchange rates and commodities were R$26.631.8 million, R$9.87.5 million, R$19.0 million and R$12.53.8 million respectively, with a negative average diversification effect of R$11.527.6 million. The chart below shows the evolution of the risk groups VaR interest rates (IR), VaR exchange rates (FX) and, VaR equity prices (EQ) (atand Commodities (CM), at a 99% confidence level, over a day time frame and a 15 day15-day moving average).average.
Risk Management of Structured Derivatives
Our structured derivatives activity is mainly focused on designing investment products and managing hedging risks for clients.customers. 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.
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The chart below shows the VaR Vega performance of our structured derivatives business in 2018, 20172021, 2020 and 2016, which2019. In the most recent year, this figure fluctuated around an average of R$5.4 million, significantly higher than the average for 2017 which was R$2.88.23 million. In particular, there was a highgeneral, the periods with higher VaR Vega level during the third quarterlevels are related to episodes of 2018, mainly due to the proximity to the Brazilian presidential elections of 2018.significant increases in market volatility.
Scenario analysis
Different stress test scenarios were analyzed during 2018.2021, A correlation break scenario generated the results presented below.
Worst Case Scenario
The table below shows the maximum daily losses for each risk factor (fixed-income, equities and currencies) as of December 31, 2018,2021, in a scenario that uses historical volatilities and simulates variations of the risk factors for +/-3 and +/-6 standard deviations on a daily basis.basis, From this group of scenarios, we generate a table of stress test results, which identifies the largest loss per risk factor.factor, The sum of the largest losses of each risk factor is the result of the Worst Case Scenario, which considers the break of correlation between risk factors.
Worst Case Stress Test | Exchange Rate | Fixed Income | Equity | Total | Exchange Rate | Fixed Income | Equity | Total | ||||||||||||
(in millions of R$) | (in millions of R$) | |||||||||||||||||||
Total trading | (50.3) | (51.5) | (38.5) | (140.2) | (14.5) | (19.7 | ) | (14.8 | ) | (49.0 | ) |
The stress test shows that the economic loss suffered by the group in the marked-to-market result would be, if this scenario materialized in the market, R$140,2180.2 million.
Non-trading Activity
Quantitative Analysis of Interest Rate Risk in 2018
2021
Convertible Currencies
At the end of 2018,2021, the sensitivity of NIM at one year, to a parallel rise of 100 basis points in the local yield curve was R$200553 million.
In addition, at the end of 2018,2021, the sensitivity of net worthMVE to parallel rises of 100 basis points in the yield curves was R$1,8611,678.0 million in the local currency yield curve.
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Structural Gap
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The following table shows the managerial gaps between the re-pricing dates of our assets and liabilities as of December 31, 20182021 in millions ofreais. reais.
Total | 0-1 month | 1-3 months | 3-6 months | 6-12 months | 1-3 years | 3-5 years | > 5 years | Not Sensitive | ||||||||||||||||||||||||||||
(in millions of R$) | ||||||||||||||||||||||||||||||||||||
Structural Gap | ||||||||||||||||||||||||||||||||||||
Money Market | 309,426 | 115,341 | 859 | 1,347 | 21,303 | 18,675 | 37,938 | 20,504 | 93,459 | |||||||||||||||||||||||||||
Loans | 470,730 | 138,528 | 62,721 | 50,867 | 60,773 | 56,304 | 54,350 | 47,394 | (208 | ) | ||||||||||||||||||||||||||
Permanent | 15,836 | - | - | - | - | - | - | - | 15,836 | |||||||||||||||||||||||||||
Other | 199,895 | 35,519 | - | 23 | - | 2 | - | - | 164,351 | |||||||||||||||||||||||||||
Total Assets | 995,886 | 289,388 | 63,580 | 52,237 | 82,076 | 74,981 | 92,288 | 67,898 | 273,437 | |||||||||||||||||||||||||||
Money Market | (126,572 | ) | (73,371 | ) | (1,934 | ) | (2,839 | ) | (4,595 | ) | (18,206 | ) | (7,959 | ) | (13,862 | ) | (3,807 | ) | ||||||||||||||||||
Deposits | (498,828 | ) | (305,888 | ) | (16,114 | ) | (6,422 | ) | (10,091 | ) | (13,844 | ) | (15,886 | ) | (93,436 | ) | (37,147 | ) | ||||||||||||||||||
Equity and Other | (370,486 | ) | (63,009 | ) | (23,483 | ) | (16,556 | ) | (23,913 | ) | (1,462 | ) | (5,224 | ) | (3,319 | ) | (233,521 | ) | ||||||||||||||||||
Total Liabilities | (995,886 | ) | (442,267 | ) | (41,531 | ) | (25,817 | ) | (38,599 | ) | (33,512 | ) | (29,069 | ) | (110,617 | ) | (274,474 | ) | ||||||||||||||||||
– Balance Gap | 0 | (152,879 | ) | 22,049 | 26,420 | 43,478 | 41,469 | 63,219 | (42,719 | ) | (1,037 | ) | ||||||||||||||||||||||||
Off-Balance Gap | 18,976 | 22,280 | (4,189 | ) | 496 | (957 | ) | (23,496 | ) | 4,750 | 3,164 | 16,929 | ||||||||||||||||||||||||
Total Structural Gap | 18,976 | (130,599 | ) | 17,860 | 26,916 | 42,520 | 17,973 | 67,969 | (39,556 | ) | 15,892 | |||||||||||||||||||||||||
Accumulated Gap | 18,976 | (111,623 | ) | (93,763 | ) | (66,847 | ) | (24,327 | ) | (6,354 | ) | 61,615 | 22,060 | 37,951 |
Total | 0-1 month | 1-3 months | 3-6 months | 6-12 months | 1-3 years | 3-5 years | > 5 years | Not Sensitive | |
(in millions of R$) | |||||||||
Structural Gap | |||||||||
Money Market | 306,054 | 89,853 | 636 | 10,388 | 5,132 | 31,770 | 12,173 | 32,919 | 123,183 |
Loans | 290,433 | 69,408 | 39,094 | 36,492 | 38,962 | 54,462 | 17,626 | 25,155 | 9,235 |
Permanent | 15,240 | - | - | - | - | - | - | - | 15,240 |
Other | 192,650 | 31,227 | 116 | 49 | 38 | - | - | - | 161,221 |
Total Assets | 804,377 | 190,488 | 39,846 | 46,928 | 44,131 | 86,232 | 29,799 | 58,073 | 308,879 |
Money Market | (126,670) | (83,570) | (800) | (980) | (1,929) | (8,851) | (13,595) | (7,772) | (9,173) |
Deposits | (385,257) | (186,099) | (5,154) | (4,418) | (7,754) | (19,776) | (10,827) | (26,126) | (125,105) |
Equity and Other | (292,449) | (45,409) | (6,899) | (5,550) | (5,907) | (1,569) | - | (2,300) | (224,815) |
Total Liabilities | (804,377) | (315,078) | (12,853) | (10,947) | (15,590) | (30,196) | (24,422) | (36,199) | (359,093) |
– Balance Gap | 0 | (124,590) | 26,993 | 35,981 | 28,541 | 56,037 | 5,377 | 21,875 | (50,214) |
Off-Balance Gap | 31,282 | 48,114 | (14,994) | (15,346) | (1,092) | (16,798) | (122) | (6,470) | 37,991 |
Total Structural Gap | 31,282 | (76,476) | 11,999 | 20,635 | 27,449 | 39,239 | 5,255 | 15,405 | (12,223) |
Accumulated Gap | 31,282 | (45,193) | (33,194) | (12,559) | 14,890 | 54,128 | 59,383 | 74,788 | 62,565 |
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$178121 million during 2018,2021, reaching a maximum of R$292607 million in January.June, The sensitivity of the market value decreased R$20593 million during 2018,2021, reaching a maximum of R$1,9811,882 million in January.September, The main factors in 20182021 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.
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The following chart shows our NIM and MVE sensitivity during each month in 2018.2021.
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Interest Rate Risk Profile as of December 31, 20182021
The currency gap tables below show the managerial distribution of risk by maturity and currency in Brazil as of December 31, 20182021 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 | |
Gaps in local currency | |||||||||
Money Market | 271,183 | 79,999 | 588 | 9,452 | 4,844 | 29,345 | 9,986 | 22,968 | 114,000 |
Loans | 251,404 | 56,708 | 28,180 | 28,120 | 35,809 | 53,243 | 17,248 | 21,898 | 10,200 |
Permanent | 15,240 | - | - | - | - | - | - | - | 15,240 |
Others | 88,418 | 22,767 | - | - | - | - | - | - | 65,651 |
Total Assets | 626,246 | 159,474 | 28,768 | 37,572 | 40,653 | 82,588 | 27,234 | 44,866 | 205,091 |
Money Market | (102,786) | (73,529) | (611) | (578) | (1,347) | (8,445) | (3,591) | (5,513) | (9,173) |
Deposits | (378,230) | (184,010) | (3,811) | (4,277) | (7,723) | (19,631) | (10,827) | (24,648) | (123,303) |
Equity and Other | (160,461) | (24,842) | - | - | - | - | - | (0) | (135,619) |
Total Liabilities | (641,477) | (282,381) | (4,422) | (4,854) | (9,070) | (28,076) | (14,418) | (30,161) | (268,096) |
Off-Balance Gap | (82,887) | 47,066 | 14,260 | (336) | (1,884) | (18,469) | (256) | (6,331) | (116,936) |
Gap | (98,118) | (75,841) | 38,606 | 32,382 | 29,698 | 36,044 | 12,560 | 8,374 | (179,941) |
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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 foreign currency | |||||||||||||||||||||||||||||||||||||||||||||
Gaps in local currency | |||||||||||||||||||||||||||||||||||||||||||||
Money Market | 34,871 | 9,854 | 48 | 935 | 288 | 2,425 | 2,187 | 9,950 | 9,184 | 268,082 | 112,019 | 823 | 1,060 | 18,672 | 15,816 | 22,730 | 18,170 | 78,792 | |||||||||||||||||||||||||||
Loans | 39,029 | 12,700 | 10,915 | 8,372 | 3,153 | 1,219 | 378 | 3,257 | (965) | 382,313 | 90,863 | 49,412 | 41,903 | 52,908 | 54,584 | 53,957 | 43,028 | (4,344 | ) | ||||||||||||||||||||||||||
Permanent | 0 | - | 0 | 15,804 | - | - | - | - | - | - | - | 15,804 | |||||||||||||||||||||||||||||||||
Others | 104,232 | 8,460 | 116 | 49 | 38 | - | 95,570 | 128,760 | 18,923 | - | 23 | - | 2 | - | - | 109,812 | |||||||||||||||||||||||||||||
Total Assets | 178,131 | 31,014 | 11,078 | 9,356 | 3,478 | 3,644 | 2,565 | 13,207 | 103,789 | 794,960 | 221,806 | 50,235 | 42,986 | 71,580 | 70,402 | 76,687 | 61,198 | 200,064 | |||||||||||||||||||||||||||
Money Market | (23,884) | (10,041) | (189) | (402) | (582) | (406) | (10,004) | (2,260) | - | (99,888 | ) | (71,740 | ) | (1,006 | ) | (1,901 | ) | (3,868 | ) | (3,020 | ) | (6,747 | ) | (7,986 | ) | (3,620 | ) | ||||||||||||||||||
Deposits | (7,027) | (2,089) | (1,343) | (141) | (30) | (145) | - | (1,478) | (1,801) | (463,227 | ) | (290,333 | ) | (5,332 | ) | (4,382 | ) | (7,209 | ) | (8,943 | ) | (11,999 | ) | (89,470 | ) | (45,558 | ) | ||||||||||||||||||
Equity and Other | (131,988) | (20,567) | (6,899) | (5,550) | (5,907) | (1,569) | - | (2,300) | (89,196) | (214,666 | ) | (24,490 | ) | (44 | ) | (66 | ) | (132 | ) | (264 | ) | 3,149 | (3,319 | ) | (189,499 | ) | |||||||||||||||||||
Total Liabilities | (162,900) | (32,697) | (8,431) | (6,093) | (6,520) | (2,120) | (10,004) | (6,038) | (90,997) | (777,780 | ) | (386,563 | ) | (6,383 | ) | (6,349 | ) | (11,209 | ) | (12,227 | ) | (15,597 | ) | (100,775 | ) | (238,677 | ) | ||||||||||||||||||
Off-Balance Gap | 114,169 | 1,049 | (29,254) | (15,011) | 792 | 1,671 | 134 | (139) | 154,927 | 36,988 | 23,679 | 8,421 | (585 | ) | (1,113 | ) | (21,346 | ) | 5,925 | 3,083 | 18,923 | ||||||||||||||||||||||||
Gap | 129,401 | (634) | (26,607) | (11,747) | (2,250) | 3,195 | (7,305) | 7,030 | 167,718 | 54,167 | (141,078 | ) | 52,274 | 36,052 | 59,258 | 36,829 | 67,016 | (36,494 | ) | (19,690 | ) |
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 | 41,344 | 3,322 | 36 | 287 | 2,631 | 2,859 | 15,208 | 2,334 | 14,667 | |||||||||||||||||||||||||||
Loans | 88,417 | 47,664 | 13,309 | 8,964 | 7,865 | 1,720 | 393 | 4,366 | 4,135 | |||||||||||||||||||||||||||
Permanent | 31 | - | - | - | - | - | - | - | 31 | |||||||||||||||||||||||||||
Others | 71,135 | 16,595 | - | - | - | - | - | - | 54,539 | |||||||||||||||||||||||||||
Total Assets | 200,927 | 67,582 | 13,345 | 9,251 | 10,496 | 4,579 | 15,600 | 6,700 | 73,373 | |||||||||||||||||||||||||||
Money Market | (26,684 | ) | (1,630 | ) | (928 | ) | (938 | ) | (727 | ) | (15,186 | ) | (1,212 | ) | (5,876 | ) | (187 | ) | ||||||||||||||||||
Deposits | (35,601 | ) | (15,555 | ) | (10,782 | ) | (2,040 | ) | (2,882 | ) | (4,901 | ) | (3,887 | ) | (3,966 | ) | 8,411 | |||||||||||||||||||
Equity and Other | (155,821 | ) | (38,519 | ) | (23,439 | ) | (16,490 | ) | (23,781 | ) | (1,198 | ) | (8,373 | ) | - | (44,022 | ) | |||||||||||||||||||
Total Liabilities | (218,106 | ) | (55,704 | ) | (35,148 | ) | (19,468 | ) | (27,390 | ) | (21,285 | ) | (13,472 | ) | (9,842 | ) | (35,797 | ) | ||||||||||||||||||
Off-Balance Gap | (18,012 | ) | (1,399 | ) | (12,610 | ) | 1,081 | 156 | (2,150 | ) | (1,175 | ) | 81 | (1,994 | ) | |||||||||||||||||||||
Gap | (35,192 | ) | 10,479 | (34,413 | ) | (9,136 | ) | (16,738 | ) | (18,857 | ) | 953 | (3,061 | ) | 35,582 |
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Market Risk: VaR Consolidated Analysis
Our total daily VaR as of December 31, 20172020 and December 31, 2018,2021, 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.
2018 | 2017 | 2021 | 2020 | |||||||||||||||||||||||
Low | Average | High | Period End | Low | Average | High | Period End | Period End | ||||||||||||||||||
(in millions of R$) | (in millions of R$) | |||||||||||||||||||||||||
Trading | 16.5 | 30.3 | 56.5 | 46.5 | 28.0 | 16.7 | 34.5 | 63.1 | 34.4 | 31.6 | ||||||||||||||||
Non-trading | 241.4 | 350.9 | 507.7 | 380.5 | 1,380.1 | 1,663.4 | 2,451.7 | 4,274.1 | - | 1,755.1 | ||||||||||||||||
Diversification effect | - | - | - | - | - | - | ||||||||||||||||||||
Total | 258.0 | 381.2 | 564.2 | 427.0 | 1,408.1 | 1,680.1 | 2,486.2 | 4,337.2 | 34.4 | 1,786.7 |
Note: | VaR figures for trading and non-trading portfolios were added, thus disregarding the diversification effect. |
Our daily VaR estimates of interest rate risk, foreign exchange rate risk and equity price risk were as set forth below:
Interest Rate Risk
2018 | 2017 | 2021 | 2020 | |||||||||||||||||||||||
Low | Average | High | Period End | Low | Average | High | Period End | Period End | ||||||||||||||||||
(in millions of R$) | (in millions of R$) | |||||||||||||||||||||||||
Interest rate risk | ||||||||||||||||||||||||||
Trading | 15.2 | 26.6 | 43.2 | 33.9 | 23.1 | 12.7 | 31.8 | 72.3 | 34.9 | 26.6 | ||||||||||||||||
Non-trading | 241.4 | 350.9 | 507.7 | 380.5 | 1,380.1 | 1,663.4 | 2,451.7 | 4,274.1 | - | 1,364.7 | ||||||||||||||||
Diversification effect | - | - | - | - | - | - | ||||||||||||||||||||
Total | 256.7 | 377.5 | 550.9 | 414.4 | 1,403.2 | 1,676.1 | 2,483.5 | 4,346.4 | 34.9 | 1,391.3 |
Note: | VaR figures for trading and non-trading portfolios were added, thus disregarding the diversification effect. |
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Foreign Exchange Rate Risk
2018 | 2017 | 2021 | 2020 | |||||||||||||||||||||||
Low | Average | High | Period End | Low | Average | High | Period End | Period End | ||||||||||||||||||
(in millions of R$) | (in millions of R$) | |||||||||||||||||||||||||
Exchange rate risk | ||||||||||||||||||||||||||
Trading | 3.5 | 12.5 | 41.1 | 24.6 | 7.5 | 4.0 | 19.0 | 48.9 | 5.9 | 35.6 | ||||||||||||||||
Non–trading | N.A. | - | - | - | - | - | ||||||||||||||||||||
Diversification effect | - | - | - | - | - | - | ||||||||||||||||||||
Total | 3.5 | 12.5 | 41.1 | 24.6 | 7.5 | 4.0 | 19.0 | 48.9 | 5.9 | 35.6 |
Note: | VaR figures for trading and non-trading portfolios were added, thus disregarding the diversification effect. |
Equity Price Risk
2021 | 2020 | |||||||||||||||||||
Low | Average | High | Period End | Period End | ||||||||||||||||
(in millions of R$) | ||||||||||||||||||||
Equity price risk | ||||||||||||||||||||
Trading | 2.6 | 7.5 | 21.5 | 6.4 | 2.8 | |||||||||||||||
Non–trading | - | - | - | - | - | |||||||||||||||
Diversification effect | - | - | - | - | - | |||||||||||||||
Total | 2.6 | 7.5 | 21.5 | 6.4 | 2.8 |
2018 | 2017 | |||||
Low | Average | High | Period End | Period End | ||
(in millions of R$) | ||||||
Equity price risk | ||||||
Trading | 1.9 | 9.8 | 24.3 | 11.6 | 8.1 | |
Non–trading | N.A. | N.A. | N.A. | N.A. | N.A. | |
Diversification effect | - | - | - | - | - | |
Total | 1.9 | 9.8 | 24.3 | 11.6 | 8.1 |
Note: | VaR figures for trading and non-trading portfolios were added, thus disregarding the diversification effect. |
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Commodity Price Risk
At December 31, | ||||||||||||||||||||
2021 | 2020 | |||||||||||||||||||
Low | Average | High | Period End | Period End | ||||||||||||||||
(in millions of R$) | ||||||||||||||||||||
Commodity price risk | ||||||||||||||||||||
Trading | 0.1 | 3.8 | 21.4 | 0.1 | 0.3 | |||||||||||||||
Non-trading | N.A. | N.A. | N.A. | N.A. | N.A | |||||||||||||||
Diversification effect | - | - | - | - | - | |||||||||||||||
Total | 0.1 | 3.8 | 21.4 | 0.1 | 0.3 |
Our daily VaR estimates by activity were as set forth below:
2021 | 2020 | |||||||||||||||||||
Low | Average | High | Period End | Period End | ||||||||||||||||
(in millions of R$) | ||||||||||||||||||||
Trading | ||||||||||||||||||||
Interest rate risk | 26.8 | 12.7 | 31.8 | 72.3 | 34.9 | |||||||||||||||
Exchange rate risk | 2.8 | 2.6 | 7.5 | 21.5 | 6.4 | |||||||||||||||
Equity price risk | 35.6 | 4.0 | 19.0 | 48.9 | 5.9 | |||||||||||||||
Commodity price risk | 0.3 | 0.1 | 3.8 | 21.4 | 0.1 | |||||||||||||||
Total Trading | 31.6 | 16.7 | 34.5 | 63.1 | 34.4 | |||||||||||||||
Non-trading | ||||||||||||||||||||
Interest rate risk | 1,663.4 | 2,451.7 | 4,274.1 | - | 1,755.1 | |||||||||||||||
Exchange rate risk | N.A. | N.A. | N.A. | N.A. | N.A. | |||||||||||||||
Equity price risk | N.A. | N.A. | N.A. | N.A. | N.A. | |||||||||||||||
Commodity price risk | N.A. | N.A. | N.A. | N.A. | N.A. | |||||||||||||||
Total Non-Trading | 1,663.4 | 2,451.7 | 4,274.1 | - | 1,755.1 | |||||||||||||||
Total (Trading + Non-Trading) | 1,663.4 | 2,451.7 | 4,274.1 | - | 1,755.1 | |||||||||||||||
Interest rate risk | 1,663.4 | 2,451.7 | 4,274.1 | - | 1,755.1 | |||||||||||||||
Exchange rate risk | 1.4 | 9.3 | 42.4 | 35.6 | 7.5 | |||||||||||||||
Equity price risk | 1.2 | 5.8 | 34.0 | 2.8 | 7.4 | |||||||||||||||
Commodity price risk | - | 0.2 | 2.5 | 0.3 | - |
Note: | VaR figures for trading and non-trading portfolios were added, thus disregarding the diversification effect. |
Commodity Price Risk
At December 31st, | |||||
2018 | 2017 | ||||
Low | Average | High | Period End | Period End | |
Commodity price risk | (in millions of R$) | ||||
Trading | - | 0.4 | 1.9 | 0.2 | - |
Non-trading | N.A. | N.A. | N.A. | N.A. | N.A. |
Diversification effect | - | - | - | - | - |
Total | - | 0.4 | 1.9 | 0.2 | - |
Our daily VaR estimates by activity were as set forth below:
2018 | 2017 | |||||
Low | Average | High | Period End | Period End | ||
(in millions of R$) | ||||||
Trading | ||||||
Interest rate risk | 15.2 | 26.6 | 43.2 | 33.9 | 23.1 | |
Exchange rate risk | 3.5 | 12.5 | 41.1 | 24.6 | 7.5 | |
Equity price risk | 1.9 | 9.8 | 24.3 | 11.6 | 8.1 | |
Commodity price risk | 0.0 | 0.4 | 1.9 | 0.2 | 0 | |
Total Trading | 16.5 | 30.3 | 56.5 | 46.5 | 28.0 | |
Non-trading | ||||||
Interest rate risk | 241.4 | 350.9 | 507.7 | 380.5 | 1,380.1 | |
Exchange rate risk | N.A. | N.A. | N.A. | N.A. | N.A. | |
Equity price risk | N.A. | N.A. | N.A. | N.A. | N.A. | |
Commodity price risk | N.A. | N.A. | N.A. | N.A. | N.A. | |
Total Non-Trading | 241.4 | 350.9 | 507.7 | 380.5 | 1,380.1 | |
Total (Trading + Non-Trading) | 258.0 | 381.2 | 564.2 | 427.0 | 1,408.1 | |
Interest rate risk | 256.7 | 377.5 | 550.9 | 414.4 | 1,403.2 | |
Exchange rate risk | 3.5 | 12.5 | 41.1 | 24.6 | 7.5 | |
Equity price risk | 1.9 | 9.8 | 24.3 | 11.6 | 8.1 | |
Commodity price risk | 0.0 | 0.4 | 1.9 | 0.2 | 0.0 |
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Operational Risk
We have adopted the definition of the Basel Committee and Brazilian Central Bank for operational risk, which defines operational risk as the possibility of losses resulting from inadequate processes, people and systems, failures, or even from external 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. This definition does not include strategic risk. Operational risk losses mayevents might result in financial losses, adversely affectadverse effects on the continuity of our business, and also negatively affect ournegative effects on public image.
image and customer experience.
To accomplish our operational risk objectives, we have established a risk model based on three lines of defense, with the objective ofaimed at continuously improving and developing our management and control of operational risks. The three lines of defense are as follows:
are:
First line of defense: all business and support areas within Santander Brasil are responsible for identifying, managing, mitigating and reporting operational |
Second line of defense: the operational |
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Third line of defense: the Internal Audit |
The objectives of ourthe 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, |
to provide support to decision-makers within Santander Brasil; |
to ensure there is sufficient coverage to cover the |
to maintain control of operational risk in a manner which is consistent with business strategy. |
The following bodies are involved in the implementation of 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): |
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Operational Risk |
Our risk management model assists managers in achieving their strategic objectives by contributing to the decision-making process and by reducingseeking to reduce operational risk exposure and losses. It is based on best market practice and is compliant with the applicable regulatory requirements.
Social and Environmental Risk
WeSince 2002, we have aremained at the forefront of social and environmental risk management system for analyzing clientsanalysis in the wholesale segment and since 2018, we have expanded this analysis to segment Empresas 3 retail clients. Under this system, clients who are part of one of our 14 sectors of specialBrazil. We consider social and environmental attentionrisk when deciding whether to extend credit. Our Social and Environmental Responsibility Policy, or “PRSA,” complies with National Monetary Council Resolution 4,327/2014 and the SARB 14 self-regulation issued by Febraban. Our PRSA establishes guidelines for social-environmental practices applicable to business and stakeholder relations, such as relations with suppliers. These practices include social and environmental risk assessment in granting or using credit. This is carried out through the analysis of the socio-environmental practices of wholesale and Empresas Nucleo (Core Companies) SME customers, which have credit limits and/or credit risk greater than R$5.05 million and belong to one of 14 social and environmental focuses.
Furthermore, the Brazilian Central Bank has recently issued new regulations and standards applicable to us relating to the management and governance of social, environmental and climate risks by financial institutions. These rules relate both to risks resulting from our products, services and activities, and to risks arising out of the activities of our counterparties, controlled entities, suppliers and outsourced service providers. One such regulation is National Monetary Council Resolution 4,945/2021, which will revoke Resolution 4,327/2014 and institute new guidelines applicable to the PRSA. The majority of these regulations will enter into effect in July 2022. See “Item 4. B Information on the Company—B, Business Overview—Regulation and Supervision—Other Applicable Laws and Regulations—Environmental, Social and Governance (ESG) requirements applicable to financial institutions.”
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We have been signatories of the Equator Principles since 2009. The Equator Principles are screened fora framework used by financial institutions to determine, assess and manage environmental and social concerns. These aspects include contaminated land, illegal deforestation, labor violationsrisk in projects, and other major environmentalare based on the Performance Standards on Social and socialEnvironmental Sustainability of International Finance Corporation (IFC) and the World Bank Group.
In 2016, we started to take into account climate change related matters in the credit rating of wholesale customers. In 2020, we began to use a water stress calculator in our socio-environmental assessments. This tool considers the client’s economic activity, hydrographic basin location and measures adopted to save water. It was developed considering the customer’s vulnerability to climate change in general, including as a result of changes in legislation or consumer preferences.
We believe that assessing the socio-environmental risk in our operations, also enables us to mitigate issues where there are potential legal penaltiesof operational, capital, credit and reputational risk. In 2018,2021, we screened 4,640911 wholesale corporate clientscustomers, 1,049 Empresas Nucleo (Core Companies) customers, and 1,895 Empresas 3 clients, including about 4328 major new projects (including both those that are and that are not subject to the Equator Principles and non-Equator Principles, for these types of risks. A specialized team with backgrounds in biology, health and safety engineering, chemical engineering and geology monitors our customers’ environmental practices and point out to our financial analysts unfavorable environmental conditions that may cause damage to our customers’ financial condition and collateral, among other effects.Principles). Furthermore, wholesale segment clients, when starting their commercial relationship with us, whosecustomers are screened for environmental and social concerns by the new clients’customer acceptance area. The socialdepartment, when they begin their commercial relationship with us. See “Item 3. Key Information—D. Risk Factors—Risks Relating to the Brazilian Financial Services Industry and Our Business—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 may have a material adverse effect on us.”
Cyber SecurityCybersecurity Risk
We have putsecurity measures in place extensive security measures to mitigate the risk of cyber-securitycybersecurity 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-securitycybersecurity 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-securitycybersecurity 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. See “Item 3. Key Information—D. Risk Factors—Risks Relating to the Brazilian Financial Services Industry and Our Business—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.”
Other Information
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TableVolatile market conditions arising from the COVID-19 pandemic may result in significant changes in macroeconomic conditions, foreign exchange rates, interest rates, and the prices of Contentsour securities, which may adversely affect us, see “Item 3. Key Information—D. Risk Factors—Risks Relating to the Brazilian Financial Services Industry and Our Business— The global COVID-19 pandemic has materially impacted our business, and the continuance of this pandemic or any future outbreak of any other highly contagious diseases or other public health emergency, could materially and adversely impact our business, financial condition, liquidity and results of operations,” “Item 4. Information on the Company—A. History and Development of the Company—Impact of COVID-19” and “Item 5. Operating and Financial Review and Prospects—A. Operating Results—Principal Factors Affecting Our Financial Condition and Results of Operations—Impact of COVID-19.”
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
12A. Debt Securities |
Not applicable.
12B. Warrants and Rights
Not applicable.
12C. Other Securities
Not applicable.
Not applicable.
12D. American Depositary Receipts |
Depositary
The Bank of New York Mellon, or BNYM, has acted as depositary in relation to our ADR program since October 20, 2015. The principal executive office of BNYM is located at 240 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; |
a fee of U.S.$0.05 or less per ADR (or portion thereof) for any cash distribution made pursuant to the deposit agreement; |
a fee of U.S.$0.05 or less per ADR (or portion thereof) per annum for depositary services; |
a fee for the distribution of securities or of rights (where the depositary will not exercise or sell those rights on behalf of the ADR holders), such fee being in an amount equal to the fee for the execution and delivery of ADRs which would have been charged as a result of the deposit of such securities under the deposit agreement entered into with BNYM (for these purposes treating all such securities as if they were Units) but which securities are instead distributed by the depositary to the ADR holders; |
such registration fees as may from time to time be in effect for the registration of transfers of Units generally on the registrar’s unit register and applicable to transfers of Units to or from the name of the depositary or its nominee or the name of the custodian for the depositary or its nominee on the making of deposits or withdrawals; |
certain other cable and facsimile transmission fees and expenses; |
such expenses as are incurred by the depositary in the conversion of foreign currency; |
stock transfer or other taxes and other governmental charges; and |
any other charges payable by the depositary or the custodian of the depositary, any of the depositary’s or such custodian’s agents or the agents of the depositary’s or such custodian’s agents, in connection with the servicing of Units or other deposited securities (which charges shall be assessed against the ADR holders as of the date or dates set by the depositary in accordance with the deposit agreement which we have entered into with BNYM and shall be payable at the sole discretion of the depositary by billing those ADR holders for those charges or by deducting those charges from one or more cash dividends or other cash distributions). |
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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.
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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, 2018,2021, such reimbursements amounted to U.S.$4.43.2 million.
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ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
No matters to report.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
No matters to report.
ITEM 15. CONTROLS AND PROCEDURES
15A. Disclosure Controls and Procedures |
As of December 31, 2018, under2021, with the supervision and with the participation of our management, including our chief executive officerChief Executive Officer (CEO) and chief financial officerChief 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 officerCEO and chief financial 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 officerCEO and chief financial 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 internal report on March 18, 2019, according toas required by the Brazilian Central Bank’s requirements regardingBank through CMN Resolution 4,968/21 and Brazilian Central Bank Circular 130/21, the effectivenessreport related to the quality and adequacy of the internal control environment.controls will be issued within 45 days after the expected date of publication of the Brazilian GAAP financial statements, which is scheduled to be March 18, 2022 (Brazilian Central Bank – GAAP).
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 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 |
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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 |
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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.
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, or “COSO,” in its Internal Control – Integrated Framework 2013. These guidelines have been extended and implemented for the Group,Santander Brasil 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 officerCEO and chief financial officer,CFO, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2018,2021, based on the framework set by the COSO Integrated Framework 2013.
Based on this assessment, which was carried out through March 25, 2019,February 24, 2022, our management concluded that as of December 31, 2018,2021, its internal control over financial reporting was effective based on those criteria.
OurPricewaterhouseCoopers Auditores Independentes Ltda. which has audited our consolidated financial statements for the year ended December 31, 2021, has also audited the effectiveness our internal controlcontrols over financial reporting under auditing standards of the Public Company Accounting Oversight Board (United States) as of December 31, 2018, has been audited by an independent registered public accounting firm which has issued astated in their report on the effectiveness ofappearing in our Internal Control overconsolidated financial reporting as of December 31, 2018, for which seestatements included in “Item 18, Financial Statements.”
15C. AuditAttestation Report of the Registered Public Accounting Firm.”
For the report, of PwC,dated February 24, 2022, from PricewaterhouseCoopers Auditores Independentes Ltda., our registered public accounting firm, dated March 25, 2019, on the effectiveness of our internal control over financial reporting as of December 31, 2018,2021, see “Item 18. Financial Statements.”
15D. Changes in Internal Control over Financial Reporting |
There was no change in our internal control over financial reporting that occurred during the period covered by this annual report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
Audit Committee Financial Expert
The boardBoard of directorsDirectors has determined that one of the members of our audit committee, Mr. Luiz Carlos NanniniMs. Maria Elena Cardoso Figueira is an “Audit Committee Financial Expert” and meets the requirements set forth by the SEC and NYSE. HeShe is, as are all other current members of the audit committee, deemed independent under the applicable Brazilian law and the regulations of the SEC and NYSE.
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For more details about the audit committee, seerefer to “Item 6. Directors, Senior Management and Employees—C. Board Practices—Board Advisory Committees—Audit Committee”Committee.”
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ITEM 16B. SANTANDER BRASIL’S CODE OF ETHICAL CONDUCT
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, 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 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 to 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.customers.
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 at https://www.santander.com.br/ri.ri/estatuto-codigo-politicas.
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
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 PwCPricewaterhouseCoopers Auditores Independentes Ltda. for the fiscal years ended December 31, 2018, December 31, 20172021, 2020 and December 31, 2016,2019, as follows:
For the year ended December 31, | For the year ended December 31, | |||||||||||||||||
2018 | 2017 | 2016 | 2021 | 2020 | 2019 | |||||||||||||
(in R$ millions) | (in R$ millions) | |||||||||||||||||
Audit of the annual financial statements of the companies audited (constant scope of consolidation) | Audit of the annual financial statements of the companies audited (constant scope of consolidation) | 19.9 | 17.5 | 9.2 | 26.3 | 24.0 | 25.2 | |||||||||||
Audit related | 0.5 | 3.9 | 0.1 | 0.2 | 0.4 | 0.1 | ||||||||||||
Tax | - | |||||||||||||||||
All other | 0.1 | 1.3 | 0.7 | 0,4 | - | 0.3 | ||||||||||||
Total | 20.5 | 22.7 | 10.0 | 26.9 | 24.4 | 25.6 |
The approximate value of withholding taxes in respect of the audit fees for the year ended December 31, 20182021 according to applicable law totaled R$2.91.9 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.
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ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
Exemptions from the Listing Standards for Audit Committees
Under NYSE and SEC rules for listed companies, we must comply with Rule 10A-3 under the Securities Exchange Act (Listing Standards Relating to Audit Committees)., Rule 10A-3 provides that we should establish an audit committee composed of members of the 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, in reliance on the general exemption of audit committees of foreign private issuers set forth in Rule 10A-3(c) (3) of the Securities Exchange Act.
In accordance with the rules of the Brazilian Central Bank, we constituted a body similar to the audit committee of the boardBoard of directorsDirectors of an American company, which we refer to as our “audit committee.“Audit Committee.”
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Our audit committee observesAudit Committee complies with Brazilian legislation, including CMN and Brazilian Central Bank regulations, and performs all the functions of an audit committeeAudit Committee under Rule 10A-3. As provided inUnder Brazilian law, ourincluding 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 are distinct statutory entities. Moreover, according tomay 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 a power reserved exclusively tofor the board of directorsdirectors. As a result, as specified in Section 3(a)(58) of the company, under the specific and express recommendation issued from the audit committee, as the case may be, for the engagement or replacement of independent auditors, andExchange Act, our board of directors actsfunctions as our audit committee for the purposespurpose of nominatingapproving any engagement of our independent auditors for audit and non-audit services provided to our subsidiaries or to us.
Pursuant to Exchange Act Rule 10A-3(c)(3), which provides for an exemption under the rules of the SEC regarding the audit committees of listed companies, a foreign private issuer, such independent auditors.
as us, is not required to have an audit committee equivalent to or comparable with a U.S. audit committee, if the foreign private issuer has a body established and selected pursuant to home country legal or listing provisions expressly requiring or permitting such a body, and if the body meets certain requirements. As a foreign private issuer, we rely on the exemption under Rule 10A-3(c)(3) of the Exchange Act with respect to our Audit Committee, and we believe that our audit committee complies with the aforementioned exemption requirements. Except in these respects, our audit committee is comparable to an audit committeeperforms the functions of the boardaudit committees of U.S. companies.
16E. Purchases of Equity Securities by the Issuer and performs the same functions of an American company. Our audit committee is able to act independently in carrying out the responsibilities of an audit committee under the Sarbanes-Oxley Act, meets the exemption requirements of Rule 10A-3(c)(3) and therefore is in compliance with Rule 10A-3 of the Securities Exchange Act.
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
Affiliated Purchasers
The following table reflects purchases of our equity securities, including in the form of ADRs, by us or our affiliates in 2018.
2021.
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 2020 | ||||||||||||||||||
December 2020 | ||||||||||||||||||
January 2021 | ||||||||||||||||||
February 2021 | 447 | 4.9208 | 447 | - | ||||||||||||||
March 2021 | - | - | - | - | ||||||||||||||
April 2021 | - | - | - | - | ||||||||||||||
May 2021 | - | - | - | - | ||||||||||||||
June 2021 | - | - | - | - | ||||||||||||||
July 2021 | 868,600 | 8.0397 | 868,600 | - | ||||||||||||||
August 2021 | - | - | - | - | ||||||||||||||
September 2021 | - | - | - | - | ||||||||||||||
October 2021 | - | - | - | - | ||||||||||||||
November 2021 | - | - | - | - | ||||||||||||||
December 2021 | - | - | - | - | ||||||||||||||
Total | 869,047 | 12.96 | 869,047 | 36,956,402 |
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 2017 | 2,305,800 | 9.1122 | 2,305,800 | - |
December 2017 | 1,283,600 | 9.4044 | 1,283,600 | - |
January 2018 | - | - | - | - |
February 2018 | 941,100 | 11.3729 | 941,100 | - |
March 2018 | 74,700 | 11.1271 | 74,700 | - |
April 2018 | - | - | - | - |
May 2018 | 1,696,600 | 9.2154 | 1,696,600 | - |
June 2018 | 6,554,900 | 8.1855 | 6,554,900 | - |
July 2018 | - | - | - | - |
August 2018 | 219,400 | 8.3526 | 219,400 | - |
September 2018 | - | - | - | - |
October 2018 | - | - | - | - |
November 2018 | 1,438,400 | 10.7684 | 1,438,400 | - |
December 2018 | 818,500 | 11.0285 | 818,500 | - |
Total | 15,333,000 | 89 | 15,333,000 | 38,717,204 |
(1) | The buyback program, as approved by our board of directors on November |
August 2, 2022. The repurchase plans define |
(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 periods as approved by our board of directors. The total number of Units that may be repurchased for the period from February 3, 2021 to August 2, 2022 as approved by our board of directors is 36,956,402.
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.”
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ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT
Change in Registrant’s Certifying Accountant
Not applicable.
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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.
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 October 2018)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.
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.
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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 noncompliance 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 practicepractices 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.
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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.By-Laws, Currently, fivefour members of our boardBoard of directorsDirectors are deemed independent (representing 50%36% 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 that such rules would permit us to have directors that would not otherwise pass the test for director independence established by the NYSE.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 two years.
Executive Sessions
NYSE rules require that the non-management directors must meet at regularly scheduled executive sessions without management present.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 membersMario Roberto Opice Leão, is a 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.
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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 compensation and equity-based plans.
In 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 at Santander Brasil.
CMN rules require us to have a compensation committeeCompensation Committee composed of at least three members. We have created the compensation committee,Compensation Committee whose function is to advise our boardBoard of directorsDirectors on matters in connection with, but not limited to (i) fixed and variable compensation policies and benefits and (ii) the long-term incentive plan.
See “Item 6. Directors, Senior Management and Employees—C. Board Practices” for a complete description of all of our board advisory committees.
Pursuant to Brazilian Corporate Law, the aggregate compensation for our directors and executive officers is established by our shareholders.
Audit Committee and Audit Committee Additional Requirements
NYSE rules require that listed companies have an audit committee composed that (i) is composed of a minimum of three independent directors who are all financially literate, (ii) meets the SEC rules regarding audit committees for listed companies, (iii) has at least one member who has accounting or financial management expertise and (iv) is governed by a written charter addressing the committee’s required purpose and detailing its required responsibilities.
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CMN rules require us to have an audit committee of at least three independent members. The audit 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 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.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.approval, Our shareholders do not have the opportunity to vote on all equity compensation plans.
Corporate Governance Guidelines
NYSE rules require that listed companies adopt and disclose corporate governance guidelines. We comply with the corporate governance guidelines under applicable Brazilian law. The corporate governance guidelines applicable to us under Brazilian law are consistent with the guidelines established by the NYSE.
Pursuant to 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.
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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 committee with ongoing assessments of the company’s risk management processes and system of internal control.controls.
OurCMN rules also require us to have an internal audit function, and 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. 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) in force. OnceWe believe that these frameworks are 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 websiteanywebsite directly or indirectly linked to these websites is not part, of and is not incorporated by reference in, this annual report.
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ITEM 16H. MINE SAFETY DISCLOSURE
Mine Safety Disclosure
Not applicable.
16I. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not applicable.
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We have responded to Item 18 in lieu of this item.
Consolidated Financial Statements are filed as part of this annual report, see pages F-1 to F-136.starting on page F-1.
(a) Index to Consolidated Financial Statements
Page | |
Independent auditor’s Report | |
Consolidated Balance Sheets as of December 31, 2021, 2020 and 2019 | F-4 |
Consolidated Statement of Income for the years ended December 31, | |
Consolidated | |
F-7 | |
Consolidated | F-8 |
Consolidated | F-11 |
Notes to the Consolidated Financial Statements for the years ended December 31, | F-13 |
(b) List of Exhibits.
We are filing the following documents as part of this annual report on Form 20-F:
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* Certain information has been omitted from this exhibit pursuant to Item 4 of the Instructions As To Exhibits of Form 20-F because it is both not material and is the type that the registrant treats as private or confidential. The registrant hereby agrees to furnish an unredacted copy of the exhibit and its materiality and privacy or confidentiality to the U.S. Securities and Exchange Commission upon request.
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SIGNATURES
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/ | Mario Roberto Opice Leão | |
Name: | Mario Roberto Opice Leão | ||
Title: Chief Executive Officer |
Date: March 25, 2019
February 28, 2022
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BANCO SANTANDER (BRASIL) S.A.
CONSOLIDATED FINANCIAL STATEMENTS
Banco Santander (Brasil) S.A.
Consolidated Financial Statements
Prepared in accordance with International Financial Reporting
Standards - IFRS
December 31, 2021
BANCO SANTANDER (BRASIL) S.A. | |||||
CONSOLIDATED FINANCIAL STATEMENTS | |||||
INDEX | |||||
Banco Santander (Brasil) S.A.
Report of Independent Registered Public Accounting Firmindependent registered public
accounting firm
December 31, 2021
Report of independent registered public accounting firm
To the Board of Directors and Stockholders of
Banco Santander (Brasil) S.A.
Opinions on the Financial Statementsfinancial statements and Internal Control
internal control over Financial Reportingfinancial reporting
We have audited the accompanying consolidated balance sheets of Banco Santander (Brasil) S.A. and its subsidiaries (the “Company”"Company") as of December 31, 20182021, 2020 and 2017,2019, and the related consolidated income statements statement of otherincome, comprehensive income, statement of changes in stockholders’stockholders' equity and statement of cash flows for each of the three years in the period ended December 31, 2018,2021, including the related notes (collectively referred to as the “consolidated"consolidated financial statements”statements"). We also have audited the Company’sCompany's internal control over financial reporting as of December 31, 2018,2021, 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, 20182021, 2020 and 2017,2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 20182021 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, 2018,2021, based on criteria established inInternal Control - Integrated Framework(2013) issued by the COSO.
Change in Accounting Principle
As discussed in Note 1.c.1 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 the accompanyingItem 15B - Management´s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on the Company’sCompany'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) 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.
PricewaterhouseCoopers, Av. Francisco Matarazzo 1400, Torre Torino, São Paulo, SP, Brasil, 05001-903, Caixa Postal 60054, T: +55 (11) 3674 2000, www.pwc.com.br |
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, 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.
Supplemental Information
The reconciliation of stockholders' equity and net income –- BRGAAP vs IFRS as of and for the years ended December 31, 2018, 20172021, 2020 and 20162019 and the statements of value added for the years ended December 31, 2018, 20172021, 2020 and 2016,2019, included in APPENDIX I and II respectively, have been subjected to audit procedures performed in conjunction with the audit of the Company’sCompany's consolidated financial statements. This supplemental information is the responsibility of the Company’sCompany'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, 2018, 20172021, 2020 and 20162019 and the statements of value added for the years ended December 31, 2018, 20172021, 2020 and 20162019 are fairly stated, in all material respects, in relation to the consolidated financial statements as a whole.
Definition and Limitationslimitations of Internal Controlinternal
control over Financial Reportingfinancial reporting
A company’scompany'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’scompany'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’scompany'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.
The
(‘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
The principal considerations for our determination that performing procedures relating to the
Addressing the
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,
During 2020, The Bank reclassified R$ 73,075,341 of “Deposits of Brazil's Central Bank and deposits of credit institutions” and R$ 390,760,088 of “Customer deposits” from level 2 to level 3, as there was no active trading market for these instruments.”
Comparison of the carrying amounts of the Bank's financial liabilities measured at other than fair value and their respective fair values
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 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.
Bonds and Debt Instruments Eligible for Capital – refer to the transaction fully agreed with a related party, in the context of the Capital Optimization Plan, whose book value is similar to the fair value.
The valuation techniques used to estimate each level are defined in note 2.e.
Bacen determines that financial institutions
In Continuing the adoption of the rules established by CMN Resolution No. 4,192/2013, as of January 2015, the Prudential Consolidated, defined by CMN Resolution No. 4,280/2013, came into
The Basel index is calculated
Banco Santander, quarterly
Financial institutions are required to maintain investments in
Interest and similar income
The breakdown of the main items of interest and similar charges accrued in
"Interest and similar
The breakdown of the main items of interest
“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:
Breakdown of the balance of this item
The breakdown of the balance of this item is as
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: Amount of all fees and commissions paid or payable in the year
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: The breakdown of the balance of this item, by type of instrument, is as follows:
Exchange differences" demonstrate the gains or losses on foreign currency transactions, the differences that arise on translations of monetary items in foreign currencies to the functional currency, and those disclosed on non-monetary assets in foreign currency at the time of their disposal.
The breakdown of "Other operating income (expense)" is as follows:
a) Breakdown
The breakdown of “Personnel expenses” is as follows:
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, 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 b.1) Local and Global Program
(**) Target of the plan
The
Each participant has a
Impact on Income
b.2)
The variable remuneration plan with payment referenced in Banco
a) Breakdown The detail of other general administrative expenses is as follows:
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: Balance of Technical reports
The approximate value of taxes according to law 12,741/2012 totaled R$
The breakdown of the balance of this item is as follows:
As of December 31,
a) Guarantees and commitments
The Bank provides a variety of guarantees to its clients to improve their credit standing and allow them to compete
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.
Maximum potential amount of future payments
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 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
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 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$
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
The funds managed by Banco Santander not recorded in the balance sheet are as follows:
c) Third-party securities held in custody
On December 31,
d) Residual maturity
The breakdown, by maturity, of the balances of certain items in the consolidated balance sheets is as follows:
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:
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:
Additionally, Banco Santander has contracts for a matures indeterminate, totaling R$
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,
Since the Pandemic in 2000, the Bank has monitored its effects on the quality of the credit portfolio and the beginning of the continuity of its results. Strategic initiatives were implemented in a timely manner, sufficient to mitigate the impacts against the scenario of increased default events due to the pandemic. Management procedures were structured in line with the guidelines and measures of the Federal Government through the National Monetary Council and the Central Bank of Brazil to mitigate the impacts caused by COVID-19, such as: (a) measures to facilitate the renegotiations of the credit operations without increasing provisions, (b) reduction of capital requirements, in order to expand the granting of credit by the Financial System and (c) reduction of compulsory reserve rates, to improve liquidity conditions. The Bank, awareness of its responsibilities, availability of changes, changes in classification, availability of new products, reinforced credit in segments and more impacts and preventive recovery and collection actions. These actions carried out as a result of alerts were identified by the constant monitoring of the portfolio. The operations benefiting from amendments made, in general, had a grace period of 60 days with the possibility of extending it for another month for individual customers. In the case of legal entities, extensions were granted with a grace period of up to 6 months in line with the BNDES (National Bank for Economic and Social Development). These measures made it possible to extend operations in good standing, with temporary criteria for classifying problem assets and restructurings, as well as allowing the maintenance of the classifications of credit operations, extended until December 2020. During the period of extensions, the actions adopted by the Bank benefited 1,728,197 customers, R$40,592 million in extended credit, equivalent to 9.72% of the total credit portfolio for the year. Of the total extensions that expired on December 31, 2020 of R$37,538 million, R$28,348 million were in stage 1, R$6,608 million were in stage 2 and R$2,567 million were in stage 3. In order to face the scenario of uncertainty and increase in delinquency, in 2020 the Bank constituted an additional provision in the amount of R$3,200,000. This provision was calculated based on the analysis of potential macroeconomic effects and considered quantitative and qualitative indicators, as well as the identification of risks and a collective assessment of exposures. Throughout 2021, follow-ups were carried out until the end of grace periods and extension actions with the resumption of operations added to the standard model of credit management adopted by the bank. In this sense, the macroeconomic scenarios were updated in the process of measuring credit risk provisions, as well as identifying the credit portfolios impacted by the pandemic, using the total balance of additional provisions constituted in 2020 to absorb the need to increase expected losses from credit. To estimate the expected loss, Santander Brasil uses prospective information. Three macroeconomic scenarios are considered, being Base, Pessimistic and Optimistic scenarios. For the elaboration of the methodology, the 5-year evolution of the following main macroeconomic indicators was considered: Prospectus for loss estimation
In the process of estimating the expected loss, a weight is assigned to each scenario, with greater relevance being attributed to the base scenario (80%), while lower weights are attributed to the pessimistic (10%) and optimistic (10%) scenarios . The weights assigned to the scenarios in the last 3 years are as follows: Macroeconomic scenario
In accordance with IFRS 8, an operating segment is a component of an entity:
(a) that engages in business activities from which it may earn revenues and incur expenses (including revenues and expenses relating to transactions with other components of the same entity),
(b) whose operating results are regularly reviewed by the entity’s Management responsible to make decisions about resources to be allocated to the segment and assess its performance, and
(c) For which 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.
The income statements and other significant data are as follows: Income statements and other significant data
Other aggregates
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.
Banco Santander has the Policy on Related Party Transactions approved by the Board of Directors, which aim to ensure that all transactions are made on the policy typified in view the interests of Banco Santander and its stockholders'. The policy defines powers to approve certain transactions by the Board of Directors. The rules laid down are also applied to all employees and directors of Banco Santander and its subsidiaries.
The transactions and remuneration of services with related parties are carried out in the ordinary course of business and 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 Bank's Board of Directors' 30, 2021. i) Long-term benefits The Banco Santander as well as Banco Santander Spain, as other subsidiaries of Santander Group, have long-term compensation programs tied to their share's performance, based on the achievement of goals. ii) Short-term benefits The following table shows the Board of Directors’ and Executive Board’s:
Additionally, in the exercise ended on December 31, iii) Contract termination The termination of the employment relationship for non-fulfillment of obligations or voluntarily does not entitle executives to any financial compensation. b) Lending operations Under current law, it is not granted loans or advances involving: I - directors, members of board of directors and audit committee as well as their spouses and relatives up to the second degree; II - individuals or legal entities of Banco Santander, which hold more than 10% of the share capital; III - Legal entities which hold more than 10% of the share capital, Banco Santander and its subsidiaries; 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,
(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.
d) Related-Party Transactions 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 in view of the interests of Banco Santander and its stockholders. The policy defines the power to approve certain transactions by the Board of Directors. The planned rules also apply 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.
Principal transactions and balances
not involve disadvantages. (1) Banco Santander (Brasil) S.A. is indirectly controlled by Banco Santander (2) Refers to the (3)
(4) Significant influence of Espanha. (5)
(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,
Risk management at Banco Santander is based on the following principles: A. Independence of the management activities related to the business; B. Involvement of the Senior Management in decision-making; C. Consensus in the decision making on credit operations between the Risk and Business departments; D. Collegiate decision-making, which includes the branch network, aiming to encourage diversity of opinions and avoiding the attribution of individual decisions;
E. The use of statistical tools to estimate default, which includes internal rating, credit scoring and behavior scoring, RORAC (Return on Risk Adjusted Capital), VaR (Value at Risk), economic capital, scenario assessment, among others; F. Global approach, which an integrated treatment of risk factors in the business departments and the concept of economic capital as a consistent metric for risk undertaken and for business management; G. Common management tools H. Organizational structure I. Scopes and responsibilities J. Risk limitation
K. Recognition L. Effective information channel M. Maintenance of a medium-low risk profile, and low volatility by: • The portfolio diversification, limiting concentration in clients, groups, sectors, products or geographically speaking; the complexity level of market operations reduction; the analysis of social and environmental risks of businesses and projects financed by the bank; continuous follow up to prevent the portfolios from deteriorating. • Policies and procedures definition that are part of the Regulatory Framework Risk, which regulates the risk activities and processes. They follow the instructions of the Board of Directors, the regulations of the BACEN and the international best practices in order to protect the capital and ensure business' profitability. At Banco Santander, the risk management and control process is structured using as reference the framework defined at corporate level and described according to the following phases: I. Adaptation of corporate management frameworks and policies that reflect Banco Santander’s risk management principles. Within this regulatory framework, the Corporate Risk Management Framework, regulates the principles and standards governing Banco Santander´s risk activities, based on the corporate organization and a management models, meeting the necessary regulatory requirements for credit management. The organizational model comprises the management map, which defines the risk function and governance, and the regulatory framework itself. II. Identification of risks through the constant review and monitoring of exposures, the assessment of new products, businesses and deals (singular transactions); III. Risks measurement using methods and models periodically tested. IV. Preparation and distribution of a complete set of reports that are reviewed daily by the heads at all levels of Banco Santander management. V. Implementation of a risk control system which checks, on a daily basis, the degree to which the Bank´s risk profile matches the risk policies approved and the risk limits set. The most noteworthy corporate tools and techniques (aforementioned) already in use at Banco Santander are in different stages of maturity regarding the level of implementation and use in the Bank. For wholesale segment, these techniques are in line with the corporate level development. For local segments, internal ratings and VI. Internal ratings- and scorings-based models which, by assessing the various qualitative and quantitative risk components by client and transaction, making it possible to estimate, firstly, the probability of default and, subsequently, the expected loss, based on Loss Given Default (LGD) estimates. VII. Economic capital, as a homogeneous measurement of the assumed risk and the basis for the measurement of the performance management. VIII. RORAC, used both as a transaction pricing tool in the whole sale segment (more precisely in global ranking and markets - bottom-up approach) as for in the analysis of portfolios and units (top-down approach). IX. VaR, which is used for controlling and setting the market risk limits for the various treasury portfolios. X. Scenario analysis and stress testing to supplement the analysis market and credit risk in order to assess the impact of alternative scenarios, even over provisions and capital.
a) Corporate Governance of the Risk Function The structure of Banco Santander’s Risk Committee is defined in accordance with the highest standards of prudent management, while respecting local legal and regulatory environment.
A. Integrate and adapt the Bank's risk to local level, further than the risk management strategy, tolerance level and predisposition to the risk, previously approved by the executive committee and board of directors, all matched with corporate standards of Banco Santander Spain; B. Approve the proposals, operations and limits of clients and portfolio; C. Regularly monitor all the risks inherent to the business, proving if your profile is adequate to what was established in the risk appetite.
D. Authorize the use of management tools and local risk models and being aware of the result of their internal validation. E. Keeping updated, assessing and monitoring any observations and recommendations periodically formulated by the supervisory authorities regarding their functions. The organizational structure of the executive vice-presidency consists of areas which are responsible for credit risk management, market and structural, A specific structure is responsible for serving internal and external regulators, supervisors and auditors. It has a
and Relationship with Supervisors and Stress Test. b) Credit Risk b.1) Introduction to the treatment of credit risk The Credit Risk Management provides subsidies to define strategies as risk appetite, to establish limits, including exposure analysis and trends as well as the effectiveness of the credit policy. The goal is to maintain a risk profile and adequate minimum profitability to offset the estimated default, both client and portfolio, as defined by the Executive Committee and Board of Directors. Additionally, it is responsible for the risk management systems applied in the identification, measurement, control and reduction of exposure to risk in individual or clustered by similar operations. The Risk Management is specialized according to each clients' characteristics, being segregated between individual clients (with the accompanied of dedicated analysts) and customers with similar characteristics (standardized). • Individualized management: It is performed by a defined risk analyst, which prepares the analysis, and forwards it to the Risk Committee and monitors the client's progress. It covers the Wholesale segment clients (Corporate and GB&M), Retail (Companies 3 and Governments, Institutions and Universities); • Standardized management: Aimed at individuals and companies not classified as individualized clients. Based on automated models of decision-making and internal risk assessment, complemented by commercial heave and analysts specialized teams to handle exceptions. Macroeconomic aspects and market conditions, sectored and geographical concentration, as well as client profiling and economic prospects are also evaluated and considered in the appropriate measuring of credit risk. b.2) Reduction to recoverable value (“impairment”) The Bank recognizes adjustments for expected credit losses with respect to the following financial instruments that are not measured at fair value through profit or loss: - financial assets that are debt instruments; - amounts receivable from leasing; - financial guarantee contracts issued; and - loan commitments issued. No impairment losses are recognized on equity instruments. The Bank measures the adjustments for losses at an amount equal to the expected credit losses over the useful life, except for the instruments below, for which they are recorded as expected credit losses in 12 months: - debt instruments that present a low credit risk at the closing date; and - other financial instruments (except lease receivables) in which the credit risk has not increased substantially since their initial recognition. Adjustments for losses on lease receivables are always measured at an amount equal to expected credit losses over their useful life. Measurement of expected credit losses Expected credit losses are a probability-weighted estimate of credit losses. They are measured as follows: - financial assets subject to impairment at the closing date: as the difference between the gross book value and the present value of estimated future cash flows; - loan commitments: 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: payments expected 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 the debtor's financial difficulties, it is necessary to assess whether the financial asset should be derecognized and expected credit losses are measured as follows : - If the expected restructuring does not result in a write-off of the existing asset, the expected cash flows arising from the modified financial asset are included in the calculation of the cash insufficiencies of the existing asset. - If the expected restructuring results in the derecognition of the existing asset, the expected fair value of the new asset is treated as the final cash flow of the existing financial asset at the time of its derecognition. This amount is included in the calculation of cash shortfalls arising from the existing financial asset discounted from the estimated retirement date to the closing date, using the original effective interest rate of the existing financial asset.
Determination of On each balance sheet date, the Bank assesses whether financial assets recorded at amortized cost and debt financial instruments recorded at fair value through Other Comprehensive Income are subject to impairment, as well as other financial instruments subject to that 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: - - delays in contractual obligations; - breach of contract, such as default or delay; - the restructuring of a loan or advance by the Bank under conditions that the Bank would not consider as interesting to carry out; - the likelihood that the debtor will enter bankruptcy or other 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 borrower's condition 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 are no other indicators of impairment. Presentation of the provision for impairment losses in the balance sheet Provisions for impairment losses are presented in the balance sheet as follows: - financial assets measured at amortized cost: as a deduction from the gross carrying amount 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, as the book value of these assets corresponds to their fair value. Individual or collective assessment An individual measurement of impairment was based on Management's best estimate of the present value of cash flows expected to be received. In estimating these cash flows, Management exercised judgment as to the financial situation of a debtor and the net realizable value of any underlying collateral. Each asset reduced to recoverable value was evaluated on its merits, while the test strategy and the estimate of cash flows considered recoverable were approved by the Bank's credit risk officers. When assessing the need for collective allowance for losses, Management considered factors such as credit quality, portfolio size, concentrations and economic factors. To estimate the necessary allowance, assumptions were established to define how the inherent losses were modeled and to determine the necessary data parameters, based on historical experience and current economic conditions. Measurement of impairment Losses due to impairment of assets measured at amortized cost were calculated as the difference between the book value and the present value of estimated future cash flows, discounted at the asset's original effective interest rate. 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 that occurred after the impairment caused a reduction in the amount 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 amount has increased and that increase could be objectively linked to an event that occurred after recognition from the impairment loss, the impairment loss was reversed through profit or loss; otherwise, Any subsequent recovery in the fair value of an equity security measured at fair value through Other Comprehensive Income and reduced to recoverable amount was recognized at any time in Other Comprehensive Income. Information, assumptions and techniques used in estimating the 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 for this Asset represents the expected loss resulting from possible non-compliance over the next 12 months; - Stage 2: If a significant increase in risk is identified since initial recognition, without having materialized deterioration, the financial instrument will be classified within this stage. In this case, the amount referring to the provision for expected loss due to default 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 that it is a non-impaired operation if considered as refinanced or operations included in a special arrangement; and - Stage 3: A financial instrument is recorded within this stage, when it shows evident signs of deterioration as a result of one or more events that have already occurred and that materialize in a loss. In this case, the amount referring to the allowance for losses reflects the expected losses from credit risk over the expected residual life of the financial instrument.
Impairment estimation methodology The measurement of the impairment loss is carried out through the following factors: - Default Exposure or EAD: is the transaction value exposed to credit risk, including the current available balance ratio that could be provided at the time of default. The models developed incorporate assumptions about changes in the payment schedule for operations. - Probability of Default (PD): is defined as the probability that the counterparty can meet its obligations to pay 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 - lifetime (Stages 2 and 3) , which considers the probability that the operation will default between the balance sheet date and the operation's residual maturity date. The standard requires that future information relevant to the estimation of these parameters must be considered. - Loss on Default (LGD): is the loss resulting from default, ie the percentage of exposure that cannot be recovered in the event of default. It mainly depends 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 regulation, future information must be considered 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 to calculate the parameters both for regulatory purposes and for internal management. Default definition The Bank considers a financial asset to be in default when: - it is probable that the debtor will not pay its credit obligations to the Bank in full; or - the debtor has significant credit obligations to the Bank overdue for more than 90 days, as a general rule. Overdrafts are considered overdue if the customer violates a recommended limit or has been granted a limit lower than the current outstanding amount. When assessing whether a debtor is in default, the Bank considers indicators: - qualitative – for example, breaches of covenants; - quantitative – for example, overdue status and non-payment of another obligation of the same issuer to the Bank; and - based on data collected internally and obtained from external sources. b.3) Measures and measurement tools Rating tools The Bank uses proprietary internal rating models to measure the credit quality of a given customer or transaction. Each rating relates to a certain probability of default or non-payment, determined on the basis of the customer's historical experience, to predict default. Rating/Scores models are used in the Bank’s loan approval and risk monitoring process. The classification of loans into different categories is made according to the analysis of economic and financial situation of the client and any other Ratings assigned to customers are reviewed periodically to include any new financial information available and the experience in the Banking relationship. The frequency of the reviews is increased in case of customers that reach certain levels in the automatic warning systems and of customers classified as requiring special monitoring. The own rating tools are monitored and reviewed to qualifications by them awarded are progressively enhanced. Credit risk parameters We assess all borrowings for an allowance for impairment of credit risk. Loans are individually assessed for impairment or collectively assessed by grouping similar risk characteristics. Loans individually assessed for impairment are not collectively assessed.
To individually measure the impairment loss of loans assessed for impairment, we consider borrowers' conditions, such as their economic and financial situation, level of indebtedness, capacity to generate cash flow, quality of management, corporate governance, quality of internal controls, payment history, industry experience, contingencies and credit limits, as well as asset characteristics, such as their nature and purpose, type, sufficiency and liquidity level of guarantees, and also based on experience historical impairment loss and other circumstances known at the time of valuation.
To measure the impairment loss of loans collectively assessed for impairment, we separate financial assets into groups considering credit risk characteristics and similarities. In other words, according to the segment, type of assets, guarantees and other factors associated with the historical impairment experience and other circumstances known at the time of the assessment. The impairment loss is calculated using statistical models that consider the following factors: Default Exposure (EAD): is the amount of a transaction exposed to credit risk, including the proportion of current outstanding balance exposure that could be provided at default. Models developed incorporate hypotheses considering possible changes in the payment schedule. Default probability (PD): is the probability that a counterparty will not fulfill its obligation to pay principal and/or interest. For the purposes of IFRS 9, this will consider both the PD-12 months, which is the probability that the financial instrument will default in the next 12 months, as well as the lifetime PD, which is the probability of the transaction to default considering its term. remaining. Future relevant information is considered necessary to estimate these parameters Loss Given Default (LGD)
To estimate the above parameters, the Bank
The table shown in note 9.b shows the portfolio by
Expected credit losses, measured using sufficient and available historical data, are presented below.
b.4) Observed loss: measures of credit cost The Bank 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
Banco Santander has a global view of its credit portfolio throughout the various phases of the risk cycle, with a level of detail that allows us to evaluate the current situation of risk and any movements. This mapping is followed by the Board of Directors and the Executive Committee of the bank that no only sets policies and risk procedures, limits and delegates responsibilities. It also approves and supervises the activities of the area. The risk management process consists of identifying, measuring, analyzing, controlling, negotiating and deciding on, as appropriate, the risks incurred in the Bank’s operations and companies of the conglomerate. The risk cycle comprises three different phases: • Pre-sale: this phase includes the risk planning and setting targets, determination of the Bank’s risk appetite, approval of new products, risk analysis and credit rating process, and limit setting. • Sale: this is the decision-making phase for both pre-classified and specific transactions. • Post-sale: this phase comprises the risk monitoring, measurement and control processes and the recovery process. Planning and setting risk limits Risk limit setting is a dynamic process that identifies Banco Santander’s risk appetite by assessing business proposals and its risk attitude. This process is defined through the risk appetite approved by the Bank's Management and the units. In the case of individualized risks, the most basic level is the customer, for which individual limits are set. For GCB clients, a pre-classification model is used based on a system of measurement and monitoring of economic capital. In relation to the Corporate segment, the operational limit model is used in maximum nominal credit amounts. To the risks of customers with standardized management, the limits of the portfolios are planned using credit management programs (SGP) agreed document for the areas of business and risks, and approved by the Executive Committee. This document contains the results expected for the business in terms of risk and return, beyond the limits which govern the activity and risk management. This client group has a more automated treatment in risks. Risk analysis and rating process Risk analysis is a pre-requisite for the approval of loans to clients by the Bank. This analysis consists of examining the counterparty’s ability on meeting its contractual obligations to the Banco Santander, which involves analyzing the client’s credit quality, its risk transactions, solvency, and sustainability of business and the return to be obtained in view of the risk assumed. The risk analysis is conducted annually, at least, and can be held shortly when client profile indicates (through systems with centralized alerts, managers visits to clients or specific credit analysis), or when operations are not covered by pre-classification.
Decision-Making on Operations The process of decision making on operations aims to analyze and adopt adopt in accordance with pre-established policies, The Banco Santander uses, among others, the RORAC methodology (profitability on risk-adjusted capital), for risk analysis and pricing in the decision-making process on transactions and deals. Risk monitoring and control In Individual retail, customers are systematically reviewed through a daily credit rating process. This process allows for reassessments in credit exposure, allowing for increases in exposure for customers with good credit quality. In case of detection of deterioration in the risk level, actions to contain credit risk and preventive actions are automatically generated.
This monitoring on a case-by-case basis). Risk control function The control function is performed by assessing risks from various complementary perspectives, the main pillars are the control by geographical location, business area, management model, product and process, facilitating thus the detection of specific areas requiring measures for which decisions should be taken. To obtain an overview of the bank's loan portfolio over the various phases of the credit cycle, with a level of detail that allows the assessment of the current risk situation and any movements. Any changes in the Bank’s risk exposure are controlled on an ongoing and systematic basis. The impacts of these changes in certain future situations, both of an exogenous nature and those arising from strategic decisions, are assessed in order to establish measures that place the profile and amount of the loss portfolio within the parameters set by Executive Commission.
"Strategies and action channels are defined according to the days of past due loans and the amounts, that result in a Map of Responsibilities and always look as the first alternative, the client's recovery. The Bank uses tools as behavioral scoring to study the collection performance of certain groups, in order to reduce costs and increase recoveries. These models seek to measure the probability of clients becoming overdue adjusting collection efforts so that clients less likely to recover, receive timely actions. In cases the payments is most likely to happen, the focus is given in maintaining a healthy relationship with clients. All clients with severe or rescheduled credits delays values have internal restrictions. Clients with high risk index have a model of recovery, with a commercial follow-up and a recovery specialist.
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 products. The From The portfolio as a whole. Credit risk from financial market operations This heading includes the credit risk arising in treasury operations with clients, mainly credit institutions. These operations are performed both via money market financing products with different financial institutions and via derivative instruments arranged for the purpose of serving our clients. Risk control is performed using an integrated, real-time system that enables the Bank to know at any time the unused exposure limit with respect to any counterparty, any product and maturity and at any Bank unit.
Credit risk is measured at its current market value and its potential value (exposure value considering the future variation in the underlying market factors). Therefore, the equivalent credit risk (CRE) is defined as the sum of net replacement value plus the maximum potential value of the contracts in the future.
Environmental risk The Banco Santander's Social and Environmental Responsibility Policy (PRSA), which follows the guidelines of CMN Resolution Mitigation of social and environmental risks in financing large projects is carried out based on analyzes based on the guidelines of the Equator Principles, a set of social and environmental criteria referenced in the International Finance Corporation's (IFC) Performance Standards on Social and Environmental Sustainability and in the Environmental Guidelines , Health and Safety of the World Bank Group. The commitments assumed in the PRSA are detailed in other Bank policies, such as the Anti-Corruption Policy, Supplier Relationships and Homologation Policies and Social and Environmental Risk Policies, as well as the Private Social Investment Policy, which aims to guide the strategy in this area. and to present guidelines for social programs that strengthen this strategy.
The business trends observed in
Below is a table showing the evolution of the main credit
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
Market risk is the exposure to risks such as interest rates, exchange rates, prices of goods, prices in the stock market and others values, according to the type of product, volume of operations, term and conditions of the agreement and underlying volatility.
The Bank operates according to global policies, within the Group’s risk tolerance level, aligned with the objectives in Brazil and in the world.
With this purpose, it has developed its own Risk Management model, according to the following principles: ●Functional independence; ●Executive capacity sustained by knowledge and proximity with the client;
●Collective decision-making, that evaluates a variety of possible scenarios and do not compromise the results with individual decision (including Brazil Executive Risk Committee - ●Management and improvement of the equation risk/return; and ●Advanced methodologies for risk management, such as Value at Risk – VaR (historical simulation of 521 days with a confidence level of 99% and time horizon of one day), scenarios, financial margin sensibility, equity value and contingency plan. The Market Risks structure is part of the Vice Presidency of Credit and Market Risks, an independent area that applies risk policies taking into consideration the guidelines of the Board of Directors and the Risks Division of Santander in Spain.
c.1) Activities subject to market risk The measurement, control and monitoring of the market risk area comprises all operations in which net worth risk is assumed. This risk arises from changes in the risk factors –interest rate, exchange rate, equities, commodity prices and the volatility thereof– and from the solvency and liquidity risk of the various products and markets in which the Bank operates. The activities are segmented by risk type as follows:
●Structural foreign currency risk/hedges of results: foreign currency risk arising from the currency in which investments in consolidable and non-consolidable companies are made (structural exchange rate). This item also includes the positions taken to hedge the foreign currency risk on future results generated in currencies other than the Real (hedges of results). ●Structural equities risk: this item includes equity investments in non-consolidated financial and non-financial companies that give rise to equities risk. The Financial Management area is responsible for the balance sheet management risk and structural risks through the application of uniform methodologies adapted to the situation of each market in which the Bank operates. Thus, in the convertible currencies area, Financial Management directly manages the Parent's risks and coordinates the management of the other units operating in these currencies. Decisions affecting the management of these risks are taken through the ALCO (Asset Liability Control committees) in the respective countries. The Financial Management goal is to ensure the stability and recurring nature of both the net interest margin of the commercial activity and the Bank’s economic value, whilst maintaining adequate liquidity and solvency levels. Each of these activities is measured and analyzed using different tools in order to reflect their risk profiles as accurately as possible.
Interest rate Risk
Position of
c.2) Methodologies
Trading
in May 2018. The standard methodology applied to trading activities by the Banco Santander in 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 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. 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.
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
Interest rate gap of assets and liabilities The interest rate gap analysis focuses on the mismatches between the reevaluation deadlines of on-balance-sheets assets and liabilities and off-balance-sheets items. This analysis facilitates a basic snapshot of the balance sheet structure and enables concentrations of interest rate risk in the various maturities to be detected. Additionally, it is a useful tool for estimating the possible impact of potential changes in interest rates on the entity's net interest margin and market value of equity.
The flows of all the on and off-balance sheet headings must be broken down and placed at the point of repricing or maturity. The duration and sensitivity of contracts that do not have a maturity date they are analyzed and estimated using an internal model.
Net interest margin (NIM) sensitivity The sensitivity of the net interest margin measures the change in the expected accruals for a specific period (12 months) given a shift in the interest rate curve. The sensitivity of the net interest margin is calculated by simulating the margin both for a scenario of changes in the interest rate curve and for the current scenario. The sensitivity is the difference between the two margins calculated.
Market value of equity (MVE) sensitivity The sensitivity of the market value of equity is a complementary measure to the sensitivity of the net interest margin. This sensitivity measures the interest rate risk implicit in the market value of equity based on the effect of changes in interest rates on the present values of financial assets and liabilities.
Value at risk (VaR) and Earnings at Risk (EaR)
It is defined with 99% base points of the MVE’s loss distribution function, calculated considering the market value of the positions, based on the payback obtained in the last two years and with degree of statistical certainty (level of trust) to a defined time horizon. It is also applied a similar methodology to calculate the maximum loss in NII (EaR), in order to consider the interest rate risk even in economic value impact as in financial margin. The unit sums the return vectors of the VAR with the return vectors of EaR, resulting the total return vector. The composition is made considering in the metric of EaR the losses in financial margin that occur between the initial moment (reference date) and the holding period of the not-trading portfolio. The losses in the economic value takes in consideration the impact of the ending positions after the holding period.
c.4) Liquidity risk Liquidity risk is associated with the Bank's ability to finance purchase commitments at reasonable market prices and to carry out its business plans with stable sources of financing.
Liquidity Management of Santander Bank
For the control and liquidity management, the Santander bank Then, we can cite:
Short-term metrics and liquidity stress:
The Santander Bank uses the Liquidity Coverage Ratio (LCR) in its liquidity risk management. LCR is a short-term index for a 30 days stress scenario, results from the division of The Total High Liquidity Assets – HQLA is composed mainly of Brazilian federal government bonds and compulsory returns. The net outflows are composed mainly of losses of deposits, offset in part by inflows, mainly loans.
b. Liquidity stress scenarios: |
The Liquidity management requires the analysis of financial scenarios in which potential problems whit liquidity are assessed, for which is necessary to construct and study scenarios in crisis situations. The model used for this analysis is the Stress Test
The stress test evaluateevaluates 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 definedefined from the analysis of market behavior during previous crisis, as well as future estimates.crisis. Four crisis scenarios are develop,developed, with different intensities.
From the stress modelsmodel’s analysis, the concept of minimum liquidity was define,defined, 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 Metricsmetric 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 even with deployment in 2019,product type. It is calculate quarterlycalculated monthly by the institution.
This metric has different weights by term and even with deployment in 2019, is calculate quarterly by the institution.
F-124
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(Thousand of Brazilian Reais - R$ - unless otherwise stated)
c. Liquidity indicators
ForIn order to help management, some liquidity indicators are calculated on a monthly basis, like a Concentration indexesratios of concentration by counterparties and concentration by segments.
Clients Funding
The Bank has different funding sources, both in products and mix of clients, with a healthy distribution between the segments. The total of clientsclients’ resources is currently in R$ 39578,6 billion and presented an increase comparing with 20172019 amount, highlighting the increasing of time deposit funding and the keeping of financial letters inventory.
highlighting the increasing of time deposit funding and the keeping of financial letters
In millions of Reais | ||||||
Customers Funding | 2021 | 2020 | ||||
0 a 30 days | Total | % | 0 a 30 days | Total | % | |
Demand deposits | 39,574 | 39,574 | 100% | 35,550 | 35,550 | 100% |
Savings accounts | 65,220 | 65,220 | 100% | 62,210 | 62,210 | 100% |
Time deposits | 92,496 | 308,950 | 30% | 77,298 | 279,778 | 28% |
Interbank deposit | 763 | 4,001 | 19% | 818 | 5,145 | 16% |
Funds from acceptances and issuance of securities | 5,621 | 88,089 | 6% | 7,544 | 70,628 | 11% |
Borrowings and Onlendings | - | 90,709 | 0% | 3,189 | 67,760 | 5% |
Subordinated Debts / Debt Instruments Eligible to Compose Capital | - | 19,641 | 0% | - | 13,120 | 0% |
Total | 203,674 | 616,184 | 33% | 186,609 | 534,191 | 100% |
In millions of Reais | ||||||
Customers Funding | 2019 | |||||
0 a 30 days | Total | % | ||||
Demand deposits | 29,524 | 29,524 | 100% | |||
Savings accounts | 49,040 | 49,040 | 100% |
Time deposits | 53,321 | 190,344 | 28% | |||
Interbank deposit | 871 | 4,299 | 20% | |||
Funds from acceptances and issuance of securities | 3,921 | 85,963 | 5% | |||
Borrowings and Onlendings | 5,077 | 54,880 | 9% | |||
Subordinated Debts / Debt Instruments Eligible to Compose Capital | - | 10,175 | 0% | |||
Total | 141,754 | 424,225 | 33% |
In millions of Reais | |||||||||||||||||
Customers Funding | 2018 | 2017 | |||||||||||||||
0 a 30 days | Total | % | 0 a 30 days | Total | % | ||||||||||||
Demand deposits | 18,854 | 18,854 | 100% | 15,252 | 15,252 | 100% | |||||||||||
Savings accounts | 46,068 | 46,068 | 100% | 40,570 | 40,570 | 100% | |||||||||||
Time deposits | 49,771 | 190,971 | 26% | 39,549 | 170,570 | 23% | 53,321 | 190,344 | 28% | ||||||||
Interbank deposit | 863 | 4,118 | 21% | 622 | 3,244 | 19% | 871 | 4,299 | 20% | ||||||||
Funds from acceptances and issuance of securities | 3,681 | 70,110 | 5% | 4,436 | 69,348 | 6% | 3,921 | 85,963 | 5% | ||||||||
Borrowings and Onlendings | 5,181 | 45,936 | 11% | 5,606 | 48,304 | 12% | 5,077 | 54,880 | 9% | ||||||||
Subordinated Debts / Debt Instruments Eligible to Compose Capital | 9,857 | 19,666 | 50% | - | 8,829 | 0% | Subordinated Debts / Debt Instruments Eligible to Compose Capital | - | 10,175 | 0% | |||||||
Total | 134,275 | 395,723 | 34% | 106,035 | 356,117 | 30% | 141,754 | 424,225 | 33% | ||||||||
In millions of Reais | |||||||||||||||||
Customers Funding | 2016 | ||||||||||||||||
0 a 30 days | Total | % | |||||||||||||||
Demand deposits | 15,794 | 15,794 | 100% | ||||||||||||||
Savings accounts | 35,901 | 35,901 | 100% | ||||||||||||||
Time deposits | 24,452 | 150,686 | 16% | ||||||||||||||
Interbank deposit | 944 | 2,379 | 40% | ||||||||||||||
Funds from acceptances and issuance of securities | 6,304 | 105,120 | 6% | ||||||||||||||
Borrowings and Onlendings | 4,114 | 46,124 | 9% | ||||||||||||||
Subordinated Debts / Debt Instruments Eligible to Compose Capital | - | 8,784 | 0% | ||||||||||||||
Total | 87,509 | 364,788 | 23% |
F-125
Consolidated Financial Statements | December 31, 2021 | F-136 |
* Values expressed in thousands, except when indicated. |
Assets and liabilities in accordance with the remaining contractual maturities, considering the undiscounted flows are as follows:
2018 | |||||||||||
Non-Discounted Future Flows Except Derivatives | In millions of Reais | ||||||||||
0 to 30 days | 31 to 180 days | 181 to 365 days | 1 to 5 years | Above 5 years | Total | ||||||
Interest-earning assets: | |||||||||||
Financial Assets Held For Trading | 7,388 | 6,199 | 12,162 | 80,590 | 52,584 | 158,923 | |||||
Debt instruments | 5,361 | 5,236 | 8,443 | 71,347 | 50,080 | 140,467 | |||||
Trading derivatives | 2,027 | 963 | 3,719 | 9,243 | 2,504 | 18,456 | |||||
Other Financial Assets At Fair Value Through Profit Or Loss | 379 | 9,230 | 379 | 18,666 | 6,037 | 34,691 | |||||
Debt instruments | 379 | 9,230 | 379 | 18,666 | 6,037 | 34,691 | |||||
Non-Current Assets Held For Sale | 24 | 558 | 126 | 3,904 | 5,119 | 9,731 | |||||
Reserves from Brazilian Central Bank | 70,103 | - | - | - | - | 70,103 | |||||
Loans and Receivables | 29,234 | 111,216 | 45,564 | 116,107 | 85,637 | 387,758 | |||||
Total | 107,128 | 127,203 | 58,231 | 219,267 | 149,377 | 661,206 | |||||
Interest-bearing liabilities: | |||||||||||
Deposits from credit institutions | 198,259 | 46,926 | 67,142 | 79,161 | 8,819 | 400,307 | |||||
Subordinated Debts / Debt Instruments Eligible to Compose Capital | 9,857 | - | - | - | 9,687 | 19,544 | |||||
Marketable debt securities | 13,395 | 21,343 | 15,290 | 33,627 | 9,717 | 93,372 | |||||
Trading derivatives | 1,104 | 1,370 | 3,257 | 9,673 | 3,322 | 18,726 | |||||
Short positions | 32,440 | - | - | - | - | 32,440 | |||||
Total | 255,055 | 69,639 | 85,689 | 122,461 | 31,545 | 564,389 | |||||
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 Trading | 5,051 | 1,788 | 6,737 | 32,841 | 18,848 | 65,265 | |||||
Debt instruments | 654 | 899 | 5,919 | 19,582 | 16,801 | 43,856 | |||||
Trading derivatives | 4,398 | 889 | 818 | 13,259 | 2,046 | 21,410 | |||||
Available-For-Sale Financial Assets | 925 | 1,283 | 12,695 | 56,167 | 50,329 | 121,399 | |||||
Debt instruments | 925 | 1,283 | 12,695 | 56,167 | 50,329 | 121,399 | |||||
Other Financial Assets At Fair Value Through Profit Or Loss | 38 | 13 | 51 | 543 | 1,994 | 2,640 | |||||
Debt instruments | 38 | 13 | 51 | 543 | 1,994 | 2,640 | |||||
Non-Current Assets Held For Sale | 81 | 169 | 227 | 3,370 | 9,573 | 13,419 | |||||
Reserves from Brazilian Central Bank | 59,051 | - | - | - | - | 59,051 | |||||
Loans and Receivables | 74,887 | 93,587 | 45,397 | 117,084 | 84,560 | 415,515 | |||||
Total | 140,034 | 96,840 | 65,107 | 210,005 | 165,304 | 677,290 | |||||
2021 | ||||||
In millions of Reais | ||||||
Future Cash Flows Except for Derivatives | 0 to 30 days | 31 to 180 days | 181 to 365 days | 1 to 5 years | Above 5 years | Total |
Remunerated Assets: | ||||||
Financial assets measured at fair value in income | - | - | - | - | 3,122 | 3,122 |
Debt instruments | - | - | - | - | 3,122 | 3,122 |
Financial assets measured at fair value in profit or loss for trading | 5,573 | 4,197 | 5,031 | 16,366 | 8,023 | 39,191 |
Debt instruments | 355 | 850 | 2,261 | 8,786 | 5,539 | 17,791 |
Equity Instruments | 21 | 1 | 8 | 11 | 3 | 44 |
Derivatives | 5,197 | 3,346 | 2,762 | 7,568 | 2,481 | 21,354 |
Financial assets measured at fair value in other comprehensive income | 54,012 | 1,007 | 4,690 | 50,092 | 15,833 | 125,635 |
Debt instruments | 54,012 | 1,007 | 4,690 | 50,092 | 15,833 | 125,635 |
Equity Instruments | - | - | - | - | - | - |
Financial assets measured at amortized cost | 109,330 | 98,848 | 78,187 | 172,736 | 78,053 | 537,155 |
Loans and Other Amounts with Credit Institutions | 73,290 | 1,464 | 2,041 | 2,313 | - | 79,108 |
Loans and advances to customers | 34,989 | 94,872 | 55,118 | 150,204 | 76,554 | 411,737 |
Debt instruments | 1,051 | 2,512 | 21,028 | 20,219 | 1,499 | 46,310 |
Total | 168,915 | 104,053 | 87,907 | 239,195 | 105,032 | 705,102 |
Remunerated Liabilities: | ||||||
Financial Liabilities Measured at Fair Value in Income Held for Trading | 18,955 | 2,564 | 2,191 | 11,196 | 2,703 | 37,609 |
Derivatives | 6,174 | 2,564 | 2,191 | 11,196 | 2,703 | 24,828 |
Short positions | 12,781 | - | - | - | - | 12,781 |
Financial liabilities at amortized cost | 289,743 | 106,358 | 102,585 | 165,145 | 25,366 | 689,197 |
Deposits from the Central Bank of Brazil and deposits from credit institutions | 33,714 | 46,465 | 25,626 | 10,610 | 2,742 | 119,157 |
Customer deposits | 252,070 | 48,364 | 67,467 | 105,690 | 23 | 473,613 |
Bonds and securities | 3,959 | 11,529 | 9,492 | 48,845 | 3,097 | 76,922 |
Debt Instruments Eligible to Capital | - | - | - | - | 19,504 | 19,504 |
Total | 308,698 | 108,922 | 104,776 | 176,341 | 28,069 | 726,806 |
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(Thousand of Brazilian Reais - R$ - unless otherwise stated)
* Values expressed in thousands, except when indicated. |
Interest-bearing liabilities: | |||||||||||
Deposits from credit institutions | 150,979 | 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 securities | 4,445 | 36,855 | 12,904 | 18,421 | 866 | 73,491 | |||||
Trading derivatives | 4,618 | 659 | 504 | 12,243 | 2,285 | 20,310 | |||||
Short positions | 32,531 | - | - | - | - | 32,531 | |||||
Total | 192,573 | 89,257 | 80,236 | 122,722 | 11,342 | 496,130 | |||||
2016 | |||||||||||
Non-Discounted Future Flows Except Derivatives | In millions of Reais | ||||||||||
0 to 30 days | 31 to 180 days | 181 to 365 days | 1 to 5 years | Above 5 years | Total | ||||||
Interest-earning assets: | |||||||||||
Financial Assets Held For Trading | 27,093 | 5,262 | 4,749 | 36,135 | 25,573 | 98,812 | |||||
Debt instruments | 20,762 | 2,390 | 2,867 | 27,676 | 20,991 | 74,686 | |||||
Trading derivatives | 6,331 | 2,872 | 1,882 | 8,459 | 4,582 | 24,126 | |||||
Available-For-Sale Financial Assets | 1,492 | 1,373 | 1,819 | 55,056 | 29,854 | 89,594 | |||||
Debt instruments | 1,492 | 1,373 | 1,819 | 55,056 | 29,854 | 89,594 | |||||
Other Financial Assets At Fair Value Through Profit Or Loss | 38 | 14 | 52 | 586 | 1,824 | 2,514 | |||||
Debt instruments | 38 | 14 | 52 | 586 | 1,824 | 2,514 | |||||
Non-Current Assets Held For Sale | 79 | 170 | 227 | 3,307 | 9,979 | 13,762 | |||||
Reserves from Brazilian Central Bank | 58,594 | - | - | - | - | 58,594 | |||||
Loans and Receivables | 18,151 | 112,337 | 42,763 | 106,518 | 82,770 | 362,539 | |||||
Total | 105,447 | 119,156 | 49,610 | 201,602 | 150,000 | 625,815 | |||||
Interest-bearing liabilities: | |||||||||||
Deposits from credit institutions | 135,725 | 51,098 | 50,024 | 86,535 | 7,444 | 330,826 | |||||
Subordinated Debts / Debt Instruments Eligible to Compose Capital | - | 347 | 330 | 10,633 | - | 11,310 | |||||
Marketable debt securities | 6,234 | 41,431 | 35,390 | 27,344 | 521 | 110,920 | |||||
Trading derivatives | 6,046 | 1,308 | 1,268 | 7,123 | 4,167 | 19,912 | |||||
Short positions | 31,551 | - | - | - | - | 31,551 | |||||
Total | 179,556 | 94,184 | 87,012 | 131,635 | 12,132 | 504,519 |
2020 | ||||||
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 in income | - | 174 | 98 | 667 | 2,900 | 3,839 |
Debt instruments | - | 174 | 98 | 667 | 2,900 | 3,839 |
Financial assets measured at fair value in profit or loss for trading | 16,028 | 19,211 | 5,763 | 63,618 | 25,489 | 130,108 |
Debt instruments | 3,873 | 12,513 | 4,046 | 53,814 | 21,859 | 96,104 |
Equity Instruments | 1,164 | - | - | - | - | 1,164 |
Derivatives | 10,992 | 6,698 | 1,717 | 9,804 | 3,629 | 32,840 |
Financial assets not intended for trading Mandatory measured at the fair value of the result | 439 | - | - | - | - | 439 |
Equity Instruments | 439 | - | - | - | - | 439 |
Financial assets measured at fair value in other comprehensive income | 5,000 | 3,874 | 13,850 | 75,849 | 35,538 | 134,110 |
Debt instruments | 4,928 | 3,874 | 13,850 | 75,849 | 35,538 | 134,038 |
Equity Instruments | 72 | - | - | - | - | 72 |
Financial assets measured at amortized cost | 53,147 | 145,280 | 69,004 | 208,295 | 135,783 | 611,509 |
Loans and Other Amounts with Credit Institutions | 24,638 | 40,579 | 2,901 | 4,205 | - | 72,324 |
Loans and advances to customers | 28,424 | 102,379 | 64,194 | 188,430 | 135,987 | 519,415 |
Debt instruments | 85 | 2,321 | 1,909 | 15,660 | (205) | 19,771 |
Total | 74,615 | 168,538 | 88,715 | 348,429 | 199,709 | 880,005 |
Remunerated Liabilities: | ||||||
Financial Liabilities Measured at Fair Value in Income Held for Trading | 55,313 | 7,878 | 2,088 | 12,629 | 3,515 | 81,424 |
Derivatives | 10,160 | 7,878 | 2,088 | 12,629 | 3,515 | 36,270 |
Short positions | 45,153 | - | - | - | - | 45,153 |
Financial liabilities at amortized cost | 176,223 | 101,111 | 93,103 | 145,931 | 16,471 | 532,838 |
Deposits from the Central Bank of Brazil and deposits from credit institutions | 3,707 | 33,039 | 22,860 | 8,014 | 2,802 | 70,421 |
Customer deposits | 165,171 | 44,571 | 62,606 | 110,809 | 215 | 383,372 |
Bonds and securities | 7,345 | 23,502 | 7,637 | 27,109 | 333 | 65,925 |
Debt Instruments Eligible to Capital | - | - | - | - | 13,120 | 13,120 |
Total | 463,072 | 217,979 | 190,382 | 317,119 | 39,972 | 1,228,525 |
Consolidated Financial Statements | December 31, 2021 | F-138 |
* Values expressed in thousands, except when indicated. |
2019 | ||||||
Non-Discounted Future Flows Except Derivatives | In millions of Reais | |||||
0 to 30 days | 31 to 180 days | 181 to 365 days | 1 to 5 years | Above 5 years | Total | |
Interest-earning assets: | ||||||
Financial Assets Held For Trading | 3,766 | 1,103 | 802 | 8,894 | 6,157 | 20,722 |
Debt instruments | 46 | 15 | 205 | 638 | 2,600 | 3,504 |
Trading derivatives | 3,720 | 1,088 | 597 | 8,256 | 3,557 | 17,218 |
Other financial assets at fair value through profit or loss | 2,642 | 1,160 | 4,853 | 23,638 | 15,502 | 47,795 |
Debt instruments | 2,642 | 1,160 | 4,853 | 23,638 | 15,502 | 47,795 |
Investments Held to Maturity | 99 | 111 | 327 | 4,066 | 6,030 | 10,633 |
Reserves from Brazilian Central Bank | 69,663 | - | - | - | - | 69,663 |
Financial Assets Measured at Amortized Cost | 32,417 | 89,335 | 65,395 | 159,615 | 110,607 | 457,369 |
Total | 108,587 | 91,709 | 71,377 | 196,213 | 138,296 | 606,182 |
Interest-bearing liabilities: | ||||||
Deposits from credit institutions | 218,883 | 61,461 | 71,953 | 79,666 | 2,660 | 434,623 |
Subordinated Debts / Debt Instruments Eligible to Compose Capital | - | - | - | 12,673 | - | 12,673 |
Marketable debt securities | 3,697 | 26,096 | 19,829 | 31,407 | 4,628 | 85,657 |
Trading derivatives | 4,597 | 1,621 | 1,074 | 9,119 | 3,828 | 20,239 |
Short positions | 23,501 | - | - | - | - | 23,501 |
Total | 250,678 | 89,178 | 92,856 | 132,865 | 11,116 | 576,693 |
Scenario analysis / Contingency plan
Based on the results obtained in the Stress Test, the bank draws upBank prepares the Liquidity Contingency Plan, which constitutesconsists of a formal set of preventive and corrective actions to be triggertaken in timesmoments of liquidity crisis. The activation of the Plan results from the monitoring of internal parameters relaterelated to the Bank´sBank's market and liquidity conditions. TheseSuch parameters serve to identify different levels of crisis severity and, then,thus, determine ifwhether or not there is a need to start the activation process.
After the crisis is identifies,identified, a clear communication is established between the internal areas capable of carrying out theexecuting corrective actions and mitigating the problems originated.
caused. These corrective actions are measures capable of generating liquidity to solve or mitigate the effects of the crisis and are decide into account theirtaken considering its complexities, implementation deadlines and the term of the desired liquidity impact.
The parameters and measures of this Plan is revieware reviewed at any time whenthat it becomes necessary, however its maximumminimum review period of review is annual.
c.5) Structural foreign currency risk / Hedges of results / Structural equities risk
These activities are monitored by measuring positions, VaR and results.
F-127
|
(Thousand of Brazilian Reais - R$ - unless otherwise stated)
c.5.1) Complementary measures
Calibration and test measures
Back-testingThe back-testing consists of performing a comparative analysis between VaRthe estimates of Value at Risk (VaR) and the daily “clean” results (profit or loss on(result of the portfolios at the endclose of the precedingprevious day, valuedevaluated at following-day prices)the prices of the following day) and “dirty” (managerial income taking into accountresult leading to also theconsidering costs, intraday results and loading). The aimpurpose of these tests is to verify and provide a measure of the accuracy of the models used to calculate VaR.in the VaR calculation.
Back-testing analyses performed atThe back-testing analyzes carried out by Banco Santander comply, at the very least, with the BIS recommendations regarding the verification of the internal systems used to measurein the measurement and managemanagement of financial risks. Additionally, the SantanderThe Bank also conductsperforms hypothesis tests: excess tests, normality tests, Spearman’s rankSpearman correlation, average excess measures, etc.
The assessmentEvaluation models are regularly calibrated and tested by a specialized unit.
Consolidated Financial Statements | December 31, 2021 | F-139 |
* Values expressed in thousands, except when indicated. |
c.6) Control system
Limit setting
The limitboundary setting process is performed together withruns alongside the budgeting activity and is thea tool used to establish the assets and liabilities available tofor each business activity. Limit settingSetting limits is a dynamic process that responds to the level of risk considered acceptable by management.
Management. The limitsboundary structure requiresconsists of developing a process to be performed that pursues,considers, among others, the following objectives:aspects:
1. To identifyIdentify and delimit, in an efficientefficiently and comprehensive manner,comprehensively, the main types of financial risk incurred,risks generated, so that they are consistent with the management of the business management and with the defined strategy.
2. To quantifyQuantify and communicate to the business areas the riskwhat levels and profile deemedrisk profiles are considered acceptable by senior management so asManagement, in order to avoid undesiredunwanted risks.
3. To provideGive flexibility to the business areas for theto assume financial risks in an efficient and timely assumption of financial risks,manner, due to changes in the market and business strategy,strategies, and always within the risks levelrisk levels considered acceptable by the Bank.institution.
4. To allowAllow business makersgenerators to assumetake risks which, althoughin a prudent areand sufficient volume to obtainachieve the budgeted results.
5. To delimitDelimit the range of products and underlying assets withunderlyings in which each Treasury unit can operate, considering featurescharacteristics such as assessment modelmodels and valuation systems, liquidity of the instruments involved, etc.
c.7) Risks and results in 2021
Financial Intermediation Activities
The average VaR from the Bank´s trading portfolio in 20182021 ended in R$30.3 34.5 million. The dynamic management of this profile allows the Bank to change its strategy to capitalize the opportunities offered by aan uncertain environment.
c.7.1) Asset and liabilitybalance sheet management (1)
Interest rate risk
Convertible currencies
At 2018 year-end,the end of 2021, 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$200553 million.
Also, at 20182021 year-end, the sensitivity market value of equity to parallel increases of 100 basis points applied to the Banco Santander in the BRL interest rate curve was positive by R$1,8611,675 million.
Quantitative risk analysis
The interest rateInterest risk in balance sheetssheet management portfolios, measured in terms of sensitivity of the net interest margin (NIM) atincome sensitivity, for one year toat a parallel increaserise of 100 b.p. inbasis points of the interest rate curve, was atincreased by R$121 million between 2021 and 2020, reaching the beginningmaximum of 2018 and 2017,R$607 million in June, 2021. Value sensitivity decreased by R$96 million during the year 2021, reaching a maximum level of R$2921,882 million in January 2018. The sensitivity value decreased R$205 million during 2018, reaching a maximum of R$1,981 million in January. September, 2021. The main factors that occurred in 20172021 and influenced in sensitivitythe sensitivities were the volatilityfall in the yield curve (convexity effect), portfolio decline and updating of the exchange rate (convexity effect), portfolio’s decay, updateimplicit methodologies on the cash flows of implicit methodology on cash flow of the Bank’s products and liquidity.Banco Santander products.
Million of Reais | |||||||||||||
2018 | 2017 | 2016 | 2021 | 2020 | 2019 | ||||||||
Sensibilities | |||||||||||||
Net Interest Margin | 200 | 378 | 385 | 553 | 432 | 334 | |||||||
Market Value of Equity | 1,861 | 2,066 | 1,680 | Market Value of Equity | 1,675 | 1,771 | 2,063 | ||||||
Value at Risk - Balance | Value at Risk - Balance | ||||||||||||
VaR | 1,744 | 1,380 | 804 | 791 | 1,365 | 1,755 |
Consolidated Financial Statements | December 31, 2021 | F-140 |
* Values expressed in thousands, except when indicated. |
c.8) Sensitivity analysis
The risk management is focused on portfolios and risk factors pursuant to the requirements of regulators and good international practices.
Financial instruments are segregated into trading and Banking portfolios, as in the management of market risk exposure, according to the best market practices and the transaction classification and capital management criteria of the New Standardized Approach of regulators. The trading portfolio consists of all transactions with financial instruments and products, including derivatives, held for trading, and the Banking portfolio consists of core business transactions arising from the different Banco Santander business lines and their possible hedges. Accordingly, based on the nature of Banco Santander’s activities, the sensitivity analysis was presented for trading and Banking portfolios.
Banco Santander performs the sensitivity analysis of the financial instruments in accordance with requirements of regulatory bodies and international best practices, considering the market information and scenarios that would adversely affect the positions and the income of the Bank.
The table below summarizes the stress amounts generated by Banco Santander’s corporate systems, related to the Banking and trading portfolio, for each one of the portfolio scenarios as of December 31, 2018.
F-128
|
(Thousand of Brazilian Reais - R$ - unless otherwise stated)2021.
Trading portfolio
2018 | 2021 | |||||||||||
Risk Factor | Description | Scenario 1 | Scenario 2 | Scenario 3 | Description | Scenario 1 | Scenario 2 | Scenario 3 | ||||
Interest Rate - Reais | Exposures subject to changes in interest fixed rate | (752) | (11,854) | (23,708) | Exposures subject to changes in interest fixed rate | (4,943) | (108,670) | (217,339) | ||||
Coupon Interest Rate | Exposures subject to changes in coupon rate of interest rate | (1,091) | (15,747) | (31,494) | Exposures subject to changes in coupon rate of interest rate | (550) | (7,132) | (14,265) | ||||
Inflation | Exposures subject to change in coupon rates of price indexes | (4,344) | (45,686) | (91,371) | ||||||||
Coupon - US Dollar | Exposures subject to changes in coupon US Dollar rate | (2,229) | (60,518) | (121,036) | Exposures subject to changes in coupon US Dollar rate | (5,564) | (34,407) | (68,815) | ||||
Coupon - Other Currencies | Exposures subject to changes in coupon foreign currency rate | (5,030) | (5,349) | (10,697) | Exposures subject to changes in coupon foreign currency rate | (5,270) | (19,539) | (39,077) | ||||
Foreign currency | Exposures subject to foreign exchange | (10,926) | (273,156) | (546,313) | Exposures subject to foreign exchange | (1,127) | (1,900) | (3,801) | ||||
Eurobond/Treasury/Global | Exposures subject to changes in interest rate negotiated roles in international market | (328) | (2,138) | (4,277) | Exposures subject to Interest Rate Variation on Papers Traded on the International Market | (426) | (10,658) | (21,315) | ||||
Inflation | Exposures subject to change in coupon rates of price indexes | (5,218) | (6,018) | (12,035) | ||||||||
Shares and Indexes | Exposures subject to change in shares price | (3,028) | (75,711) | (151,422) | Exposures subject to change in shares price | (1,553) | (38,814) | (77,629) | ||||
Commodities | Exposures subject to change in commodities' prices | (2) | (42) | (84) | Exposures subject to change in commodities' prices | (1,184) | (29,609) | (59,217) | ||||
Total(1) | (27,730) | (490,201) | (980,402) | (25,835) | (256,747) | (513,493) |
(1) Amounts net of taxes.
Scenario 1: a shock of 10 base points on the interest curves and 1% to price changes (currency and stocks);
Scenario 2: a shock of +25% and -25% in all risk factors, are considered the greatest losses per risk factor;
Scenario 3: a shock of +50% and -50% in all risk factors, are considered the greatest losses per risk factor.
Portfolio Banking
2018 | 2021 | |||||||||||
Risk Factor | Description | Scenario 1 | Scenario 2 | Scenario 3 | Description | Scenario 1 | Scenario 2 | Scenario 3 | ||||
Interest Rate - Reais | Exposures subject to changes in interest fixed rate | (48,019) | (821,285) | (1,636,606) | Exposures subject to changes in interest fixed rate | (48,956) | (1,673,128) | (3,756,544) | ||||
TR and Long-Term Interest Rate - (TJLP) | Exposures subject to changes in Exchange of TR in TJLP | (22,042) | (364,231) | (551,674) | Exposures subject to changes in Exchange of TR in TJLP | (6,413) | (97,524) | (145,711) | ||||
Inflation | Exposures subject to change in coupon rates of price indexes | (37,400) | (475,444) | (948,607) | Exposures subject to change in coupon rates of price indexes | (34,286) | (455,628) | (838,652) | ||||
Coupon - US Dollar | Exposures subject to changes in coupon US Dollar rate | (2,721) | (43,693) | (71,662) | Exposures subject to changes in coupon US Dollar rate | (13,530) | (60,291) | (117,298) | ||||
Coupon - Other Currencies | Exposures subject to changes in coupon foreign currency rate | (4,241) | (63,970) | (128,421) | Exposures subject to changes in coupon foreign currency rate | (3,891) | (7,770) | (15,642) | ||||
Interest Rate Markets International | Exposures subject to changes in interest rate negotiated roles in international market | (3,692) | (80,702) | (141,043) | Exposures subject to changes in interest rate negotiated roles in international market | (31,456) | (78,782) | (161,417) | ||||
Foreign Currency | Exposures subject to Foreign Exchange | (2,513) | (62,821) | (125,642) | Exposures subject to Foreign Exchange | 560 | 13,995 | 27,989 | ||||
Total(1) | (120,628) | (1,912,146) | (3,603,655) | (137,972) | (2,359,128) | (5,007,275) |
(1) Amounts net of taxes.
Scenario 1: a shock of +10bps and -10bps in interest rate curves and 1% price variance (currency and stocks); are considered the greatest losses per risk factor;
Scenario 2: a shock of +25% and -25% in all risk factors, are considered the greatest losses per risk factor;
Scenario 3: a shock of +50% and -50% in all risk factors, are considered the greatest losses per risk factor.
Consolidated Financial Statements | December 31, 2021 | F-141 |
* Values expressed in thousands, except when indicated. |
d) Bank´s business is highly dependent on the proper functioning of information technology systems.
d)Our business is highly dependent on the ability of our information technology systems to accurately process a large number of transactions across numerous and diverse markets and products in a timely manner, and on our ability to rely on our digital technologies, computer and email services, software and networks, as well as on the secure processing, storage and transmission of confidential data and other information in our computer systems and networks. The proper functioning of our financial control, risk management, accounting, customer service and other data processing systems is critical to our business and our ability to compete effectively.
e) Independent Structure
The Operational Risk & Internal Control area, subordinated to the Executive Vice-Presidencyvice Presidency of Risks,Risk, operates independently as a second line of defense, supporting and challenging the first line of defense. They maintain persons, structure, standards, methodologiesguidelines, policies and toolsprocesses to ensure the conductionconduct and adequacy of the Operational Risk Control and Management Model in Santander.
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 chose to adoptopted for 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)e.1) Operational Risks & Internal Control
ItsThe Operational Risk & Internal Control area has a mission towith Banco Santander is:Santander: To corroboratesupport the fulfillment of the strategic objectives and the decision-making process, in the adaptationadapting and fulfillment of the obligatorymeeting mandatory requirements, in maintaining the solidity,soundness, reliability, reductionreducing and mitigation ofmitigating losses due to risks operational, risks, besides thein addition to implementation, dissemination of culture of operational risks.the Operational Risk culture.
Acts in preventingAdditionally, the operational riskOperational Risk & Internal Control area works to prevent Operational Risks and supports for the continuedcontinuous strengthening of the internal controlInternal Controls system, attendingmeeting the requirements of regulatory agencies, Newthe Regulatory Bodies, Basel Agreement – BIS II andAccord, resolutions of the National Monetary Council.Council (CMN) and Applicable Regulators. This modelModel also follows the guidelines established by Banco Santander Spain which was based on COSO-Committeethe COSO - Committee of Sponsoring Organizations of the Tread way Commission-Internal Control –Treadway Commission –Internal Control– Integrated Framework 2013.
The procedures developedControl 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.model
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(Thousand of Brazilian Reais - R$ - unless otherwise stated)
In the second half of 2014, was consolidated the adoption if the approaches bySantander Brasil has implemented a model based on lines of defense approvedthat aims to improve and continuously develop the management and control of operational risks, ensuring that structures can assess, monitor, control, mitigate, report and reduce the risks and losses to which they are exposed.
The attributions of this model include carrying out activities for the identification, evaluation, monitoring, control, mitigation and reporting of Operational Risk. Thus, different analyzes and follow-ups are carried out and reported. The main instruments that make up the Operational Risk Control and management Model are presented below:
● | Definition of the operational risk appetite; |
● | Capture and evaluation of loss events (internal and external); |
● | Training, Communication and Culture; |
● | Evaluation of products and services; |
● | Self-assessment of operational risks; |
● | Scenario analysis; |
● | Risk and Control Indicators; |
● | Internal controls. |
Model Governance
The Model has the approval of the Executive Risk Committee and approval by the Board of Directors, integrating the Organization's corporate governance structure and responsibility. Periodically, the relevant matters of Operational Risks are communicated to senior management for awareness and deliberations.
Consolidated Financial Statements | December 31, 2021 | F-142 |
* Values expressed in thousands, except when indicated. |
As part of the Risk Governance system, the Senior Forum on Internal Controls and Operational Risks (CIRO) is also implemented, whose objective is to deliberate for the Risk Pro Officers (RPO), of the 1st Line of Defense, policies, processes, procedures, strategy and decisions on the topics to be applied in the Executive Committee.business units, and has a bimonthly periodicity.
In order to ensure a structured process for disseminating the culture of Operational Risk management and control, the relevant topics are dealt with in specific Committees and Forums.
Defense Line Modele.2) Responsibilities and duties of the Operational Risks and Internal Controls area
The Operational Risks & Internal Control is thearea acts as second line of defense in Santander'sthe Santander’s operational risk model and aimsaim to maintain the fulfillment, alignment andachieve compliance with Santander Group’s corporate guidelines ofpolicies, and other regulations established by both local and global regulators. In addition, the Santander group,area is responsible for the Basle Accord and resolutions of the National Monetary Council. Also acts in the controloversight and challenge of the activities performed by the first line of Defense, contributingdefense and aim to its strengthening, vision ofachieve an integrated approachoperational risk management approach. The main responsibilities attributed to risk management.the Operational Risk and Internal Control are listed below:
d.2) ComprehensivenessDisseminate the Operational Risk and SustainabilityInternal 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.
The scope• 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, CVM, SEC, B³Ensure 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 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;
risks,
• The creation, dissemination, and maintenance of Instruction Manuals, promoting corporate values and commitment;
commitment.
• Coordination of the annual process for projecting losses caused by operational risks, defining action plans to reduce these losses and for accountability;
accountability.
• Development of key risk indicators, aiming to monitor the main operational risks;
risks.
• CompositionManagement of lines of defense creating new functions for the role of ORM Networks: "““ORMN – Operational Risk Management Network” considering roles performed by:
i)“RPO-Risk Pro Officer” whose function is to reportmonitoring and reporting of operational risk management aspects to the executive the follow-upSenior Management, ii) “RPA-Risk Pro Agent" and iii) “Operational Risk Assistants” management and implementation of the topics of Operational Risk at the strategic level of the Executive Board, “RPA-Risk Pro Agent "Management Model within its Division and "OR Assist" covering the perimeter of RO and "experts" in cases where the“Risk Experts” specifically for “transversal” operational risk is transverse to the organization.management purposes.
d.4) Communicatione.4) 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 (“FSCIRO”) and the “Reunião de RO” (Operational Risk Forum 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.
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* Values expressed in thousands, except when indicated. |
(Thousand of Brazilian Reais - R$ - unless otherwise stated)
e) Reputational
f) 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 clientsclient’s 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 theirby different technical areas, ensuring a multidisciplinary mapping of risks, have been fully mitigated, and subsequently approved by the Commercialization Local Comercialization Committee (CLC), composed of BankSantander executives. After reviewanalysis and approval, the new products and services are monitored tryingsubject to identify them so timely events that may pose reputationalmonitoring and tests carried out to mitigate any conduct risk which if identified, are reported toin the CLC.sale.
f)g) Compliance with the new regulatory framework
The Banco Santander Brazil has assumed a firm commitmentan integrated management of risks and capital for the decision-making process, respecting the guidelines of Resolution BCB No. 4,557. This process contributes to the principles underlyingoptimization and efficiency in the “Revised Frameworkuse of International Convergencecapital in its operations, considering the objectives of Capital Measurementthe Institution with respect to capital ratios and Capital Standards” (Basel II). This framework allows entitiesreturn to make internal estimatesshareholders.
The Brazilian participation in the Basel Committee on Banking Supervision (BCBS) encourages the timely implementation of international prudential standards in the Brazilian regulatory framework.
Consolidated Financial Statements | December 31, 2021 | F-144 |
* Values expressed in thousands, except when indicated. |
Aligned with this perspective, Santander Brazil invests in the continuous improvement of capital management processes and practices, in accordance with regulatory and supervisory benchmarks.
The Institution's capital management consists of a continuous process of planning, evaluation, control and monitoring of the capital they are required to hold in ordercover the Conglomerate's relevant risks. It considers the capital necessary to safeguard their solvency against events caused by various typessupport Pillar 1 risks (credit, market and operational); development of risk. As a resultmethodologies for quantifying additional capital for Pillar 2 risks; Internal Capital Adequacy Assessment Process (ICAAP); projection and monitoring of this commitment, the Bank has devoted all the human and material resources required to ensure the successcapital ratios; preparation 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, Technologycapital plan and Operations, Internal Audit −to verify the whole process, as the last layer of control at the entity−, and Business −particularly as regards the integrationcontingency plan; preparation of the internal models into management. Additionally, specific work teams have been set up to guarantee the proper managementrecovery plan; stress tests; and preparation of the most complex aspects of the implementation.quarterly risk and capital management report - Pillar 3.
Supplementing the efforts of the Basel II operating team, the Bank management has displayed total involvement from the very beginning. Thus, the progress of the project and the implications of the implementation of the New Capital Accord by the Banco Santander have been reported to the management committee and to the board of directors on a regular basis.
In the specific case of credit risk, the implementation of Basel II entails the recognition, for regulatory capital purposes, of the internal models that have been used for management purposes.
The institution has applied the internal models based ratings methodology (AIRB) of Basel II in part of its portfolios, in compliance with regulatory requirements.
The additional capital requirements derived from the self-assessment process (Pillar II) should be compensated by the risk profile that characterizes the Bank's business activities (low average risk), due to its focus on Commercial Bank (small and medium-sized enterprises and Individuals) and the diversification of the business. The Pillar II which considers the impact of risks not addressed under Pillar I (regulatory capital) and the benefits arising from the diversification among risks, businesses and geographical locations.
Regarding the other risks addressed under Pillar I of Basel II, Banco Santander was approved for the use of internal models for market risk and will remain using the standardized method for operational risk, since it considers the premature use of advanced models (AMA) for this purpose. Regarding the Market Risk, Banco Santander was approved to the use of Internal Models in February 2018 and started to disclose the capital by this method from May 2018.
Pillar II is another significant line of action under the Basel Corporate Framework. In addition to the methodology supporting the economic capital model review and strengthening, the technology was brought into line with the platform supporting Pillar I, so that all the information on credit risk will come from this source.
Besides the Basel II implementations, Banco Santander complies with the new regulations of Basel III, according to the standards issued by Bacen.
According to the definition proposed by the Basel Committee (Basel III), Credit Valuation Adjustment (CVA) is an adjustment to the fair value of derivative financial instruments in order to measure the credit risk of a counterparty. Thus, the CVA depends on the credit spread of the counterparty, as well as the market risk factors that drives the values of the derivatives and, therefore, their exposure. In an analytical way, the CVA can be defined by the following expression:
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(Thousand of Brazilian Reais - R$ - unless otherwise stated)
CVA = EE * PD * DF * LGD(1)
(1) EE=Expected Exposure; PD=Probability of Default; DF=Discount Factor; LGD=Loss Given Default
Expected Exposure (EE) is the future exposure of the derivative based on the counterparty's market risk. The probability of default (PD) is calculated based on credit spreads and is also marked to market. The discount factor (DF) is the factor that brings to the present value the projected exposure weighted by its respective probability of default. A Loss Given Default (LGD) is the estimated loss in the event of a credit.
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 essential support to the risk committee and management, as they are responsible for ensuring that appropriate procedures and systems are in place to monitor and control the entity's risks. In this case,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, compliance, operational, 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 risk management aspects concerning the model risk control.
Amongprocesses.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;
ii. Propose documents and model validation guides;
iii. Evaluate the methodology and data used in the development of the model and challenge the model and its use, stating the implications and limitations of the model, as well as the associated risks;
iv. Issue a technical opinion on the adequacy of internal models for the intended internal and regulatory effects, concluding on their usefulness and effectiveness; and
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).
i. | Establish general validation principles, conducting an independent evaluation process including (I) data quality, (II) Methodology aspects (III) technological environment, (IV) performance and (V) use and government; |
ii. | Evaluate the methodology and data used in the development of the model and challenge the model and its use, stating the implications and limitations of the model, as well as the associated risks; |
iii. | Issue a technical opinion on the adequacy of internal models for the intended internal and regulatory effects, concluding on their usefulness and effectiveness; and |
iv. | Provide essential support to risk committees and management of the Bank, through a qualified and independent opinion for responsible decision-making on the authorization of the use of models (for management purposes as well as regulatory use). |
It is important to note that Banco Santander's internal validation function is fully consistent with the independent validation criteria for advanced approach issued by the Basel Committee, the European supervisor 'home regulator' (Banco de España and the European Central Bank) and the Bacen in compliance with the rules Circular 3,648 dated March 4, 2013 (Chapter III), Circular Letter 3,565 of September 6, 2012, 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.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' 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.
Consolidated Financial Statements | December 31, 2021 | F-145 |
* Values expressed in thousands, except when indicated. |
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's capital;
5 - Accordance with the regulation in locations where the Bank operates in the review process of Pillar II by supervisors.
g.2)h.2) The Economic Capital Model
In calculating the economic capital, it is the Bank's definition of losses to be covered. Thus, it is used a confidence interval necessary to ensure business continuity. The confidence interval for the Banco Santander is 99.90% higher than required by Basel II.
The risk profile in Brazil is distributed by Credit risk, Market, ALM, Business, Operations and materials assets. However, to successfully anticipate the changes proposed in Basel III, new risks have been incorporated to model: Intangibles, pension funds (defined benefit) and deferred tax assets, which allow the Bank to adopt a position even more conservative and prudent.
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(Thousand of Brazilian Reais - R$ - unless otherwise stated)
% Capital | 2018 | 2017 | 2016 | 2021 | 2020 | 2019 | ||||||||
Risk Type | New Methodology | New Methodology | New Methodology | New Methodology | ||||||||||
Credit | 72% | 70% | 62% | 62% | 69% | 71% | ||||||||
Market | 2% | 4% | 5% | 2% | ||||||||||
ALM | 8% | 4% | 9% | 6% | 2% | 5% | ||||||||
Business | 6% | 8% | 8% | 7% | 3% | |||||||||
Operational | 5% | 6% | 6% | 7% | 6% | 7% | ||||||||
Fixed Assets | 1% | 2% | 2% | 1% | 2% | |||||||||
Intangible Assets | 0% | 1% | 1% | 5% | 1% | |||||||||
Pension Funds | 1% | 1% | 1% | 1% | 2% | 4% | ||||||||
Deferred Tax Assets | 5% | 4% | 6% | 9% | 5% | |||||||||
TOTAL | 100% | 100% | 100% | 100% |
Still, for being
Even so, as it is a commercial Bank, creditbank, Credit is theBanco Santander's main source of risk in Banco Santander and the evolution of thisits portfolio is a leading factor for oscillation.
Banco Santander periodically evaluates the level and evolution of RORACone 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 obtainedfactors 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.fluctuation.
RoRAC
Banco Santander has used the RORAC, with the following objectives:
1 – Analyze and set a minimum price for operations (admission) and clients (monitoring).
2 – Estimate capital consumption of each client, economic groups, portfolio or business segment, in order to optimize the allocation of economic capital, maximizing the efficiency of the Bank.
3 – Measure and monitor business performance.
To evaluate the operations of global clients, the calculation of economic capital considers some variables used in the calculation of expected and unexpected losses.
Among these variables are:
1 – Counterparty rating;
2 – Maturity;
3 – Guarantees;
4 – Type of financing;
The economic value added is determined by the cost of capital. To create value for shareholders, the minimum return operation must exceed the cost of capital of Banco Santander.
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* Values expressed in thousands, except when indicated. |
(Thousand
47. | Subsequent Events |
Acquisition of Brazilian Reais - R$ - unless otherwise stated)Equity Interest in Monetus Investimentos Ltda. and Monetus Corretora de Seguros Ltda.
On January 4, 2022, upon compliance with the applicable conditions precedent, Pi Distribuidora de Títulos e Valores Mobiliários SA (“Pi”), Toro Corretora de Títulos e Valores Mobiliários SA (“Toro CTVM”), and Toro Investimentos SA ( “Toro Investimentos” and, together with Toro CTVM, “Toro”) formalized, together with the partners of Monetus Investimentos Ltda., and Monetus Corretora de Seguros Ltda. (together “Monetus”), the closing of the transaction resulting from the investment agreement and other covenants, formalized on June 15, 2021 (“Closing”). As a result of the Closing, Toro Investimentos now holds 100% of Monetus' share capital. Monetus, originally from Belo Horizonte, carries out its activities through an automated objective-based investment application, after considering the client's needs and risk profile, the application automatically creates, executes and monitors a diversified and personalized investment strategy that use the platform to undertake and serve customers in the best way.
Acquisition of Equity Interest in Mobills Labs Soluções em Tecnologia Ltda. and Mob Soluções em Tecnologia Ltda.
On January 4, 2022, upon compliance with the applicable conditions precedent, Pi Distribuidora de Títulos e Valores Mobiliários SA (“Pi”), Toro Corretora de Títulos e Valores Mobiliários SA (“Toro CTVM”), and Toro Investimentos SA ( “Toro Investimentos” and, together with Toro CTVM, “Toro”), formalized, together with the partners of Mobills Labs Soluções em Tecnologia Ltda., and Mob Soluções em Tecnologia Ltda (together “Mobills”), the closing of the transaction resulting from of the investment agreement and other covenants, formalized on June 15, 2021 (“Closing”). As a result of the Closing, Toro Investimentos now holds 100% of the share capital of Mobills. Based in Ceará, Mobills has a variety of financial applications that have a large user base, especially related to financial planning.
Acquisition of Equity Interest in CSD Central de Serviços de Registro e Depósito aos Mercados Financeiro e de Capitais S.A.
On January 21, 2022, Santander Corretora de Seguros, Investimentos e Serviços S.A. ("Santander Corretora"), together with other investors – including Banco BTG Pactual S.A. and CBOE III, LLC – formalized, together with CSD Central de Serviços de Registro e Depósito aos Mercados Financeiro e de Capitais S.A. ("CSD BR ") and their respective shareholders, an investment agreement for the subscription of a minority equity interest in CSD BR ("Transaction "). CSD BR operates as a register of financial assets, derivatives, securities and insurance policies, authorized by the Central Bank of Brazil, the Brazilian Securities and Exchange Commission (Comissão de Valores Mobiliários) and the Superintendence of Private Insurance (Superintendência de Seguros Privados). The effectiveness of the Transaction will be subject to the conclusion of the definitive instruments and the implementation of certain customary precedent conditions, with the applicable regulatory approvals. After the implementation of these conditions and with the closing of the Transaction, Santander Corretora's equity interest in CSD BR will be 20% (twenty percent).
Deliberation on Interim Dividends and Interest on Equity
The Board of Directors, at a meeting held on February 1, 2022, approved the proposal of the Executive Board, ad referendum of the Annual General Meetings to be held in 2022 and 2023 respectively, for the distribution of Interim Dividends, in the amount of R$ 1,300,000,000.00 (one billion, three hundred million reais), based on the profit for the year calculated until the balance sheet of December 31, 2021 and Interest on Equity, in the gross amount of R$ 1,700,000,000.00 (one billion and seven hundred million reais), based on the balance of the Company's Dividend Equalization Reserve. Shareholders who are registered in the Bank's records at the end of February 10, 2022 (inclusive) will be entitled to Dividends and Interest on Equity. Thus, as of February 11, 2022 (inclusive), the Bank's shares will be traded “Ex-Dividends and Ex-Interest on Equity”. The amount of Dividends and Interest on Equity will be paid as of March 4, 2022. Dividends will be fully allocated to the minimum mandatory dividends to be distributed by the Bank, referring to the year 2021 and Interest on Equity will be imputed in full to the mandatory minimum dividends to be distributed by the Bank, referring to the year 2022, without any monetary restatement for both. The decision was approved by the Fiscal Council, as per the meeting held on the same date.
Consolidated Financial Statements | December 31, 2021 | F-147 |
* Values expressed in thousands, except when indicated. |
APPENDIX I – RECONCILIATION OF STOCKHOLDERS’ EQUITY AND NET INCOME - BRGAAP vs IFRS
The table below presents a conciliation of stockholders' equity and net income attributed to the parent between standards adopted in Brazil (BRGAAP) and IFRS, with the conceptual description of the main adjustments:
Thousand of Reais | Note | 2018 | 2017 | 2016 | Note | 2021 | 2020 | 2019 | ||||||
Shareholders' equity attributed under to the Parent Brazilian GAAP | 65,233,743 | 59,499,954 | 57,771,524 | |||||||||||
Stockholders' equity attributed under to the Parent Brazilian GAAP | Stockholders' equity attributed under to the Parent Brazilian GAAP | 78,739,563 | 78,968,183 | 69,773,232 | ||||||||||
IFRS adjustments, net of taxes, when applicable: | IFRS adjustments, net of taxes, when applicable: | |||||||||||||
Reclassification of financial instruments at fair value through profit or loss | i | 8,344 | 18,301 | 643 | Reclassification of financial instruments at fair value through profit or loss | i | (103,386) | (882) | 8,767 | |||||
Reclassification of available-for-sale financial instruments | j | - | 34,818 | 23,180 | ||||||||||
Reclassification of fair value through other comprehensive income | k | 72,980 | - | Reclassification of fair value through other comprehensive income | j | 182,094 | (522,107) | 73,431 | ||||||
Impairment of loans and receivables | a | - | (71,091) | 124,787 | ||||||||||
Impairment of financial assets measured at amortized cost | a | (1,483,043) | - | Impairment of financial assets measured at amortized cost | a | (1,468,494) | (635,194) | (23,589) | ||||||
Remensurations, Debt instruments, due to reclassifications IFRS 9 | 26,274 | - | Remensurations, Debt instruments, due to reclassifications IFRS 9 | - | 907 | - | ||||||||
Category transfers - IAS 39 | b | - | 351,132 | 608,897 | ||||||||||
Category transfers - IFRS 9 | b | (619) | - | b | (141,260) | 357,972 | (206,984) | |||||||
Deferral of financial fees, commissions and inherent costs under effective interest rate method | Deferral of financial fees, commissions and inherent costs under effective interest rate method | c | 851,629 | 664,204 | 297,720 | Deferral of financial fees, commissions and inherent costs under effective interest rate method | c | 1,549,438 | 1,324,853 | 1,197,325 | ||||
Reversal of goodwill amortization | d | 26,764,529 | 26,592,852 | 25,122,573 | d | 26,709,187 | 27,527,699 | 26,933,892 | ||||||
Realization on purchase price adjustments | e | 631,120 | 702,436 | 778,882 | Realization on purchase price adjustments | e | 603,544 | 615,953 | 477,366 | |||||
Recognition of fair value in the partial sale in subsidiaries | f | 112,052 | Recognition of fair value in the partial sale in subsidiaries | f | - | - | 112,052 | |||||||
Option for Acquisition of Equity Instrument | g | (1,323,994) | (1,287,240) | (1,017,000) | Option for Acquisition of Equity Instrument | g | (763,988) | (1,744,336) | (1,816,799) | |||||
Goodwill acquisition Santander Services (Santusa) | h | (269,158) | (298,978) | - | Goodwill acquisition Santander Services (Santusa) | h | (179,387) | (209,285) | (239,182) | |||||
Tax Credit with realization over 10 years | 322,539 | 62,539 | - | Tax Credit with realization over 10 years | - | - | 184,005 | |||||||
Others | 56,479 | 269,728 | 263,797 | 512,835 | 93,224 | 177,064 | ||||||||
Shareholders' equity attributed to the parent under IFRS | 91,002,875 | 86,650,707 | 84,087,055 | |||||||||||
Stockholders' equity attributed to the parent under IFRS | Stockholders' equity attributed to the parent under IFRS | 105,640,146 | 105,776,987 | 96,650,580 | ||||||||||
Non-controlling interest under IFRS | 592,585 | 436,894 | 725,504 | 334,349 | 312,885 | 558,581 | ||||||||
Shareholders' equity (including non-controlling interest) under IFRS | 91,595,460 | 87,087,601 | 84,812,559 | |||||||||||
Thousand of Reais | Note | 2018 | 2017 | 2016 | ||||||||||
Net income attributed to the Parent under Brazilian GAAP | 12,166,145 | 7,996,577 | 5,532,962 | |||||||||||
IFRS adjustments, net of taxes, when applicable: | ||||||||||||||
Reclassification of financial instruments at fair value through profit or loss | i | (11,974) | 18,775 | 7,960 | ||||||||||
Reclassification of available-for-sale financial instruments | j | - | (46,160) | (39,234) | ||||||||||
Reclassification of fair value through other comprehensive income | k | 28,419 | - | |||||||||||
Impairment on loans and receivables | a | - | (195,878) | (8,091) | ||||||||||
Impairment of financial assets measured at amortized cost | a | 140,557 | - | |||||||||||
Remensurations, Debt instruments, due to reclassifications IFRS 9 | (5,360) | - | ||||||||||||
Category transfers - IAS 39 | b | - | (219,829) | (45,314) | ||||||||||
Category transfers - IFRS 9 | b | (16,195) | - | |||||||||||
Deferral of financial fees, commissions and inherent costs under effective interest rate method | c | 187,425 | 366,484 | 148,450 | ||||||||||
Reversal of goodwill amortization | d | 171,677 | 1,470,279 | 1,755,750 | ||||||||||
Realization on purchase price adjustments | e | (71,316) | (76,446) | (76,247) | ||||||||||
Option to Acquire Own Equity Instrument | g | (143,194) | (270,240) | - | ||||||||||
Goodwill acquisition Santander Services (Santusa) | h | 29,820 | - | |||||||||||
Others | (153,527) | (182,037) | 58,327 | |||||||||||
Net income attributed to the parent under IFRS | 12,322,477 | 8,861,525 | 7,334,563 | |||||||||||
Non-controlling interest under IFRS | 217,441 | 213,984 | 130,355 | |||||||||||
Net income (including non-controlling interest) under IFRS | 12,539,918 | 9,075,509 | 7,464,918 | |||||||||||
Stockholders' equity (including non-controlling interest) under IFRS | Stockholders' equity (including non-controlling interest) under IFRS | 105,974,495 | 106,089,872 | 97,209,161 |
Thousand of Reais | Note | 2021 | 2020 | 2019 | ||||
Net income attributed to the Parent under Brazilian GAAP | 14,987,716 | 13,469,380 | 14,180,987 | |||||
IFRS adjustments, net of taxes, when applicable: | ||||||||
Reclassification of financial instruments at fair value through profit or loss | i | (83,995) | (27,428) | 422 | ||||
Reclassification of fair value through other comprehensive income | j | 45,826 | 68,960 | 451 | ||||
Impairment of financial assets measured at amortized cost | a | (1,028,937) | (498,778) | 1,872,553 | ||||
Remensurations, Debt instruments, due to reclassifications IFRS 9 | - | 907 | (16,659) | |||||
Category transfers - IFRS 9 | b | 126,520 | (78,057) | 6,437 | ||||
Deferral of financial fees, commissions and inherent costs under effective interest rate method | c | 215,525 | 185,478 | 346,298 | ||||
Reversal of goodwill amortization | d | 29,658 | 145,903 | 175,257 | ||||
Realization on purchase price adjustments | e | (17,758) | (5,348) | (153,752) | ||||
Option to Acquire Own Equity Instrument | g | 1,180,949 | 318,929 | - | ||||
Goodwill acquisition Santander Services (Santusa) | h | 29,898 | 29,898 | 29,898 | ||||
Tax credit with realization over 10 years | - | (184,005) | (75,995) | |||||
Others | 42,648 | (7,311) | 41,035 | |||||
Net income attributed to the parent under IFRS | 15,528,051 | 13,418,528 | 16,406,932 | |||||
Non-controlling interest under IFRS | 31,272 | 32,224 | 224,518 | |||||
Net income (including non-controlling interest) under IFRS | 15,559,323 | 13,450,752 | 16,631,450 |
a) Impairment on loans and receivables and financial assets measured at amortized cost:
In 2018, refersRefers to the adjustment resulting from the estimate of the expected loss and losses on the portfolio of loans and receivablesassets subject to impairment, loan commitments to be released and financial guarantee contracts, which was determinedcalculated based on the criteria described in the accounting practice note 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 2016 and 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". TheseIFRS. Such criteria differ in certain aspects from the criteriathose adopted byunder BRGAAP, which use certainuses the regulatory limits defined by the Central Bank (Bacen), in addition to the difference in the scope of calculation ofthe basis for calculating these losses, which for theIFRS purposes of IFRS considers other assets other thanin addition to 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.provided by Bacen.
F-134
|
* Values expressed in thousands, except when indicated. |
(Thousand of Brazilian Reais - R$ - unless otherwise stated)
b) Categories of financial assets
As detailed in the accounting practices note, IFRS9 provides for the definition of the business 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 classification in the categories of financial 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. The criteria for reclassification between categories are also different between the two accounting practices.
c) Deferral of financial fees, commissions and other costs under effective interest rate method:
Under IFRS, 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 over a period of up to 10 years, subject to the impairment test at least once a year or in a shorter period, in the event of any 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. 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 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 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' equity in the amount of R$950 million and R$67 million, respectively. 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 addendum 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 Investment 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 all the shares issued by Bosan Participações SA, for the total amount of R$1.6 billion, to be paid on the closing date of the Operation. On January 30, 2020, the name of Banco Olé from Banco Olé Bonsucesso Consignado SA was changed to Banco Olé Cosignado SA On January 31, 2020, the Bank and the shareholders of Bosan Participações SA concluded the final agreement and signed the purchase and sale of 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$1,608,772,783.47. As a result, the Bank became, directly and indirectly, the holder of 100% of Banco Olé's shares.
On March 31, 2021, the partial spin-off of Santander Brasil was approved, which resulted in the segregation of the shares owned by it issued by Getnet Adquirência e Serviços para Meios de Pagamentos SA (“Getnet”), with the spun-off portion being transferred to Getnet whose the effects are mentioned in note 27.a.
h) Santander Serviços goodwill (Santusa)
According to the 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 acquisition cost and the equity amount of the shares.
Consolidated Financial Statements | December 31, 2021 | F-149 |
* Values expressed in thousands, except when indicated. |
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 IFRS 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 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.
j) Reclassification of available-for-sale financial instruments
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 measuring them at fair value with changes in "other comprehensive income", in line with IAS 39 "Financial Instruments: Recognition and Measurement", which does not allow the reclassification of any financial instrument to fair value with changes in the income statement after the initial recognition.
k)j) 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 thisthese investments as financial assets measured at fair value through other comprehensive income them at fair value with changes in "other comprehensive income", in line with IFRSIAS 9 "Financial 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-135
|
(Thousand of Brazilian Reais - R$ - unless otherwise stated)
Consolidated Financial Statements | December 31, 2021 | F-150 |
* Values expressed in thousands, except when indicated. |
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.
2018 | 2017 | 2016 | 2021 | 2020 | 2019 | |||||||||||||||
Thousand of Reais | ||||||||||||||||||||
Interest and similar income | 70,478,393 | 71,418,349 | 77,146,077 | Interest and similar income | 77,987,308 | 62,774,940 | 72,841,060 | |||||||||||||
Net fee and commission income | 14,132,159 | 12,721,868 | 10,977,596 | Net fee and commission income | 15,273,301 | 16,228,214 | 15,713,152 | |||||||||||||
Impairment losses on financial assets (net) | (12,713,435) | (12,338,300) | (13,301,445) | Impairment losses on financial assets (net) | (17,112,734) | (17,450,188) | (13,369,905) | |||||||||||||
Other income and expense | (6,861,406) | (3,043,565) | (751,727) | Other income and expense | (3,843,999) | (5,012,403) | (4,025,384) | |||||||||||||
Interest expense and similar charges | (28,557,051) | (36,471,860) | (46,559,584) | Interest expense and similar charges | (28,885,478) | (18,332,228) | (28,519,953) | |||||||||||||
Third-party input | (7,219,152) | (6,728,881) | (5,804,939) | (8,078,399) | (7,946,539) | (7,544,695) | ||||||||||||||
Materials, energy and others | (544,237) | (495,913) | (510,961) | Materials, energy and others | (713,400) | (641,831) | (659,656) | |||||||||||||
Third-party services | (5,572,127) | (5,107,077) | (4,589,468) | Third-party services | (6,231,129) | (6,424,755) | (6,047,498) | |||||||||||||
Impairment of assets | (508,310) | (456,711) | (114,321) | Impairment of assets | (165,799) | (84,908) | (131,435) | |||||||||||||
Other | (594,478) | (669,180) | (590,189) | (968,071) | (795,045) | (706,106) | ||||||||||||||
Gross added value | 29,259,508 | 25,557,611 | 21,705,978 | Gross added value | 35,339,999 | 30,261,796 | 35,094,275 | |||||||||||||
Retention | ||||||||||||||||||||
Depreciation and amortization | (1,739,959) | (1,662,247) | (1,482,639) | Depreciation and amortization | (2,433,921) | (2,579,127) | (2,391,857) | |||||||||||||
Added value produced | 27,519,549 | 23,895,364 | 20,223,339 | Added value produced | 32,906,078 | 27,682,669 | 32,702,418 | |||||||||||||
Added value received from transfer | ||||||||||||||||||||
Investments in affiliates and subsidiaries | 65,958 | 71,551 | 47,537 | Investments in affiliates and subsidiaries | 144,184 | 112,261 | 149,488 | |||||||||||||
Added value to distribute | 27,585,507 | 23,966,915 | 20,270,876 | Added value to distribute | 33,050,262 | 27,794,930 | 32,851,906 | |||||||||||||
Added value distribution | Added value distribution | |||||||||||||||||||
Employee | 8,185,896 | 29.7% | 7,908,746 | 33.0% | 7,378,374 | 36.4% | 8,045,893 | 24.3% | 7,943,711 | 28.6% | 8,457,212 | 25.7% | ||||||||
Compensation | 5,863,584 | 5,795,579 | 5,455,374 | 5,929,439 | 5,749,669 | 5,961,765 | ||||||||||||||
Benefits | 1,534,560 | 1,421,910 | 1,397,711 | 1,593,386 | 1,514,611 | 1,637,099 | ||||||||||||||
Government severance indemnity funds for employees - FGTS | Government severance indemnity funds for employees - FGTS | 448,699 | 413,871 | 352,939 | Government severance indemnity funds for employees - FGTS | 431,249 | 448,457 | 502,173 | ||||||||||||
Other | 339,053 | 277,386 | 172,350 | 91,819 | 230,974 | 356,175 | ||||||||||||||
Taxes | 5,813,381 | 21.1% | 6,131,544 | 25.6% | 4,659,989 | 23.0% | 9,269,368 | 28.0% | 6,298,717 | 22.7% | 7,674,704 | 23.4% | ||||||||
Federal | 4,864,176 | 5,481,969 | 4,101,629 | 8,332,994 | 10,088,318 | 6,571,450 | ||||||||||||||
State | 224 | 1,260 | 717 | 813 | (830,771) | 54 | ||||||||||||||
Municipal | 948,981 | 648,315 | 557,643 | 935,561 | (2,958,830) | 1,103,200 | ||||||||||||||
Compensation of third-party capital - rental | 786,312 | 2.9% | 788,577 | 3.3% | 767,595 | 3.8% | Compensation of third-party capital - rental | 175,677 | 0.5% | 101,749 | 0.4% | 88,540 | 0.3% | |||||||
Remuneration of interest on capital | 12,799,918 | 46.4% | 9,138,048 | 38.1% | 7,464,918 | 36.8% | Remuneration of interest on capital | 15,559,324 | 47.1% | 13,450,753 | 48.4% | 16,631,450 | 50.6% | |||||||
Dividends and interest on capital | 6,600,000 | 6,300,000 | 4,550,000 | Dividends and interest on capital | 9,649,000 | 3,837,085 | 10,800,000 | |||||||||||||
Profit Reinvestment | 5,982,477 | 2,624,064 | 2,784,563 | Profit Reinvestment | 5,879,052 | 9,581,444 | 5,606,932 | |||||||||||||
Profit (loss) attributable to non-controlling interests | 217,441 | 213,984 | 130,355 | Profit (loss) attributable to non-controlling interests | 31,272 | 32,224 | 224,518 | |||||||||||||
Total | 27,585,507 | 100.0% | 23,966,915 | 100.0% | - | 20,270,876 | 100.0% | 33,050,262 | 100.0% | 27,794,930 | 100.0% | 32,851,906 | 100.0% |
F-136
Consolidated Financial Statements | December 31, 2021 | F-151 |